University of Chicago
Type of paper: Thesis/Dissertation Chapter
Avoiding Alignment Trap
This case analysis discusses the findings in the article ‘Avoiding the Alignment Trap’, where even though most companies are aware that IT must be aligned with business strategy in terms of aligning IT expenses with revenue growth, over 11% of companies that align IT with business strategy spend more than 13% on average on IT expenses with a resulting of less than 14% average in revenue growth. The objective of this case analysis is to recommend a governance arrangement that will lead most companies that are currently have less effective IT alignment with business alignment to IT-enabled growth where the cost of IT more than compensates with the revenue growth of the company. The recommendation is to adopt a Duopoly governance arrangement where both the CEO and CIO make decisions, form a committee to oversee IT decisions and business strategy decisions made by these leaders, and ensure adequate decision making and monitoring of performance based on IT and business-related decisions. The ISO 38500 can be used as a framework to monitor these decisions and evaluate IT decisions based on their effectiveness, alignment with overall strategy and the value they bring to the organization.
According to the article, almost every company is aware that IT and business strategies must be aligned in order to gain competitive advantage in their industry. This means their IT spending must be matched with their growth strategies. To test this notion, the authors of this article surveyed 452 companies and received 504 responses. The survey determined the companies IT spending and 3-year sales compounding to determine annual growth rate. In their survey, they have found the following: 1.74% of these companies do not align IT to their business strategies. Companies allocate enough funds to their IT necessary to keep the systems running. It is not meant to add value to the business. As a result, their growth rate is 2% below on average on a three-year span 2.11% of these companies have highly aligned IT with business strategy, but not highly effective.
Their IT spending was 13% higher than average and their revenue growth rate was 14% below average 3.8% of these companies spent 15% lower than average on IT that resulted in an 11% above average revenue growth rate. 4.7% of these companies spent 6% lower than average on IT that resulted in more than 35% above average revenue growth rate. To apply these findings against the different governance models, the 74% of companies that do not align IT to their business strategies have a Federal Model of Governance Arrangements. Federal Models are decisions made by leaders from different functional departments and in this type of Governance Model, they mostly pay more attention on Business Application Needs and less on IT Principles, IT Architecture & Infrastructure Strategies. 11% of companies that are highly aligned and yet incur more spending than revenue growth fall to the Business Monarchy Governance Model. In this type of governance arrangements, decisions are made by senior business leader. In the Charles Schwab example in the article, their governance arrangement is IT Monarchy. Their decisions were made by IS leader and put more emphasis on IT Architecture, Infrastructure strategies and have resulted in worst business application needs.
To put an organization in an IT-enabled growth quadrant, an organization should adopt a Duopoly Model of governance arrangement where senior business leaders and IS leaders make decisions jointly. In other words, the CEO and CIO must work closely together to formulate the best IT principles and align it with the firm’s business strategy as a whole. Also, they must implement information technology that is less complex. In the words of Leonardo Da Vinci per the article ‘simplicity is the ultimate sophistication.’ By reducing complexity, the company builds simplified, standardized infrastructure rather than extensive customizing of information technology. With these 2 put together, it can result in effective IT governance which will enable growth in revenue in the future.
Alternatives and Recommendations
With respect to the article, the 85% of the companies that fall to the less effective quadrant in IT governance can start adopting a Duopoly Governance Arrangement where both the CEO and CIO work together and make decisions jointly. With Duopoly, a committee can be formed to oversee IT decisions, rate the IT leadership by the CIOs & continuous monitoring managers within the organization in their decision making & oversight. However, some organizations do not adopt a duopoly governance arrangement due to its size. Therefore, the next governance arrangement that can be adopted by the organizations is the Business Monarchy where decisions are made by senior business leader.
With this model, the business leader can ask for the financial manager’s help to identify the kinds of information and system the organization needs, perform cost-benefit analysis, evaluate options based on priority setting and needs assessment and determine what’s important and upgrade as benefit. Most of all, there must be adequate communication throughout the organization of the decision. The article suggests that to achieve an effective IT governance, companies must keep their IT environment simple. Although achieving a simple IT environment and standardizing it within the organization requires investment of time and money, in the future this can lead to lower costs. Even though complexity can still creep in, it is suggested that the company have an early-warning indicator that will keep track of IT spending with product development. If this ratio starts to increase, it is a sign that it’s time for another simplification. Down the road, companies can reach the IT-enabled quadrant where costs are less and revenue growth is more.
RISK MANAGEMENT PLAN
To avoid the alignment trap, the best governance arrangement that can help an organization change its status from being trapped in aligning IT with business strategy to IT-enabled growth is to adapt a Duopoly governance arrangement where senior business leaders and IS leaders make decisions jointly-meaning the CEO and the CIO work closely together. Both these decision makers can form a committee to oversee IT decisions and ensure managers are monitored in their decision-making and oversight. They must also adapt a simple IT application; eliminate add-ons and replacing legacy systems. For guidance in decision making by the committee, the organizations can adopt ISO 38500 where the following 6 principles focuses on 3 main tasks. These 6 principles are: 1.Responsibility – everyone involved in the committee should understand responsibilities and have the authority to meet those responsibilities
2.Strategy – aligning IT Strategy & Organizational Strategy and analysing the current and future situations of the organization and consider both the needs of organization and those that can be done within its own IS department
3.Acquisitions – can be made after both careful and rational analysis. The acquisition decision must be transparent and justified
4.Performance – information systems are implemented such that service levels and quality levels meet the organization’s needs both now and in the future
5.Conformance – compliance with regulations & legislations 6.Human Behaviour – ensures respect for current and evolving needs of all individuals involved The 3 main tasks are:
1.Evaluate current and future needs on a continual basis – focuses on continual improvement & incorporates the principles above both now and in the future
2.Preparation and Implementation of investment plans – the committee needs to make sure that responsibilities for plans and policies are clearly being assigned
3.Monitor performance and conformance to policies against the plans – crucial in monitoring expected service levels being met. If this is not done properly, then there won’t be appropriate information for decision making. Reaching the IT-enabled quadrant is not easy and it involves a big investment in simplifying the IT used within the organization. This is why most organizations focuses temporarily on effectiveness of IT implementations within the organization more than alignment of IT with organizational strategy. This means giving up specific applications customized on a particular division in order to achieve its desired performance and centralizing and simplifying a good part of the IT function.