The Challenge of Change
High-profile scandals involving companies such as Enron, Tyco, and WorldCom, and resulting legislation including the Sarbanes-Oxley Act, have brought renewed focus on corporate governance and new demands on the CFO. Even before this, however, corporate governance was in need of major surgery. The failure of many, if not most, organizations to deliver demonstrable value from major change initiatives, including mergers and acquisitions, business process re-engineering, and major information technology investments is a symptom of the failure of corporate governance to evolve to meet the needs of a complex and rapidly changing business environment.
Current governance processes are woefully inadequate to manage what is, in most cases, an uncertain journey to an uncertain destination. We need a continuous and dynamic governance process that manages the full investment cycle from concept to cash, one that senses and responds to changes in the internal and external environment, our understanding of what is working and not working as expected, and our assumptions. Without such a process, the risk of ending up in the wrong place, with the associated undesirable business consequences, is significantly increased.
To be effective in delivering value, the governance process must ensure that organizations:
Strategic Governance
In the revised edition of The Information Paradox (2003), we introduced the strategic governance framework (see Figure 1), which defines an approach that continually manages the alignment between business strategy, the portfolio of business change programs, individual programs, the projects (including business, process, people, technology, and organizational change projects) that make up the individual programs, and the enterprise architecture.
The total focus of strategic governance is on optimizing business value through effectively managing change in a constantly changing business environment.
The Challenge of Value
Value is complex, context-specific, and dynamic. Value and strategy are tightly related, in that value results from the successful execution of well-chosen and focused strategies. The key word here is focus. No one can do it all.
The underlying cause of the difficulty in realizing business value lies in the increasing rapidity and complexity of change and in the changing sources of value creation. Organizations today are increasingly generating value from intangible assets, like brand, knowledge, improved governance processes, and re-engineered organizational structures.
The challenge is in understanding and managing a value-creation process that is dynamic and complex and is dominated by these kinds of intangible assets. The value-creation process must be anchored to an explicit, clear, and focused business strategy. Without a clearly articulated and understood strategy, it is difficult to align investment decisions with strategic direction, to select the right things to do, and to decide what you will not do.
Rethinking the Strategy Process
Traditional strategic planning, the way we have done in the past, doesnt cut it. We cannot, however, just stop doing it. Strategy is even more important in todays fast-moving and uncertain business environment. Strategy today must be value-driven and asset-based. Business value results from the successful execution of business strategies, which configure and manage all the assets of the organization to deliver the greatest possible value in line with business objectives. Our understanding of assets must evolve to include all those capabilities or resources, tangible or intangible, internal or external to an organization, that the organization can influence, and how they interact with each other to impact the bottom line.
Strategy is of no value if it is not successfully executed. Unfortunately, one of the few areas that rivals the poor track record of IT projects (or more accurately IT-enabled change) is that of strategy implementation. In a CIO Insight magazine article, David Norton, co-author of The Balanced Scorecard, cites research conducted by CIO Insight and the Balanced Scorecard Collaborative that found that barely half of the companies adequately communicate goals to employees, only a quarter of employees have even a general understanding of the strategy, and less than 30 percent of executives believe that their budgets are strongly linked to strategy.
Most strategies are both too wide in scope and too shallow in detail. The statements are often unarguable, but unimplementable. If the process of strategy is to be more effective, we must approach strategic planning and strategy execution very differently. Whats required is a strategy process that recognizes the complexities of managing that uncertain journey to an uncertain destination.
Figure 1: The Strategic Governance Framework
Recognizing, Understanding, and Managing Complexity
A major cause of the failure to successfully execute strategy is that many leaders make overly simplistic statements of strategy and do not want to be bothered with drilling down to the complexities of implementation. In his book Execution: The Discipline of Getting Things Done, co-authored with Ram Charan, Larry Bossidy writes, Lots of business leaders like to think that the top dog is exempt from the details of actually running things. Its a pleasant way to view leadership: You stand on the mountain top, thinking strategically and attempting to inspire your people with visions, while managers do the grunt work. I refer to this as the Star Trek school of management. All that the leader has to do is say Make it so! and wait for it to happen. Unfortunately, in most cases, no one understands what it is, or worse, they all have a different idea of what it is. The result is a lot of activity, but little if any value.
We cannot wish complexity away by denying that it exists. Organizations cannot continue to respond to the continuing speed and scope of change and increasing complexity with simplistic solutions. Only when complexity is understood and managed can simplification occur. While they may wish to hand off the complexity of execution, it is incumbent on leaders to understand the complexity of strategy execution and to ensure that those executing the strategy both understand and are managing the complexity. As Bossidy goes on to write, Execution requires a comprehensive understanding of a business, its people, and its environment. The leader is the only person in a position to achieve that understanding. Recognizing, accepting, and managing this complexity is todays leadership challenge. To do any less is an abdication of leadership responsibility.
The Role of Portfolio Management
One approach that organizations are adopting to increase value from their assets and investments is portfolio management. Portfolio management has been around for some time in the financial world, as well as in new-product development. Portfolio management related to IT assets and investments is now getting a lot of press and attention. Unfortunately, much of the writing and talking about portfolio management as it relates to IT is missing the point. The primary objective is cost reduction, and the focus is on the technology project. While portfolio management is indeed useful in understanding and managing costs, the real prize in portfolio management is in driving increased value.
If organizations are to seriously tackle the question of value with a portfolio management approach, they must recognize that the challenge is managing change. They must shift their focus beyond activities to the desired outcome. This involves:
Putting Teeth in the Process
Every business change program should have a complete and comparable business case that will be evaluated throughout the portfolio-management process. Few organizations have comprehensive, rigorous, or consistently applied business-case processes. In a recent Web poll of more than 200 organizations, only 20 percent felt that they had an effective process, while 60 percent felt that their process was inadequate or very inadequate.
Where business cases are created, there is usually far more rigor applied to the cost side than to the benefits side and they are seldom looked at after the decision to proceed. If they are looked at, it is usually some form of post-implementation review, an event akin to an autopsy.
Business cases must apply the same level of rigor to business benefits as to costs, and they must look at the total lifetime cost and value of investments. They need to look beyond ROI to include alignment with business objectives and the risk of not realizing the anticipated benefits. They must be used, not as a one-time go, no-go document, but as an ongoing operational tool to both select high potential investments and to manage the realization of value. They must be updated as we learn more and as circumstances change, and must be continually reviewed as part of the governance process.
Enterprise Architecture
Another root cause of many execution problems today is the lack of robust and flexible enterprise architectures. Enterprise architecture is not limited to technology nor technical architecture. It is broad and comprehensive. It is about how the whole enterprise is structured. It includes every value-creating component of the enterprise and the relationships between them. Enterprise architecture components include business units, business processes, information, applications, and technology, as well as knowledge, relationships, etc.
The enterprise architecture view enables organizations to properly structure programs of business change, ensuring that all the necessary components of change are considered, and that individual programs of change are not moving in conflicting directions. Failure to take such a view may result in unintended consequences, including long-term structural problems that may be showstoppers to future change.
Putting It All Together
Most organizations have elements of strategic governance. While their effectiveness may vary, strategy and project management are well-established disciplines. Many organizations have an individual, a group, or multiple groups responsible for strategy, although this is often still seen as more of an annual ritual than a process. Most organizations have some focus on project management, often through a project management office. Many organizations also have an architecture role, although usually within the IT function. The focus is often on the technology aspects of architecture and on the definition of those aspects rather than the ongoing management and implementation of the architecture, and integration with the overall enterprise architecture. An increasing number of organizations have established program management offices, although in some cases these view programs as a number of related technology projects, rather than business change programs incorporating all the aspects of business, process, people, technology, and organizational change. A few organizations are implementing some form of value management office to support the value aspects of portfolio management. But rarely do these five critical components come together, even in an annual review, let alone as part of an ongoing governance process.
There are critical relationships between these functions. The integration of these functions, managed well, will provide tremendous competitive advantage to organizations.
Conclusion
If they are to survive, let alone prosper, organizations must continue to demonstrate that they understand how to create value, have strategies capable of delivering value both quickly and over the long term, and must have a track record of successfully executing those strategies. They must stop going for the big bang and structure change into doable chunks that deliver real and measurable value in 60- to 90-day increments. In the private sector, how well this is done plays an increasingly significant role in determining market valuation. In the public sector, the mandate, public perception, and viability of the organization may well hinge on the clarity with which its actions and investments can be tied to value.
Adopting and implementing this new governance approach will not be easy. The CFO has both an opportunity and a responsibility to take a leadership role in making this change. It will require vision, discipline, and the courage to stay the course. It represents a fundamental change in how we think, manage, and act. Without such change, however, we will continue to dismally underperform. There will, as always, be a few bright stars, but most results will be mediocre at best and appalling at worse. Organizations, the people they serve, the people who work in them, and society as a whole deserve better. Investors and analysts will demand that we do better.
We can and must do better.
