How IT Governance Maturity and Strategic Alignment Influence Organizational Performance: Insights from CEO-CIO Dyads
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How IT Governance Maturity and Strategic Alignment Influence Organizational Performance: Insights from CEO-CIO Dyads - Detmar Straub
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How IT Governance Maturity and Strategic Alignment Influence Organizational Performance: Insights from CEO-CIO Dyads
- 1. HOW IT GOVERNANCE MATURITY AND STRATEGIC ALIGNMENT INFLUENCE ORGANIZATIONAL PERFORMANCE: INSIGHTS FROM CEO-CIO DYADS BY SHELLY PJ WU, DETMAR STRAUB, AND T.P. LIANG
- 2. What We Know? •Good news… •75% of execs try to align IT with business strategies (ITGI 2009). •Empirical evidence says: alignment performance •This linkage is more or less established. •Not new.
- 3. Motivation • There is a gap between belief and action. • Should not be: ▫ Mature IT governance firms yield up to 40% higher ROIT than their competitors (Weill and Ross 2004). ▫ Stronger IT governance IT outcomes (ITGI 2009).
- 4. Motivation • Many consider IT governance to be an integral to enterprise governance. • But IT governance maturity is still relatively low!! • Worldwide IT spending up to total $3.7 trillion in 2012 (Gartner, 2012)
- 5. The Theoretical Domain Alignment – Performance Link: Well studied IT Governance Maturity + Strategic Alignment + Organizational Performance
- 6. Research Problem • Insufficient understanding of the relationship between IT governance and downstream variables ▫ Missing empirical evidence to support that IT governance can help achieve the fusion of IT and business strategy
- 7. Research Questions • RQ#1: Can key mechanisms contributing to the IT governance maturity be identified and empirically validated? • RQ#2a: Theoretically, what are the causal mechanisms through which IT governance maturity influences performance via strategic alignment? • RQ#2b: Statistically, are the causal linkages between IT governance maturity and organizational performance mediated by strategic alignment?
- 8. Strategic Alignment Performance • The degree of coherence between realized business strategy and realized IT strategy (Chan 1992) ▫ Strategic fit theory predicts that a well aligned organization will have better performance. • Well researched but empirical research what affects strategic alignment is still lagging (Cragg et al. 2002; Chan et al. 2006; Chan and Reich 2007; Preston and Karahanna 2009).
- 9. IT Governance Research • IT governance: ▫ an integral part of enterprise governance ▫ consists of organizational structures, processes and leadership ▫ to ensure that organizational IT sustains and extends executive strategies and objectives (ITGI 2003). • Previous research (e.g., Brown 1997; Sambamurthy and Zmud 1999; Weill 2004). • Substantive research on IT governance as a critical predictor affecting the extent of strategic alignment is scarce.
- 10. IT Governance Maturity • Definition: the degree to which an organization implements critical IT governance best practices in terms of decision-making structure, formal processes and communications ▫ Mature IT governance (well-balanced implementation of major governance mechanisms) can: (1) ensure that organizational IT supports and aligns with business strategies and (2) promote desirable IT behaviors and at the same time.
- 11. The Research Model Alignment - Performance Link IT Governance Maturity + H2 Decisionmaking Structure Formal Process Communication Approach Product Strategic Alignment + Strategic Alignment Quality Strategic Alignment Organizational Performance H1 Market Strategic Alignment Financial Return Operational Excellence Customer Perspective
- 13. Methodology • Field study using interviews and questionnaires for data collection • Interviews with matched CIOs and CEOs for content validity purposes • Pre-tested questionnaire with 36 Executive MBA students with business and IT backgrounds • Sampling frame: senior managers or high level executives from both business and IT departments in medium-to-large-sized organizations • Matched responses from 136 organizations in Taiwan
- 14. Descriptive Statistics Frequency Percent 8 32 27 28 41 5.9 23.5 19.9 20.6 30.1 27 15 43 51 19.9 11.0 31.6 37.5 7 38 5.1 27.9 56 30 5 41.2 22.1 3.7 Revenues (2008) Less than $ 16.5 million $ 16.5 million - $ 165 million $ 165 million - $ 330 million $ 330 million - $ 1.6 billion More than $ 1.6 billion Number of Employees 100 - 500 501 - 1000 1001 - 5000 More than 5001 Industry Group Financial Services Business and Professional Services Manufacturing IT Other Respondents were business and IT/IS exec or senior managers, with a mean age of 46 and work experience of 11 years. 64% have Master’s or higher educational degree.
- 15. Dyadic (pair-matched) Data • Consists of a single business exec and a single IT exec • Reduces common method bias (Podsakoff et al. 2003) • Controlled length of survey to reduce high attrition rate (Klein et al. 2007) • Tailored survey items to respondent’s domain of expertise (IT and business strategy) • Response rate: 71%, high relative to matched surveys found elsewhere in the alignment literature (Sabherwal and Chan 2001). • 136 dyads is large relative to earlier studies (e.g., 83 dyads in Dyer’s [1996] work and 91 in Klein, Rai, and Straub [2007]).
- 16. Instrument Validation • Formative constructs (Jarvis et al. 2003) ▫ Direction of causality, not interchangeable indicators, covariation not necessary, different nomological net • Indicators created by multiplying values by their individual PLS weights; second-order constructs by composite score (weighted sum of the firstorder indicators) • Avoided common methods variance by gathering IVs and DVs from different sources (Podsakoff et al. 2003)
- 17. Creation of Composite Score
- 18. Instrument Validation • VIF < 3.3 (Diamantopoulos and Siguaw 2006) • Content validity: literature review and interviews with experts (CIO and CEO) • Construct validity: removing the first-order indicators with insignificant weightings (Diamantopoulos and Winklhofer 2001). • Discriminate validity: inter-item and item-toconstruct correlations correlate higher with each other than with other constructs.
- 19. Results of Path Analysis Alignment – Performance Link IT Governance Maturity 0.383*** Decisionmaking Structure .591*** 0.312*** 0.385*** Formal Process Communication Approach 0.167Ϯ Product Strategic Alignment Strategic Alignment R2 = 35% 0.442*** Quality Strategic Alignment Organizational Performance R2 = 49% .698*** 0.496*** Market Strategic Alignment Significance level: ***p < 0.001; **p < 0.01; *p < 0.05; Ϯp < 0.10. 0.110 Financial Return 0.649*** Operational Excellence 0.330* Customer Perspective
- 20. Data Analysis Summary (N=136) Controls Only Controls PLS Model Industry NS Size NS Alignment Performance H1 (+) Supported .698*** Maturity Alignment H2 (+) Supported .591*** Explained Variance: R2 Organizational Performance Strategic Alignment Statistical Power 1.3% 2.8% 49% 35% 0.99
- 21. Tests of Mediation (H3) IT Governance Maturity β = 0.487 *** Organizational Performance • Indirect effect of IT governance maturity is significant by the Sobel test (8.183, p < 0.001). • Full mediation of strategic alignment : the direct effect of IT governance maturity on firm performance changes from insignificant to positive and significant.
- 22. Discussion • IT governance maturity enables strategic alignment, which increases organizational performance, particularly operational excellence and customer perspective. • IT governance maturity is a strong predictor of strategic alignment, with a significant and strong positive effect (β = 0.591, p < 0.001), explained variance (35%). • The more the IT strategy aligns with business strategy in terms of intensive marketing and exploiting new markets, the better performance it achieves.
- 23. Discussion • Insignificant weight of financial return: 1.The lingering effects of the financial tsunami of 2008 2.Productivity paradox (Brynjolfsson 1993). Intangibles do not always increase the amount of financial output, but do help meet customer demands. 1. Conventional measures such as financial metrics are thus seen as inadequate to fully capture corporate performance (Banker et al. 2001). 2.When managers get excessively focused on short-term financial performance metrics, activities such as process improvements and customer and market development, both of which bring in long-term benefits, will be traded off for quarterly profitability.
- 24. Contributions (Scholarly) • Empirically validate IT governance maturity as a construct that captures crucial mechanisms as well as critical IT governance practices. • Propose a research model postulating a causal line between IT governance, strategic alignment and organizational performance. • Identify and empirically test the strategic alignment as fully mediating the positive impact of IT governance maturity on organizational performance.
- 25. Contributions (Practitioner) • Structure maturity : (1) IT steering committee at executive or senior management level, (2) SIS planning steering committee composed of business and IT people and (3) a CIO reporting to CEO and/or COO structure • Established formal process (e.g., for portfolio management) to monitor and ensure that IT policies are consistent with business needs • Communication approaches: (1) CIO on executive committee, (2) agenda to report and discuss IT issues, and (3) CIO (or similar role) articulates a vision of IT’s role, especially in market-oriented business-IT strategic alignment.
- 26. Limitations and Future Research 1. 2. 3. 4. Perceptual data from more sources Longitudinal research Cross-border research Both quantitative and qualitative data and perhaps mixed methods studies
- 27. Conclusion • Our findings provide a better understanding of the positive impact of IT governance maturity on organizational performance and the mediating role strategic alignment plays in influencing such impact.
- 28. Construct Definition IT Governance Maturity: The degree to which an organization implements critical IT governance best practices. Type Formative-2nd order Items Reference Weill and Ross (2004); De Haes and Van Grembergen (2009) Decision-making Structure The degree to which the organization has established organizational units and roles responsible for making IT decisions such as committees. Formative-1st order IT steering committee (ITM1), strategic information systems planning steering committee (ITM8) and CIO reporting to CEO and/or COO (ITM9) De Haes and Van Grembergen (2009) Formal Process The degree to which the organization has established formal processes to monitor and ensure that IT policies are consistent with business needs. Formative-1st order Formal process for portfolio management Weill and Ross (2004); De Haes and (ITM3), formal process for strategic Van Grembergen (2009) information systems planning (ITM7), and formal process for project governance (ITM10) Communication Approach The degree to which the organization has Formative-1st order established channels to ensure proper communication and disseminate IT governance principles. CIO on executive committee (ITM2), IT Weill and Ross (2004) strategy committee and agenda to report and discuss IT issues (ITM5), and CIO or similar role to articulate a vision of IT’s role (ITM6). Strategic Alignment: The degree of coherence between realized business strategy and realized IT strategy. Formative-2nd order Product-oriented Strategic Alignment The alignment between IS strategy and business strategy in product development. Formative-1st order IT strategies supporting new products Hussin et al. (2002) (B4IT4), products diversification (B5IT6) and differentiation (B3IT2) strategies. Quality-oriented Strategic Alignment The alignment between IS strategy and business strategy in terms of quality and production efficiency. Formative-1st order IT strategies supporting product quality (B2IT3), production efficiency (B6IT5) and service quality (B7IT7) strategies. Hussin et al. (2002) Market-oriented Strategic Alignment The alignment between IS strategy and business strategy regarding marketing activities. Formative-1st order IT strategies supporting intensive marketing (B8IT8) and new markets (B9IT9) strategies. Hussin et al. (2002) Organizational Performance: An organization’s aggregate performance relative to its competition. Financial Performance The degree to which the organization’s performance is better than its competitors in terms of conventional financial measures. Chan (1992) Formative-2nd order Rai et al. (2006) Formative-1st order Return on investment (OP1), return on equity (OP2) and return on assets (OP3) Weill and Ross (2004) Customer Perspective The degree to which the organization’s Formative-1st order performance is better than its competitors from customers’ perspective. Customer’s perception of products and services quality (OP4), customer satisfaction (OP5) and firm image (OP6) Kaplan and Norton (2004) Operational Excellence The degree to which the organization’s Formative-1st order performance is better than its competitors in its responsiveness and generation of productivity improvements. Productivity improvements (OP7), timeline of customer service (OP8), production cycle time (OP9) Rai et al. (2006)
Notas do Editor
- This realization has long been true in the IT profession, both academics and practitioners. Strategic alignment has been a top managerial concerns since the beginnings of the IS profession (Luftman and Kempaiah 2008; Taylor et al. 2010).
- First, there is insufficient understanding of the relationship between IT governance and strategic alignment. Although researchers have repeatedly emphasized that the goal of IT governance is to achieve the fusion of IT and business strategy (e.g., De Haes and Van Grembergen 2005, 2006, 2009), solid empirical evidence to support this argument is still missing. Second, exactly what are the mechanisms through which business–IT strategic alignment impacts the role of IT governance in its downstream effect on organizational performance? Although prior literature has examined the effect of IT governance on firm performance (e.g., Weill and Ross 2004) and the effect of strategic alignment on performance (Chan et al. 1997; Chan et al. 2006; Oh and Pinsonneault 2007; Preston and Karahanna 2009; Tallon 2008; Tallon and Pinsonneault 2011), research connecting these two perspectives is lacking.
- First, there is insufficient understanding of the relationship between IT governance and strategic alignment. Although researchers have repeatedly emphasized that the goal of IT governance is to achieve the fusion of IT and business strategy (e.g., De Haes and Van Grembergen 2005, 2006, 2009), solid empirical evidence to support this argument is still missing. Second, exactly what are the mechanisms through which business–IT strategic alignment impacts the role of IT governance in its downstream effect on organizational performance? Although prior literature has examined the effect of IT governance on firm performance (e.g., Weill and Ross 2004) and the effect of strategic alignment on performance (Chan et al. 1997; Chan et al. 2006; Oh and Pinsonneault 2007; Preston and Karahanna 2009; Tallon 2008; Tallon and Pinsonneault 2011), research connecting these two perspectives is lacking.
- According to ITGI (2003), the ultimate goal of IT governance is to ensure that an organization’s IT sustains and extends the organization’s strategies and objectives. With this objective in mind, then, well implemented IT governance practices should be able to improve the alignment between IT and business strategy, and ultimately firm performance. In other words, the maturity level of IT governance should be an important causal agent and predictor of strategic alignment. However, few research papers have empirically examined the effect of IT governance maturity on strategic alignment. This is probably because the maturity measures of IT governance were yet to be established and validated.
- Realized not intended business strategy Intellectual dimension: more dominant perspective focuses on alignment between business and IS on various dimensions and combinations of dimensions such as alignment of strategy, alignment of plans or alignment of processes. Content: concerns the question: “what strategy is the organization pursuing?” IS strategy focuses on systems or business applications of IT, being concerned primarily with aligning them with business needs and using them to derive strategic benefits (Sabherwal and Chan, ISR 2001). While process concerns the question “how does the organization develop its strategy? Though prior research has provided conceptual insight into the antecedents of “intellectual” IS strategic alignment, few theory-based empirical studies have examined the relationship between IS strategic alignment and its antecedent variables (Chan et al. 2006).
- Prior research has proposed different types of and contingency factors for IT governance (e.g., Brown 1997; Sambamurthy and Zmud 1999; Weill 2004). Nevertheless, in spite of this valuable work, it is still not clear by which mechanisms IT governance exerts its effects on firm performance.
- The overall rationale for the model is that the implementation maturity of IT governance mechanisms can facilitate the alignment between IT strategies and business strategies, which thereby leads to higher organizational performance. Notably, we did not include items for learning and growth dimension since it was less likely that our respondents could rank their own employees’ learning skills and innovative potentials relative to those of their competitors. In addition, based on Rai et al. (2006), we concur that these three dimensions are sufficient and appropriate. 2. Product-oriented: The alignment between product development strategy and IT strategy supporting this business strategy. Quality-oriented: The alignment between quality and productivity strategies and IT strategy supporting these business strategies. Market-oriented: The alignment between market-oriented strategy and IT strategy supporting this business strategy.
- A dyadic design is preferable because it enhances measurement validity by cross-referencing perceptions of both sides of a dyad (Klein 2007) and reduces common method bias by measuring predictor and criterion variables from multiple, presumably independent sources (Podsakoff et al. 2003). while collecting all variables from both sides would be ideal, we wanted to control the length of the survey. This approach reduces the concern about high attrition rate often seen in match-sample designs (Klein et al. 2007). Since the focus of our study spans two areas of expertise (IT and business strategy), a matched survey design was adopted. Matched surveys help to limit common method bias while allowing researchers to develop survey items that are tailored to each respondent’s domain of expertise. A rate that is relatively high with matched surveys found elsewhere in the alignment literature (Sabherwal and Chan 2001).
- (1) the direction of causality is from indicators to constructs, (2) the indicators need not be interchangeable, (3) covariation among indicators is not necessary; and (4) the nomological net of indicators can differ.
- 1. To evaluate reliability of formative items, we use the VIF (variance inflation factor) statistic to determine whether the formative measures are correlated too highly. The VIF values of all formative constructs are below the threshold value 3.3 (Diamantopoulos and Siguaw 2006), which suggests that our measures do not have a multicollinearity problem.
- The instrument was validated via PLS (SmartPLS, version 2.0). After purification (MacKenzie et al. 2011), the psychometric properties of the instrument were assessed. In order to estimate the significance of the indicator weights(Gefen et al. 2000), a bootstrapping technique with 500 resamples was used. No minimum threshold values for second-order indicator weights have been established. The statistical significance of the weights can be used to determine the relative importance of indicators in forming a latent construct.
- To assess the significance of the mediation effect of strategic alignment and determine whether it partially or fully mediates the relationship between IT governance maturity and organizational performance (H3), we first performed a Sobel test (Baron and Kenny 1986; Kenny 2011; Sobel 1982). This technique examines the path coefficients and the standard errors of the direct paths between IT governance maturity (independent variable, designated IV), strategic alignment (mediating variable, designated M), and organizational performance (dependent variable, designated DV). The indirect effect of IT governance maturity on organizational performance is significant as indicated by the Sobel test (8.183, p < 0.001). To decide whether strategic alignment completely or partially mediates the link between IT governance maturity and organizational performance (Kenny 2011), we look at the direct effect when the mediator is removed from the model.
- 2. a weighted composite of the three mechanisms contributes to higher strategic alignment, with a significant and strong positive effect (β = 0.591, p < 0.001). In addition, the strong effect of IT governance maturity on strategic alignment, as indicated by the path coefficient, as well as the explained variance (35%), suggest that IT governance maturity is a strong predictor of strategic alignment. 4. the insignificant weight of financial return with organizational performance suggests that strategic alignment may not directly lead to superior financial return. Nevertheless, this result might be explained by the productivity paradox (Brynjolfsson 1993). Intangibles such as better responsiveness to customers do not always increase the amount of financial output, but do help meet customer demands. Conventional measures such as financial metrics are thus seen to be inadequate for fully evaluating corporate performance (Banker et al. 2001). To survive and compete in the information age, it is necessary for companies to use measurement systems derived from their strategies and capabilities (Kaplan and Norton, 1996). When managers get excessively focused on short-term financial performance metrics, activities such as process improvements and customer and market development which bring in long-term benefits will be traded off for quarterly profitability.
- There are many factors besides IT that can lead to Ricardian rents across all the value-adding activities of a firm. Also, historical externalities could have had the major impact on financial performance itself during the time of the data gathering. For example, the lingering effects of the financial tsunami of 2008 could be overwhelming internal factors in our sample
- This study adds to the IT governance and strategic alignment literature in three ways. First, we propose and empirically validate IT governance maturity as a construct that captures crucial mechanisms as well as critical IT governance practices; we base this on the implementation frameworks of De Haes and Van Grembergen (2009) and Weill and Ross (2004), but our modeling of the construct is unique in the literature. Second, we propose a research model postulating a causal link between IT governance maturity, strategic alignment and organizational performance and thus conceptually linking these two key antecedents to organizational performance. Third, we identify and empirically test the strategic alignment as fully mediating the positive impact of IT governance maturity on organizational performance.
- IT steering committee at executive or senior management level, strategic information systems planning steering committee composed of business and IT people and a CIO reporting to CEO and/or COO structure leads to better strategic alignment. The shared understanding and knowledge between IT and business executives can best be achieved by more conscious communication. Enjoining proper communication channels, IT and business managers are more apt to sense market opportunities or threats and to build a consensus around particular strategies. 3. CIO be given full membership on executive committee, (2) enjoining an IT strategy committee wherein there is an agenda to report and discuss IT issues, and (3) having a CIO (or similar role) on the committee to articulate a vision of IT’s role, especially in market-oriented business-IT strategic alignment.
- IT governance maturity and strategic alignment may have higher reliability if answered by more members of senior management from the same organization . Such research could provide valuable insights into the influence of the dynamic interaction of governance antecedent factors and strategic alignment on organizational performance over time. There could be interesting cultural effects being played out across these regions. In these cases, more sophisticated analyses of the possible moderating impacts caused by cultural differences could evaluate the relationships among IT decision-making structures and strategic alignment. Future research should use both quantitative and qualitative data and perhaps mixed methods studies to contribute deeper insights.
- IT governance is still a neglected, but crucial area of IS studies, one that has fortunately gained greater attention recently. However, empirical studies in this field are still scarce.