A recent survey of 204 board members by Oliver Wyman’s Global Risk Center and the National Association of Corporate Directors (NACD) finds that nearly half (47 percent) of board members are dissatisfied with their boards’ ability to provide IT risk oversight. When you consider how much is riding on companies’ ability to use technology effectively, that figure is alarming. The world’s largest 500 companies lose more than $14 billion every year because of failed IT projects, according to an Oliver Wyman analysis. Therein lies an opportunity. Companies that receive valuable board direction and input on IT-related risk will have a significant competitive edge.
The IT Governance Dilemma
The pace of technological change is continually accelerating: Think how different the technology landscape looked just ten years ago. In 2001, there were no iPhones delivering apps on the go, social media was in its infancy and few people had heard of cloud computing. Keeping up with these advances and dealing with the threats and opportunities they create is extremely difficult for IT professionals, never mind for “laypeople.” It’s unfortunate, then, that fully half (51 percent) of those board members surveyed say they aren’t given enough information to perform their IT oversight duties. Few board members have extensive IT experience: Only 16 percent of survey participants report having been a CIO or senior IT executive earlier in their career.
While opinions differ on the degree of importance IT will have on the future of the companies they govern, there is near unanimous agreement that it will markedly change the company’s performance. More than 99 percent of survey participants believe that IT will have a significant impact on the organization in the next five years. More than a third (36 percent) expect IT to improve operational efficiencies, while 30 percent believe IT will provide a competitive advantage for their company in the next five years. Nineteen percent harbor even higher expectations: They believe IT will transform their company.
What’s more, the vast majority of board members surveyed say that oversight of IT risk should be the board’s responsibility. Boards want to provide counsel and direction, and shareholders and senior management expect them to do so—especially on the most challenging issues that impact the future of the corporation. Clearly, then, what boards urgently need is a different way to approach the breadth of IT-related issues.
A New Framework
Given the many areas of a business that IT touches, IT risk shouldn’t be viewed as a monolithic issue. Rather, boards should consider IT in the context of a wide range of business concerns. Our framework, consisting of four pillars of risk, will give boards and executives a common language to address IT-related risks. The four areas of risk the firm could be exposed to by ineffective management of IT are: competitive, portfolio, execution, and service and security. Below is an examination of each of these risks in turn.
1. Competitive Risk: Threats here include the risk of competitors getting to market faster, gaining market share or achieving an insurmountable first-mover advantage. That may happen through the introduction of a new technology that changes the channel to the end-consumer, dramatically alters the pricing or economics of a given business or eliminates the need for the company’s products and services.
One well-known example is the iPod. Apple wasn’t the first company to introduce an mp3 player. It was the first one to revolutionize the way customers legally bought and downloaded music. The iTunes store was nearly an instant hit. It not only helped the iPod dominate the market, but it also dramatically altered the economics of the entire music industry.
It is critical for board members to understand how the top management team is managing such potential external threats. Boards have a responsibility to determine how great the risk is that competitors’ innovative use of IT could alter their own business’s core value proposition. How does the management team evaluate the evolving IT capabilities of their competitors? What steps are being taken to ensure that the company’s position and its ability to maintain margin and grow revenues are not threatened?
While the specifics of these answers will be unique to each company, management should be able to offer a structured, data-driven evaluation of these risks across product and business lines. This analysis is most helpful when supported by detailed and integrated input from business unit executives—not just from functional IT management. Scenario-based views that analyze the potential impact on revenue streams and margins across multiple business units or product lines should also be used.
If boards don’t hear these elements, they should consider it a red flag. That means they need to work with their management teams to improve the corporation’s ability to plan, prepare and respond to these disruptive IT risks that can jeopardize its future.
2. Portfolio Risk: The IT project portfolio can involve hundreds, if not thousands, of independent and challenging IT projects. Generally speaking, 70 percent of these are dedicated to “keeping the lights on.” They are business-as-usual operations—email, upgrades to existing systems and the like. Such projects are necessary, but they won’t fundamentally change the firm. The other 30 percent are transformational—the applications or platforms that could give your firm a big leg up on the competition. Boards need to be aware of the risk of spending too much of scarce IT dollars and resources on basic operational expenses and not enough on true transformational investments.
For a large corporation with an IT budget of approximately $1 billion, effective portfolio management can have a huge impact on competitiveness. A firm that manages its portfolio well can reduce its “lights on” investment from the industry norms of 70 percent to 60 percent or even lower. This gain of 10 percentage points is a major competitive advantage. Over a typical, large, three-year-long transformational program, that translates into $300 million of capital available for developing new capabilities that can make or break entire product and market strategies.
It is also important to consider how the management team spreads IT dollars across the portfolio of projects to achieve an efficient risk/return ratio. Boards with a high awareness of IT issues look for a structured and well-documented process for making allocation decisions, monitoring performance and reviewing the overall portfolio. Moreover, the executive team should be able to explain the trade-offs they have made clearly. That would demonstrate they are making thoughtful and measured decisions, as well as optimizing scarce IT capital and resources.
3. Execution Risk: This type of risk involves a company not executing IT programs effectively or not delivering critical capabilities to the business on time and on budget. Because IT initiatives are often enterprise-wide, they impact many people and must be integrated with multiple technologies. They often impact client service. The failure of large programs can also cause lasting damage to brand reputation and cause companies to lose market share.
One would hope that failure is a rare occurrence. But this is not the case. As many as 70 percent of large IT programs don’t reach their goals in the allotted time and budget, according to an Oliver Wyman estimate. Many great business strategies and plans fall apart because IT programs are poorly executed.
To manage execution risks, boards must focus on two areas: Monitoring the progress made in carrying out IT programs and insisting on their integrated management by both leaders in business lines and their counterparts in IT organizations. Management teams need to offer a thorough and consistent framework for reporting their progress in meeting IT commitments. Such a framework contains real-world IT program metrics that can act as an early warning system, rather than the typical “red-amber-green” IT status reports that show everything as “green”—until the promised delivery date is close, then the reports suddenly turn “red.” If IT status reports don’t show a healthy dose of “amber” throughout the program, then teams are at best too lenient in their judgment of their own progress. At worst, the full story is not being told for fear of repercussions.
Business and IT managers should also present an integrated view of major IT programs. If they don’t, it’s a warning that vast capital is being spent on IT programs without full support from business management teams.
4. Service & Security Risk: The last category of risk refers to systems being available to keep a business and the data within its systems secure. Poor service levels and often painfully public security breaches of sensitive client information can alienate customers and employees as well as seriously damage a company’s reputation. Yet all too often, boards and senior executives leave these issues to their IT organizations. They need to place them squarely on their own plates.
Boards should ask exactly how the firm invests in ongoing service and security management on a quarterly basis. Proper investments are not just in technology—they include critical employee education and process improvement that often are the weak links in overall firm security. The executive team should undertake regular and comprehensive security assessments that include the probability of service and security breaches, prevention and remediation plans, crisis plans and process improvement plans for areas prone to security risks.
It is important for boards to exercise leadership regarding security risks. They should ensure that their management teams understand that their companies’ most critical information assets are constantly under threat by internal and external parties, and may already be compromised. Those who claim to have this issue solved are, at best, overly optimistic. In December of 2010, the National Security Agency announced that it now assumes all computer networks within the most secretive branch of the US intelligence service have been compromised. This should alert every corporation that it is engaged in a real and unfortunate “arms race” with cyber thieves from all corners of the world.
Technology is changing the way businesses operate in exciting ways, and at breath-taking speed. Yet now more than ever, companies need the counsel of their boards to help them navigate a rapidly changing environment.
Unfortunately, as our survey shows, many board members are frustrated with their ability to oversee IT risk. Whether it’s due to a lack of technical expertise, insufficient information coming from management, or that old chestnut, lack of time, many boards don’t offer the same sort of guidance and pushback that they do in other areas of corporate performance.
That has to change. Boards must begin demanding the information they need, and management must start presenting a picture of IT that is integrated with their view of their business. By using a common framework to think about IT risk, board members will have a shared lens through which to assess their position and a solid platform from which to take actions that benefit the corporations and shareholders they serve.
This article was developed as part of a Global Risk Center Project in cooperation with the National Association of Corporate Directors