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

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.

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).

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)

The Theoretical Domain

Alignment – Performance Link: Well studied

+

IT GovernanceMaturity

OrganizationalPerformance

+ StrategicAlignment

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

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?

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).

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.

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.

The Research Model

Alignment - Performance Link

+

H1

IT Governance Maturity

Decision-making

Structure

Formal Process

Communication Approach

Organizational Performance

Operational Excellence

Customer Perspective

+

H2

Strategic Alignment

Product Strategic

Alignment

Quality Strategic

Alignment

Market Strategic

Alignment

Financial Return

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

Descriptive Statistics   Frequency PercentRevenues (2008)    Less than $ 16.5 million 8 5.9$ 16.5 million - $ 165 million 32 23.5$ 165 million - $ 330 million 27 19.9$ 330 million - $ 1.6 billion 28 20.6More than $ 1.6 billion 41 30.1Number of Employees    100 - 500 27 19.9501 - 1000 15 11.01001 - 5000 43 31.6More than 5001 51 37.5Industry Group    Financial Services 7 5.1Business and Professional Services

38 27.9

Manufacturing 56 41.2IT 30 22.1Other 5 3.7

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.

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]).

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 first-order indicators)

•Avoided common methods variance by gathering IVs and DVs from different sources (Podsakoff et al. 2003)

Creation of Composite Score

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-to-construct correlations correlate higher with each other than with other constructs.

Results of Path Analysis

Significance level: ***p < 0.001; **p < 0.01; *p < 0.05; Ϯp < 0.10.

Alignment – Performance Link

.591*** .698***

0.312*** 0.330* 0.110 0.167Ϯ

0.442*** 0.496***

Strategic Alignment R2 = 35%

Product Strategic

Alignment

Quality Strategic

Alignment

Market Strategic

Alignment

0.649***

Organizational Performance

R2 = 49%

Financial Return

Operational Excellence

Customer Perspective

IT Governance Maturity

0.383*** 0.385***

Decision-making

Structure

Formal Process

Communication Approach

Data Analysis Summary (N=136)

Controls Only PLS Model

ControlsIndustry NS

Size NS

Alignment PerformanceH1 (+) Supported

.698***

Maturity AlignmentH2 (+) Supported

.591***

Explained Variance: R2

Organizational PerformanceStrategic AlignmentStatistical Power

1.3%2.8%

49%35%0.99

Tests of Mediation (H3)

• 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.

IT GovernanceMaturity

OrganizationalPerformance

β = 0.487 ***

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.

Discussion• Insignificant weight of financial return: 1.The lingering effects of the financial tsunami of

20082.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.

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.

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.

Limitations and Future Research1. Perceptual data from more sources2. Longitudinal research 3. Cross-border research4. Both quantitative and qualitative data

and perhaps mixed methods studies

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.

Construct Definition Type Items ReferenceIT Governance Maturity: The degree to which an organization implements critical IT governance best practices.

Formative-2nd order   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 (ITM3), formal process for strategic information systems planning (ITM7), and formal process for project governance (ITM10)

Weill and Ross (2004); De Haes and Van Grembergen (2009)

Communication Approach The degree to which the organization has established channels to ensure proper communication and disseminate IT governance principles.

Formative-1st order CIO on executive committee (ITM2), IT 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).

Weill and Ross (2004)

Strategic Alignment: The degree of coherence between realized business strategy and realized IT strategy.

Formative-2nd order   Chan (1992)

Product-oriented Strategic Alignment

The alignment between IS strategy and business strategy in product development.

Formative-1st order IT strategies supporting new products (B4IT4), products diversification (B5IT6) and differentiation (B3IT2) strategies.

Hussin et al. (2002)

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.

Formative-2nd order   Rai et al. (2006)

Financial Performance The degree to which the organization’s performance is better than its competitors in terms of conventional financial measures.

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 performance is better than its competitors from customers’ perspective.

Formative-1st order 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 performance is better than its competitors in its responsiveness and generation of productivity improvements.

Formative-1st order Productivity improvements (OP7), timeline of customer service (OP8), production cycle time (OP9)

Rai et al. (2006)