I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

I work for ThoughtWorks, the global leader in software delivery and consulting.

Saturday, November 30, 2013

Governing IT Investments

In the previous blog, we looked at common misconceptions of IT governance. We also looked at how corporate governance works to better understand what governance is and is not. In this blog, we'll look at how we can implement more comprehensive governance in tech projects.

For corporate tech investments, the top most governing body is the firm's investment committee. In small companies, the investment committee and the board of directors are one and the same. In large companies, the investment committee acts on behalf of the board of directors to review and approve the allocation of capital to specific projects, usually on the basis of a business case. They also regularly review the investment portfolio and make adjustments to it as the firm's needs change.

The investment committee is composed of senior executives of the firm. Although executives are managers hired by investors to run the business, in this capacity they are making a specific allocation of capital that is generally of too low a level for board consideration. This is not a confusion of responsibilities. The board will have previously approved capital expenditure targets for the year as well as the strategy that makes the investment relevant, and any investment made by the investment committee has to stand up to board scrutiny (e.g., the yield should exceed the firm's cost of capital, or it should substantially remove some business operating risk). The investment decision is left to a capital committee composed of the firm's executives - who always have a fiduciary responsibility to shareholders - for sake of expediency.

The individual shareholders of a company have multiple investments and have limited amounts of time, so they rely on a board of directors to act on their behalf. In the same way, the investment committee members are the shareholders of an IT investment. They invest the firm's capital in a large and diverse portfolio above and beyond just IT investments. They will not have time to hover over each investment they make. So, just as investors form a board to govern a corporation, the investment committee forms a board to govern an individual investment.

In technology projects, we usually associate a "steering committee" with the body that has governance responsibilities for a project. As mentioned in the prior blog, steering committees are too often staffed by senior delivery representatives. This is a mistake. People who govern delivery do so on behalf of investors, not delivery. They must be able to function independently of delivery.

We'll call our governing body a "project board" so as not to confuse it with a traditional "steering committee". A project board that represents investors is composed of:

  • a representative of the corporate investment committee (e.g., somebody from the office of the CFO)
  • a representative from the business organization that will be the principal consumer of the investment (e.g., somebody from the COO's organization)
  • a senior representative of the IT organization (e.g., somebody from the office of the Chief Information Officer or Chief Digital Officer)
  • at least one independent director with experience delivering and implementing similar technology investments.

The program manager responsible for delivery and implementation of the investment is the executive, and interacts with the steering committee in the same way that the CEO interacts with the board of directors.

Again, notably absent from this board are the delivery representatives we normally associate with a steering committee: technical architects, vendors, infrastructure, and so forth. They may be invited to attend, but because they represent the sell side of the investment and not the buy side, they have no authority within the board itself. Investing them with board authority invites regulatory capture, which undermines independent governance.

The project board has an obligation to make sure that an investment remains viable. It does this primarily by scrutinizing project performance data, the assets under development and the people responsible for delivery. In addition, the board is given some leeway by the investment committee to change the definition of the investment itself.

Let's first look at how the board scrutinizes performance. The board meets regularly and frequently, concentrating on two fundamental questions: will the investment provide value for money? and is it being produced in accordance with all of our expectations? The program executive provides data about the performance of the project and the state of the assets being acquired and developed. The board uses this data, and information about the project its members acquire themselves, to answer these two governance questions. It also reconciles the state of the investment with the justification that was made for it - that is, the underlying business case - to assess whether it is still viable or not. The project board does this every time it meets.

The project board is also granted limited authority to make changes to the definition of the investment itself. It does not need to seek investment committee approval for small changes in the asset or minor increases in the cash required to acquire it if they do not alter the economics of the investment. This enables the project board to negotiate with the delivery executive to exclude development of a relatively minor portion of the business case if the costs are too high, or approve hiring specialists to help with specific technical challenges. The threshold of the project board's authority is that the sum of changes it approves must not invalidate the business case that justified the investment.

Scrutinizing performance and tweaking the parameters of the investment are how the board fulfills the three governance obligations presented in the previous blog. It fulfills its duty of verification by challenging the data the executive provides it and asking for additional data when necessary. It also has the obligation and the means to seek its own data, by e.g., spending time with the delivery team or commissioning an independent team to audit the state of the assets. It fulfills its duty of setting expectations by changing the parameters of the investment within boundaries set by the investment committee (e.g., allowing changes in scope that don't obliterate the investment case). It fulfills its duty of hiring and empowering people by securing specialists or experts should the investment run into trouble, and changing delivery leadership if necessary.

If the board concludes that an investment is on a trajectory where it cannot satisfy its business case, the board goes to the investment committee with a recommended course of action. For example, it may recommend increasing the size of the investment, substantially redefining the investment, or suspending investment outright. The board must then wait for the investment committee decision. The presence of a member of the investment committee on the project board reduces the surprise factor when this needs to happen.

This model of governance is applicable no matter how the investment is being delivered. Teams that practice Agile project management, continuous integration and static code analyses lend themselves particularly well to this because of the frequency and precision of the data they provide about the project and the assets being developed. But any team spending corporate capital should be held to a high standard of transparency. Delivery teams that are more opaque require more intense scrutiny by their board. And, while this clearly fits well with traditional corporate capital investment, it applies to Minimum Viable Product investing as well. MVP investments are a feedback-fueled voyage of discovery to determine whether there is a market for an idea and how to best satisfy it. Without independent governance, the investor is at risk of wantonly vaporizing cash on a quixotic pursuit to find anything that somebody might find appealing.

This is the structure and composition of good governance of an IT investment. Good structure means we have the means to perform good governance. But structure alone does not guarantee good governance. We need to have people who are familiar with making large IT investments, how those investments will be consumed by the business, what the characteristics of good IT assets are, and above all know how to fulfill their duty of curiosity as members of a project board. Good structure will make governance less ineffective, but it's only truly effective with the right people in governance roles.