Proposing a Theoretical Model for IT Governance and IT Business ...

Proceedings of the 42nd Hawaii International Conference on System Sciences - 2009

Proposing a theoretical model for IT governance and IT business alignment Daniel Beimborn, Frank Schlosser, Tim Weitzel University of Bamberg, Germany {daniel.beimborn | frank.schlosser | tim.weitzel}@uni-bamberg.de

Abstract This paper suggests extending the view that strategic alignment is a core IT governance issue and postulates that considering operational alignment as well offers more precise insights into how governance mechanisms influence business process performance. Theoretically combining findings from IT value, IT business alignment and IT governance research, we show the tantamount role of top executive support and operational alignment from a governance perspective. Empirical data from 82 firms show, among others, that the impact of IT governance mechanisms on success is mediated by strategic and operational alignment.

1. Introduction Building on the suggestion by van Grembergen et al. [70] that strategic alignment is a core IT governance issue we suggest to extend this view and postulate that operational alignment is a key IT governance mechanism as well. We expect a closer integration of insights from alignment and from IT governance research to offer a better understanding of how IT governance mechanisms actually work in theory and practice. Encouraged by recent insights from case studies and cross sectional surveys on the role of IT business alignment for IT value creation and especially the effectiveness of practical alignment mechanisms [10, 11, 72], we propose a theoretical model that links alignment with governance mechanisms and business process performance. More precisely, we want to evaluate if our understanding of structures and processes associated with IT value creation is theoretically sufficiently sound to explain business process performance and sufficiently relevant to evaluate the effectiveness of particular governance/alignment actions. While this study is only a first step to evaluate if our approach is worth further pursuing, we offer two main insights. First, by combining IT governance and IT business alignment arguments it is shown that operational alignment, i.e. alignment at the level of daily business, is a relational governance aspect that me-

diates the impact of governance actions to success. Second, the results strongly indicate that executive support in terms of both structural (IT represented in the board) and behavioral (top management does actively support and propel alignment) factors as a primary governance obligation drive strategic alignment, operational alignment, and governance mechanisms. Besides, the model offers exciting avenues for further research to analyze the effectiveness of governance measures and also to maybe think about the role of alignment for compliance issues.

2. Model Development Recent literature on both, IT business alignment and IT governance has highlighted the important role of alignment for IT value creation. And while there is a rich and maturing research on both areas, we suggest that closer aligning the literature and theoretical concepts on IT governance and alignment can help to put forward clear theoretical models for IT governance and IT business alignment. This should also allow us to evaluate practical measures and approaches towards IT governance structures and processes. In the following, we implicitly explore an analogy between IT governance (long term, strategic) and IT management (short term, daily business) on the one side and strategic (long term) and operational (short term, daily business) alignment on the other. Within IT governance research, governance mostly refers to the distribution of decision rights [51] while IT management is concerned with the daily IT operations and centers around more practical questions related to strategy implementation and mechanisms to ensure effective IT governance in daily work routines. Thus, IT management and IT governance belong together but still are distinct from one another [69]. Analogous, strategic alignment, as elaborated below, has long been discussed as the extent of harmony between business and IT plans [39, 56] while operational alignment comprises interaction, communication and cognitive linkages between IT and business personnel in daily business [9, 71]. Accordingly, de Haes & van

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Proceedings of the 42nd Hawaii International Conference on System Sciences - 2009

Grembergen have emphasized that such relational mechanisms are important for aligning IT and business [28, 29]. Figure 1 depicts our suggested model that is explained and empirically evaluated in the following. Process performance H1

alignment

Operational alignment H2

governance

H7

Strategic alignment H5

Executive support

H4

H3 H6

IT governance tools

Figure 1. Research model.

2.1. IT Business Alignment and Performance In recent years, IT business alignment has become an important explanatory factor within the IT business value debate [31, 56]. The literature has conceptualized alignment as a multi-faceted construct with different levels (alignment on the strategic level vs. alignment on the structural level [39]) and dimensions (intellectual vs. social dimension [56]). Since “strategies are only effective when they are translated into actions” [31], interaction between the business and the IT domain has to be effective not only on the strategic level but also within IT projects and on the operational (or structural) level. Even perfectly aligned business and IT strategies need to be implemented and transformed into daily business in order to lead to the intended results [35]. Therefore, in this work we build on both levels of alignment, capturing them in distinct constructs. While strategic alignment (i.e. congruence of IT and business strategies and plans [56]) has been focused on in many research works during the last 15 years, there is more lack of clarity and of agreement on conceptualizing alignment on the structural level. As one of the more recent works, which bring several of the more fundamental conceptualizations together, Wagner [71] has composed operational alignment by three different dimensions. Drawing on Reich and

Benbasat [55, 56], Tiwana et al. [33] and others [32, 49, 75], the first component is “communication” and refers to the intensity and quality of interaction patterns between business and IT [56]. The second dimension is “shared domain knowledge” and refers to one side’s knowledge about the other side’s domain, which has shown to be a critical requirement for effective collaboration of IT and business side as well as for achieving superior IT performance [5, 49, 59]. For example, if the IT staff does not have knowledge about the supported business activities, products, and processes, they will not be able to provide valuable services or adapt the systems to fulfill the demands of the business [65]. The third dimension in Wagner’s concept is described as the “cognitive” dimension of the IT/business relationship. Based on [33, 66] the “cognitive relationship” embraces concepts like trust, mutual acceptance and respect of each other´s work, which have been shown in numerous studies to be an essential factor for a successful relationship between business and IT people. Obviously, those three dimensions of operational alignment are highly interrelated. Reich and Benbasat [56] argue that shared knowledge improves communication, while it is also obvious that communication leads to more shared knowledge [1, 14] and cognition [66]. Similar argumentations can be made for the relationship between communication, shared knowledge, and the cognitive dimension [17, 38, 60, 66]. Summarizing, operational IT business alignment represents a linkage between the business and IT side of the firm and allows effective interaction, knowledge transfer and collaboration [74]. Operational alignment leads to the IT services orientating at the actual demands of the business and thus leads to higher IT effectiveness. Two propositions supporting this argument can be directly drawn from Wagner [71]: (1) Alignment leads to more effective IS support processes at the operational level [3, 40] and (2) alignment increases “the likelihood of developing and changing information systems according to the business requirements by frequent communication between the IT unit and the business unit” [71], cf. also [44, 64]. Since business units, in case of high operational alignment, are more strongly involved in IT planning and, thus, their requirements are better reflected in the information systems, the resulting information systems both are more likely to be used [3, 45] and providing a higher level of efficiency. In turn, as a direct consequence from the IT being better adapted to the business’ needs and the IT being used more efficiently and effectively, the operational performance of the business process (e.g., in terms of time/cost/quality) will increase. Hypothesis 1: Operational IT Business Alignment leads to increased process performance.

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By contrast, we do not propose a direct link between strategic alignment and operational process performance. As [31] argues, strategies as well as strategic alignment have to be brought down and implemented on the structural level of the firm in order to actually generate value. Strategic alignment is useless if it is not reflected by alignment on the operational level. Therefore, although strategic alignment of course has value-contributing characteristics, these will be more indirect and are mediated by other variables, one of them being operational alignment. The following section will shed light on this interrelationship.

2.2. IT Governance Previous literature has presented different definitions of IT governance, indicating that there are various ways in assessing this concept [73]. However, some central aspects have been identified which should be incorporated when dealing with IT governance. According to Broadbent [16], IT governance is part of the corporate governance and has to provide mechanisms for IT councils, business alignment, and implementation processes. Based on this, van Grembergen (2000) defines IT governance as "the organizational capacity to control the formulation and implementation of IT strategy and guide to proper direction for the purpose of achieving competitive advantages for the corporation" [68]. Since our research has a focus on IT business alignment, especially on how alignment on the operational level can leverage the impact of governance mechanisms on process performance, we lean on this definition and do not include aspects like policies and procedures, which is also in line with [73]. Van Grembergen et al. referred to them as IT governance structures, processes, and relational mechanisms [26] [20]. In order to achieve them, promising mechanisms have been proposed for each part [26, 49]. We build upon that and investigate executive support (as aspect of IT governance structures), distinctive governance mechanisms like partnership rewards (as mechanisms for relational IT governance mechanisms), and strategic alignment (as mechanism for IT governance processes), which is in line with [26, 49]. In the following we elaborate each aspect in more detail, starting with strategic IT business alignment. As highlighted above, IT business alignment has been identified to be positively correlated with business process performance. What is still rather unclear is the question of how IT business alignment, in particular on the operational level, can be reached. First, one has to distinguish between strategic and structural or operational alignment. Guldentops [37] distinguishes between “Alignment in strategy” and “Alignment in

operations” and points out that alignment is important in the operational level rather than only on the strategic level. Alignment on the operational level needs to be based on alignment on the strategic level. Thus, we state that an IT strategy that is documented and accurately aligned with the business strategy allows to clearly communicate this strategy as well as major objectives down to the IT unit and the business units. In this way, strategic IT business alignment is positively correlated with operational IT business alignment. Hypothesis 2: Alignment between business and IT strategy increases operational IT business alignment. In addition to this direct link between strategic and operational alignment, we propose a mediating effect of strategic alignment over distinctive governance mechanisms as good alignment on the strategic level might allow for a more effective application of these mechanisms. The reason is that only when there are clear objectives and aligned IT and business strategies it is likely that, first, there are mechanisms to implement these plans and strategies in daily business, and, second, these mechanisms are used in a valuable way. Our next hypothesis therefore is that better strategic IT business alignment has a positive impact on the use of alignment governance mechanisms. Hypothesis 3: The appropriate use of alignment governance tools is driven by strategic alignment. Since it is very unlikely that good alignment on the operational level happens by accident, it seems promising to investigate the enablers which drive operational alignment. Above, we argued that alignment on the strategic level enhances alignment on the operational level. However, we assume that this link can be facilitated by the appropriate implementation of several mechanisms, some of them identified by Wagner [71] and supported by others. It has been shown that e.g. the existence of a liaison unit that aims at improving the collaboration between business units and the IT unit can have positive effects [32, 71]. However, it is also possible that it leads to a reduced level regarding the direct communication between business and IT as it represents an additional layer within the organization. This can result in longer ways and more bureaucracy. Also, the involvement of business units into IT planning has been identified to enhance the operational alignment in terms of better shared domain knowledge and cognitive relationship [26, 55, 56]. This is even more important as the process of IT planning is regularly mentioned to be decisive for improving alignment [54, 57]. Moreover, incentives rewarding good interaction between business and IT on the operational level will lead to better operational IT business alignment [70], as it might be an enabler and accelerator for supe-

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rior communication [69]. Our next hypothesis thus is as follows. Hypothesis 4: Governance mechanisms facilitate IT business alignment on the operational level. Extending the hypotheses stated so far, we address and include another factor into our research model which is the executive support, or top management support. According to [21] the role of top management is crucial for gaining firm-internal abilities and shaping the firm´s environment. Top management support is shown to be important in the literature in various ways. Teo and Ang [64] found that top management commitment to the strategic use of IT is a critical success factor for alignment. Luftman and Brier [47] identified senior executive support for IT as an enabler of strategic alignment. To make this even more effective it is key that the IT is personally represented in the executive board what also explicates the role and responsibilities as well as the decision rights of IT executives within a firm. Thus, “IT governance must be driven from the highest levels within the organization” [73]. The need for IT being part of the firm’s governance or being addressed by an distinctive IT governance arises from the fact that IT has become a key factor in supporting and sustaining the business [70]. Business executives have to deal with IT decisions in most sectors and industries and cannot simply delegate, ignore, or avoid them [52, 67, 70]. Van Grembergen et al. [70] also point out that strategic alignment is a core issue of IT governance, being a responsibility of the firm´s board. Thus, when clear leadership and guidance are present and everybody knows who is accountable for specific decisions and furthermore this is done in a way of close collaboration between business and IT, this may have positive effects on other parts of the firm, such as IT business alignment and governance mechanisms. We therefore state the following three hypotheses: Hypothesis 5: Executive support positively influences IT business alignment on the strategic level. Hypothesis 6: The appropriate use of governance mechanisms is driven by executive support. Hypothesis 7: Executive support increases operational IT business alignment.

3. Methodology 3.1. Approach / Data collection As unit of analysis for this study we examined the banks’ business process of granting credits to small and medium sized enterprises (SME credit process). The overall survey was conducted to investigate the

influence of IS usage on process performance and to examine which factors actually lead to a more effective IS usage in order to achieve and sustain business value from IT and a competitive advantage in the corporate loans business as the relevant market. The data shows that more than 90% of all respondents see their bank within a highly competitive environment in regard of the SME credit process, indicating the relevance of the SME loans business. Moreover, more than two third of the banks (69%) perceive the design of their SME credit process to deliver a sustainable competitive advantage. Besides the high relevance of the corporate loans business for the typical bank’s retail model, the SME credit process was chosen as application domain for various reasons: banking processes in general are highly IT reliant, Thus, IT can spend a business value, but the ubiquitousness can also lead to the opposite effect [20]. Moreover, the SME credit process does not necessarily force a bank to utilize a high degree of IT since loan applications can also be processed by humans. Consequently, this process shows high potential for variation in IT usage which facilitates our research. Choosing only one industry and one business process for conducting a survey avoids heterogeneity and, thus, makes the use of several demographic control variables obsolete [see 24]. The study focuses on similar IT systems, on similar business contexts, on people with comparable skills and competencies, and on firms acting in the same regulatory environment and market. We focus on the business process level and the relevant IT system because aggregation of organizational measures across the firm will lead to the dilution and disguise of IT impacts [4]. Therefore, all constructs are operationalized at a business process level. In this analysis, we particularly focus on the collaboration of IT and business units involved in this process both on the strategic and the operational level. Which roles do superior executive support and distinctive governance mechanisms play for enhanced operational IT business alignment and thus process performance? Data collection was conducted in 2007 by sending a six-page questionnaire to C-level executives in the 1,500 largest US banks according to total assets. In order to ensure that the questionnaire will be addressed to the person who is in charge of the SME credit process (i.e. the Chief Credit Officer or the Chief Lending Officer), we contacted the corporate office of each bank to identify the adequate addressee, explain the objective of our survey and ask for participation. Since only the headquarters have been called, there are no bank duplicates in the overall population. Out of the 1,500 credit process managers, 1,213 initially agreed to participate. We sent them the ques-

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tionnaire using the individually preferred channel (email, mail, or fax) and resent it after four weeks to those banks who had not answered. Four to six weeks after that, the managers who still had not sent back the completed survey were called again to make sure they had received the questionnaire and to find out why they had not replied. Most of those executives who indicated a reason for not taking part in the survey, mentioned lack of time or lack of interest. Those who were still willing to complete the questionnaire received it once again. Finally, we received 149 mainly completed questionnaires, representing a response rate of 12.3 % when ignoring the 287 initial declines where no questionnaire was sent out. This rate is in line with other studies among firm managers (e.g. [12, 14, 71]). All data were then entered into a data base and verified by a second person based on the original documents. For testing our model, we conducted a PLS analysis using smartPLS [58]. Before starting the calculation, all cases containing at least one missing value regarding the items used were skipped, leading to a final sample for calculation that consisted of 82 data sets.

3.2. Measurement Next, we show how the different constructs in our research model have been operationalized. A detailed overview of all indicator questions is presented in the appendix at the end of this paper. Executive support (ES): Executive support reflects both the general IT commitment of executives, in particular those from the business area, and moreover the active support for alignment initiatives between business and IT. In our model, we also evaluate if the IT unit is personally represented in the bank´s board. Thus, the two indicators assessing the level of executive support count for a sufficient representation of the IT unit in the bank´s executive board, and for an dedicated top management support of interaction between business and IT. The construct executive support is one out of two constructs measured formatively in our model. Strategic IT business alignment (SA): This construct is concerned with the functional integration at the strategic level. It is about the link between business and IT strategy. According to Reich and Benbasat [55], strategic IT business alignment can be seen as a process of organizational learning that brings business and IT knowledge together in order to support business objectives. For the purpose of this research, we measure strategic alignment by three items: (1) alignment of IT strategy with the business strategy, (2) documentation of IT strategy, and (3) familiarity of the Chief Credit Officer with the IT strategy.

Governance Mechanisms (GM): Governance Mechanisms is the second construct to be measured formatively. These mechanisms contain tools which help to transform the executive support and IT business alignment on the strategic level into daily business and thus enhance the IT business alignment on the operational level. We address this construct by taking into account three tools, which have already been pointed out in section 2.2. First, it is important if there is a dedicated liaison unit to foster the collaboration between business and IT. Second, we examined if there are explicit incentives rewarding good interaction between business and IT. Third, the fact whether the back office is proactively involved into IT planning has been included. Operational IT business alignment (OA): Since a consistent framework which allows for measuring the structural or operational dimension of IT business alignment is still missing, we focus on the three major dimensions discussed above: (1) communication, (2) shared domain knowledge, and (3) cognitive linkage (cf. section 2.1). However, we do not measure the three domains as separate constructs but consider them altogether as operational IT business alignment. The reason is, as already pointed out in section 2.1, that the three dimensions are strongly interrelated. Since these correlations are not subject to our investigations in this research, we can aggregate all three dimensions all into one reflective construct. Nevertheless, the indicators used represent each of the dimensions and are adopted from previous literature (cf. appendix). Communication [56] is evaluated by the extent to which there is extensive communication between IT unit and back office, and by checking if there are regular meetings between the different parties in order to identify business process improvements. For measuring shared domain knowledge [5, 49, 59], we asked, if the IT employees are able to interpret business related problems and develop solutions. Finally, cognition [33, 66] is measured by two items: (1) the level of mutual trust and respect between IT and business; (2) the fact if IT unit and business units regularly consult each other. Process Performance (PP): Process performance displays the overall success measure in our research model. Basically process performance can be measured by time, cost, and quality [48]. We argue that process performance in the SME credit process is positively correlated with the quality level and therefore focus on quality issues. Thus, we wanted to know, if the current SME credit process configuration allows the respective bank to sustain a competitive advantage, and/or allows differentiating from the competitors. Additionally, a third and a fourth indicator captured the level of operational efficiency and the excellence of the process design compared to the competitors. This approach of

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considering different aspects of performance helps to more consistently reflect the real level in each bank.

4. Analysis and Results

vergent validity, an AVE of above .5 [25] and a composite reliability of above .7 [50] is recommended. Table 2 shows that the composite reliability is larger than .8 for all (reflectively measured) constructs and that AVE is larger than .5 for all reflective constructs.

4.1 PLS Measurement Model Our model was tested based on formative and reflective measures. While formative measures were applied for the constructs executive support and governance mechanisms, the other constructs (strategic IT business alignment, operational IT business alignment, process performance) were measured reflectively. The analysis of the measurement model was carried out with respect to content validity, indicator reliability, and construct validity. Content validity was addressed by deriving the indicator questions from the existing literature, which is in line with [30]. Testing the stability and statistical significance of the constructs was performed by applying the PLS bootstrap algorithm. In our case, we calculated 500 random samples. The results of both the factor loadings and the T-values are presented in table 1. Literature suggests that loadings should be above .707 [41]. All reflective measures fulfill this requirement and are significant at the .001 level, so that indicator reliability can be assumed (cf. Table 1). Table 1. Measurement model parameters Construct Ind. ID Loading T-Value /Weight ES1 0.298 2.680 Executive support (ES) (formative) ES2 0.818 9.313 SA1 0.844 17.046 Strategic alignment SA2 0.884 36.216 (SA) (reflective) SA3 0.820 13.979 GM1 0.112 0.921 Governance Tools GM2 0.889 12.275 (GM) (formative) GM3 0.121 0.896 OA1 0.817 24.466 OA2 0.883 30.878 Operational alignOA3 0.812 17.153 ment (OA) (reflective) OA4 0.894 39.371 OA5 0.763 16.182 PP1 0.825 12.162 0.858 20.050 Process Performance PP2 (reflective) PP3 0.709 8.534 PP4 0.842 19.449 Further, the following tables show that the requirements regarding construct validity are fulfilled as well. According to [62] one has to distinguish between convergent and discriminant validity. For ensuring con-

Table 2. Quality measures for reflective constructs Composite Cronbach’s AVE R Square Reliability Alpha SA 0.886 0.722 0.816 0.388 OA 0.920 0.698 0.891 0.717 PP 0.884 0.657 0.824 0.254 The following tables show furthermore that the constructs fulfill the requirement of discriminant validity. Cross-correlations between latent variables are smaller than the squared AVE in all cases (table 3), indicating a good fit between the latent variables and their measurement [34]. Also, all indicators load highest on their own construct (table 4). Table 3. Correlations of latent variables and AVE square root (shaded cells) SA OA PP SA OA PP

0.850 0.594 0.382

0.835 0.504

0.811

Table 4. Cross-loadings of manifest variables Indicator ES SA GM OA PP ES1 0.706 0.543 0.407 0.507 0.271 ES2 0.966 0.564 0.676 0.736 0.423 SA1 0.424 0.844 0.309 0.385 0.250 SA2 0.692 0.884 0.518 0.633 0.405 SA3 0.383 0.820 0.338 0.428 0.276 GM1 0.340 0.195 0.505 0.399 0.184 GM2 0.670 0.484 0.983 0.758 0.405 GM3 0.330 0.233 0.576 0.500 0.187 OA1 0.706 0.557 0.601 0.817 0.393 OA2 0.614 0.524 0.660 0.883 0.474 OA3 0.562 0.436 0.629 0.812 0.339 OA4 0.676 0.496 0.702 0.894 0.400 OA5 0.576 0.461 0.657 0.763 0.485 PP1 0.360 0.364 0.299 0.344 0.825 PP2 0.387 0.363 0.331 0.407 0.858 PP3 0.312 0.216 0.308 0.441 0.709 PP4 0.321 0.306 0.361 0.419 0.843

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Having examined the measurement model, we now present the results of the PLS analysis regarding the structural model in the following section.

4.2 Structural Model: Test of Hypotheses Figure 2 displays an overview of the PLS calculation results. As can be seen, all hypotheses except one could be supported. Executive support reveals a high and significant impact on operational IT business alignment (H7). However, this correlation is considerably mediated by both strategic IT business alignment and governance mechanisms. Both links (H5, H6) are very strong and significant, too. The corresponding hypotheses from strategic IT business alignment (H2) and governance mechanisms (H4) to operational IT business alignment could also be supported. Validation of H2 is not that strong and less significant, nevertheless existent. Merely the proposed positive correlation between strategic IT business alignment and governance mechanisms (H3) turned out to be insignificant. Finally, we could find evidence that operational IT business alignment is significantly correlated with process performance (H1). Significance levels: *** p