All right. Let's get into the definition of IT Governance. As I said, the Institute of internal Auditors defines IT Governance as the leadership organizational structures and processes that ensure that the enterprises information technology supports the organization strategies and objectives. So, let's look at the word leadership first. In this definition, leadership means the directors on the board that are responsible for governing IT. Leadership also includes CIO or any other IT executive on the board that is responsible for governing IT. Leadership also includes any board level committees that are there to monitor and govern IT. So, what does this leadership do? They have two roles. The first role is monitoring or oversight. They are responsible for asking questions like, "Are we making good investments in IT? Is IT contributing to organizational performance? Are we complying with all the regulations that go along with IT?" So, this is their first role, the second role they have is they provide their expertise to the organization. They explain to the organization or it is their responsibility to make sure that the organization understands what is the role of IT in their industry and is the organisation taking advantage of its IT opportunities? The board is also responsible for providing preferential access to external IT providers. It's very natural for any organization to lack some expertise. So, it is the role of the IT Governance Board to get access to external service provider and make it available to the organization. So, the role of leadership is provide oversight and provide expertise and access to external specialists. The next question is, what happens if the leadership fails to perform its role? In this regard, I'm going to point to a very interesting study conducted by Michael Benrock and his co-author. They examined 110 operational failures in financial services firms in the US. What they found was whenever there is an IT failure at a large US financial services firm, the stock price of the firm goes down and the drop in stock price is associated with changes on the board. So, what are the changes on the board? The first change is there is an increase in number of directors with IT competence. The idea here is there was an IT failure which means there was an IT Governance failure which means the leadership did not have the expertise to provide the oversight that they needed to provide. So, one resolution to this problem is to add more directors to the leadership so that the organization is able to provide the oversight that is needed. So, IT failures were associated with change in the number of directors. So, new directors were added, new directors that had IT competence. Another implication of the IT failure is that there is a turnover in the CIO or the CTO role. So, there is an IT failure, stock price goes down, and the CIO or the CTO is replaced. Just to give you an example of this, I'm going to refer to a local company, Target. Target is the largest discount retailer in the US after Walmart. On December 19th, 2013, Target disclosed a breach of 40 million credit card accounts over a three week period before Christmas. On January 10th, 2014, the company said, "Hackers also stole personal information from as many as 70 million customers." As of March 2014, Target shares were down six percent since the breach was disclosed. So, this illustrates that there was an IT failure, the IT failure was associated with a significant drop in the market price, significant drop in the share price of the company and on March sixth, 2014, Target's CIO resigned and on May 5th, 2014, Target's CEO and Chairman resigned amid fallout from the database. So, here we see an example where there is an IT failure and the IT failure is subsequently followed by the CIO being replaced and the CEO also having to go. So, this example illustrates the negative implications of IT Governance, that is what happens if IT Governance fails. Now, I would like to point you to another study which highlights the positive significance of IT Governance. This study was done by [inaudible]. What they find is that IT Governance is associated with IT business alignment and IT business alignment is associated with firm performance. To dig a little deeper into this study, what they found was that IT Governance in this study, IT Governance was measured in various ways. Two of them are highlighted here. The first one is steering committee, that is, did the company have a IT committee to monitor and govern IT investments and IT plans? Did the company have an IT investment prioritization process? That is, did the company have a well-defined process to evaluate all the IT ideas and proposals and then choose the best ones? This study found that IT Governance was associated with IT business alignment. In this study, IT business alignment was measured as alignment between business and IT about products that is deciding which products to introduce. IT business alignment was measured as process alignment, that is, business and IT align in terms of how different processes will work and finally alignment between business and IT about which markets to enter. This study found that IT business alignment was associated with firm performance, that is, IT business alignment leads to improvement in financial performance measured as improvement in Return On Assets and Return On Equity, operational excellence, that's is, efficiency of processes in the organization compared to the efficiency in competitors' processes and customer satisfaction measured as how satisfied the firm's customers are compared to the competitors' customers. So, this study clearly suggests that the mechanism through which IT Governance contributes is, IT Governance leads to IT business alignment and IT business alignment leads to superior firm performance. In the next video, I'm going to discuss what specific questions you should be asking if you are in a leadership position and are responsible for IT Governance. Thank you
