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case study _student copy Teaching case Reshaping the IT governance in Octo Telematics to gain IT–business alignment Giovanni Vaia1, Erran Carmel2 1Department of Management, Ca’ Foscari University Venice, Cannaregio, VENEZIA; 2Kogod School of Business, American University, Washington, DC, USA Correspondence: G Vaia, Department of Management, Ca’ Foscari University Venice, San Giobbe, Cannaregio, 873 30121, VENEZIA. Tel: +39 041 2346907; E-mail:
[email protected] Abstract The case shows how a technology services company shaped and reshaped – and reshaped again – its IT governance structure to better integrate the IT function with business clients. The company is a large Italian telematics provider – Octo Telematics – which is specialized in the provision of telematic services and systems for the insurance and automotive markets. During the period described in this case, the company was growing and globalizing rapidly. The desired alignment between IT and the business units is needed to promote behaviors consistent with the organization’s mission and strategy. As Octo experimented with new processes, committees and reorganizations the company ‘traveled’ through several governance archetypes. Journal of Information Technology Teaching Cases (2013) 3, 88–95. doi:10.1057/jittc.2013.8; published online 12 November 2013 Keywords: IT governance; IT–business alignment; IT organization Introduction O cto Telematics S.p.A. is a large telematics providerspecialized in the provision of telematic services andsystems for the insurance and automotive market. Octo based its growing business on partnerships with large auto insurers in Italy and in other countries. This approach yielded a new and profitable customer value proposition for insurers based on a customer’s driving and risk profiles.1 The heart of the system is a small telematic device (OBU – On Board Unit) installed in a vehicle, which captures and transmits data about where, when and how the vehicle is being driven. Telematic information has reduced auto insurance premiums for drivers, reduced claims and fraud for the insurer, while at the same time creating other social benefits. The technology has created an entirely new ecosystem of various stakeholders, including installers of tracking devices, security operation centers, data analyzers, government, info- mobility providers, telco providers and other third parties providing value-added services. This ecosystem restructuring creates opportunities for new value innovation as a result of alignment of data, functions, price and cost positions. Octo developed IT infrastructure and software to support the telematics business, and since 2003, when it set up a pilot program for its first 2500 OBUs,2 Octo has continuously tried to align the information architecture and services to its stake- holder needs, to generate and distribute the large amounts of data that form the basis of value-adding analytics. Technology is at the heart of a new ecosystem of services, resources, data and stakeholders. Different stakeholders have joined forces to design the technology, share information and work as a dynamic meta-business system to build a valuable asset – without having to merge. In this case, the systems integrator – Octo – played the role of market facilitator and enabler; it set up and refined the Italian network of installers, OBU manufacturers, telecom providers and insurance companies. In managing this role of system integrator Octo has had to reshape the organization and the link between the IT function and the business, in terms of decision rights, committees, processes and roles. To date, the alignment between the IT function and the business, which should be a critical capability for Octo, is still not stable. When 10 pioneers set up the company in 2002, IT was almost the entire business. But today, with the success in international market and the growing power of other internal functions such as Sales, Finance and Operations, the IT function is seen more as a provider of specialized technology, emphasizing the vision of IT as being separate from the business and the role of the CIO as that of a technical expert. This teaching case describes the continuing attempt of the CIO to forge a dual identity: the IT function as a strategic partner of the business, critical for value creation, and the CIO as a business problem solver. The case describes the challenges faced by the CIO and the organization in designing a new IT Journal of Information Technology Teaching Cases (2013) 3, 88–95 © 2013 JITTC Palgrave Macmillan All rights reserved 2043-8869/13 palgrave-journals.com/jittc/ ONLY FOR USE IN THIS COURSE. DO NOT POST ON MEDIA OUTSIDE OF THIS COURSE SITE FOR COPYRIGHT REASONS shalo Highlight governance model to align changing business needs with IT delivery. Governing the alignment of business and IT: methods and approaches Aligning IT and its business has been a top concern of IT managers for 30 years. Alignment is understood to be essential as a competitive weapon and a way to get a superior perfor- mance. Alignment considers the strategic fit between strategy and infrastructure as well as the functional integration between business and IT (Luftman and Brier, 1999). The 2012 annual survey conducted by the Society for Information Management (Luftman and Derksen, 2012) on the key issues facing IT executives finds that IT and business alignment, ranked 2nd of all issues – and has been quite stable since 2003 (after dropping to 3rd place in 2010, it was #1 in 2011, and in 2012 is #2). Alignment is considered as a continuous process that evolves through a search of a dynamic equilibrium, among the many variables of strategy, technology, organization architecture, pro- cesses and skills (Henderson and Venkatraman, 1990). Luftman and Brier (1999) suggested six enablers that help the alignment: senior executive support for IT; IT involved in strategy develop- ment; IT understands the business; business/IT partnership; well-prioritized IT projects; IT demonstrates leadership. In Weill’s (2004) framework, pictured in Figure 1, firm performance is the result of a combination between the typology of decisions and models of governance. Weill describes five major IT decisions (include IT principles, IT architecture, IT infrastructure strategies, business application needs, and IT investment and prioritization) and three perfor- mance measures like asset utilization, profit and revenue growth. Rather than considering the traditional centralized, decentrali- zed and middle ground designs, he suggests that there are, in fact, six governance classifications available to IT organizations based on the ideal of political archetypes. They are as follows (Brown and Grant, 2005): ● Business Monarchy – IT decisions are made by Chief Officers (CxOs). ● IT Monarchy – Corporate IT professionals make the IT decisions. ● Feudal – Decision by autonomous business units. ● Federal – Hybrid decision making. ● IT Duopoly – IT executives and one business group. ● Anarchy – Each small group makes decisions. While the Business Monarchy and IT Monarchy archetypes represent a centralized decision making structure, Feudal archetype reflects a decentralized structure where business unit owners are the primary decision makers within their dominion of control. The IT Duopoly archetype, instead, represents a two-party arrangement between a business partner and a technical partner and is more restrictive and specialized than the Federal model. Weill found that high-performing companies typically use the IT Duopoly model. This seems to allow for creative business solutions within agreed-upon constraints. Lowest- performing companies typically use federal or feudal arrange- ments (Weill, 2004). Therefore, combining performance measure with type of decisions and governance we have three different approaches as follows: ● Leaders in asset utilization typically use ‘IT Duopoly’ governance for all five IT decisions and the IT group plays an important coordinating role. To become high perform- ing companies have to: set IT principles; empower business/ IT relationship managers; establish a technical core of infrastructure and architecture providers who plan and implement the enterprise’s technology platform; involve IT architects on business unit projects to facilitate IT education of the business leaders; and develop a simple chargeback system and a regular review process. ● Leaders on profit have a more centralized IT governance approach making decisions on principles, architecture and investments. These firms use senior business management committees. They have to: staff an enterprise-wide IT steering committee with capable business executives and the CIO, with a strong cost control; manage the firm’s IT and business architectures to drive down business costs; designing a clear architecture exception process to mini- mize costly exceptions and enable learning; create a cen- tralized IT organization designed to manage infrastructure, architecture and shared services; use transparent processes to make decisions on investments; implement simple chargeback and service-level agreement mechanisms to allocate IT expenses. ● Leaders in revenue growth try to balance the entrepreneurial needs of the operational units with the firm-wide business objectives. More often a ‘Business Monarchy’ or a ‘Feudal’ approach is used to set mainly the IT principles. Successful firms in this category have to: empower the business units to drive IT investment; place IT professionals into operational units to focus on customers’ needs; create operational-unit- based IT infrastructure capabilities tailored to local needs; enable a technical core of infrastructure providers. In conclusion, managers have to minimize situations that inhibit alignment and, conversely, maximize activities that booster alignment. All this towards the high-performing goal: improving the relationships between the business and IT functional areas enables visibility, efficiency and profitability. Octo Telematics: company background Two former senior managers of Viasat founded Octo Tele- matics in 2002, an Italian company specialized in car satellite security. Fabio Sbianchi and Giuseppe Zuco, the founders, are today, respectively, Octo’s CEO and CIO. They haveFigure 1Weill’s framework of analysis on IT governance. “Octo” and “Telematics” G Vaia and E Carmel 89 maintained 10% of the stocks to date. Fabio and Giuseppe are the two central characters in our case. We will refer to them by their first names as they are known in the company. Since its startup, Octo Telematics has been considered by the financial press ‘a machine to make money’ with a strong orientation to financial markets, with EBITDA around 50% and a growth rate exceeding 25% (2013) in Italy, its home market, as well in some international markets. In 2010 the biggest private equity funds became interested in the high-growth sector of telematics and Charme II, a private equity fund managed by Montezemolo & Partners, took over 65%, and Amadeus Capital Partners Limited and R Capital Management 25%. In mid-2013 several private equity firms were reported looking at acquiring Octo. Reports of the sale prices ranged from 500 to 600 million euros. The value of the company increased about 500% from 2009 to 2013. Octo can be considered, using Weill’s framework from above, a leader on profits. Managers have had the capability to balance – over time – investments, costs and revenues, assuring high margins and dividends to investors. Octo Telematics started in 2003 with a pilot program to install telematic devices in Unipol’s customer vehicles. After the successful pilot program, Unipol decided to design a specific insurance policy for telematics users. The new insur- ance policy was named Unibox. The company offered a 10% discount on premiums for accidents, and 50% on premiums for theft. This was the first telematics insurance policy in