Strategic Thinkers: Arun Rai, V. Sambamurthy, Ritu Agarwal
Credentials: Rai is Regents' Professor and Harkins Chair in Information Systems at the Robinson College of Business's Center for Process Innovation and Department of Computer Information Systems at Georgia State University; Sambamurty is the Eli Broad Professor of IT and executive director, Center for Leadership of the Digital Economy, Eli Broad Graduate School of Management, Michigan State University; Agarwal is the professor and the Dean's Chair of Information Systems at the Robert H. Smith School of Business, University of Maryland, College Park. All three authors have published extensively and have consulted with many Fortune 500 firms.
Big Idea: Value nets—the IT-enabled networks for managing sourcing agreements and alliances between firms—are a source of innovation and growth, but governance is challenging.
As organizations increasingly forge business relationships with other firms to enhance their capabilities related to innovation, production and distribution, they are relying on IT to deliver the networks that can connect all these activities into a coordinated strategy. A recent article in MIS Quarterly Executive, "How CIOs Can Enable Governance of Value Nets," notes that the number of corporate alliances has been increasing by 25 percent per year and as much as one-third of value and revenue of companies comes from these relationships.
Apple's successful iPod and iPhone launches, for example, are not due just to product innovation, the authors note, but also from its ability to manage its global network of component providers, contract manufacturers and logistics providers. Likewise, without the proper controls a value net can achieve disappointing results. For example, inadequate monitoring and controls at manufacturing plants in China, led to Mattel's recall of nine million toys that contained hazardous magnets or lead paint.
The challenge for CEOs and CIOs, however, is governing these value nets. "A successful value net strategy depends on effective governance because it synchronizes the capabilities, resources, and decision-making expertise of the value net partners and enhances the competitiveness and profitability of all the firms in the network," the authors say. The authors conducted field-based research at three Fortune 100 companies-a telecom provider, supply chain solutions vendor and a home mortgage broker-to gain insights into how CIOs should deploy IT to achieve their governance objectives.
As part of a governance decision, CIOs must look at how to structure information exchanges, communication and decision rights with its external partners. The authors present three different governance models-prescriptive, evaluative and collaborative-that address the challenges CIOs face as they decide whether they should use tight or loose control to monitor their partner's actions and what type of process architecture is best suited to the interests of all parties in the value net.
The prescriptive governance model—uses tight control and monitoring of partners' actions. Firms using this prescribe most of the actions partners can perform and retain most of the decision-making authority. Partner is paid for execution of specific transactions.
The evaluative governance model—gives partners greater discretion in daily execution of activities. Firms using this periodically evaluate their partners' performance. Partner is paid for achieving agreed-upon outcomes.
The collaborative governance model—provides partners with significant discretion in executing and monitoring their activities. Firms using this observe trends in their partners' performance and expect partners to be active collaborators in developing new capabilities, products or services. Partner is paid for total execution capability and shares risks and rewards of new capability development.