The Impact of Adopting IT Governance on Financial Performance - Coursework Example

Name: Institution: Course: Lecturer: Date: Title page Authors: Guilherme Lerch Lunardi and João Luiz Becker Institute of Economics, Business and Accounting, Federal University of Rio Grande, Av. Itália km 8, Rio Grande, RS, 96201-900, Brazil Antonio Carlos Gastaud Maçada and Pietro Cunha Dolci: Management School, Federal University of Rio Grande do Sul, R. Washington Luiz 855, Porto Alegre, RS, 90.010-460, Brazil Title: The impact of adopting IT governance on financial performance No of words: 2011 Introduction IT governance is a very significant aspect affecting the financial performance of business organizations today. It consists of the executives and the board of directors’ responsibility, including the leadership, organizational arrangements and processes that the IT of the enterprise sustain and extends to the strategies and objectives of the organization. A business enterprise adopting appropriate IT governance models is guaranteed to generate higher profits, Increase productivity and enlarge markets as compared to enterprises that never employ IT governance. There are different IT governance frameworks which are used as references for improving business financial performance by different enterprises. For instance, COBIT is one of the re-known IT governance frameworks and supporting toolsets that allow managers to link the distance between control demands, technical matters and business risks. It enables clear development of policies as well as good practices for IT control in organizations. Furthermore, it stresses on regulatory compliance, helps businesses to raise the value acquired through IT, facilitates alignment and makes execution of the organization's IT governance and control frameworks easier (Weill & Ross 2004). “The impact of adopting IT governance on financial performance: An empirical analysis among Brazilian firms” is an article written by Guillermo Larch Lenard, Jiao Luis Becker, Antonio Carlos Gusted Macadam and Petro Cunha Dolce. The article is a research report presenting the process of determining whether and how the adoption of IT governance mechanisms affects financial performance of a business. The research is carried out in Brazil - the nation that is currently at the top in the global scenario as experiencing the fastest economic growth (Paulo & Francisco 2011). The article supports that the secret behind the Brazilian success is due to the promotion of IT governance mechanisms in their companies. Furthermore, the article employs randomized two group pre-test post-test experimental design as a foundation of developing the report content. The two groups involves a control and an experimental group, where the group of enterprise that have adopted IT governance in Brazil is used as the experimental group while the group of enterprises that have not adopted IT governance is used as the control group. Random sampling is employed to obtain the type and size of the two groups (Dedrick et al 2003). The total sample consist of 405 Brazilian companies with the experimental group having 101 companies. The control group is not treated but it is observed at seven different time intervals, i.e. seven years. This is done by collecting statistics of their financial performance for seven years. Statistics for the experimental group are also collected for seven different years with the first three years showing statistics for business financial progress before adopting IT governance mechanisms and the rest of the four years showing statistics for business financial performance while and after adopting IT governance mechanisms. Then the article analyses and compares these results through calculations like the t-test, abnormal returns, as well as using tables and graphs to present certain outcomes. Then the authors conclude by finding out that the group of enterprises that adopted the IT governance performs better financially as compared to the group that never adopts the IT governance. This paper is a review of this article against the standards of appropriate business IT governance emphasizing on the COBIT framework principles (ISACA 2013). Body G.L. Lunardi et al’s journal article is written in a prose form, with a clear and logical expression of ideas. The authors have also used correct grammar, spelling and well punctuated sentences. Furthermore, its vocabulary is well selected and reader friendly. Besides, G.L Lunardi et al have employed the right report format which adds to its many significant features useful for both academic and research purposes. A good research report should include the following parts: Introduction, Statement of the problem, Literature review, Methods and/or Design, Measurement techniques, Result chapter, Discussion, Summary and conclusion/Recommendation. This article has employed the above report format characteristics and under each characteristic it explicitly describes the relevant content useful to learners and researchers. From the definition of IT governance, it is evident that it is quite a broad activity than the article seems to portray it in the literature review. If IT governance mechanisms are appropriately acquired and implemented, the business enterprise will certainly experience better performance in terms of its productivity, profitability and market measures. Firstly, it is very important that while acquiring appropriate IT governance mechanisms, the decision-makers put into consideration the needs of the business, business objectives, available physical and human resources, business’ productive capacity and business strategies. This means that the company should not opt for IT whose implementation will not align to the objectives of the company, or which will be too expensive for the company to meet its demands, or which will take too long for the company due to unavailability of adequate resources. Secondly, appropriate methods and resources are vital during implementation. This is where the managers, board of directors and executives actively take control of their responsibilities towards implementation of the IT governance in alignment with the business processes and structures (Brown & Magill 1994). For better understanding and management of IT governance, we view its principles through its greatest framework – COBIT. As defined above, Control Objectives for Information and related Technology (COBIT) is a framework which delivers decent practices and presents activities in a manageable and logical order across the IT governance domain and processes. COBIT is a control framework, i.e. it controls IT through: Making links to the requirements of the business, organizing the activities of IT into a generally recognized process mechanism, Identifies the chief IT resources to be leveraged and defines the objectives of management control which needs to be considered (Hardy 2006). Lunardi et al have used appropriate experimental design as a guiding tool for data collection and analysis. They analyzed the statistics for the output of the two research groups. However, the analysis does not go down to test the measures that the management of these companies put forward towards keeping IT under control. It is important to note that these measurable outcomes are achieved through a process and since they are entirely a resultant of this process, the process itself needs to be reviewed. IT management – a subset of IT governance – is controlled using control objectives which dictates the final goal of executing policies, strategies and procedures, as well as business structures intended to offer practical. IT management is also controlled using bench marking, goals and metrics and activity goals (Lutchen 2004). COBIT framework is designed to take the role of the backbone of IT governance in that it ensures that IT: Is aligned with the objectives of the business, enables the business to maximize profits, resources are responsibly used and risks are appropriately managed. The authors have described COBIT as the chief framework of IT governance taking the highest percentage on the graph of IT governance mechanism. They have went further, and analyzed other frameworks’ contribution towards IT governance using neat graph work, tables and calculations. They have described that IT Governance focuses on the following areas: Strategic alignment, value delivery, resource management, risk management and performance management. These are the key areas under that management of any company ought to look into before acquiring and implementing IT governance. Furthermore the article – through personal knowledge and review of related literature – clearly explains the products of COBIT products in different levels and their key benefits. This is a very important artistic tool before carrying out an experiment. It is clear that many of the companies in Brazil have adopted COBIT framework. While the authors of the above named article have described the other frameworks means there are companies that have adopted other frameworks. Although the writers have explained this observation, it is clear that proper implementation of the COBIT framework leads to the accomplishment of its mission – “To research, develop, publicize and promote an authoritative, up‐to‐date, internationally accepted IT governance control framework for adoption by enterprises and day‐to‐day use by business managers, IT professionals and assurance professionals.” (Weill & Ross 2004). The authors have also hinted that, it is not always that the information and technology that an organization acquires may be appropriate and how the acquired information and technology is implemented varies between different companies. This means that there are some activities that depends on how the human resource of a company go about while implementing the IT governance. These activities include: Purpose of using COBIT, COBIT’s view on the roadmap to success including the requirements for success, IT governance framework requirements as well as why we need to focus on good IT practices. In a nutshell, COBIT directs IT governed enterprises towards the following goals: Business focused, process oriented, Control based and Measurement driven (Haes & Grembergen 2008). Companies also tend to differ depending on their effectiveness, efficiency, confidentiality, integrity, availability, compliance and reliability. Wilkin, Cand Chenhall (2010) explains that business goals and IT goals work together. They are inseparable and they work together towards influencing business processes and activities. IT governance has effects on different business perspectives. COBIT describes generic business goals for these perspectives where the degree of business performances matters on what control was the most effective. These perspectives include: Financial perspective, internal management perspective, Learning and growth perspective and customer perspective. Lunardi et al explains that IT governance has impact on all these but mainly emphasizes financial perspective. This is, however, a weakness since it is not possible to tell where the management of the selected sample companies had put their emphasis. One company may not have experienced as great impact on the financial sector as compared to other sectors. In spite of this Lunardi et al have employed appropriate procedures to calculate the financial differences of the two groups putting into consideration the time periods before, during and after implementation (Lazic et al). Another significant factor that the article has considered in defining IT governance and conducting research on its impact on financial operations of a business is IT resource management. Management of these resources is very significant in determining the returns of the business. Under COBIT, this is commonly defined using two domains: “The plan and organize (PO) domain and acquire and implement (AI) domain. PO domain covers strategy and tactics, and concerns the identification of the way IT can best contribute to the achievement of the business objectives”. “The AI domain covers identification of IT solutions (develop or acquire), as well as implementation and integration into the business processes” (Katsikas et al 1996). There are other important domains like deliver and support domain and monitor and evaluate domain. The results obtained were quite accurate since the companies were expected by the government to give true statistical figures and explanations concerning them. According to the business and IT control objectives (General and Application controls), the conclusions made from on the report are high likely to be accurate. Measuring the performance against the standards of IT governance involves the measurement, assessment and evaluation of business maturity models, performance goals and metrics for the IT processes and activity goals for enabling effective process performance (Wood 2010). All the important information about IT measurement can be explained using the three main COBIT domains of IT governance. These are: Plan and organize domain (PO), Acquire and implement domain (AI) and Deliver and Support domain (DS). PO domain elaborates ten processes and seventy four control objectives, AI has seven processes and forty control objectives while the DS domain has thirteen processes and seventy one control objectives. Conclusion The articles carefully and explicitly evaluates, analyses gets a good interpretation for the results of the two groups. It is agreeable that those companies that adopted the IT governance mechanisms have greater financial performance as compared to those that do not use these mechanisms. It is also evident that financial performance for companies adopting IT governance stabilizes with time as they get used the new approach, innovating and directing its goals towards the business goals. These results could have been more accurate if other factors affecting financial performance were analyzed separately so ass to make comparisons. 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