Is there a clear alignment between your organi

Journal of Information Technology Teaching Cases (2013) 3, 88–95 © 2013 JITTC Palgrave Macmillan All rights reserved 2043-8869/13

palgrave-journals.com/jittc/

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 provider specialized in the provision of telematic services and systems 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

89 “Octo” and “Telematics” G Vaia and E Carmel

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.

Figure 1 Weill’s framework of analysis on IT governance.

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 have

90 “Octo” and “Telematics” G Vaia and E Carmel

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 Europe. Since 2005, Octo Telematics has offered its telematics infrastructure to other big players in the insurance industry, bringing in new customer segments. Drivers have benefited from lower premiums and other services, such as assistance after an accident.

During the second phase of the program, around 2008, Octo based its own value proposition on three services: (1) Stolen Vehicle Tracking, (2) Automatic Crash Notification and (3) Profiling. Octo also started to deliver services to carmakers and companies with big fleets (for details of Octo’s client acquisition, see Figure 2). These companies benefited from e-Call, stolen vehicle recovery services and vehicle diagnostics. e-Call has the ability to detect an accident and evaluate crash history data in the most efficient way by using

crash recorder technology; while an in-vehicle tracking system has become a strong weapon to fight car theft. The car itself may detect a failure and/or the need for a maintenance service. The tele-diagnosis system informs the dealer of the failure; in turn, the dealer can proactively call the customer and order the necessary parts.

In 10 years Octo acquired 50 corporate clients, over 1.2 million global customers (2012) and is installing an average of 1500 OBUs per day. Octo has subsidiaries and partners in over 20 countries across Europe, the US, South America and Asia.

The infrastructure and services Figure 3 presents the telematics infrastructure. The OBU is able to collect specific driving data (e.g., location, crash statistics) and transmit them to a server for further processing. The data flow into the data exchange repository, which is the heart of the telematics infrastructure. This repository is maintained by Octo Telematics. Machine to machine (M2M) infrastructure allows the sharing of data about driving, con- tracts, policies between the insurance company and Octo via different IP protocols or via file exchange. This M2M data exchange is required when volumes are significant (hundreds of mobile terminals), while an exchange via web is cheaper and does not involve any direct investment.

Business customers are becoming better informed about telematics and location-based services. These newer ‘Smart Services’ create an open communication channel with the customer. Ongoing interaction can be established by using different communications technologies, such as SMS or MMS, via a website or within a smartphone application. Smart services are used to enrich an existing or new telematic offering, or as a starting point for potential or existing insurance clients, to be rolled out successively towards other customer segments.3

The organization and IT dilemmas Since inception Octo had a typical functional organization in which governance was strongly centralized. Octo used a ‘Business Monarchy’ archetype to make IT decisions that spanned the infrastructure and services, the core of Octo’s

Figure 2 Octo’s key client acquisition history. Source: Octo’s internal document.

91 “Octo” and “Telematics” G Vaia and E Carmel

Figure 3 The Octo’s Telematics information system. Source: Vaia et al., 2012.

business. The CEO held strong control of functional areas including procurement, marketing, quality, sales, operations, and especially of IT. Before he became CEO at Octo, Fabio was the CIO in Viasat, so it was natural that he designed Octo’s infrastructure with Giuseppe Zuco and other found- ing firm members. Together they also designed the business model. Then Fabio managed, ad interim, the Sales function for many years.

The establishment of international branches and the arrival of new investors led to a restructuring of the company with a new corporate entity and different legal entity for each country. These changes brought new managers with a more international approach into Octo. In particular, three new managers were appointed: for Sales (Vincent Bonnet), Finance (Maria Enrica Angelone) and Operations (Federico Santini). The three implemented new managerial tools with an eye to international growth, but the functions remained quite isolated, like silos, and decision rights were still centralized.

By around 2009 Giuseppe Zuco, the CIO, had to face a new, complex situation. Until then he had been in a symbiotic relationship with Fabio, the CEO, and all business and technological decisions were taken together. Now Giuseppe had to respond to continuous requests from Finance about the SAP implementation process, from Sales about the creation of new platforms/services for international customers and from Operations about the quality and effectiveness of IT services delivered. Therfore Giuseppe’s role changed from being a strategic partner to an internal (technical) provider. In a sense, it was a step back in the name of growth and profit.

Since this reorganization, in 2009, Giuseppe started centra- lizing IT decisions, including: architecture and rules for the use of the IT platform and business services, priorities on customers and projects, IT investments and development. Thus, Giuseppe had instituted an ‘IT Monarchy’ within Octo. This approach helped Giuseppe to maintain power and influence inside the organization. People from Sales and Operations were forced to negotiate tasks and priorities with Giuseppe and he had the ability to manage different political coalitions. Sales and Operations, the two big units inside Octo, were rivals for Giuseppe’s resources: requirements and prio- rities on customer’s project were defined on a direct agreement with Giuseppe and not on the basis of an objective analysis

and a feasibility study. This approach increased the number of customized services and changes on implemented services, where the return on investment was not always positive.

They [colleagues in the Sales Department] convinced Giu- seppe to develop 20 platforms for a German customer. This huge project stopped our projects on Italian insurance companies for months. Now these German platforms has generated just 1000 of end users and very low revenues.

(Quote from Octo’s Sales professional)

Giuseppe and his team were considered by internal collea- gues to be reactive. While the IT department was able to change priorities underway and to customize services rapidly, it was perceived as being under pressure. IT was not controlling the agenda in terms of performance, growth and scalability.

Giuseppe was beset by a huge series of issues. We note nine of these issues here: rework was about 30%; lack of time to analyze recurring issues; frequent downtime caused by unco- ordinated releases or changes; high level of workarounds; lack of planning for roll-out; a high number of problem tickets per day; long response times to fix problem tickets (sometimes months!); no formal escalation path for problem tickets; overbooking of human resources.

The CIO’s frustration was not unusual. Other CIOs face similar struggles. Giuseppe realized that Octo’s people and roles were not connected to company processes and that data were distributed in disconnected islands. Octo managed a huge amount of information without a strong methodology and with an overlap among functions. All this meant that Octo has insufficient awareness about the financial and economic impacts of decisions on projects. Business clients, such as the powerful Sales unit had no visibility onto timing for delivery and on project management overall.

Giuseppe, as owner of the company, was concerned about profitability of projects and the quality of services delivered by the company. ‘It’s time to change’ he said, ‘We have to work on services vs technology, on quality vs costs, on proactivity vs reactivity … . I need to rethink IT and I have to integrate my work with corporate operations and sales, through a new governance structure.’

From that moment the journey began.

92 “Octo” and “Telematics” G Vaia and E Carmel

Getting aligned through the new governance approach From the end of 2009 through 2013 we observed a wobbly alignment process that could be explained in two distinct stages. During each stage Octo implemented some governance alternatives to reduce the gap between IT and the business, but each time something went wrong.

In order to ease the understanding of the narrative, in the description below each unit is noted as belonging to either IT, Business or a bridging unit by adding one of these tags to the text: [IT], [Business] or [Bridge]. Bridging units in all cases here are committees or end-to-end processes staffed by both IT and the Business – mostly Sales and Operations units. Note that the Operations unit is responsible for service delivery to end customers and thus has revenue responsibility (it can do up-selling on added-value services and close contracts).

Stage 1: from ‘IT Monarchy’ to ‘Duopoly’ First step – transparency Giuseppe, the CIO, wanted to institutionalize arrangements with the two key business units: with Operations [Business] on post-sales support and day-to-day quality of services; and with Sales [Business] about requirements setting and projects plan- ning. He wanted to reduce the re-work rate, to better prioritize projects, to optimize projects profitability with a stronger cost control, to make infrastructure change management more effective.

The IT department had a simple structure: a development team, a testing and operations team, a unit focused on the OBU devices, and a group specialized on SAP. During the first phase Giuseppe introduced two new functions and a new process. He introduced Program & Service Management [I.T.] and Demand Management [I.T.] function and the Incident Management (IM) process [Bridge].

The scope of Demand Management [I.T.] was related to two needs: the collection and integration of business needs from organizational clients and the formalization of new IT initiatives (including objectives and timelines). Demand Man- agement was also responsible for those applications already in operation and for the definition of areas of evolution and transfer requests for corrective and adaptive maintenance.

Program Management [I.T.] responsibilities included: checking for consistency between business planning and Information and Communication Technology (ICT) planning, and the definition of priorities for implementation; monitoring IT projects through periodic meetings, underlining any problems or deviations from the project baseline; submission for approval of any changes in the scope of the project; definition of functional test planning; post- implementation review with the client and end user.

Program Management was also delegated to define service level agreements (SLA) tailored to the needs of business, in terms of availability and performance of the systems. Program Management became one of the critical interfaces with the client for all kinds of issues, questions and complaints. The unit set out to improve business communication and customer satisfaction. It was also the first level of escalation for the customer that dealt with new requests and/or about critical downtime and recurrent problems.

But Giuseppe soon backtracked on his decision to structure the relationship around SLAs – and this is not implemented. He was troubled about the unit’s performance.

To strengthen the relationship with Operations [Business], Giuseppe introduced an inter-functional process, IM, with shared common objectives. Its scope was to record and track all incidents/issues raised by customers due to a platform’s downtime or a loss in the service, investigating the cause of the incident, to find a solution (both temporary workaround and permanent), escalate trouble tickets and to verify customer satisfaction.

In the beginning the control over the IM [Bridge] process was maintained by Giuseppe, but after several months Giu- seppe switched it to Operations [Business]. IT and Operations together managed and organized the IM process across three levels of support. The first level of support was managed by corporate operations in Italy and other countries. IT staff trained colleagues at the first level of support to manage IT trouble tickets more easily. The second level of support was composed of expert groups from Operations, IT and Admin- istration; while the third level of support was typically IT (developers).

Before the introduction of this new process, IT was the only function involved in the management of trouble tickets with a huge effort in terms of classification and first resolution. The results of the reorganization were felt immediately: the number of tickets decreased and Operations people started learning more about IT work and its customer approach. A bright young man within Operations was engaged as Incident Manager [Bridge]. As owner of the process he was responsible for the management, improvement and review of the cross- functional IM process [Bridge]. Now there was a transparent chain from IT to the end

customer that was more informed about the time for resolu- tion, people involved and more aware about the solutions applied. Octo’s people had the chance to be engaged in a structured learning process and share information through the chain.

But both IT and Business people were not satisfied with the reorganization. It was not effective for three reasons:

● Demand Manager [I.T.] was too isolated from the IT team. Furthermore, sales people did not accept his support during the negotiation with clients, so functional requirements were not always workable;

● Program Management [I.T.] was isolated from sales people, so the unit did not have an overall view of projects, needs and planning. In addition, sales people were competitive and thus, did not support Program Management defining priorities among projects and clients.

● IM was a success except within the development team [I.T.], which felt ‘controlled.’ The unit refused to use the proce- dure and the tools for the management of tickets. Therefore trouble tickets began to rise and the Incident Manager [Business] was frustrated because he felt that Giuseppe was not supportive.

Second step – sharing After the first steps towards alignment with business were not successful enough, Giuseppe decided to get more commitment on IT from Sales for a stronger budget and cost control. Often, Sales [Business] signed contracts agreeing on delivery dates, effort and services without consulting with IT. IT staff were constantly under pressure, projects were delivered past

93 “Octo” and “Telematics” G Vaia and E Carmel

deadlines, the content of the services agreed on was not always workable and costs were not under control.

Giuseppe had to act. He created a new bridge organization, called Change Advisory Board (CAB) [Bridge] for shared decision making – especially with Sales. CAB was to be an enterprise-wide committee in charge of process changes on platforms and services, and architecture exceptions. The goals were to minimize costs and enable learning. The committee was determining investment needs together – both IT and Sales.

Thus, all changes affecting the Octo platform (Web, M2M and all other business processes) had to be reported to and coordinated through CAB. A formal change request had to be submitted in writing via a new tool. Then CAB was to review the request, determine and review potential failures, and make the decision to allow or delay the request. Each change request had to receive formal approval from CAB before proceeding with the change. Core activities consisted of planning, con- trolling, managing risk, minimizing disruption, communicat- ing, implementing, measuring change, monitoring costs. For each change request, the impact of changes on customer business operations was discussed, as well as the effect on the infrastructure and customer service, and on the capacity, performance, reliability and resilience of the service.

Meetings were held on a weekly basis to review outstanding requests. It was the first time that people had the chance to share their own knowledge, strategies and ideas about service and cost optimization. Cost was a key driver. Once Giuseppe started to compute the marginal cost of each project and the profitability of each client, the number of change requests decreased dramatically – and then roughly 70% of those submitted were approved.

Once the process appeared to be working, Giuseppe delegated much of the coordination to middle managers and capable business executives did not staff the committee. Giuseppe made another mistake: sales people did not like the profit margin project criteria so they started to sabotage some projects to get more control over the process. Giu- seppe started losing credibility when changes approved were not put into planning, causing a large backlog in develop- ment. As a result Sales [Business] started to complain to Fabio, the CEO.

Stage 2: dis-integration: back to the ‘Business Monarchy’ Eight years of rapid growth forged the company culture – characterized by agility and dynamism. But Octo’s staff hesitated with Giuseppe’s projects. The IT department was seen as disorganized. Giuseppe, still looked upon as a senior developer, was not able to project personal leadership. The first signals of this disappointment came when the Chief Operations Manager [Business] brought under his control the Program Management [Business] and Service Manage- ment [Business], mirroring functions and roles.

But in the middle of 2011, Giuseppe decided to implement a new inter-organizational process to manage new project set-up. In order to drive business costs down and manage the IT-business architecture, Giuseppe decided to further centralize much of the design phase within a steering com- mittee [Bridge] composed by IT, Operations [Business] and Finance [Business]. Giuseppe proposed to integrate phases from concept, design and prototype with a better definition of requirements and the use of business cases to evaluate in

detail the profitability of new customers/projects. In that way, the decision ma

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