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February 27, 2006

Getting Governed: Handling the Risk of Value

Remember life before governance?

We planned the work, and then we worked the plan.
A lot of the planning was about defining the "we" -- and cascading that definition down from the high (market) level to the low (task) level.

In this cascading, our business starts out as a model for certain kinds of market interactions, and then an organization is created to operate according to the model. We have a strong idea about what kinds of things are required for the interactions to succeed, so what we focus on is making sure that we know someone is responsible for attending to those requirements. We distribute those responsibilities -- expecting the organization's dynamics to more or less derive from that distribution.

So far so good. Then the fun begins: people actually start doing things, and on any given day the cause-effect relationships of what they do to what they accomplish is most of what we ever think about -- except of course for considering the value of what got made.

Between the resulting shortcomings and the advantages, the unnecessary and the useful, we make most of our judgement calls about what should continue "as is" and what should change.

The big hypothesis is that the model we started out with will generate sufficient redeemable value, if only it is executed vigorously enough. We're experienced enough to recognize that there will be obstacles, but to get around them or through them, we're willing to redesign the way we meet the requirements.

How much of that flexibility is a good thing?

I.

Most businesses initially take a pragmatic approach to flexibility that looks at whether results seem to be proving the prevailing method of satisfaction. The habit: do more of what works, less of what doesn't, and look mainly for external indicators that something different should be done.

The "performance" mentality is driven by pragmatism. But what has also developed during the last five to ten years is a perspective that holds the entire enterprise responsible to a community of stakeholders -- which expands the range of external drivers and, correspondingly, requirements.

In some arenas, this new perspective argues that the broadened scope of responsibilities actually increases the likelihood not of episodic performance but of sustained performance. The intuitive logic of this is as follows: as an aspect of competition in a hypercompetitive world, it's too risky to alienate or disrepect any stakeholder of significant influence -- namely, one who has the freedom to take their support to a different business (such as customers), or one who has a critical opportunity to undersupport their host (such as sponsors and employees). Performance is therefore seen as the result of stakeholders being motivated to beneficially cooperate in their provision of a hospitable environment for the business's competitiveness.

Environment? As represented by models such as "balanced scorecard strategy maps", stakeholder cooperation means logically promoting desired outcomes by chemically reacting in more or less the same alignment seen in a value chain. This reaction is casually thought of as a "process" because it represents cooperation as interdependencies -- and then represents interdependencies as a set of serially productive influences. If A then B; if B then C; etc. But a proper understanding of the influences is that the "links in the chain" are actually dimensions, co-existing and intersecting at all times, creating an operating "space" within which the organization tries to find, extend and orientate itself.

In contrast, a "governance" mentality is a more functional outlook than environmental. Closely related to the problem of methodological quality, governance argues that the organization must execute systematically but that its system cannot be managed without enforcing limits on the complexity of its internal interactions. As opposed to the competitiveness that is the ultimate concern of the performance perspective, the governance perspective is ultimately concerned with the effectiveness of the organizational structure in its given configuration.

So what is the argument about effectiveness that governance makes?

II.

Three thoughts lay out the governance view on effectiveness.

(1) Governance and Performance share a strong concern with impacts, but where performance looks at impact from a benefits point of view, governance looks at impact from a risks point of view.

(2) Governance distinguishes effectiveness from impact. "Effective" means that a certain way of doing things is acknowledged and desired for the predictability of its effect. The concept's true significance is in its use for identifying and thus selecting functional options according to a pre-measured balance of value versus risk. (Not all value is beneficial; value is identified as a significant difference, but benefit imposes the requirement that the difference is relevant.)

(3) Governance focuses on the likelihood of the organization's functionality being systematically coherent enough to maximize value while minimizing risk. It's natural elements of disciplinary intelligence are architectures, policies, and approvals -- all of which organize constraints on demand.

Performance, in contrast, concerns itself with "efficiency" -- in terms of how much input is necessary for a given level of output "on-demand". Performance doesn't expect governance to work on efficiency.

But what performance sometimes forgets is that the kind of capacity made available as input (to demand fulfillment) is a product of governance. Poor governance can easily mean poor (or unreliable) input.

In real life, not just in theory, performance's demand on capacity has not been a good thing for businesses lacking governance. The most notable consequences include corrective movements such as Sarbanes-Oxley and the crackdown on software license violations -- as well as gutted share prices and other industry news headliners. Less notable as general news are breakdowns like post-facto productivity failures in mergers, missed time-to-market, or violations of contracted service levels. To an important degree of frequency, these outcomes spring from innovated and improvised execution that has been directed yet disruptive, dedicated but ultimately incoherent.

Governance implements a certain way that real-time functional capacity is produced -- in the same way that fitness and technique combine to power an athlete's responsiveness to opportunities and threats. Ideas, strategies and plans are based on confidence levels in effectiveness.

III.

Governance focuses management on effectiveness by forcefully modeling execution as opposed to just process. Execution is dominated by the decisions that occur before action is taken. Process models assume a certain range of circumstances, but processes must be invoked. Execution is a management function establishing the decision that activates a process. Whether formulaic or improvised, execution precedes process and is primarily attentive to the circumstances that present or argue for the alternatives in hand.

Governance is concerned, therefore, with the quality of the decisions, and with preventing execution from being displaced by process. Here, decision quality refers to the risk/value balances that establish response-capacity on terms predictable by all key stakeholders -- and execution intends to manage impacts and help build benefits accordingly.

The illustration below describes how governance aligns influences on operational behaviors in a way that aligns the generation of impacts with the concerns of stakeholders. As shown here, the key feature of governance is management's attention to control. But the influence of governance pervades several layers of functional predispositions. An important property of the arrangement as illustrated is that it also establishes the semantics for discussing governed response-capacity -- on each layer and in the relationship of the layers to each other.

These semantics do not "cascade" -- not in the sense that the meanings on one layer are derivative of meanings on another layer. Instead, they distinguish what it is about each layer that is most relevant to controlling response-capacity for the best balance of risk and value. As a result, the various layers are logically complementary in their overall influence on the functional coherence of the organization. That is, under governance, the impacts of individual functions do not work at cross-purposes, making response-capacity more reliable under demand.

Posted by Malcolm Ryder at February 27, 2006 6:09 PM

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