Harvard Business Review Article – Volkswagen Case Analysis

1) What is your assessment of the new process for managing priorities at Volkswagen of America? Are the criticisms justified? Is it an improvement over the old process? The new process that was instituted to prioritize IT projects at Volkswagen of America is very well organized. It takes an IT project and looks at it from multiple aspects, from business to IT. It also allows for several departmental entities to play a more active role in tying in business objectives with stated benefits of the IT project.

As stated in Applegate, “IT governance is the effort to devise an overarching and integrated approach, addressing broad themes such as operating performance, strategic control, risk management, and values alignment.” (Applegate, 403) In tying it to the case we can see this was the goal of the new process, to tie in business goals with the IT projects.

As with the problem with Volkswagen and other company, many times IT’s objectives isn’t in line with what is best for the business as a whole. As Applegate best states it “The need for a system of governance is partially driven by what we refer to as the agency problem: the fact that the physical separation between the owners of a company and its managers (or agents) provides those managers the opportunity to act in ways that are advantageous to themselves but detrimental to the interests of the owners.”

(Applegate, 404) Volkswagen of America needs to separate the governance of the agency problem to help mitigate control and properly asses were to best spend IT’s limited resources. Often projects may not provide enough added benefits to be justified into the budget, therefore this process is in place to help mitigate that risk and ensure all projects conform to providing value to the company and its stakeholders.

“Governance aims to ensure that managers and employees faithfully translate strategies into operational initiatives throughout the organization, that they protect organizational assets and use them efficiently, and that they comply with laws and regulations.” (Applegate, 404) Volkswagen accomplishes this through the different phases they place the IT projects through. The first phase communicates the process and identifies dependencies. In the second phase, Volkswagen accomplishes what Applegate was referring to by translating strategies into operational initiatives.

They classified each project by investment types which are: Stay in business, return on investment (ROI), and option-creating investment (OCI). By classifying them into the three different investment types, Volkswagen was able to distinguish how the project affected the business goals and objects and assigned budgets accordingly. One of the positive benefits to the new system of selecting IT projects is that it allows different department employees to present a business case as to why they feel their project should be funded. In that each project is tied to the company’s strategy and business goal. For Volkswagen these strategies and goals was the NRG initiative that prepped the company for the growth in new model offerings.

After which, the said goals are debated amongst the committee to prioritize the projects based on impact. This allows each IT case to be heard and allowed time to make the case for IT. A well implemented IT governance system helps achieve IT and business goals, Applegate states this in the following quote; “Strategic control systems focus on communicating and implementing the organization’s strategy, while encouraging debate about that strategy intended to stimulate learning and growth.” (Applegate, 405) Volkswagen in implementing their enterprise goal portfolios allowed each department to make the case for IT budget and if the case aligned with the company’s strategy and passed the other criteria listed above, it was then recommended and prioritized for approval.

By switching the focus from strictly just IT, to a combination of IT and business, Volkswagen was able to prioritize projects that made more sense financially to the firm; “Governance practices, such as the establishment of procedures and criteria for evaluating, prioritizing, and monitoring the major IT investments necessary to deliver business value, can help organizations through this transition from a cost-side to a revenue-side perspective of IT.” (Applegate, 408) The new IT governance is a huge upgrade to the old system that was in place. The old system caused IT projects to be viewed as a cost to the company rather than impact to profits.

The new system shifted this focus and made IT and business more inline. “Increasing evidence points to the fact that organizations with effective IT governance consistently generate better returns for their shareholders than equivalent organizations with ineffective IT governance.” (Applegate, 412) As Applegate puts it, the change in the IT governance at Volkswagen has allowed them to shift the focus of IT from a cost to a revenue driving function. They are able to cut costs by forgoing IT projects that don’t align with the overall business plans. As well as putting the focus on IT projects that provide the most impact to the bottom line.

2) Who controls the budgets from which IT projects are funded at Volkswagen of America? Who should control these budgets? Should the IT department have its own budget? The budget for the IT projects was set to $60 million; this budget was capped by the parent Volkswagen group in Germany. There clearly is not enough in the budget to accommodate for every project that IT comes across. In that sense they have to set-up a system to prioritize the ones that have the most business impact.

The budget should be in that case controlled by the Executive Leadership Team with input from the CIO. This established ETL team is better able to determine the needs of the company as a whole and determine if the IT projects fits those goals. IT in itself should not budget and drive these projects; many times their goals do not match those of the whole organization and that disconnect will not bring the added benefit needed. This shifts the focus of IT from a cost center to a value adding entity of the firm.

Applegate, through the case of the Department of Veterans Affairs narrated on p408, gives a perfect example as to why IT budgets should not be decentralized. In the VA case, when they decided to place the IT budgets separate from the CIO’s oversight and within each department they started to run into governance issue on who was responsible for what. This disconnect decentralized the leadership and IT costs were out of control; as a result VA saw a number of their IT projects fail.

As Applegate puts it, IT governance is the recognition of the increasing criticality of IT to enterprise viability (Applegate, 408). In that not having a centralized IT leadership will cause IT projects to overrun and misalign with business goals; as was seen in the Volkswagen case. “Since governance is the main job of the company board and there is little rationale to govern IT separately from the rest of the business, IT governance should be considered an integral part of overall business governance.” (Applegate, 418)

Utilizing that logic, we can see how this benefits Volkswagen of America to have a centralized leadership budgeting IT projects. As the case depicted, there were times when the IT projects over lapped between business units, with some having dependencies on the completion of other projects. If the budget was not centralized and each were allowed to run their own budgets, then the different business units could have ran into scheduling and cost overrun because of this issue.

Also another factor to consider is that IT is becoming more and more an integral part of achieving business goals. With that, a centralized controlling unit, like other aspects of the business, will help keep the focus of IT projects on providing added value to the business. Thus that is the main reason why IT departments should not have their own budgets, because IT projects are becoming an integral part of business strategy and competitiveness. As such their end goals have a much deeper effect on business than ever before. As Applegate states, “These factors substantially affect the complexity of major IT projects, and thus the risk to the organization if such projects get out of control.

They even can create an adverse impact from what might appear to be a modest adjustment to an application or data source.” (Applegate, 408) As stated before in the case of Volkswagen, prior to this IT restructure, projects were being overrun by increasing costs and delayed schedules. This overrun of costs in turn had a negative effect on the business as a whole, so it only makes sense to centralize the IT governance to ensure that these projects are managed correctly to match business requirements. “Like enterprise governance, the purpose of IT governance is to ensure that the resources accorded to an initiative are appropriate for the risk and return anticipated from that initiative and that the initiative aligns with organizational goals.” (Applegate, 405)

3) How should Matulovic respond to his fellow executives who are calling to ask him for special treatment outside the new priority management system? No exceptions should be made; otherwise it could damper the integrity of the IT governance and decrease faith that this method is the correct approach to IT. As Applegate puts it, “Every organization needs a way to ensure that IT effort, skills, and investments are not squandered on low-priority activities while higher-priority needs languish for lack of resources or attention.” (Applegate, 406)

As IT projects are evaluated, they are all put through the same standard and each is given an opportunity to present a reasonable business case that matches the IT project with the company’s NRG goals. There is a reason why these projects did not get funded this time around, because they did not provide that case sufficiently. As Applegate states, “A major driver of IT governance is the goal of ensuring that IT creates value for the organization.” (Applegate, 407)

This was the purpose of instating the new system of selecting IT projects, to ensure they provide the desired value added to organizations. Applegate states that IT governance can be viewed as the effort to design a system to achieve a set of related objects which include: attainment of strategic goals, efficient operation, reliable measurement, and compliance management. It involves designing business processes and standards that may imply obligations of both IT and business unit managers and employees.

(Applegate, 413) With that in mind, a proper approach to dealing with executives wanting special treatment is to communicate with them and try to have them understand the perspective of the business. The purpose of the new IT governance is to ensure that the company can operate as single unified enterprise and not show bias to any one functional business area. Breaking that integrity would undermine the process.

Another possible solution is to set-up communication channels for these executives that allow them to vent their frustrations, but at the same time reiterate the goals of the new IT procedures. “Governance efforts also shouldn’t try to meet all possible goals but should be viewed as a means to highlight and raise discussion about conflicting goals.” (Applegate, 418) With that in mind, communication is critical to ensuring compliance and understanding of the new IT governance procedures.

“A key part of an IT governance leader’s role is to gain buy-in to governance and educate colleagues, to ensure access to resources, attention, and support for the governance initiative from business leaders.” (Applegate, 420) As stated, the introduction of a new IT governance system requires a well-defined execution plan as well as the willingness to enforce the new practices. A good but simple way to start is to link IT governance to key business objectives. By doing so, Matulovic can communicate the value added by using the new system as well as provide reason why certain projects were denied.

4) What should Matulovic do about the unfunded Supply Flow project? This is where I would re-classify the Supply Flow project; originally the supply flow project was placed on the responsibility of Volkswagen of America. However, the business impact of this IT project actually spans multiple regions and does not inherently or directly affect the business goals of Volkswagen of America.

This is exemplified in the case where it states; “Much of its value would be recognized at the global level of the organization, not at the Volkswagen of America importer level”. The value this project adds locally is of minimal impact. Rather the main impact is affected within the global supply chain. As such this project should be treated as a global initiative and receive a separate budget outside of what is already allocated to Volkswagen of America. This can be achievable as there is enough evidence to support the need for a separate budget for the Volkswagen group. As such, this should not be a cause of concern to the integrity of the new IT governance system.

As Applegate states, “any governance initiative should account for the size, industry, strategic goals, organizational culture, and local environment of the enterprise.” (Applegate, 418) While utilizing the current IT governance policy for IT initiatives that affect the company locally, another strategy should be put in place to allow for exceptions such as these. “As a result, despite the need for enforcing standards, the governance process should also allow for exceptions when standard policies block the achievement of agreed upon shared business goals.” (Applegate, 412) Being able to flex the rules, as stated by Applegate, in my opinion is a good practice to do when the process does not account for other business goals that may have a significant impact.

However the purpose of the NRG initiative at Volkswagen of America is to progress and prepare the local IT projects for the growth that is expected for Volkswagen of America and not Volkswagen globally. Thus the focus of the IT initiative should encompass that of the American region. For IT projects that affect other regions, there should be a separate set of IT governance in place that helps mitigate a separate budget through the Volkswagen group and the affected regions. Doing so will help keep the integrity of the current IT initiatives, and allow for exceptions to be made on a global level.