IT Governance and IT Investment Performance: An Empirical Analysis

Abstract

This study analyzes the influence of IT governance on IT investment performance. IT investment performance is known to vary widely across firms. Prior studies find that the variations are often due to the lack of investments in complementary organizational capitals. The presence of complementarities between IT and organizational capitals suggests that IT investment decisions should be made at the right organizational level to ensure that both IT and organizational factors are taken into consideration. IT governance, which determines the allocation of IT decision rights within a firm, therefore, plays an important role in IT investment performance. This study tests this proposition by using a sample dataset from Fortune 1000 firms. A key challenge in this study is that the appropriate IT governance mode varies across firms as well as across business units within a firm. We address this challenge by developing an empirical model of IT governance that is based on earlier studies on multiple contingency factors of IT governance. We use the empirical model to predict the appropriate IT governance mode for each business unit within a firm and use the difference between the predicted and observed IT governance mode to derive a measure of a firm's IT governance misalignment. We find that firms with high IT governance misalignment receive no benefits from their IT investments; whereas firms with low IT governance misalignment obtain two to three times the value from their IT investments compared to firms with average IT governance misalignment. Our results highlight the importance of IT governance in realizing value from IT investments and confirm the validity of using the multiple contingency factor model in assessing IT governance decisions.

Keywords: IT Governance, Value of IT, IT Investment, ROA Analysis, Tobin's q