IT Orientation, CIO Reporting Structure, and Firm Performance: To Whom Should the CIO Report? Rajiv Banker 1 - Nan Hu 2 - Paul A. Pavlou 1 1 University of California, Riverside 2 Singapore Management University ABSTRACT Twenty years after the introduction of the CIO position, the IS literature has yet to prescribe the ideal CIO reporting structure. To address this void, this study proposes a contingency model in which the CIO reporting structure depends on the firm s competitive firm IT orientation. We introduce Sales over Assets as a success measure for firms employing IT for strategic differentiation. Also, Operating Income over Sales is introduced as a performance measure for firms leveraging IT for operational excellence. Following the strategy-structure paradigm, this study hypothesizes that firms with higher Sales over Assets will have their CIO reporting to the highest executive (CEO), while firms with higher Operating Income over Sales will have their CIO report to a lower-rank executive (CFO). In addition, following the alignment paradigm, we hypothesize that only firms with either (i) a superior Sales over Assets and a CIO-CEO reporting structure, or (ii) a superior Operating Income over Sales and a CIO-CFO reporting structure will have superior performance over time than the other configurations. Secondary data from 700 firms support the proposed hypotheses, validating the strategy-structure and the alignment theories. The paper concludes by discussing the ideal CIO reporting structure and its performance implications. 1. RESEARCH MOTIVATION The CIO position has emerged in the early 80s (Synnott and Gruber 1981) in response to rapidlychanging technology, frequent changes in consumer preferences that require market orientation and data mining tools, increased business competition that requires new delivery channels and services, enhanced user sophistication who demand greater functionality, and the emergence of the information economy (Benjamin et al. 1985; Fleming, 2002). Since its inception, the CIO position has gradually become more strategic in nature as IT has been increasingly playing a greater role in the firm s success (Lancit 2001; O Donnell 2001; Lasker and Norton 1996). IS researchers have focused on prescribing several means (e.g., business background, communication skills, service orientation) by which CIOs could become more important (e.g., Rockart 1982). Today s CIOs have many roles, such as from new product development, knowledge management, business process reengineering, regulatory compliance, and IT maintenance. The CIO s role varies dramatically among firms (Gottschalk 1999). A key distinction of primary concern to the CIOs is one between a strategic (IT as a competitive weapon) versus an operational (IT for cost-effectiveness) role of IT (Watson 1990). This distinction is herein proposed to influence the decision of the firm s IT structure in regards to CIO reporting (CEO Vs CFO). Despite the important role of the CIO reporting structure on firm strategy and performance, the literature has yet to address the links between IT structure, strategy, and performance. This is what this study aims to do by shedding light on two research questions: How does a firm s IT orientation determine its CIO reporting structure (CEO Vs CFO)? Does an alignment between IT orientation and CIO reporting structure influence firm performance? 2. LITERATURE REVIEW 2.1 CIO Roles & Reporting Structure There are two broad categories that describe the CIO s role (Stephens et al. 1992; Vizard 2000): First, a strategic role where the CIO is involved in strategic planning, participates in strategic policy committees, stimulates new business opportunities, and influences the firm s decision making (Gottschalk 2002). This CIO role is associated with a leadership role, increased staff orientation, and corporate responsibility for information resource policy and strategy (Rockart et al. 1982). Such strategic CIOs help align IT with firm strategy and lead IT-enabled strategic projects. 1
Second, an operational or supporting role that the CIO is responsible for IT implementation, managing the IT infrastructure, and providing functional IT support in a cost-effective way. This more traditional focuses on managing must-do IT projects with clear payback (Caldwell et al. 1996). A key element of a firm s IT structure is the CIO reporting structure. Whether the CIO reports to the CEO (one level down) or CFO (two-levels down) is a well-accepted measure of the relative power and importance of the CIO in the firm (Applegate and Elam 1992). For the CIO, the CFO is often seen as an adversary or obstacle due to the difficulty of CIO to show returns on IT investments (Slater 2002). 3. CONCEPTUAL DEVELOPMENT 3.1 Firm IT Orientation The strategy-structure paradigm (Chandler 1962) has long advocated the need to match a firm s strategy with its structure. Since a firm s competitive strategy largely depends on IT (Bakos and Treacy 1986), following the strategy-structure paradigm, the IS literature has suggested that a firm s competitive strategy is related to its IT structure (Tavakolian 1989). Without loss of generality, firms have two key types of IT orientation: strategic Vs operational. Firms with a strategic IT orientation focus view IT as a competitive weapon and an enabler of new business opportunities. Firms with an operational IT orientation focus on cutting operating expenses and emphasizing strict IT spending, allowing business needs to drive IT decisions (and not vice versa). To capture the relative importance of IT in the firm, we propose Sales over Assets as a success measure for firms employing IT for strategic differentiation. On the other hand, Operating Income over Sales is proposed as a performance measure for firms leveraging IT for operational excellence. 3.2 CIO Reporting Structure The CIO reporting structure depends on how critical is IT to the firm s strategy, and the culture of the firm in terms of IT (Benjamin et al. 1985; Jones et al. 1995). We propose that firms with a strategic IT orientation tend to have their CIO report directly to the CEO, whereas in firms where IT has an operational role, the CIO tends to report to the CFO. A CIO-CEO reporting structure is associated with emphasis on new product development, business process reengineering efforts, market orientation, and knowledge management. Firms whose CIO has a strategic role often have a formal IT strategy, an IS strategic orientation, greater IS planning success, and greater IS maturity. A CIO-CEO reporting structure is often the result that IT plays an important role in managing knowledge, and the need for the CIO to implement knowledge management systems (Lasker and Norton 1996). Firms whose CIOs report to the CEO tend to leverage IT for growth and competitive advantage (Caldwell et al. 1998). A CIO-CFO reporting structure helps bring portfolio management and cost discipline to IT spending, it focuses IT initiatives on business needs, and ensures adequate IT resources dedicated to financial reporting and analysis systems (OptimizeMag, 2003). This reporting structure emphasizes efficiency, infrastructure maintenance, and regulatory compliance. In summary, reporting to the CEO is an IT structure for firms who view IT as a source of competitive advantage, while firms whose CIO reports to the CFO see IT as a way to cut operating expenses (Caldwell et al. 1998). H1: Firms with a strategic IT orientation (high Sales over Assets) have their CIO reporting to the CEO. H2: Firms with an operational IT orientation (high Operating Income over Sales) have their CIO report to the CFO. 3.3 Strategy-Structure Alignment & Firm Performance Alignment or contingency-fit, rooted in the information processing view (Galbraith 1977), is conceptualized as the degree of ideal configuration among relevant factors (Venkatraman 1989). Following this contingency view, the success of any CIO reporting structure depends upon the firm s IT orientation (strategic or operational) since the relationship between the CIO and other C-level executives (CEO or CFO) may influence the success of IT in the firm (Feeny et al. 1992; Jarvenpaa and Ives 1991). 2
Direct CEO reporting improves the similarity of IT perceptions between the CIO and CEO ( shared vision for IT ) (Tai and Phelps 2000) and the CIO-CEO relationship and communication (Gottshcalk 1999; Raghunatham 1992), which would be particularly valuable for firms that emphasize a strategic IT role. A direct CIO-CEO reporting also facilitates IT implementation (Gottshcalk 1999), which in turn elevates the attention to the strategic role of IT and the CIO s influence on the CEO (Slofstra 2001). On the other hand, firms where IT has a supporting role must emphasize strict IT spending and focus on low-risk projects where IT can result in further efficiency improvements. Summarizing these arguments, we expect to have two ideal profiles: H3: Firms with either (i) a strategic IT orientation and a CIO-CEO reporting structure, or (ii) an operational IT orientation and a CIO-CFO reporting structure will have superior performance over time. 4. RESEARCH METHODOLOGY & RESULTS To test the proposed hypotheses, secondary data from 700 Fortune 2000 firms were collected. Sales over Assets: A strategic IT orientation is operationalized with superior sales over assets. The reliability (Cronbach s alpha) of this variable was.80. Operating Income over Sales: An operational IT orientation is operationalized with superior operating income over sales. This variable s reliability was.99. The dichotomous nature of the CIO reporting structure allowed us to use a logistic regression analysis using the following equation over a 5-year period: Report to CEO t = α 1 * Operating Income/Sales + α 2 * Sales/Assets The results of the logistic regression model are shown in Table 1, which validate H1 and H2. The cumulative results for sales/assets and operating income/sales are shown in Appendices 1 & 2, which render support for H3. In sum, the results support all three proposed hypotheses. Table 1. Logistic Regression Results Logistic Regression Factor Coefficient p-value Operating Income/Sales Over 5 Years 2.2248 0.0662 Sales/Assets Over 5 Years -0.3244 0.0030 5. DISCUSSION 5.1 Key Findings The results suggest that a firm s IT orientation determines its CIO reporting structure. Firms with superior sales over assets tend to have their CIO report directly to their CEO. On the other hand, firms with higher average operating income over sales have their CIO reporting to the CFO. In turn, the alignment between IT orientation and CIO reporting structure influence firm performance. More specifically, firms with a strategic IT orientation (high sales over assets) that have their CIO report to the CEO have superior performance over time. Similarly, firms with an operational IT orientation (operating income over sales) and a CIO-CFO reporting structure also have a superior performance compared with firms that have other IT orientation-reporting structure configuration (i.e., operational IT orientation with CIO-CEO reporting and strategic IT orientation with CIO-CFO reporting structure). In sum, the results confirm both the strategy-structure paradigm (Chandler 1962) and also the strategy-structure alignment perspective (Galbraith 1977, Venkatraman 1989), and shed light on the ideal CIO reporting structure. 5.2 Theoretical and Managerial Implications The study has implications for the nature of CIO reporting structure and its implications for firm performance. From a descriptive perspective, the study reveals how a firm s IT orientation (as reflected by key accounting factors) predicts to whom the CIO reports to (CEO Vs CFO). From a prescriptive standpoint, the study sheds light on the ideal CIO reporting structure depending on a firm s IT orientation. This finding can help managers design their CIO s reporting structure based on how their firm views IT. 3
5.3 Limitations and Suggestions for Future Research Economic conditions influence the role of the CIO and her importance in the firm. Recessions are associated with an emphasis on cost reduction and reduced IT spending (reduced importance of the CIO), while economic expansions emphasize new IT-enabled initiatives (enhanced CIO role). Even if the longitudinal results may have captured changes in economic conditions, future research could examine the role of economic conditions (among other factors) that may shape the ideal CIO reporting structure. REFERENCES 1. Applegate, L.M. and Elam, J.J. New Information Systems Leaders: A Changing Role in a Changing World, MIS Quarterly (16), 1992, pp. 469-490. 2. Bakos, J.Y and Treacy, M.E. Information Technology and Corporate Strategy: A Research Perspective, MIS Quarterly (10:2), 1986, pp. 107-124. 3. Benjamin, R.I., Dickinson, C. and Rockart, J.F. Changing Role of the Corporate Information Systems Officer, MIS Quarterly (9), 1985, pp. 177-188. 4. Caldwell, B., McGee, M.K., and Wilder, C. CEOs Turn to IT, Information Week, June 22, 1998. 5. Chandler, A.D. Strategy and Structure: Chapters in the History of Industrial Enterprise, MIT Press, Cambridge, MA, 1962. 6. Feeny, D.F., Edwards, B.R. and Simpson, K.M. Understanding the CIO/CEO Relationship, MIS Quarterly (16:4), 1992, pp. 435-448. 7. Fleming, C. CIOs shed nerd image, Credit Union Magazine, 68, 7, 2002, pp. 17-18. 8. Galbraith, J.R., Organizational Design, Addison-Wesley, Reading, MA, 1977. 9. GottSchalk, P. Strategic Management of IS/IT Functions: The Role of the CIO in Norwegian Organizations, International Journal of Information Management (19), 1999, pp. 389-399. 10. GottSchalk, P. The Role of the Chief Information Officer in Formal Strategic Information Systems Planning, Information Journal of Technology Policy and Management (2:2), 2002, pp. 93-101. 11. Jarvenpaa, S.L. and Ives, B. Executive Involvement and Participation in the Management of Information Technology, MIS Quarterly (15:2), 1991, pp. 204-227. 12. Jones, M.C., Taylor, G.S., and Spencer, B.A. The CEO/CIO Relationship Revisited: An Empirical Assessment of Satisfaction with IS, Information and Management (29:3), 1995, pp. 123-130. 13. Lancit, C. CIO Role Gaining Stature through Corporate Change, Computing Canada (27:8), 2001, pp. 19. 14. Lasker, H.M. and Norton, D.P. The New CIO/CEO Partnership, Computerworld (11:1), 1996, pp. 1-7. 15. O Donnell, A. CIO Role Shifts From Systems to Strategy, Insurance & Technology, New York, NY, 2001. 16. Raghunatham, T.S. Impact of the CEO s participation on Information Systems Steering Committees, Journal of Management Information Systems (8:4), 1992, pp. 83-96. 17. Rockart, J.F. The Changing Role of the Information Systems Executive: A Critical Success Factors Perspective, Sloan Management Review (24:1), 1982, pp. 3-13. 18. Rockart, J.F., Bullen, C.V. and Ball, L. Future Role of the Information Systems Executive, MIS Quarterly (6:1), 1982, pp. 1-14. 19. Slater, D. Get in Touch with Your Inner CFO: How can the CIO and CFO quit arguing and come together? Who better to tell us than leaders who have lived both roles simultaneously, CIO (15:19), 2002, pp. 1-3. 20. Slofstra, M. CIO role grows in influence on CEO, Corporate Strategy Computing Canada (27:16), 2001, pp. 1-2. 21. Stephens, C.S., Ledbetter, W.N., Mitra, A. and Ford, F.N. Executive or Functional Manager? The Nature of the CIO s Job, MIS Quarterly (16), 1992, pp. 449-467. 22. Synnott, W.R. and Gruber, W.H. Information Resource Management, John Wiley & Sons, New York, NY, 1981. 23. Tavakolian, H., Linking the Information Technology Structure with Organizational Competitive Strategy: A Survey, MIS Quarterly (13), 1989, pp. 309-317. 24. Venkatraman, N., "The Concept of Fit in Strategy Research: Toward Verbal and Statistical Correspondence," Academy of Management Review (14:3), 1989, pp. 423-444. 25. Vizard, M. Changing CIO Characteristics Explain CTO s Rise, InfoWorld, December 4, 2000, pp. 49. 26. Watson, R.T. Influences on the IS Manager s Perceptions of Key Issues: Information Scanning and the Relationship with the CEO, MIS Quarterly (14), 1990, pp. 217-231. 4
Appendix 1. Cumulative Results for Sales Over Assets () Value P-Value Test (p-value) bothceo=bothcfo bothcfo=diffcfo bothceo=diffcfo (T+1, T+2) bothceo -1.10322 0.0001 0.0003 0.0004 0.0005 bothcfo 0.09161 0.4011 DiffCFO -0.85894 0.0001 (T+1, T+2, T+3) bothceo -0.75827 0.0001 0.0020 0.0240 0.0006 bothcfo 0.17812 0.2868 DiffCFO -0.51308 0.0016 (T+1, T+2, T+3, T+4) bothceo -0.67401 0.0001 0.0005 0.0123 0.0005 bothcfo 0.24150 0.2073 DiffCFO -0.42585 0.0032 Appendix 2. Cumulative Results for Operating Income Over Sales (OPIS) Value P-Value Test (p-value) bothceo=bothcfo bothcfo=diffcfo OPIS (T+1, T+2) bothceo 0.01138 0.1333 0.0075 0.1676 0.0001 bothcfo -0.04381 0.0272 DiffCFO -0.01509 0.0795 OPIS (T+1, T+2, T+3) bothceo 0.01508 0.0738 0.0001 0.0234 0.0001 bothcfo -0.05122 0.0041 DiffCFO -0.01286 0.1183 OPIS (T+1, T+2, T+3, T+4) bothceo 0.02643 0.0047 0.0001 0.0091 0.0001 bothcfo -0.04282 0.0091 DiffCFO -0.0020 0.4250 Where: bothceo=diffcfo bothceo bothcfo DiffCFO Both CEO (Actual and Predicate) Both CFO (Actual and Predicate) Actual CFO but predicate CEO 5