Do Boards Need a Technology Audit Committee? What does FedEx, Pfizer, Wachovia, 3Com, Mellon Financial, Shurgard Storage, Sempra Energy and Proctor & Gamble have in common? What board committee exists for only 10% of publicly traded companies but generates 6.5% greater returns for those companies? What is the single largest budget item after salaries and manufacturing equipment?

Technology decisions will outlive the tenure of the management team making those decisions. While the current fast pace of technological change means that corporate technology decisions are frequent and far-reaching, the consequences of the decisions-both good and bad-will stay with the firm for a long time. Usually technology decisions are made unilaterally within the Information Technology (IT) group, over which senior management chose to have no input or oversight. For the Board of a business to perform its duty to exercise business judgment over key decisions, the Board must have a mechanism for reviewing and guiding technology decisions.

A recent example where this sort of oversight would have helped was the Enterprise Resource Planning (ERP) mania of the mid-1990’s. At the time, many companies were investing tens of millions of dollars (and sometimes hundreds of millions) on ERP systems from SAP and Oracle. Often these purchases were justified by executives in Finance, HR, or Operations strongly advocating their purchase as a way of keeping up with their competitors, who were also installing such systems. CIO’s and line executives often did not give enough thought to the problem of how to make a successful transition to these very complex systems. Alignment of corporate resources and management of organizational change brought by these new systems was overlooked, often resulting in a crisis. Many billions of dollars were spent on systems that either should not have been bought at all or were bought before the client companies were prepared.

Certainly, no successful medium or large business can be run today without computers and the software that makes them useful. Technology also represents one of the single largest capital and operating line item for business expenditures, outside of labor and manufacturing equipment. For both of these reasons, Board-level oversight of technology is appropriate at some level.

Can the Board of Directors continue to leave these fundamental decisions solely to the current management team? Most large technology decisions are inherently risky (studies have shown less than half deliver on promises), while poor decisions take years to be repaired or replaced. Over half of the technology investments are not returning anticipated gains in business performance; Boards are consequently becoming involved in technology decisions. It is surprising that only ten percent of the publicly traded corporations have IT Audit Committees as part of their boards. However, those companies enjoy a clear competitive advantage in the form of a compounded annual return 6.5% greater than their competitors.

Tectonic shifts are under way in how technology is being supplied, which the Board needs to understand. IT industry consolidation seriously decreases strategic flexibility by undercutting management’s ability to consider competitive options, and it creates potentially dangerous reliance on only a few key suppliers.

The core asset of flourishing and lasting business is the ability to respond or even anticipate the impact of outside forces. Technology has become a barrier to organizational agility for a number of reasons:

o Core legacy systems have calcified
o IT infrastructure has failed to keep pace with changes in the business
o Inflexible IT architecture results in a high percentage of IT expenditure on maintenance of existing systems and not enough on new capabilities
o Short term operational decisions infringe on business’s long term capability to remain competitive

Traditional Boards lack the skills to ask the right questions to ensure that technology is considered in the context of regulatory requirements, risk and agility. This is because technology is a relatively new and fast-growing profession. CEOs have been around since the beginning of time, and financial counselors have been evolving over the past century. But technology is so new, and its cost to deploy changes dramatically, that the technology profession is still maturing. Technologists have worked on how the systems are designed and used to solve problems facing the business. Recently, they recognized a need to understand and be involved in the business strategy. The business leader and the financial leader neither have history nor experience utilizing technology and making key technology decisions. The Board needs to be involved with the executives making technology decisions, just as the technology leader needs Board support and guidance in making those decisions.

A Tough Year For Palos Verdes Home Sales I recently looked at single family home sales in the beach cities of the South Bay to get a sense of whether the market has turned the corner yet. The credit market crash of late 2007 hit the real estate industry hard and the South Bay was no exception. Sales volume and median selling prices took a big hit everywhere in 2008. This year has, for the most part, been a continuation of the same painful slide of last year with only a few exceptions.

In a recent article “Are Home Sales in the Beach Cities Turning the Corner?”, we saw that a handful of the beach cities sub-areas are showing signs of reversing this trend. In the 17 sub-areas of Palos Verdes, on the other hand, only one area has clearly changed course, though a few are getting close.

Perhaps not surprisingly, the Rolling Hills area (166) has seen an increase in both average selling prices and median selling prices this year-to-date over last year. Three areas are close – Crest (174), Peninsula Center (175), and Silver Spur (176). Monte Malaga (162) has higher average selling prices this year, but is low with respect to the median prices. All other areas are below the painful thresholds of last year.

The good news in all of this is that the sales volume in an overwhelming majority of the areas is already higher this year compared to last year. Of those that have fallen short, all but one area is easily within reach. Nonetheless, these volumes are still quite off from the peak years for each area before the shocking credit crunch of a couple of years ago. It remains to be seen if the sales volume has at least stabilized for now. We will continue to follow this to see if there are signs of renewed life in the market in early 2010.

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