Presentation on theme: "Economics of IS (Return On Investment). IntroductionMeasuring value of ISIS value chain by sectorChallenges in Measuring Value of ISROI versus CBADriving."— Presentation transcript:
Economics of IS (Return On Investment)
IntroductionMeasuring value of ISIS value chain by sectorChallenges in Measuring Value of ISROI versus CBADriving Business Value of IS
If you cannot measure IT, you cannot manage IT --- Chairman Emeritus, Intel Corporation. Is this positivism or actual?
Introduction “An organization can and will create a competitive advantage and increase shareholder value not by just deploying information technology, but by deploying the right information technology by linking IT to corporate objectives and focusing all efforts on the requirements of the end user. “– David Sward, Measuring Business value of IT
Measuring Value of IS – The Dynamic Capabilities Theory Dynamic capability is defined as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments”. The basic assumption of the dynamic capabilities framework is that today’s fast changing markets force firms to respond quickly and to be innovative.
Measuring Value of IS – The Dynamic Capabilities Theory According to Wade and Hulland (2004), IS resources may take on many of the attributes of dynamic capabilities, and thus may be particularly useful to firms operating in rapidly changing environments. Even if IS resources do not directly lead the firm to a position of superior sustained competitive advantage, they may nonetheless be critical to the firm’s longer- term competitiveness in unstable environments if they help it to develop, add, integrate, and release other key resources over time.
Measuring Value of IS – The productivity paradox Popularized in a widely-cited article by Erik Brynjolfsson,Erik Brynjolfsson Noted the apparent contradiction between the remarkable advances in computer power and the relatively slow growth of productivity at the level of the whole economy, individual firms and many specific applications. Also referred to as the Solow computer paradox in reference to Robert Solow's 1987 quip, "You can see the computer age everywhere but in the productivity statistics."Robert Solow The paradox has been defined as the “discrepancy between measures of investment in information technology and measures of output at the national level.”
Traditional Value of IT/IS Performance measure is traditionally based on the following – Help desk support calls – Percentage of uptime of the systems during the week/month/year – Keeping the lights on through business support and availability of systems – Deployment of new desktops – Support of the ERP
IT / IS Value Chain by sector Differences in organizations management / operation of the businesses and the strategic goals of organizations define the value of IS investment. SME / NGO Private corporations Government – public service
Challenges in Measuring Value of IS Measurement: the gains are real, but our current measures miss them; Mismanagement: there are no gains because of the unusual difficulties in managing IT or information itself. Redistribution: there are private gains, but they come at the expense of other firms and individuals, leaving little net gain; Time lags: the gains take a long time to show up;
Returns on Investment (ROI) A calculation of the most tangible financial gains or benefits that can be expected from a project versus the costs for implementing the suggested program or solution. ROI = (net benefits/total cost) Net benefits equals total benefits minus total cost. It is the incremental financial gain (or loss). An ROI ratio greater than zero is necessary for a program to be economically attractive. A sub-zero ratio may not automatically “kill” a project, because it may result in a required capability that doesn’t currently exist.
Cost Benefit Analysis (CBA) CBA is more comprehensive than ROI, and attempts to quantify both tangible and intangible (or “soft”) costs and benefits. Like an ROI calculation, the result of CBA is a ratio expressed as a percentage, and economic attractiveness is determined the same way: above zero is attractive, and below zero is not. The equation is the same, although more costs and benefits are included. That is the essential difference between the two methods
Business Value of IS Business value is the benefit for the business unit and the organization as a whole, represented in monetary terms, as a result of IT solutions or services as outlined below – Direct Contribution to the organizations market position or increased revenue – Deliverables and results that support solving customer business needs and challenges Customer cost saving or financial benefits
Business Objectives MEASURED BUSINESS VALUE User Requirements IT Capabilities USER EXPERIENCE DESIGN Techno-centrism to User-centrism
Drivers of Business Value Balanced score card IT strategy versus corporate strategy – cost centre against strategic centre / partner rather than support KPIs / KRAs – CAPEX / OPEX Driver of change rather than implementer of change
Sample Research Topics Information economics and the value of information Economics of software from creation to delivery Pricing of digital goods Economics of information security and privacy Electronic markets Economics of E-commerce Network effects and IS/IT Economics of IT outsourcing Economics of diffusion of IT products and innovations
Sample completed research KINYANJUI J. WANJIRU A SURVEY OF WORK VALUES AND THE USE OF INFORMATION SYSTEMS. A CASE OF SELECTED BUSINESS FIRMS IN MUGANDA NIXON AN INVESTIGATION OF THE BUSINESS VALUE OF E- COMMERCE. THE CASE OF SELECTED FIRMS IN ODILON DIZON JR. EVALUATION OF FEASIBILITY OF IT PROJECTS BY PUBLICLY QUOTED COMPANIES IN ANENE M. THE CONVERGENCE OF THE TELECOMMUNICATIONS, IT AND MEDIA AND THE IMPLICATION FOR REGULATION IN MBOTE J.K. INFLUENCE OF IT ON MARKETING. THE CASE OF COMMERCIAL BANKS IN KARIUKI F.M. IT STRATEGY AND ORGANIZATION STRUCTURE RELATIONSHIP IN COMPANIES LISTED ON THE NSE OWUOR S.J.O.THE USE OF IT AS A FACILITATOR OF BUSINESS PROCESS REENGINEERING. THE CASE OF BIDCO OIL REFINERIES LIMITED
Conclusion Emerging trend of merging product development with technology – technology to gain competitive advantage Challenge is balancing the top line against costs to improve the bottom line New IS managers must comprehend the commercial sense of IS projects / plans
IT people are Business People too and IT enables the business chain – CIO Chevron Corporation Thank you