1. IS INVESTMENT Title: IS Investment Why Finance Matters?
Productivity and the Productivity Paradox
IS Investment
Evaluation Tools/Techniques
Traditional (tangibles)
Modern (intangibles)
Modern (tangibles)
Cases

2. “The past forty years has seen dramatic advances in the technology of information processing and its widespread adoption bears testimony to the advent of the ‘information society’. However, the economic implications of this transition remain to some degree obscure, since there is little evidence that the new technology has led to clear improvements in productive efficiency.”
Geoffrey M. Brooke

3. Why IT Gets no Respect (Forbes et al., 2005)
COMPANIES ARE MAKING THE SAME MISTAKES OVER AND OVER AGAIN
A full 1/3 of the IT money was essentially wasted
More than one half of projects either fail or experience major cost overruns
Only 10% were on time and on budget
More than 1/3 of the attempts to implement major software packages fail
71% cannot say whether IT is delivering value for money(VFM)
38% say IT is “… only moderately well in alignment with business objectives…”

4. Why Finance Matters? Company’s need real assets
Some assets are tangible – plant, machinery etc.
Some assets are intangible – expertise, trademarks, patents
All need to be paid for!
Two major financial questions
How much should we invest and what specific assets should we invest in?
How to raise cash for the investment – loans, shares etc.
Our focus is on the first question – IS investment decisions

5. Productivity Paradox !
Over the last 50 years, organizations have invested trillions of dollars in information technology.
Total worldwide annual spending on IT in 2005 was three trillion dollars,
Yet it is very hard to demonstrate that IT investments really have increased outputs or wages or profitability.
The discrepancy between measures of investment in information technology and measures of output at the national level is described as the Productivity Paradox.

6. Case: IT versus Profitability
Quaker Oats
80%
Coca-Cola
Return on Equity
Philip Morris
40%
Pepsico
H.J. Heinz
Tyson
Foods
Dole
Food
SuperValu 0%
$100
$1,000
$10,000
$100,000
IT Spending per Employee
Information Economics, Paul Strassman

7. IS INVESTMENT
The head of IT in AT&T (2003) stated that
“the area of measurement is the biggest single failure of information systems while it is the single biggest issue in front of our board of directors”
Peter Drucker
“If you can’t measure it, you can’t manage it “

8. A number of measurement problem areas have been identified:
Inappropriate measures
Budgeting practices concealing full cost
Undersanding human and organisational costs
Understanding knock-on costs
Overstating costs
Neglecting ‘intangible’ benefits
Not fully investigating risk
Failure to devote evaluation time and effort to major capital assets and failure to take into account time-scales for likely benefits
2 Approaches – Justification and Evaluation

9. IT/IS COSTS Hardware Software Installation Environmental
Running/Expense
Maintenance
Security
Networking
Training
Wider Organisational
Compliance/Regulatory

10. Example of an ITJustification Framework

11. EVALUATION TOOLS/TECHNIQUES
The traditional approach to evaluating IT investment concentrated on the tangibles and was focused on financial techniques
However, information, which, is at the core of most intangible assets has become a valuable commodity, which requires measure in order to enable a company to gain a true reflection of the value of their investments and the subsequent derived outcomes

12. Traditional IS Evaluation Tools/Techniques (Tangibles)
Cost Benefit Analysis (CBA)
Return on Investment (ROI)
Internal Rate of Return (IRR)
Net Present Value (NPV)
Discounted CashFlow (DCF)
Payback Period
*See notes for more details

13. Tangible Tools Tangible Tool Purpose Ratio Return on Investment
Evaluate a no of projects
annual net income
project investment
Net Present Value
Use discount rate based on cost of capital to establish present value of project
NPV =
Present Value of Benefit
Present Value of Investment
Internal Rate of Return
Base on NPV
Uses interest rate to cause npv to equal 0
Discount rate at which
Cash receipts = cash expenditure
Discounted Cash Flow
Considers time-dependant nature of money value
Payback Period
Amount of time for cash inflows to equal project investment
Payback(in time) = Investment
Average Annual Benefit

14. Costs/Benefits Benefits: Intangible Costs: Ongoing
Synergy with other projects
Expanded long-term opportunities
Strategic positioning
Job enrichment
Recording of knowledge
Costs: Ongoing
Operating personnel Communication lines
Hardware maintenance
Software upgrades
Office space and utilities
Benefits: Quantifiable
Improved decision speed
Improved decision quality
Automation of tasks
Ability to perform new tasks
Costs: One Time
Software expert system purchase
Software development
Other software purchase
Hardware platform lease or purchase

15. Evaluation: Automation Investments
An area where it is necessary to define and measure IT benefits and costs.
Car Assembly, robots
Warehousing, bar-coding
Wine Production
Capital investment decision. Such decisions can be analyzed by a cost-benefit analysis
Car Example with Robots
Benefits labour cost savings over usable life of the robots
Costs are the capital investment and
the operating and maintenance costs

16. Modern Evaluation Tools/Techniques (Intangibles)
Information Economics
Performance Metrics
Benchmarking
Return on Management
Risk Analysis
Opinion Modelling
*see notes for more details

17. Information Economics
Information Economics is another method of evaluating IT that focuses on key organizational objectives.
It incorporates the technique of scoring methodologies, which are used in many evaluation situations.
Scoring methodology is used by analysts to first identify all the key performance issues and assign a weight to each one.
Organizational objectives are used to determine which factors to include, and what weights to assign in the scoring methodology.
This approach can incorporate both tangible and intangible benefits.
This flexible approach can be carried out by software packages such as Expert Choice (expertchoice.com).

18. Information Economics
Return on Investment (ROI) =
Traditional cost-benefit analysis (CBA)
+ Value Linking
+ Value Acceleration
+ Value Restructuring
+ Innovation Evaluation

19. Information Economics – Value Assessment Factors
Business Domain
Strategic Match +
Competitive Advantage +
Management Information +
Competitive Response +
Organisational/Project Risk -
IT Domain
Strategic IS Architecture +
Definitional Uncertainty -
Technical Uncertainty -
IS Infrastructure Risk -

20. Performance Measurement Example
PROCESS
STRATEGIC GOAL
CSF
MEASUREMENT
Software Procurement
Reduce cost
Negotiate Pricing
Percent discount/user

21. Some Current IT Performance Metric Examples
Development
No. of modifications to software package
No. of changes to design
% development cost
Ratio of contractors to employees
Data Center
No of users requesting access to tools
No. of errors reported
No. of user queries stored
No. of Service outages
Network
Network response time
Mean time to repair (MTTR)
Network availability percent
Cost per LAN port

22. Evaluating IT - Benchmarking
One approach to evaluating infrastructure is to focus on objective measures of performance known as benchmarks.
Benchmarks come in two forms:
Metric benchmarks provide numeric measures of performance.
IT expenses as percent of total revenues.
Percent of “downtime” (when the computer is not available).
CPU usage (as percent of total capacity).
Percentage of IS projects completed on-time and within budget
Best-practice benchmarks emphasize how information system activities are actually performed rather than numeric measures of performance.

23. Benchmarking Tool
Costmark is a benchmarking tool to assist in managing SAP R/3-related environments.
It provides a snapshot of various costs related to personnel, hardware, software licenses, maintenance, help-desk functions, and telecommunications.
Some examples of reports generated by Costmark:
Distribution of cost of operations across different user groups.
Total cost of operations across different user groups and across different departments.
Comparison of various costs with average costs obtained across all SAP-R/3 installations (i.e., industry average).

24. Return on Management
A measure of performance based on the added value to an organisation provided by management
Return-on-Management = Management Value-added
Management Costs

25. Risk Analysis Game Theory Simulation/modelling Techniques
Sensitivity Analysis/Structured Scenarios
Probability of Attainment
Bayesian Analysis

26. Opinion Modelling Interviews Questionnaires
Direction of Perception methods
Opinion Surveys

27. Modern IT Evaluation Costing Approaches
Total Cost of Ownership
Chargeback

28. Evaluating IT - TCO
An interesting approach for evaluating the value of IT is the total cost of ownership (TCO).
TCO is a formula for calculating the cost of owning and operating a PC.
The cost includes hardware, technical support, maintenance, software upgrades, and help-desk and peer support.
By identifying such costs, organizations get more accurate cost-benefit analyses and also reduce the TCO.
It is possible to reduce TCO of workstations in networked environments by as much as 26 percent by adopting best practices in workstation management (Kirwin et al., 1997).

29. IT Accounting Systems
Ideally IT accounting systems will effectively deal with two issues:
Provide an accurate measure of total IT costs for management control purposes.
Charge users for shared (usually infrastructure) IT investments and services in a manner that contributes to the achievement of organization goals.
These are two very challenging goals for any accounting system.
The complexities and rapid pace of change make them even more difficult to achieve in the context of IT.
In the early days of computing it was much easier to identify costs. Nowadays a large proportion of the costs are in “hidden,” indirect costs that are often overlooked.

30. Chargeback
Chargeback is an alternative IT accounting method which distributes all costs of IT to users as accurately as possible, based on actual costs and usage levels.
Although accurate allocation sounds desirable in principle, it can create problems in practice.The most accurate measures of use may reflect technological factors that are totally incomprehensible to the user.
Behavior-oriented chargeback is another IT accounting alternative. The primary objective of this system is influencing users’ behavior.
It is possible to encourage (or discourage) usage of certain IT resources by assigning lower (or higher) costs. Although more difficult to develop, it recognizes the importance of IT to the success of the organization.