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SESSION 13 UNDERSTANDING THE BUSINESS VALUE OF SYSTEMS AND MANAGING CHANGE.

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Presentation on theme: "SESSION 13 UNDERSTANDING THE BUSINESS VALUE OF SYSTEMS AND MANAGING CHANGE."— Presentation transcript:

1 SESSION 13 UNDERSTANDING THE BUSINESS VALUE OF SYSTEMS AND MANAGING CHANGE

2 Capital budgeting Process of analyzing and selecting various proposals for capital expendituresProcess of analyzing and selecting various proposals for capital expenditures The payback methodThe payback method ROIROI Cost benefit ratioCost benefit ratio NPVNPV Profitability IndexProfitability Index IRRIRR Traditional Capital Budgeting Models

3 Do not express the risks and uncertainty of own cost and benefits estimatesDo not express the risks and uncertainty of own cost and benefits estimates Costs and benefits do not occur in the same time frame for ISCosts and benefits do not occur in the same time frame for IS Technology changes causing estimates to varyTechnology changes causing estimates to vary Intangible benefits are difficult to quantifyIntangible benefits are difficult to quantify IS life expectancy is shorter than manufacturing systemsIS life expectancy is shorter than manufacturing systems Limitations of Financial Models Traditional Capital Budgeting Models

4 Heartland Stores General merchandise retail chain upgrading supply chain management system Reduce inventory costs: Items stocked in inventory Reduce labor costs: Inventory and tracking personnel Reduce telecommunication costs: Less time on phone tracking inventory and shipments Reduce transportation costs: Consolidating shipments, more efficient shipping schedules Understanding the Business Value of Information Systems Case Example: Capital Budgeting for a New Supply Chain Management System

5 Understanding the Business Value of Information Systems Costs and benefits of the new supply chain management system Figure 14-1

6 Understanding the Business Value of Information Systems Financial models Figure 14-2

7 Understanding the Business Value of Information Systems Payback Method Time required to pay back initial investment of project Case Example: Capital Budgeting for a New Supply Chain Management System Original investment = Number of years to pay back Annual net cash inflow

8 Understanding the Business Value of Information Systems Accounting Rate of Return on Investment (ROI) Desired rate of return must equal or exceed cost of capital (Total benefits – Total cost – Depreciation) = Net benefit Useful life Case Example: Capital Budgeting for a New Supply Chain Management System Net benefit =ROI Total initial investment

9 Understanding the Business Value of Information Systems Net Present Value Compare investment with future savings and earnings Case Example: Capital Budgeting for a New Supply Chain Management System Present value of expected cash flows -Initial investment cost =Net present value

10 Understanding the Business Value of Information Systems Cost-Benefit Ratio Ratio of benefits to cost Case Example: Capital Budgeting for a New Supply Chain Management System Total benefits =Cost-benefit ratio Total costs

11 Understanding the Business Value of Information Systems Profitability Index Allows ranking of different possible investments Case Example: Capital Budgeting for a New Supply Chain Management System Present value of cash inflows = Profitability index Investment

12 Understanding the Business Value of Information Systems Internal Rate of Return (IRR) Rate of return, or profit, that an investment is expected to earn Discount (interest) rate that will equate the present value of the projects future cash flows to the initial investment cost Case Example: Capital Budgeting for a New Supply Chain Management System

13 Portfolio Analysis Analysis of portfolio of potential applications within a firmAnalysis of portfolio of potential applications within a firm Determines risks and benefitsDetermines risks and benefits Selects among alternatives for information systemsSelects among alternatives for information systems Strategic Considerations

14 A System Portfolio Figure 14-3 Strategic Considerations

15 Scoring Models Method for deciding among alternative systems based on a system of ratingsMethod for deciding among alternative systems based on a system of ratings Real Options Pricing Models Models for evaluating information technology investments with uncertain returnsModels for evaluating information technology investments with uncertain returns Strategic Considerations

16 Knowledge Value–Added Approach Focuses on knowledge input into a business processFocuses on knowledge input into a business process Determines costs and benefits of changes in business processes from new information systemsDetermines costs and benefits of changes in business processes from new information systems Strategic Considerations

17 Productivity :Measure of firm’s efficiency in converting inputs to outputs Productivity paradoxProductivity paradox Information Technology Investments and Productivity

18 System failure Information system does not perform as expected, is not operational at a specified timeInformation system does not perform as expected, is not operational at a specified time Poor design, inaccurate data, excessive expenditure, breakdown in operationsPoor design, inaccurate data, excessive expenditure, breakdown in operations IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE Information System Problem Areas

19 Figure 14-4 IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE

20 Implementation Organizational activities working towards adoption, management, and routinization of innovationOrganizational activities working towards adoption, management, and routinization of innovation Change Management and the Concept of Implementation IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE

21 Role of users in implementation processRole of users in implementation process Degree of management support for implementation effortDegree of management support for implementation effort Level of complexity and risk of implementation projectLevel of complexity and risk of implementation project Quality of management of implementation processQuality of management of implementation process Causes of Implementation Success and Failure IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE

22 Factors in Information System Success or Failure Figure 14-5 IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE

23 User–designer communications gap Different backgrounds, interests, and prioritiesDifferent backgrounds, interests, and priorities Impedes communication and problem solving among end users and information systems specialistsImpedes communication and problem solving among end users and information systems specialists User Involvement and Influence IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE

24 Project requires backing and commitment of management at various levelsProject requires backing and commitment of management at various levels Perceived positively by both users and technical information services staffPerceived positively by both users and technical information services staff Management Support and Commitment IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE

25 Project size: Larger project has greater riskProject size: Larger project has greater risk Project structure: Clear and straightforward requirements help define outputs and processesProject structure: Clear and straightforward requirements help define outputs and processes Experience with technology: Project risk rises if project team and information system staff lack required technical expertiseExperience with technology: Project risk rises if project team and information system staff lack required technical expertise Level of Complexity and Risk IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE

26 Improper management leads to: Cost overrunsCost overruns Unexpected time slippageUnexpected time slippage Technical shortfallsTechnical shortfalls Failure to obtain anticipated benefitsFailure to obtain anticipated benefits Management of the Implementation Process IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE

27 Consequences of Poor Project Management Figure 14-6 IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE

28 Managing Technical Complexity: Usage of internal integration tools to ensure operation of implementation teamManaging Technical Complexity: Usage of internal integration tools to ensure operation of implementation team Formal Planning and Control Tools: Structures and sequences tasks, monitors progress towards fulfillment of goalsFormal Planning and Control Tools: Structures and sequences tasks, monitors progress towards fulfillment of goals Controlling Risk Factors

29 Increasing User Involvement and Overcoming User Resistance: Linking work of implementation team to that of users at all organizational levelsIncreasing User Involvement and Overcoming User Resistance: Linking work of implementation team to that of users at all organizational levels Controlling Risk Factors


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