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Chapter 14 Information Systems Value and Financial Strategy.

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Presentation on theme: "Chapter 14 Information Systems Value and Financial Strategy."— Presentation transcript:

1 Chapter 14 Information Systems Value and Financial Strategy

2 Logical to Address Necessary to Articulate Controversial Because “It Can’t Be Measured.” A Management Process--Not Techniques or Methodologies. The Reason for Significant Management Consulting. Information Systems Value

3 “The Question” What are we getting for that?

4 What have I received for past information technology investments? How can we maximize the positive impact of information technology on the business? What is the right amount of investment for the future? How can I track the returns on continuing investments in IT? Needed: A process for measuring and tracking benefits realized from Information Technology. Senior Management Questions

5 Information Systems Value and Financial Strategy "You have got to get me a lot more comfortable with the fact that you are spending $400 million a year on information systems. Meanwhile, you are not getting any more." CEO to Information Systems Vice President CEO to Information Systems Vice President

6 The IT Value Issue 1. The applications development process costs too much and takes too long. 2. Integrated systems connectivity and compatibility have major cost implications. 3. A lack of ease of use negatively impacts user productivity. 4. All of the above impact the ability to articulate IT value.

7 The IS Value Issue 1. A Big Deal – The topic is receiving significant attention and increases in IS spending are unlikely. 2. A Medium Deal - Being talked about but taking a back seat to other business issues. 3. No Deal - Not a current issue and there is no need to make it a priority within the Information Systems organization.

8 IT Value Can Become A Major Issue If 1.The business is experiencing major cost reduction pressures. 2.IT expenditures are viewed as a significant cost of running the business. (now or in the future) 3.There is a growing sentiment that a better job could be done in managing IT expenditures.


10 IS Value and Financial Strategy Less than favorable publications: 1. “The Elusive IT Payback.” 2. “The Dreaded ROI Question.” 3. “IT Spending: Is It Out of Control? Service Sector’s Huge IT Infrastructure Weakens Competitiveness” 4. “Office Automation: Making It Pay Off.” 5. “New Metrics for MIS.” 6. “Banks Reassess IT Spending.” 7. “ROI in Real Time.”

11 Is the Value Issue Unique to Information Systems? What about? Advertising? Research and Development? Public Relations Programs?

12 IS Value and Financial Strategy The heart of the matter is not how to quantify the contribution of information systems, but how to satisfy management that this support resource is contributing to the success of the business.

13 The Value of IT IS executives should be prepared to develop and provide high-level metrics that demonstrate the value of IT to the rest of the organization. While mathematical precision is not entirely possible or even desirable, it is possible to arrive at some meaningful estimates. Using information they can quickly access, IT executives should develop these "dashboard" metrics based on key business processes that IT supports, and communicate them in business language.

14 We can find no indication of any positive impact on national productivity despite enormous investments in information technology. Lester Thurow, Dean Sloan School of Management MIT

15 IS Value and Financial Strategy The U.S. service sector has spent $862 billion on IT over the past decade--a figure that is equal to the GNP of France--without any meaningful improvement in productivity.

16 We have seen a very serious problem for the past fifteen years not because of any inherent deficiencies in the machines or the software, but because of management ineptitude in applying technology to productive endeavors. Stephen Roach Economist Morgan Stanley & Co. IS Value and Financial Strategy

17 Information Systems Value Chains Technology Tasks Activities Programs Goals System Individual Department Organization Enterprise

18 As You Progress Up the IS Value Chain Financial benefits would be greater but more difficult to measure. The time horizon to implement a new application would be longer. The organizational level for approval of a new project would be higher. The management direction and coordination would be greater. The amount of risk in implementing the application would be greater. The correlation of benefits with information systems would be less.

19 Dissatisfaction with IS! Prompts a rifle-shot focus on specific elements of Information Systems: Costs Technical versus a business orientation Measurable return on investment Flexibility or lack thereof Complexity Project status and time schedules Lack of business control and understanding

20 Information Systems Do Not Produce Value Directly Information Systems Value to the Business Business Change

21 Who Should Answer the IT Value Question? 1.Chief Financial Officer (CFO) 2.Information Systems Executive 3. User Management (Those benefiting from the IS support)

22 Industry IT Spending Everyone wants to know how they compare with others within their industry. Unfortunately, industry averages can be very misleading.


24 Telecommunications 11% Financial Services 9% Banking 8% Consulting & Business Services 7% Health Care & Medical 5% Biotechnology & Pharmaceuticals4% Chemicals4% Insurance4% Information Technology4% Logistics & Transportation4% Media & Entertainment4% Consumer Goods3% Percentage of company’s worldwide projected annual sales revenue represented by IT budget

25 Distribution3% Electronics3% Hospitality & Travel3% Manufacturing3% Automotive2% Construction & Engineering2% Energy2% Food & Beverage Processing2% Retail: General Merchandising2% Retail: Specialty Merchandising2% Utilities2% Metals & Natural Resources1% Total 4% Source: InformationWeek, Sept. 2001

26 National Semiconductor Annual IT Costs 1. $53 million.Corporate IS Organization Budget 2. $30 millionRemote Site IS Budget 3. $30 million?Other Information Systems Phoenix Utility Management Conference

27 IS Value and Financial Strategy "There is no universal formula for determining the business value of information technology that can be applied in every company and value can change over time." Consultant to Information Systems Vice President

28 Difficulty of IT Benefit Analysis IT is an integral part of other business initiatives. IT benefits accrue over long periods of time. Changes in a company’s business environment make it difficult to assess benefits.

29 Organization DP Planning Financial Strategy Motivation Application Support InitiationExpansionControlMaturity IIIIIIIV Budget Business Case Post Install Audit Charge Out System Management Process Single Area Proliferation Containment Organization Strategy People Displacement Cost Avoidance DP Efficiency Competitive Advantage Little Reactive Directed Proactive Single Dept. Multiple Dept. Centralized Centralized Decentralized Distributed Figure 14-2 Evolution of IS Strategy

30 In the Beginning There are Budgets Information Systems belongs to a single department within the organization. The financial management challenge is to do as much as possible with information systems but to do so within the limits of the budget.

31 IS Business Case A need to prioritize new requests for Information Systems support. A business case provides the business justification for a new application. A post-installation audit verifies that what was proposed actually was actually accomplished.

32 Business Case A financial management concern with the business case approach is that it does not provide an on-going focus on the value of information systems.

33 Charge-Out System People should pay for what they receive in terms of information systems support.

34 Charge-Out System Objectives 1.Maximize worthwhile information systems usage. 2.Minimize frivolous use. 3.Encourage information systems efficiency. 4.Spark interest and participation by users to develop innovative applications.

35 Charge-Out System A Cost Center A Profit Center A Service Center

36 What to Charge For? R&D Projects Feasibility Studies User Training User Support Data Storage Telecommunications Transaction Processing Program Maintenance Program Development New Applications

37 Pricing Methodology Memo As Incurred Estimates Bundled Pricing Algorithm Break-even Annual Break-even Product Life Standard Cost

38 Charge-Out System What is good about such an approach? What is wrong with this approach?

39 A Management Process Application Support Prioritized by a Business Strategy. A Major Focus on Using Information Systems to Compete. A Proactive Role by the Information Systems Organization in the Business Planning Process.

40 Management Process In formulating a management process it is critically important that careful consideration be given to the factors that drive the success of the business. It then logically follows that information systems should be aligned with the same factors that drive the success of the business.

41 Information Systems Value Within many companies a great deal of effort has been made to get user management to conclude that the bill received for information systems support was fair, precise, complete and understandable. In accomplishing this, does user management also conclude that this “bill regarding IS support” Represents real value to them.

42 Costs By User By Application Benefits Macro: Business Function and Unit Micro: Project Justification (The initial investment decision) Confirmation (Measuring the results of the investment) Management Processes: Methodologies Major Factors to Be Addressed

43 Information Systems Value? The ultimate test is still efficient, cost effective and responsive solutions to business requirements.

44 National Institutes of Health What is the source of funding for a federal agency? How likely is it that the Information Systems organization can sell Congress on the idea that they need money for storage devices to help cure cancer?

45 National Institutes of Health The Cancer Institute sells Congress on their need for money to cure cancer. They pay the IS organization for computer-based support through a charge-out system. The IS Director estimates that the $50 million a year for IT resources would probably be half that amount if this financial strategy was not used. NIH has used a charge-out system as an integral part of an effective overall management process to effectively implement a successful financial strategy.

46 IS Financial Strategy A computer-based company concluded that their ability to sustain a sound level of financial performance was directly related to an ability to maintain current levels of productivity despite a projection of significant growth in business transaction volumes.

47 Productivity Challenge Head Count Time Total Productivity Headcount Increase Risk Productivity Programs

48 Management Process Management Incentives Eliminate Simplify Automate Business Case Process I/S Development Discipline Interlock Management Benefit Management

49 Measurements Daily user logs. Surveys of user perceptions, attitudes, comments and usage. Interviews of users. Information system statistics of actual use.

50 Six Year Results Revenue Before Tax Profit Head Count (number of employees) $1.2B$3.1B $178M (15%) $605M (19.5%) 11,00011,500

51 Hewlett-Packard Test Measurement Organization (Agilent) IS Value Case Study A primary objective became strategically positioning the IT organization by building better working relationships with customers (users). A necessary step was to establish the IT organization as a “business within a business.” The initial trigger for action was based on a company wide effort to reduce cost.

52 IS as a Business within a Business 1. Must communicate effectively with customers regarding products and services. 2. Need to shift the focus of IT from operations to strategically important business activities. 3. Must build an accepted cost base to assess the value of IT.

53 A Critical Factor A necessary platform for a successful Information Systems business is a competitive cost structure for service offerings that is accepted by those that pay.

54 To move up the curve... Exploiting IT Cost effective IT operations Securing return on investment Enabling change & innovation Exploiting the knowledge base Each step requires a different approach build on a sound foundation.

55 Guiding Principles FocusInvest in major trends in cross- organizational networked solutions and services. Cost StructureAchieve competitive cost structure for service offerings. OrganizationReduce decision-making layers and increase responsiveness to business partners. PartnershipsForge solid partnerships with internal and external suppliers of IT services.

56 Value Propositions Customer NeedIT Value Proposition Improve organizational agility and flexibility in a rapidly changing global marketplace. Increase the ability of the businesses to create and support new geographically dispersed organization structures through worldwide information systems convergence and integration Make TMO organizations more effective by enabling better, more timely decision- making processes. Improve decision-making capabilities by providing a simple information environment that is accessible to all levels of the organization. Achieve a better return on investments in desktop computing assets. Increase the efficiency and effectiveness of individual contributors and work groups through better utilization of desktop computing devices. 1 2 3 4 Improve customer satisfaction and return on assets through deployment of signifi- cantly improved (reengineered) processes. 5 Improve sales growth through improved time to market. 6 Maximize the lifetime return on process and system investments. Increase the global competitiveness of the business by delivering services which increase the effectiveness of business process transformation initiatives. Increase the speed and reduce the complexity of transferring design and product information between organizations. Optimize the operations return on investment in mature processes through the selective application of process and technology improvements.

57 The New TMO IT Strategy 1. Understand customers and their needs. 2. Define the market segments. 3. Specify customer segments. 4. Define products and services including cost drivers, pricing methodologies and customer invoicing. 5. Complete development and implementation plan. 6. Develop financial analysis of IT investments. 7. Identify potential problem areas in the new model. 8. Document recommendations and linkage issues. 9. Develop first year tactical plan.

58 Initial Three Year Objectives Increase customer satisfaction Increase customer focus Streamline operational processes Reduce operational costs Customer satisfaction index ratings Quality/response time Competitive rates Increase return on investment Evolve scenario planning process Increase new product offerings Market share % Turnaround time Market share % Develop an agile, skilled and motivated team OBJECTIVESTRATEGYMEASURE Evolve a learning organization Motivation Agility (skill matrix)

59 Total Investment in IT Minimize cost per unit of service 81% Strategic Investments 15% IT Management and Planning IT ServicesStrategy % of TMO IT 4% Operations and Infrastructure Start3 rd Year 70% Maximize Return On Investment 26% Control costs versus budget 4%

60 Information Systems Organization of Manufacturing Company Good reputation as a support organization. Good success and benefits through the use of an information center. Good PC program including support. Under pressure to reduce head count.

61 Acceptable Proposition? Head CountMIPS IS $s 206 176 157 116 102 186 282 402 Flat

62 Clinching Argument “You have a high risk of failure with your new business strategy because of a lack of necessary new information systems support.”

63 Considerations Importance of dealing with the value question. Effort and cost to do so?

64 IS Financial Strategy Conclusions Even the most supportive senior executives have “a pain threshold” regarding IS spending. The financial management strategies for information systems are evolutionary and tend to trail the need for them. They are additive as shown by the stages model.

65 More Considerations There are a wide range of practices for even companies in the same industry. Telecom networks have emerged as a major component of IT costs. It is both difficult and potentially misleading to generalize on what constitutes an appropriate level of IT expenditures for a specific company.

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