1 Issues and techniques for IT evaluation Pertemuan Matakuliah: A Evaluasi Efektivitas Sistem Informasi Tahun: 2006

2 Introduction How to convert the benefits based on IT investment into measurable values Not all goods or services have to be traded in order to establish value Balance sheet value of a business asset is in no way related to its earning capability, but management perception

3 Measuring business performance What constitutes good performance? Ratios Inflation An art and not a science

4 When is performance measured Where the amount of funds involved is not substantial Where the performance or value is taken for granted Where the organization classifies the activity in terms of an ongoing expense rather than as a capital investment

5 Why IT investment is heavily scrutinized The amounts of money are frequently quite substantial Many IT investments are not always perceived as being close to revenue or profit-making aspects of business There is not always agreement as to the IT investment need, value, or performance Much IT expenditure, especially on hardware, has traditionally been capitalized There has been growing dissatisfaction at the performance of IT functions.

6 Assessment of IT effectiveness Accountant  ROI? Operating Mgmt  what company get from IT investment? BOD  are computers enhancing business performance? Evaluate IS Dept : compare to competitor and to historic performance

7 Investment purposes, types, & evaluation techniques Investment purposeInvestment typeEvaluate/measure Business survivalMust doContinue/discon tinue business Improving efficiencyVital/coreCost benefit Improving effectiveness Critical/coreBusiness analysis Competitive leapStrategic/ prestige Strategic analysis InfrastructureArchitecture/ must do Very broad terms

8 Issues strategy differentiation Does IT lead to adding information to the product? Does IT application make it easier for clients to order, buy, and obtain delivery of the goods or service? Are there fewer errors in processing the business? Have the after sales service aspects of the business been enhanced? Strategy of cost leadership

9 Issues strategy low cost leadership Will IT application result in direct cost reductions? Will there be labor reductions? Will the time to market improve? Will there be greater utilization of equipment? Will Just-In-Time manufacturing be possible?

10 Different approaches to measurement Physical counting Assessment by ordering, ranking, or scoring

11 Examples of satisfactory and poor systems objectives Satisfactory objectives : Reduce inventories by 5% by value and 10% by volume within the next 180 days Increase ROI by 1% by the end of year Improve staff acceptance if new IT system Poor objectives : Improve profitability Reduce errors Enhance cash flow

12 Steps in measuring intangible benefits Conceptualize the chain of cause-and-effect events that may result from the introduction of the system Identify how it will be possible to establish the changes that are likely to occur as a result of introduction of the information system Consider how the size of the change may be measured Where the effect of the system is clear, the analyst may be proceed with the next three steps Measure the size of change Put monetary value on changes that have been observed

13 3 Most frequently encountered 1.Noise ; effect of IT investment may be masked by other events in the environment 2.Fluctuations in short term ; due to seasonal changes in demand, cost or prices 3.Lies, damn lies, and statistics; assumptions may often be manipulated

14 Specific Methodologies 1.Strategic match analysis and evaluation; issues not well understood, unaware of strategy 2.Value chain assessment; organization and industry internal value, difficult to obtain data 3.Relative competitive performance ; competitor’s acquisition of IT, difficult to compare benefits of different systems, uncertainty competitor’s plan 4.Proportion of management vision achieved ; high degree of subjectivity, not easy to admit failure 5.Work-study assessment ; regular review of how the work in department is performed, changes in work patterns

15 Specific Methodologies (cont’d) 6. Economic assessment; theoretical approach, mathematical terms, abstract 7.Financial cost benefit analysis; subject to manipulation, require a sound infrastructure 8. User attitudes; individual user, survey method, technical approach 9. Value-added analysis; assess the value of the system first, costs under control 10.Return on management; stimulate re-thinking, not easy to operation

16 Key Business Application FunctionApplication/Systems Product design & development Product engineering Project control OperationsLabor control Inventory management Procurement MarketingStreamlined distribution Telemarketing SalesAdvertising monitor Sales consolidation AdministrationPlanning and budgeting Office automation

17 Management Value Added Revenue - Purchases and taxes = Business Value Added – Dividend – Operation cost – Management cost = Management Value Added

18 Questions to be addressed What assumptions underlie the cost and benefit calculations? What goes into the investment? What costs should be attributed to a system? What benefits have been identified and for how long? How are future benefits adjusted for inflation? What measure of inflation has been used? How are future exchange rates accommodated?