Presentation on theme: "Dinesh Mirchandani University of Missouri – St. Louis"— Presentation transcript:
1 Dinesh Mirchandani University of Missouri – St. Louis Information Technology: Strategic Decision Making For Managers Henry C. Lucas Jr. John Wiley & Sons, IncDinesh MirchandaniUniversity of Missouri – St. LouisCopyright 2004 John Wiley & Sons, Inc.
2 Copyright 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.Copyright 2004 John Wiley & Sons, Inc.
3 Making the IT Investment Decision Chapter 7Making the IT Investment DecisionCopyright 2004 John Wiley & Sons, Inc.
4 A Garbage Can Model of IT Value Portrays the factors most organizations confront when investing in ITHelps understand why not all IT investments are successfulCopyright 2004 John Wiley & Sons, Inc.
6 Project Success and Other Outcomes Some unsuccessful IT investments include:IRS’s modernization projectDenver airport’s automated baggage handling systemAA Sabre Technologies and Marriott Hotels’ travel supermarket systemThe Department of Transportation’s air traffic modernization projectThere are many examples of successful IT investments as wellCopyright 2004 John Wiley & Sons, Inc.
7 Conversion Effectiveness The effectiveness with which investments in IT are converted to useful outputsThe four components of conversion effectiveness are:top management commitmentexperience with ITuser satisfactionturbulence of the firm’s political environmentCopyright 2004 John Wiley & Sons, Inc.
8 Other Success Factors for IT Investments Size and scope of the projectAmount of unknown technology involvedProject managementSupport and encouragement of managers, sponsorshipThe urgency of the problem/opportunity addressed by the technologyNorms in the organizationUser commitment and involvementTechnical development environmentQuality of the IT staffStrength of the project teamLevel of expertise of participantsCopyright 2004 John Wiley & Sons, Inc.
9 Success Factors for IT Investments (continued) Type of technology employedType of applicationAmount of custom code writtenNature of packaged software includedUse of external consultantsDegree of understanding between users and developersPresence of a project championSenior management involvementAmount of organizational change requiredThreat to existing personnel, vested interestsUser’s views of the quality of the systemCopyright 2004 John Wiley & Sons, Inc.
10 The IT Investment Equation P(Success/Return) = P(Return on Investment Type) * P(Conversion Success)Type of InvestmentManagement and IT Staff estimate of probability of returnEstimate of probability of successful conversion effortOverall probability of a return; S/R indexBudgeting system.51.0JIT/EDI system.95.75.71Infrastructure network.7.35Package tracking system.2Groupware.9.8.72Web order entry.63Web home pagesCopyright 2004 John Wiley & Sons, Inc.
11 Copyright 2004 John Wiley & Sons, Inc. Estimating ReturnsIt is difficult to estimate the return from specific IT investmentsManagers should also consider the cost of not investing in necessary technologyCopyright 2004 John Wiley & Sons, Inc.
12 Copyright 2004 John Wiley & Sons, Inc. The IT Value EquationExpected Return = Estimated Return * P(Return) x P(Conversion Success)i.e., Expected Return = Estimated Return * P(Success/Return)Copyright 2004 John Wiley & Sons, Inc.
13 The Investment Decision Traditional Net Present Value AnalysisThe Real Options Pricing FrameworkMaking a decision solely based on these approaches is not recommended because:estimates of costs and future returns to be madeneither approach is particularly suited for IT investment decisionsCopyright 2004 John Wiley & Sons, Inc.
14 Copyright 2004 John Wiley & Sons, Inc. SummarySenior management support is necessary for new IT initiativesIT investments have the potential to return tremendous value or fail miserablyDecision makers can use either quantitative or qualitative analysis to approve projects depending on the type of the investment proposedQuantitative analysis alone (NPV or OPM) may not provide a complete picture to the decision makerCopyright 2004 John Wiley & Sons, Inc.