1. Chapter 4 Issues and Techniques for IT Project Evaluation Management of Computer System Performance

2. 2 Agenda Analytical approaches to Cost Benefit Analysis. Objective: Students should be able: to explain the concepts and methodology of IT performance measurement. Issues and Techniques for IT Project Evaluation

3. 3 IT Evaluation Process The concept of IT Evaluation is based on the IT investment receiving an adequate valuation. IT investment value, from a financial perspective, is defined as what a firm is willing to pay today to own claims on future income streams based upon that investment. Value is relative in non-financial terms and should be considered as such when discussing IT valuation. Keep it in perspective. IT projects may have great operational benefit to individuals or departments but may be cost drains to the company.

4. 4 IT Evaluation Process IT investment, in a financial context, is the key to successful IT management. Measure cost and benefit. The measurement of the IT value uses the tools previously discussed (NPV, ROI, IRR, etc.) The value of future income streams must be measured in terms of industry standards. As an example, a Steel producers’ growth should not be compared against IT firms but only against another steel producer in the same market segment that is subject to the same market stresses.

5. 5 IT Evaluation Process Within the comparative market or industry segment, a ratio analysis is often used for comparing a firms performance. The performance of an individual firm as compared to one another provides a starting point for judging the valuation of that IT investment. The approach that can be taken this type of analysis is to normalize the returns across the industry and then look for factors that will skew those returns. That assumes that you can even identify those returns.

6. 6 IT Evaluation Process In so doing, the normalization across and Industry may not be readily available and the “quantifiable” data may be soft As a CFO, are you going to release key financial information that could be used for competitive analysis? No, of course not. Therefore, the normalization may have to be done against your own internal data.

7. 7 IT Evaluation Process The problem of measuring the impact of an investment is that there are numerous factors that contribute to the success of any company. Factors have different weights for different firms within the same industry so comparative analysis of an investment in one firms and not in another will not necessarily. Using internal data requires meticulous data tracking and metrics. Many, if not most firms that do not use ERP/ERM systems, do not track costs to this level consistently.

8. 8 IT Evaluation Process To solve this problems, diligent tracking of how things are done and what changed will be required to quantify (measure) the results of any investment. There are two methods to accomplish this. These are straightforward and are easily supportable: Physical counting and Assessment by ordering and ranking. Recognizing that IT investments may generate numerous intangible benefits to an organization, striving to quantify those benefits become a challenge.

9. 9 IT Evaluation Process Intangible benefits require more work to obtain a value. Steps suggested include: Identify the cause and effect relation of the IT investment, Identify the changes in metrics that should be anticipated and then measured, Assign a monetary value on that measured change,

10. 10 IT Evaluation Process Apply time value of money principals to the evaluation process (NPV, ROE and IRR as part of the expectations discussed) To reiterate a point, the greatest benefits are the result of re- engineering processes and using IT to take the manual cost elements out of the loop.

11. 11 IT Evaluation Process Once the IT change has been made, then the effectiveness of that change may be assessed. There are numerous approaches to this methodology. These include: Strategic Match, Value Chain, Relative Competitive Performance, Work Study, Financial Cost benefit, User satisfaction, others.

12. 12 IT Evaluation Process The evaluation method selected should be consistent with the method used for the evaluation of other capital investment projects with the firm if at all possible. Inconsistent methodologies will result in inconsistent results. DO NOT CUSTOMIZE MODELS FOR IT PROJECTS.

13. 13 Homework Prepare a BOE, using the downloadable form, for one element of a task identified in your mid term exam. www.TheEbusinessSite.com www.TheEbusinessSite.com Be prepared to discuss the information. Costing is hard. This exercise is used to continue to provide reinforcement of this contention.