Laudon

1
UNDERSTANDING BUSINESS VALUE OF SYSTEMS AND
MANAGING CHANGE
April 8, 2003 Oliver Yao
2
LEARNING OBJECTIVES

• EVALUATE MODELS DETERMINING BUSINESS VALUE OF
  INFORMATION SYSTEMS
• ANALYZE PRINCIPAL CAUSES OF INFORMATION SYSTEM
  FAILURE
• ANALYZE REQUIREMENTS FOR BUILDING SUCCESSFUL
  SYSTEMS
• SELECT STRATEGIES TO MANAGE SYSTEM
  IMPLEMENTATION

3
UNDERSTANDING BUSINESS VALUE OF INFO SYSTEMS

• CAPITAL BUDGETING MODELS
• PORTFOLIO ANALYSIS
• REAL OPTIONS PRICING MODELS

4
CAPITAL BUDGET

• PAYBACK METHOD How long will it take to pay back
  the investment?
• RETURN ON INVESTMENT Does return during useful
  life of an item exceed the cost to borrow money?
• COST-BENEFIT RATIO Does the ratio of benefit
  versus cost exceed 1?

5
CAPITAL BUDGET

• PROFITABILITY INDEX What is the ratio of present
  value of cash inflow to initial investment?
• NET PRESENT VALUE Accounting for cost, earnings
  time value of money what is the investment
  worth?
• INTERNAL RATE OF RETURN
• Accounting for the time value of
• money, what is the return rate of an investment?

6
COSTS BENEFITS

• COSTS
• HARDWARE
• SOFTWARE
• SERVICES
• PERSONNEL

7
COSTS BENEFITS

• TANGIBLE BENEFIT
• INCREASED PRODUCTIVITY
• LOW OPERATING COSTS
• REDUCED WORK FORCE
• LOWER COMPUTER EXPENSES
• LOWER VENDOR COSTS
• LOWER CLERICAL/PROFESSIONAL COSTS
• REDUCED GROWTH OF EXPENSES
• REDUCED FACILITY COSTS

8
COSTS BENEFITS

• INTANGIBLE BENEFIT
• IMPROVED ASSET USE RESOURCE CONTROL PLANNING
• INCREASED FLEXIBILITY
• MORE TIMELY INFORMATION
• INCREASED LEARNING
• ATTAIN LEGAL REQUIREMENTS
• ENHANCED EMPLOYEE GOODWILL, JOB SATISFACTION,
  DECISION MAKING, OPERATIONS
• HIGHER CLIENT SATISFACTION
• BETTER CORPORATE IMAGE

9
CAPITAL BUDGETING MODELS

• LIMITATIONS
• Assume all relevant alternatives have been
  examined cost benefits can be expressed as
• Ignore intangible benefits

10
PORTFOLIO ANALYSIS

• ANALYSIS OF POTENTIAL APPLICATIONS
• TO DETERMINE RISKS BENEFITS
• DETERMINE DESIRABLE FEATURES, ACCEPTABLE RISKS OF
  REQUIRED SYSTEM
• GENERATE PORTFOLIO OF CHARACTERISTICS, RISKS FOR
  EACH ALTERNATIVE
• SCORING MODEL

11
SCORING MODEL

• IDENTIFY DESIRABLE FEATURES
• PROVIDE WEIGHTS FOR EACH (ADD TO 1.00)
• LOOK AT EACH ALTERNATIVE
• WHICH FEATURES ARE PRESENT?
• TO WHAT EXTENT (as an amount)?
• SCORE THE ALTERNATIVE
• RANK-ORDER THE ALTERNATIVES
• SELECT HIGHEST RANKED OPTION

12
REAL OPTIONS PRICING MODELS

• USEFUL UNDER UNCERTAIN CONDITIONS
• INCLUDE ESTIMATES FOR MANAGEMENT LEARNING, VALUE
  OF DELAYING DECISION, VOLATILITY OF COSTS
  REVENUES