Information Systems Value

1
Chapter 14

• Information Systems Value
• and
• Financial Strategy

2
Where are we?
After today - five classes left.
3 chapters IS and business planning, TQM and
IS and a closing chapter.
Final papers due next Tuesday.
Paper presentations (five minutes) on Mar. 9
next to last class
3
Final ATP
Revised Section I and II Introduction to Section
III Option Generator Model tailored to your
company Roles, Roles and Relationships concept
clearly identified Redefine and/or Define (what
did your company change?) Value to Customer model
Telecom role Success Factor Profile - 4 to 6
factors Section IV - a true summary of the entire
analysis
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Information Systems Value

• Logical to Address
• Necessary to Articulate
• Controversial Because It Cant Be
• Measured.
• A Management Process--Not Techniques
• or Methodologies.
• The Reason for Significant Management
• Consulting.

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The Question
What are we getting for that?
6
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

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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.

8
The IS Value Issue?

• A Big Deal - Something needs to be done.

• A Medium Deal - Being talked about but taking
  
• a back seat to other business issues.

• No Deal - Not a current issue and there is no
  need to
• make it a priority within the I/S organization.

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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.

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Is the Value Issue Unique to IS?
What about?
Advertising?
Research and Development?
Executive Development Programs?
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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
  Sectors
• 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.

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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
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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.

14
IS Value and Financial Strategy
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.
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Information Systems Value Chains

• System
• Individual
• Department
• Organization
• Enterprise

• Technology
• Tasks
• Activities
• Programs
• Goals

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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.

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Widespread Dissatisfaction with IS?!
Prompts a rifle-shot focus on specific elements
of Information Systems

• Costs
• Measurable return on investment
• Inflexibility
• Complexity
• Project status and time schedules
• Lack of business control and understanding
• Technical Orientation

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Industry IT Spending

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

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(No Transcript)
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Measuring the Cost/Benefits of IS?
1. The amount of the expense? 2. The rate of the
expense growth? 3. The benefits of information
systems?
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Information Systems Value

• Company/Enterprise

Infrastructure

• Function/Department

Applications

• Personal/Individual

Personal Applications and Tools
Figure 14-3
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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

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Evolution of Financial Strategy
Initiation
Expansion
Control
Maturity
I
II
III
IV
Application Support
Single Area Proliferation
Containment Organization
Strategy
People Displacement
Cost Avoidance
Competitive Advantage
DP Efficiency
Motivation
Business Case Post Install Audit
Financial Strategy
Charge Out System
Management Process
Budget
Little Reactive
Directed Proactive
DP Planning
Centralized Decentralized Distributed
Organization
Single Dept. Multiple Dept.
Centralized
Figure 14-2
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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.

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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 accomplished.

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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.

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Charge-Out System

• People should pay for what they
• receive in terms of information
• systems support.

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Charge-Out System

• A Cost Center
• A Profit Center
• A Service Center

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What to Charge For?

• RD Projects
• Feasibility Studies
• User Training
• User Support
• Data Storage
• Telecommunications
• Transaction Processing
• Program Maintenance
• Program Development
• New Applications

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Pricing Methodology

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

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Charge-Out System

• What is good about such an approach?
• What is wrong with this approach?

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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.

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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
business.
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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.

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Information Systems Value

• Initial Investment
• Infrastructure
• Applications
• Personal Computing

• On-Going Basis
• Budget
• Business Case
• Charge-out System
• Management Process

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The Information Systems Business

• Can it be monitored and measured?
• Can it meet defined objectives?
• Is it worth doing both of the above?

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IS Business Success

• A necessary platform for a successful
• information systems business is a
• competitive cost structure for service
• offerings that is achieved by those that
• pay.

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Job Costing

• Whatever the source that a company uses
• to collect the information that it needs, the
• object is to trace specific costs to each
• specific job, to the extent that such tracing
• is economically feasible.

George Foster Cost Accounting A Management
Emphasis
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Client-Server Impact on the I/S Value Issue

• Complicates cost allocation to specific functions
  or departments since more I/T is shared.
• Increases the intangibles to justify the cost of
  network-based support. i.e.., decision assist.
• Spreads the cost of I/T across the enterprise and
  lessens the spotlight on the total cost.

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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 same IS support
  represents
• real value to them.

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Information Systems Value?

• The ultimate test is still efficient, cost
• effective and responsive solutions to
• business requirements.

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Hewlett-Packard Test Measurement OrganizationIS
ValueCase Study
The primary objective was to strategically
position 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.
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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.
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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.
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To move up the curve. . .
Exploiting the knowledge base
Each step requires a different approach build on
a sound foundation.
Enabling change innovation
Securing return on investment
Cost effective IT operations
Exploiting IT
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Guiding Principles
Focus Invest in major trends in
cross- organizational networked solutions and
services. Cost Structure Achieve competitive
cost structure for service offerings. Organiza
tion Reduce decision-making layers and
increase responsiveness to business
partners. Partnerships Forge solid
partnerships with internal and external
suppliers of IT services.
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Value Propositions
Customer Need
IT 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
1
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.
2
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.
3
Improve customer satisfaction and return on
assets through deployment of signifi- cantly
improved (reengineered) processes.
Increase the global competitiveness of the
business by delivering services which increase
the effectiveness of business process
transformation initiatives.
4
Increase the speed and reduce the complexity of
transferring design and product information
between organizations.
Improve sales growth through improved time to
market.
5
Optimize the operations return on investment in
mature processes through the selective
application of process and technology
improvements.
Maximize the lifetime return on process and
system investments.
6
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The New TMO IT Strategy
1. Understand customers and their needs. 2.
Define the market segments. 3. Specify customers
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.
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Initial Three Year Objectives
OBJECTIVE
STRATEGY
MEASURE
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

• Evolve a learning
• organization

• Motivation
• Agility (skill matrix)