chapter 14 introduction information systems value and financial strategy
TRANSCRIPT
Chapter 14 IntroductionChapter 14 Introduction
Information Systems Value and
Financial Strategy
High IS Costs Gets Senior High IS Costs Gets Senior Managements AttentionManagements Attention
There is a growing dependence on information There is a growing dependence on information systems to run the organization.systems to run the organization.
Information systems expenses and capital funding Information systems expenses and capital funding have frequently become quite large.have frequently become quite large.
For these reasons senior management has become For these reasons senior management has become more active in managing the role and significance more active in managing the role and significance of Information Systems.of Information Systems.
Primary Inhibitors of the Primary Inhibitors of the Growth of ISGrowth of IS
Inability to articulate the value derived from the use of Information Systems.
Implementation of new applications – takes too long and costs too much.
Major connectivity problems among installed systems provided by vendors, both within and outside the enterprise.
Lack of ease of use of installed systems – a slow learning curve.
The Heart of the MatterThe Heart of the Matter
The heart of the matter is not how to quantify the contribution of information systems, but how to satisfy management that this support resource makes economic sense based on its role within the organization.
Average Information Systems Average Information Systems Spending for an IndustrySpending for an Industry
Many executives want to know this!
Not very meaningful!
Industry averages can be misleading!
Compare With Whom?Compare With Whom?
Compare to your own company! How has IS use and spending evolved over the
years? Is the role and effectiveness of IS what it should
be? What should be done to improve or correct the
situation?
Evolution of Financial StrategyEvolution of Financial StrategyInitiationInitiation
II
ExpansionExpansion
IIII
ControlControl
IIIIII
MaturityMaturity
IVIV
ApplicationApplication
SupportSupport
Single Area Proliferation Containment Organization
Strategy
MotivationMotivation People
Displacement
Cost
Avoidance
DP
Efficiency
Competitive Advantage
FinancialFinancial
JustificationJustification
Budget Business Case Install
Audit
Charge-Out System
Management
Process
DP DP
PlanningPlanning
Little Reactive Directed Proactive
OrganizationOrganization Finance
Dept.
Multiple
Dept.
Centralized Centralized
Decentralized
Distributed
Chapter 14Chapter 14
Information Systems Value Information Systems Value
and and
Financial StrategyFinancial Strategy
Information Systems Value
• Logical to Address• Necessary to Articulate• Controversial Because “It Can’t Be Measured.”• A Management Process--Not Techniques or Methodologies.• The Reason for Significant Management Consulting.
Senior Management Questions
What have I received for past information technology investments?
How can we maximize the positive impact of information technology on the business?
What is the right amount of investment for the future?
How can I track the returns on continuing investments in IT?
Needed: A process for measuring and tracking benefits realized from Information Technology.
Information Systems Value and Information Systems Value and Financial StrategyFinancial Strategy
"You have got to get me a lot more comfortable "You have got to get me a lot more comfortable
with the fact that you are spending $400 million a with the fact that you are spending $400 million a
year on information systems. Meanwhile, you year on information systems. Meanwhile, you
are not getting any more."are not getting any more."
CEO to Information Systems Vice CEO to Information Systems Vice PresidentPresident
The IT Value IssueThe 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.
The IS Value Issue? The IS Value Issue?
A Big Deal A Big Deal - Something needs to be done.- 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.
IT Value Can Become IT Value Can Become A Major Issue If:A Major Issue If:
1. The business is experiencing major cost reduction pressures.
2. IT expenditures are viewed as a significant cost of running the business. (now or in the future)
3. There is a growing sentiment that a better job could be done in managing IT expenditures.
IS Value and Financial StrategyIS Value and Financial Strategy
The heart of the matter is not how to quantify The heart of the matter is not how to quantify
the contribution of information systems, but the contribution of information systems, but
how to satisfy management how to satisfy management that this support that this support
resource is contributing to the success of the resource is contributing to the success of the
business.business.
Senior Management Feels Too Much is Spent on IT
0% 5% 10% 15% 20% 25% 30%
Disagree Strongly
Disagree Somewhat
Neutral
Agree Somewhat
Agree Strongly
Is the Value Issue Unique to Is the Value Issue Unique to Information Systems?Information Systems?
What about?
Advertising?
Research and Development?
Public Relations Programs?
IS Value and Financial StrategyIS 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
Sector’s 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.”
We can find no indication of any positiveimpact on national productivity despiteenormous investments in informationtechnology.
Lester Thurow, DeanSloan School of ManagementMIT
IS Value and Financial StrategyIS Value and Financial Strategy
The U.S. service sector has spent $862 billion The U.S. service sector has spent $862 billion
on IT over the past decade--a figure that is on IT over the past decade--a figure that is
equal to the GNP of France--without any equal to the GNP of France--without any
meaningful improvement in productivity.meaningful improvement in productivity.
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 RoachEconomistMorgan Stanley & Co.
Information Systems Value Chains
Technology
Tasks
Activities
Programs
Goals
System
Individual
Department
Organization
Enterprise
As You Progress Up the IS Value ChainAs 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.
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
Information Systems Do Not Information Systems Do Not Produce Value DirectlyProduce Value Directly
Information Systems
Value to the Business
Business Change
Who Should Answer the IT Who Should Answer the IT Value Question?Value Question?
1. Chief Financial Officer (CFO)
2. Information Systems Executive
3. User Management (Those benefiting from the
IS support)
Industry IT Spending Industry IT Spending
Everyone wants to know how Everyone wants to know how
they compare with others within they compare with others within
their industry.their industry.
Unfortunately, industry averages Unfortunately, industry averages
can be very misleading. can be very misleading.
IT Budget as Percentage of 1999 Revenue
0% 2% 4% 6% 8% 10%
Banking and Financial Services
Professional Services
Telecommunications
Health Care
Information Technology
Media and Entertainment
Consumer Goods
Insurance
Construction and Engineering
Electronics
Energy
Pharmaceutical
Transportation
Chemicals
Manufacturing
Retail and Distribution
Utilities
Hospitality & Travel
Metals and Natural Resources
Food and Beverage Processing
Overall Median
National Semiconductor National Semiconductor Annual IT Costs Annual IT Costs
1. $53 million. Corporate IS Organization Budget
2. $30 million Remote Site IS Budget
3. $30 million? Other Information Systems
IS Value and Financial StrategyIS Value and Financial Strategy
"There is no universal formula for "There is no universal formula for
determining the business value of information determining the business value of information
technology that can be applied in every technology that can be applied in every
company and value can change over time."company and value can change over time."
Consultant to Information Systems Vice Consultant to Information Systems Vice PresidentPresident
Difficulty of IT Benefit Difficulty of IT Benefit AnalysisAnalysis
• IT is an integral part of other business
initiatives.
• IT benefits accrue over long periods of time.
• Changes in a company’s business environment
make it difficult to assess benefits.
Organization
DP Planning
FinancialStrategy
Motivation
ApplicationSupport
Initiation Expansion Control Maturity
I II III IV
BudgetBusiness
CasePost Install
Audit
Charge OutSystem
ManagementProcess
Single Area Proliferation Containment Organization Strategy
PeopleDisplacement
Cost Avoidance
DP Efficiency CompetitiveAdvantage
Little Reactive Directed Proactive
Single Dept. Multiple Dept. Centralized
CentralizedDecentralizedDistributed
Figure 14-2
Evolution of IS StrategyEvolution of IS Strategy
In the Beginning There are In the Beginning There are BudgetsBudgets
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.
IS Business CaseIS 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 actually accomplished.
Business CaseBusiness 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.
Charge-Out SystemCharge-Out System
People should pay for what they
receive in terms of information
systems support.
Charge-Out System ObjectivesCharge-Out System Objectives
1. Maximize worthwhile information systems usage.
2. Minimize frivolous use.
3. Encourage information systems efficiency.
4. Spark interest and participation by users to develop innovative applications.
Charge-Out SystemCharge-Out System
A Cost Center
A Profit Center
A Service Center
What to Charge For?What to Charge For? R&D Projects Feasibility Studies User Training User Support Data Storage Telecommunications Transaction Processing Program Maintenance Program Development New Applications
Pricing MethodologyPricing Methodology
Memo As Incurred Estimates Bundled Pricing Algorithm Break-even Annual Break-even Product Life Standard Cost
Charge-Out SystemCharge-Out System
What is good about such an approach?
What is wrong with this approach?
A Management ProcessA 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.
Management ProcessManagement Process
In formulating a management process it iscritically important that careful considerationbe given to the factors that drive the success of the business. It then logically follows thatinformation systems should be aligned withthe same factors that drive the business.
Information Systems ValueInformation Systems ValueWithin 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.
Costs
By User
By Application
BenefitsMacro: Business Function and Unit
Micro: Project
Justification (The initial investment decision)
Confirmation (Measuring the results of the investment)
Management Processes:
Methodologies
Major Factors to Be AddressedMajor Factors to Be Addressed
Information Systems Value?Information Systems Value?
The ultimate test is still efficient, cost
effective and responsive solutions to
business requirements.
National Institutes of HealthNational Institutes of Health
What is the source of funding for a federal agency?
How likely is it that the Information Systems organization can sell Congress on the idea that they need money for storage devices to help cure cancer?
National Institutes of HealthNational Institutes of Health
The Cancer Institute sells Congress on their need for money to cure cancer.
They pay the IS organization for computer-based support through a charge-out system.
The IS Director estimates that the $50 million a year for IT resources would probably be half that amount if this financial strategy was not used.
NIH has used a charge-out system as an integral part of an effective overall management process to effectively implement a successful financial strategy.
Productivity ChallengeProductivity ChallengeH
ead
Cou
nt
Time
Tot
al P
rodu
ctiv
ity
Headcount Increase
Risk
Productivity Programs
Management Process
Management Incentives
EliminateSimplifyAutomate
Business Case Process
I/S Development Discipline
Interlock Management
Benefit Management
MeasurementsMeasurements
• Daily user logs.
• Surveys of user perceptions, attitudes,
comments and usage.
• Interviews of users.
• Information system statistics of actual use.
Six Year ResultsSix Year Results
Revenue
Before Tax Profit
Head Count
$1.2B $3.1B
$178M
(15%)
$605M
(19.5%)
11,000 11,500
Hewlett-Packard Hewlett-Packard Test Measurement OrganizationTest Measurement Organization
(Agilent) IS Value Case Study(Agilent) IS Value Case Study
A primary objective became strategically positioning 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.”
The initial trigger for action was based on a company wide effort to reduce cost.
IS as a Business within a BusinessIS 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.
A Critical FactorA 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.
To move up the curve. . .To move up the curve. . .
Exploiting
IT
Cost effective IT operations
Securing return on
investment
Enabling change &innovation
Exploiting
the knowledge
base
Each step requires a different approach build on a sound foundation.
Guiding PrinciplesGuiding Principles
Focus Invest in major trends in cross-organizational networked solutions and services.
Cost Structure Achieve competitive cost structure for service offerings.
Organization Reduce decision-making layers and increase responsiveness to business partners.
Partnerships Forge solid partnerships with internal and external suppliers of IT services.
Value PropositionsValue PropositionsCustomer Need IT Value Proposition
Improve organizational agility andflexibility 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
Make TMO organizations more effective by enabling better, more timely decision-making processes.
Improve decision-making capabilities by providinga simple information environment that is accessibleto all levels of the organization.
Achieve a better return on investments indesktop computing assets.
Increase the efficiency and effectiveness of individualcontributors and work groups through better utilizationof desktop computing devices.
1
2
3
4Improve customer satisfaction and return on assets through deployment of signifi-cantly improved (reengineered) processes.
5Improve sales growth through improvedtime to market.
6 Maximize the lifetime return on processand system investments.
Increase the global competitiveness of the businessby delivering services which increase the effectivenessof business process transformation initiatives.
Increase the speed and reduce the complexity of transferring design and product information between organizations.Optimize the operations return on investment in matureprocesses through the selective application of process and technology improvements.
The New TMO IT StrategyThe 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.
Initial Three Year ObjectivesInitial Three Year Objectives
Increase customersatisfaction
•Increase customer focus
•Streamline operational processes•Reduce operational costs
•Customer satisfaction index ratings•Quality/response time
•Competitive rates
Increase return oninvestment
•Evolve scenario planning process•Increase new product offerings
•Market share %
•Turnaround time•Market share %
Develop an agile,skilled and motivatedteam
OBJECTIVE STRATEGY MEASURE
•Evolve a learning organization
•Motivation•Agility (skill matrix)
Total Investment in ITTotal Investment in IT
Minimize cost per unit of service
81%
StrategicInvestments
15%
IT Management and Planning
IT Services Strategy% of TMO IT
4%
Operations and Infrastructure
1997 2000
70%
Maximize Return
On Investment26%
Control costs versus budget
4%
Information Systems Information Systems OrganizationOrganization
• Good reputation as a support organization.
• Good success and benefits through the use of
an information center.
• Good PC program including support.
• Under pressure to reduce head count.
Acceptable Proposition?Acceptable Proposition?
Head Count MIPS IS $s
206
176
157
116
102
186
282
402
Flat
Flat
Flat
Flat
ConsiderationsConsiderations
Importance of dealing with the value question.
Effort and cost to do so?
More ConsiderationsMore Considerations
There are a wide range of practices for even companies in the same industry.
Telecom networks have emerged as a major component of IT costs.
It is both difficult and potentially misleading to generalize on what constitutes an appropriate level of IT expenditures for a specific company.
IS Financial Strategy IS Financial Strategy ConclusionsConclusions
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.