is 356 it for financial services calculating the return on it investment october 22, 2015...

IS 356IS 356IT for Financial ServicesIT for Financial Services

Calculating the Return on IT Investment

April 20, 2023

http://www..evergreen.loyola.edu/~pptallon/is356.htm

April 20, 2023© Paul Tallon 2/21BusinessWeek 6/14/99

April 20, 2023

Productivity ParadoxProductivity Paradox

© Paul Tallon 3/21

Roach, HBR, 1991

… which implies that ROIT is falling

April 20, 2023

G. Loveman in “Information technology and the Corporation of the 1990s” T. Allen and M.S..Morton (eds.)

Paradox continued…Paradox continued…

© Paul Tallon 4/21

April 20, 2023© Paul Tallon 5/21

Executives Cry Foul…...Executives Cry Foul…...

Only 25% of CEOs are Only 25% of CEOs are satisfiedsatisfied with their IT investments. with their IT investments.

Spending on IT Spending on IT is wastefulis wasteful

London School of Economics (1999)


Numerical AnalysisNumerical Analysis

Return on Investment (ROI)

The net revenue gain or operational cost reductions that exceed the investment

Payback analysis The length of time to recover the cost of a project (regardless of time value of money)

Net Present Value (NPV) Current value of the expected cash flows minus cost of the project

Economic Value Add (EVA)

Operating profit, minus the capital and debt used to generate profit

Internal Rate of Return (IRR)

The potential profits resulting from the completion of the project


FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

SERVICEINBOUND

LOGISTICS

OPERATIONS OUTBOUND

LOGISTICS

MARKETING

AND SALES

SUPPORTACTIVITIES

MA

RG

IN

MA

RG

IN

PRIMARY ACTIVITIES

Source: Competitive Advantage: Creating and Sustaining SuperiorPerformance by Michael E. Porter, 1985, The Free Press

Value Chain ProcessesValue Chain Processes


Three Research StudiesThree Research Studies

Thermometer of IT Business Value– Benchmarking studies by industry

IBM and Economist Intelligence Unit– 304 firms; global survey; select case studies

Multi-respondent survey– Triangulate responses


Thermometer of IT Business ValueThermometer of IT Business ValuePost-implementation Comparison of IT Impacts

Paper Inc. All Manufacturing Paper & Forestry Products Desired Benchmark Criteria Large, OE Small, OE Large, OE Small * Large, OE

N=8 N=16 N=8 N=13

IT Business Value Assessment

Process Planning & Support 6.16 5.91 6.79 6.48 6.92 Supplier Relations 4.77 4.71 5.37 4.25 5.10 Production & Operations 5.77 5.28 6.47 6.34 6.23 Product & Service Enhancement 4.41 5.21 5.92 4.32 5.67 Sales & Marketing Support 4.78 4.79 4.87 4.41 5.09 Customer Relations 5.47 5.40 6.43 5.88 6.28 Competitive Dynamics 4.00 3.47 5.11 4.37 5.30

* Our sample of 24 paper and forestry product firms was divided into 8 small firms (OE: 1, CI: 7) and 16 large firms (OE: 13, CI: 2, PL: 1). Using only one small, OE firm as a benchmark could yield an unfair or inaccurate comparison. Therefore, we grouped all small paper and forestry products firms together to form an overall benchmark for small firms in this industry.

Benchmarking example for Fortune 200 firm


Size and Industry EffectsSize and Industry EffectsIT Business Value and Two-way Interaction Effects

Industry x Value Discipline Size x Value Discipline Business Processes OE CI PL OE CI PL

Mfg. 6.51 5.73 6.19 Large 6.19 5.87 6.25 Process Planning

Services 5.85 6.48 6.06 Small 5.71 6.54 5.82

Mfg. 5.16 4.44 4.62 Large 4.85 4.90 5.74 Supplier Relations

Services 4.26 4.94 5.44 Small 3.93 4.77 4.12

Mfg. 6.09 5.15 5.12 Large 5.96 5.26 5.81 Production & Ops.

Services 5.58 6.04 5.42 Small 5.34 6.14 4.41

Mfg. 5.69 3.95 4.70 Large 5.32 4.47 5.48 Prod. & Serv. Enhance.

Services 4.77 5.13 5.18 Small 4.49 5.05 4.17

Mfg. 4.84 3.97 3.77 Large 4.44 4.38 5.17 Sales & Marketing

Services 4.02 4.85 4.52 Small 3.87 4.78 2.59

Mfg. 6.10 5.41 5.27 Large 5.96 5.85 5.88 Customer Relations

Services 5.37 5.96 5.58 Small 4.98 5.81 4.73

Mfg. 4.59 3.91 3.62 Large 5.02 5.33 5.63 Competitive Dynamics

Services 4.86 5.50 5.56 Small 4.55 4.98 3.66

Production and Operations Customer Relations


Corporate Productivity and ITCorporate Productivity and IT•

••

•

•

••

• •

•

••

•

•

•

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000I/S budget per employee

Intel Corp.

Rev

enue

per

em

ploy

ee

Apple Computer

ATL Products

Data General

Diebold

Gateway

Hewlett-Packard

IBM

Intergraph

Pitney Bowes

Seagate Technology

Silicon Graphics

Storage Technology

Sun Microsystems

Western Digital

Computer & Office Equipment Companies

High productivityLow investment

Low productivityLow investment

High productivityHigh investment

Low productivityHigh investment

Source: InformationWeek (1998)


Benchmarking: What’s in an Industry?Benchmarking: What’s in an Industry?

ADP

Comdisco

Computer Associates

CSC

EDS

Entex Info. Services

Lexis-Nexis

Microsoft

Novell

Oracle

Unisys

Wang Global

Computer Services Companies

High productivityLow investment

Low productivityLow investment

High productivityHigh investment

Low productivityHigh investment

I/S budget per employee

Rev

enue

per

em

ploy

ee

•

•

•

• ••

•

•

•••

••

•

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$0 $10,000 $20,000 $30,000 $40,000

Intel Corp.

Source: InformationWeek (1998)


IBM/EIU ~ Sample ParticularsIBM/EIU ~ Sample ParticularsVariable Frequency Percent

Revenues (1997)Less than $500m 112 36.8

$500m $1b 41 13.5

$1b $5b 67 22.1

$5b $10b 39 12.8

More than $10b 45 14.8

Industry GroupManufacturing 128 42.1Wholesale / Retail Trade 39 12.8Telecommunications / Utilities 19 6.3Finance, Insurance & Real Estate 52 17.1Business & Professional Services 66 21.7

RespondentsCEO 38 12.5CFO 37 12.2Vice President 86 28.3Director 85 28.0Senior Manager 43 14.1Other 15 4.9


IT Business Value and the Value ChainIT Business Value and the Value Chain

3.0

3.5

4.0

4.5

5.0

5.5

ProcessPlanning

SupplierRelations

Production &Operations

Prod/ServiceEnhancement

Sales &Marketing

CustomerRelations

CompetitiveDynamics

Process-level Performance Measures

Rea

lized

Val

ue (

1-7)

Unfocused Operations Focus Market Focus Dual Focus

The Level and Locus of Value...The Level and Locus of Value...


Satisfaction with Return on ITSatisfaction with Return on IT

2.0

2.8

3.6

4.4

5.2

6.0

IncreasingProductivity

Enabling NewProfit Levels

Reducing COGS EnhancingRevenue Growth

Increasing MarketShare

EnhancingCustomer

SatisfactionFirm Level Performance Measures

Sat

isfa

ctio

n R

atin

g (1

- 7

)


Bottom LineBottom Line Top LineTop Line


“ So we invest in the computers and in training personnel – millions of dollars, thousands of hours – but we never go back and check on whether we saved ourselves even one person, let along the twenty-two that were promised.”

“ I’ve signed so many projects that by now I should have nobody left. Yet I don’t know that our decisions – or

our cars – get any better.”

Lee Iacocca, “Talking Straight”

Post-Implementation EvaluationPost-Implementation Evaluation


Evaluation of IT ProjectsEvaluation of IT Projects

3

4

5

6

7

Executive ManagementReviews of Large

Spending Proposals

Justification beforePurchase

Formal Reviews afterImplementation

Regular Reviews byBusiness Units

Ad-hoc Evaluations ofProjects

Criteria for Evaluting IT Projects

Ext

ent

of U

se (

1 -

7)


Pre-ImplementationPre-Implementation Post-ImplementationPost-Implementation


Linked Survey Design Linked Survey Design

University of California, Irvine www.crito.uci.edu

STRATEGY EXECUTIVE

Business Strategy & Information Technology

SECTION I. ELEMENTS OF ORGANIZATION STRATEGY 1. To what extent have the following items been implemented as part of your company’s strategy? Organizational Planning and Support Not at all To a great

extent

1 2 3 4 5 6 7 Improve internal communication/ coordination.

1 2 3 4 5 6 7 Improve global communication/ coordination.

1 2 3 4 5 6 7 Strengthen strategic planning. 1 2 3 4 5 6 7 Enable your organization to adopt

new organizational structures. 1 2 3 4 5 6 7 Improve management decision-

making. 1 2 3 4 5 6 7 Streamline business processes.

Supplier Relations (In-bound Logistics) Not at all To a great

extent

1 2 3 4 5 6 7 Help your corporation gain leverage over its suppliers.

1 2 3 4 5 6 7 Help reduce variance in supplier lead times.

1 2 3 4 5 6 7 Help develop close relationships with suppliers.

1 2 3 4 5 6 7 Improve monitoring of the quality of products/services from suppliers.

1 2 3 4 5 6 7 Enable electronic transactions with suppliers.

Production and Operations Not at all To a great

extent

1 2 3 4 5 6 7 Improve production throughput or service volumes.

1 2 3 4 5 6 7 Improve operating flexibility. 1 2 3 4 5 6 7 Improve the productivity of labor. 1 2 3 4 5 6 7 Enhance utilization of equipment. 1 2 3 4 5 6 7 Reduce cost of tailoring products

or services. Product and Service Enhancement Not at all To a great

extent

1 2 3 4 5 6 7 Enhance the value of products/ services by embedding IT in them.

1 2 3 4 5 6 7 Decrease the cost of designing new products/services.

1 2 3 4 5 6 7 Reduce the time to market for new products/services.

1 2 3 4 5 6 7 Enhance product/service quality. 1 2 3 4 5 6 7 Support product/service

innovation. Marketing and Sales Not at all To a great

extent

1 2 3 4 5 6 7 Enable the identification of market trends.

1 2 3 4 5 6 7 Increase your ability to anticipate customer needs.

1 2 3 4 5 6 7 Enable sales people to increase sales per customer.

1 2 3 4 5 6 7 Improve the accuracy of sales forecasts.

1 2 3 4 5 6 7 Help track market response to pricing strategies.


I/S EXECUTIVE

Business Use of Information Technology

SECTION I. BUSINESS USE OF IT 1. To what extent is your company using information technology (IT) for each of the following? Organizational Planning and Support Not at all used Used to a

great extent






Supplier Relations (In-bound Logistics) Not at all used Used to a

great extent






Production and Operations Not at all used Used to a

great extent


1 2 3 4 5 6 7 Improve operating flexibility. 1 2 3 4 5 6 7 Improve the productivity of labor. 1 2 3 4 5 6 7 Enhance utilization of equipment. 1 2 3 4 5 6 7 Reduce cost of tailoring products

or services.

Product and Service Enhancement Not at all used Used to a

great extent




1 2 3 4 5 6 7 Enhance product/service quality. 1 2 3 4 5 6 7 Support product/service

innovation. Marketing and Sales Not at all used Used to a

great extent






Customer Relations (Out-bound Logistics) Not at all used Used to a

great extent

1 2 3 4 5 6 7 Enhance your ability to provide after-sales service and support.

1 2 3 4 5 6 7 Enhance flexibility and responsiveness to customer needs.

1 2 3 4 5 6 7 Improve the distribution of goods and services.

1 2 3 4 5 6 7 Enhance your ability to attract and retain customers.

1 2 3 4 5 6 7 Enable you to support customers


BUSINESS EXECUTIVES

Business Value of Information Technology

SECTION III. RATING OF BUSINESS VALUE OF INFORMATION TECHNOLOGY

11. How does IT boost firm performance in the following areas? Please restrict your appraisal to value already realized rather than value expected in the future. Organizational Planning and Support Not at all To a great

extent






Supplier Relations (In-bound Logistics) Not at all To a great

extent






Production and Operations Not at all To a great

extent


1 2 3 4 5 6 7 Improve operating flexibility. 1 2 3 4 5 6 7 Improve the productivity of labor. 1 2 3 4 5 6 7 Enhance utilization of equipment. 1 2 3 4 5 6 7 Reduce cost of tailoring products or

services. Product and Service Enhancement Not at all To a great

extent




1 2 3 4 5 6 7 Enhance product/service quality. 1 2 3 4 5 6 7 Support product/service innovation.

Marketing and Sales Not at all To a great

extent







Matched SurveysMatched SurveysU.S. Ireland Holland Total

Population

Corporations 477 64 541

Respondents

Business Executives 123 31 2 156

Strategic Planners 80 24 1 105

IT Executives 91 20 1 112

Total respondents 294 75 4 373

Survey Matching

Match 3 (complete) 46 16 1 63

Match 2 (missing 1) 33 5 38

Match 1 (missing 2) 62 12 74

Firms responding 141 33 1 175

Response Rate 29.6% 51.6% 32.3%

86 Bus. Execs

63 IT Execs

67 Planners


Strategic Alignment and IT Business ValueStrategic Alignment and IT Business Value

3.70

3.80

3.90

4.00

4.10

4.20

4.30

4.40

4.50

4.60

4.70

4.80

4.90

Sales &MarketingSupport

Product &Service

Enhancement

SupplierRelations

ProcessPlanning &

Support

CustomerRelations

Production &Operations

Business Processes

IT B

usi

ne

ss V

alu

e (

1 -

7)

0.33

0.38

0.43

0.48

0.53

0.58

0.63

Strate

gic A

lign

me

nt (0 - 1)

Business Value Strategic Alignment


For Next Class…For Next Class… Reminder:

− We will discuss XBRL next class− The stock market game ends on Friday, April 25. The report is

due by 6pm on Monday, April 28 (hard copy please). Please drop it off in my office (SH325).

is 356 it for financial services calculating the return on it investment october 22, 2015...

Documents

project paul tallon

firm paul tallon

industry effects paul

paul tallonchart14

locus of value

project economic value

value chainthe level

industry ibm