The PlanThe Plan

Today—finish Chapter 13 and start Chapter 14. Thursday—finish chapter 14 and start Chapter 15. Mar. 2 –finish chapter 15 and chapter 16. Mar. 4—Chapter 17 and final papers due. Mar. 9—student presentations. Mar. 11—last class. Talk about final exam. Mar. 16—final exam 4 to 7 PM

eBay PresentationeBay Presentation

An interesting example of a technical guy who became an ISM type person.

Didn’t really say much about the IT Doesn’t Matter article.

Can make available a copy of his presentation. Feels that foreign outsourcing pendulum will

swing back in a couple of years. Doesn’t feel that universities do enough to prepare

students to go into the job market.

Chapter 13 SummaryChapter 13 Summary

Information Systems Organization and Information Systems Organization and Personnel ConsiderationsPersonnel Considerations

By Vitaliy LeeBy Vitaliy Lee

Business Strategy & Organization drive Business Strategy & Organization drive Information Systems OrganizationInformation Systems Organization

Must not only look at information systems or

the structure of information systems, but

more importantly at company vision, values,

strategies, policies, tactics, and processes.

Factors influencing the structure of the Factors influencing the structure of the Information Systems OrganizationInformation Systems Organization

Management style and attitude about centralization or decentralization of authority.

IT knowledge and skill level within the organization.

Actual Information Systems Implemented Amount of application development

Information Systems OrganizationInformation Systems OrganizationIS Vice President

Data BaseAdministration

Figure 13-1

Office Systems Planning AdministrativeStaff

Data BaseAdministration

NetworkOperations

ComputerOperations

Development &Maintenance

ProjectManagers

SystemsAnalysts

Programmers

SystemsSupport

SystemsProgramming

DevelopmentCenter

InformationCenter

Information Systems Manager Skill Information Systems Manager Skill ProfileProfile

Industry experience

Management experience

General technical qualifications

Vendor technical experience

Political, organizational, and communication skills.

Successful Information SystemsSuccessful Information Systems

Product of good working relationships! Must interact and understand its customers (users) Approaches to building relationships

– Steering Committee

– Functional Interface Managers

– User training and education

– Joint R&D Projects

Future Information Systems Future Information Systems OrganizationOrganization

IS Organizations will change, but there will always be a need for central organization.

The challenge will be deciding which type of IS organization will provide the best results for the enterprise.

Possible Exam QuestionsPossible Exam Questions

What makes Information Systems Managers job different from other major functions of the company?

Why is it important for the IS Organization to establish good relationships within the company?

Chapter 14 IntroductionChapter 14 Introduction

Information Systems Valueand

Financial Strategy

By Andrew Poblete

OverviewOverview

- IS Value Issues

- High Cost Gets Senior Management’s Attention

- 3 factors in determining Value

- The Evolution of Financial Strategy

IS Value IssuesIS Value Issues

- Inability to articulate the value derived fromthe use of information systems

- Application development takes too long andis too expensive

- Connectivity

- Ease of use

High IS Costs Get Senior High IS Costs Get Senior Management AttentionManagement Attention

• There is a growing dependence on information systems to run the organization.

• Information systems expenses and capital funding have become quite large.

• For these reasons senior management has become more active in managing the role and importance of information systems.

Information Systems Do Not Information Systems Do Not Produce Value DirectlyProduce Value Directly

Information Systems

Value to the Business

Business Change

Factors in Determining ValueFactors in Determining Value

Company/Enterprise

Personal/Individual

Function/Department

Infrastructure

Applications

Personal Applicationsand Tools

Evolution of Financial Strategy

Application Support

Motivation

Financial Justification

DP Planning

Organization

Initiation Expansion Control Maturity

I II III IV

Single Area Proliferation ContainmentOrganizational

Strategy

People Displacement

Cost Avoidance DP Efficiency

Competitive Advantage

Little Reactive Directed Proactive

BudgetBusiness Case

Installation AuditCharge-Out

SystemManagement

Process

Finance Dept. Multiple Dept. CentralizedCentralized

Decentralized Distributed

Based on material from Gibson and Nolan, Harvard Business Review, January-February 1974, pp. 76-88.

The Evolution of Information The Evolution of Information Systems JustificationSystems Justification

Financial Justification for Control Financial Justification for Control and Maturity Strategiesand Maturity Strategies

Charge Out Decisions

- Cost Center: operates with zero sum budget - Profit Center: profit is earned based on charges to users. - Service Center: less than 100% of the costs of

running IS is charged to users.

Key Elements of a Management Process

Management Incentives

EliminateSimplifyAutomate

Business Case Process

I/S Development Discipline

Interlock Management

Benefit Management

ConclusionsConclusions

The issue of information systems value is being addressed by an increasing number of organizations.

This is a fundamental management issue that can best be resolved by the processes described in this chapter.

Chapter 14Chapter 14

Information Systems Value Information Systems Value

and and

Financial StrategyFinancial Strategy

• 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.

Information Systems ValueInformation Systems Value

““The Question”The Question”

What are we getting for that?

• 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.

Senior Management QuestionsSenior Management Questions

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

1. A Big Deal – The topic is receiving significant attention and increases in IS spending are unlikely.

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

3. No Deal - Not a current issue and there is no need to make it a priority within the Information Systems organization.

IT Value Can Become IT Value Can Become A Major Issue IfA 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.

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 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.”

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 IS Value and Financial StrategyStrategy

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.

The Value of ITThe Value of IT

IT executives should be prepared to develop and provide high-level metrics that demonstrate the value of IT to the rest of the organization.

While mathematical precision is not entirely possible or even desirable, it is possible to arrive at some meaningful estimates.

Using information they can quickly access, IT executives should develop these "dashboard" metrics based on key business processes that IT supports, and communicate them in business language.

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

on IT over the past decade--a figure that is

equal to the GNP of France--without any

meaningful improvement in productivity.

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.

IS Value and Financial StrategyIS Value and Financial Strategy

Information Systems Information Systems Value ChainsValue 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!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

they compare with others within

their industry.

Unfortunately, industry averages

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

Telecommunications 11%

Financial Services 9%

Banking 8%

Consulting & Business Services 7%

Health Care & Medical 5%

Biotechnology & Pharmaceuticals 4%

Chemicals 4%

Insurance 4%

Information Technology 4%

Logistics & Transportation 4%

Media & Entertainment 4%

Consumer Goods 3%

Percentage of company’s worldwide projected annual sales revenue represented by IT budget

Distribution 3%

Electronics 3%

Hospitality & Travel 3%

Manufacturing 3%

Automotive 2%

Construction & Engineering 2%

Energy 2%

Food & Beverage Processing 2%

Retail: General Merchandising 2%

Retail: Specialty Merchandising 2%

Utilities 2%

Metals & Natural Resources 1%

Total 4%

Source: InformationWeek, Sept. 2001

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 IS Value and Financial StrategyStrategy

"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

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 that information systems should be aligned with the same factors that drive the success of 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(employees)

$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 Organization Information Systems Organization of Manufacturing Companyof Manufacturing Company

• 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

Clinching ArgumentClinching Argument

“You have a high risk of failure with your new business strategy because of a lack of necessary new information systems support.”

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.