Chapter 14 Information Systems Value and Financial 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.
“The Question” What are we getting for that?
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.
"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 Information Systems Value and Financial Strategy
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.
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 A Major Issue If • The business is experiencing major cost reduction pressures. • IT expenditures are viewed as a significant cost of running the business. (now or in the future) • There is a growing sentiment that a better job could be done in managing IT expenditures.
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 Value and Financial Strategy
Is the Value Issue Unique to Information Systems? What about? Advertising? Research and Development? Public Relations Programs?
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.
The Value of IT IS 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 positive impact on national productivity despite enormous investments in information technology. Lester Thurow, Dean Sloan School of Management MIT
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. IS Value and Financial Strategy
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.
Information Systems Value Chains System Individual Department Organization Enterprise Technology Tasks Activities Programs Goals
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.
Dissatisfaction with IS! Prompts a rifle-shot focus on specific elements of Information Systems: • Costs • Technical versus a business orientation • Measurable return on investment • Flexibility or lack thereof • Complexity • Project status and time schedules • Lack of business control and understanding
Information Systems Do Not Produce Value Directly Information Systems Value to the Business Business Change
Who Should Answer the IT Value Question? • Chief Financial Officer (CFO) • Information Systems Executive 3. User Management (Those benefiting from the IS support)
Industry IT Spending Everyone wants to know how they compare with others within their industry. Unfortunately, industry averages can be very misleading.
Percentage of company’s worldwide projected annual sales revenue represented by IT budget 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%
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 Annual IT Costs 1. $53 million. Corporate IS Organization Budget 2. $30 million Remote Site IS Budget 3. $30 million? Other Information Systems Phoenix Utility Management Conference
"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 IS Value and Financial Strategy
Difficulty of IT Benefit Analysis • 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.
Evolution of IS 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
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.
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 actually accomplished.
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.
Charge-Out System People should pay for what they receive in terms of information systems support.
Charge-Out System Objectives • Maximize worthwhile information systems usage. • Minimize frivolous use. • Encourage information systems efficiency. • Spark interest and participation by users to develop innovative applications.
Charge-Out System • A Cost Center • A Profit Center • A Service Center
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 Methodology • Memo • As Incurred • Estimates • Bundled Pricing • Algorithm • Break-even Annual • Break-even Product Life • Standard Cost
Charge-Out System • What is good about such an approach? • What is wrong with this approach?
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.
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 success of the business.
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 “bill regarding IS support” Represents real value to them.
Major Factors to Be Addressed Methodologies Costs Benefits Macro: Business Function and Unit Micro: Project By User By Application Management Processes: Justification (The initial investment decision) Confirmation (Measuring the results of the investment)
Information Systems Value? The ultimate test is still efficient, cost effective and responsive solutions to business requirements.
National 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 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.
IS Financial Strategy A computer-based company concluded that their ability to sustain a sound level of financial performance was directly related to an ability to maintain current levels of productivity despite a projection of significant growth in business transaction volumes.
Productivity Challenge Head Count Productivity Programs Total Productivity Risk Headcount Increase Time
Management Process Management Incentives Eliminate Simplify Automate Business Case Process I/S Development Discipline Interlock Management Benefit Management
Measurements • Daily user logs. • Surveys of user perceptions, attitudes, • comments and usage. • Interviews of users. • Information system statistics of actual use.
Six Year Results Revenue $1.2B $3.1B $178M (15%) $605M (19.5%) Before Tax Profit Head Count (number of employees) 11,000 11,500