Information Systems Value and Financial Strategy: Addressing Inhibitors and Maximizing Returns

1. Chapter 14 Introduction Information Systems Value and Financial Strategy

2. High IS Costs Gets Senior Managements Attention • There is a growing dependence on information systems to run the organization. • Information systems expenses and capital funding have frequently become quite large. • For these reasons senior management has become more active in managing the role and significance of Information Systems.

3. Primary Inhibitors of the Growth 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.

4. The 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.

5. Average Information Systems Spending for an Industry Many executives want to know this! Not very meaningful! Industry averages can be misleading!

6. 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?

7. Evolution of Financial Strategy

8. Chapter 14 Information Systems Value and Financial Strategy

9. 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.

10. 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.

11. 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

12. 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.

13. 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.

14. 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.

15. 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.

17. Is the Value Issue Unique to Information Systems? What about? Advertising? Research and Development? Public Relations Programs?

18. 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 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.”

19. 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

20. 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.

21. 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.

22. Information Systems Value Chains System Individual Department Organization Enterprise Technology Tasks Activities Programs Goals

23. 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.

24. 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

25. Information Systems Do Not Produce Value Directly Information Systems Value to the Business Business Change

26. Who Should Answer the IT Value Question? • Chief Financial Officer (CFO) • Information Systems Executive 3. User Management (Those benefiting from the IS support)

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

29. 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

30. 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

31. 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.

32. 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

33. 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.

34. 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.

35. 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.

36. Charge-Out System People should pay for what they receive in terms of information systems support.

37. 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.

38. Charge-Out System • A Cost Center • A Profit Center • A Service Center

39. What to Charge For? • R&D Projects • Feasibility Studies • User Training • User Support • Data Storage • Telecommunications • Transaction Processing • Program Maintenance • Program Development • New Applications

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

41. Charge-Out System • What is good about such an approach? • What is wrong with this approach?

42. 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.

43. 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.

44. 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.

45. 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)

46. Information Systems Value? The ultimate test is still efficient, cost effective and responsive solutions to business requirements.

47. 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?

48. 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.

49. Productivity Challenge Head Count Productivity Programs Total Productivity Risk Headcount Increase Time

50. Management Process Management Incentives Eliminate Simplify Automate Business Case Process I/S Development Discipline Interlock Management Benefit Management