Value of IT

1. Value of IT The Economics of IT Investments

2. Nicholas Carr “Nicholas Carr has foisted an existentialist debate on the mighty information-technology industry.” –The Economist “Carr [has] performed a service in puncturing some of the starry-eyed and self-serving cant of industry insiders.” –Newsweek “Careful research, effective marshalling of figures, convincing use of historical parallels and a refreshing sense of ‘emperor’s new clothes’ truth-telling.” –Accountancy Age “His ideas have been vilified and embraced, but no one has called them boring.” –Computerworld

3. Discuss the Carr article • Clearly list what you think are Carr’s major points. • Can IT provide sustainable advantage? • What are the implications of Carr’s arguments on IT innovation? • What do you think are the implications of Carr’s argument for IT management?

4. Moore’s Law

5. Moore’s Law Year of introduction Transistors • 4004 1971 2,250 • 8008 1972 2,500 • 8080 1974 5,000 • 8086 1978 29,000 • 286 1982 120,000 • 386™ processor 1985 275,000 • 486™ DX processor 1989 1,180,000 • Pentium® processor 1993 3,100,000 • Pentium II processor 1997 7,500,000 • Pentium III processor 1999 24,000,000 • Pentium 4 processor 2000 42,000,000 Source: http://www.intel.com/research/silicon/mooreslaw.htm?iid=sr+moore&

6. Implications of Moore’s Law • Price-to-Performance ratio is declining exponentially • Existing functions will be done at lower costs (efficiency improvements) • New uses for technology will emerge • Enhanced products and services • Make the technologically feasible economically viable • IT will be embedded in traditionally low-tech goods • Provides competitive advantage to innovative companies • Greater benefit to consumers • Greater emphasis on intangible benefits

7. Intangible Benefits of IT • Factors that are important but difficult to express in terms of monetary value • Early days- easy to measure value • Computers replaced manual jobs on a one-by-one basis • Now… most manual tasks have been dealt with • Additional advantages come through re-engineering business processes • BPR produces intangibles – better response time, better quality… difficult to measure

8. Productivity Paradox • Despite massive investments in IT in the 1970s and 1980s, there is lack of evidence of a payoff. • Services showed much less productivity gains than manufacturing • Difficult to demonstrate that the IT investments are directly correlated to higher wages or outputs • The discrepancy between measures of IT investments and output measures is called the productivity paradox.

9. Explaining the Paradox • Data and Analysis problems • Difficult to allocate costs to products in the service sector • Analysis does not take into account time lags (it takes time to learn new software – productivity may decrease…) • IT gains are offset by losses in other areas • Reduce production staff (due to IT) but increase staffing in other areas • IT gains are offset by IT losses • Is there really a relationship between IT spending and profitability? • Strassman says “no evidence” • What if IT causes outputs to increase 25 percent but inputs increase 30 percent? • Evaluations must include changes in inputs over entire lifecycle (including projects not implemented) • Support costs • Wasted time • Software development problems • Software maintenance (remember Y2K?) • Incompatible systems and integration costs.

10. Realizing Business Benefits from IT Investments

11. Five Principles • IT Has no inherent value • Benefits arise when IT enables people to do things differently • Only business managers and users can release business benefits • All IT projects have outcomes but not all outcomes are benefits • Benefits must be actively managed to be maintained

12. Seven Questions • Why must we improve? • What improvements are necessary or possible? • What benefits will be realized by each stakeholder if objectives are achieved? How will each benefit be measured? • Who owns the benefit and who’s accountable? • What changes are needed to achieve each benefit? • Who is responsible for the changes • How and when can each change be made?

13. Interventions • Change will be required if benefits are to be realized • Problem-based interventions • Ends-driven • Easy to identify targets – these forms basis of ROI • Innovation-based interventions • Business value arises from ability to do things in a new way through new IT means

14. Benefits Dependency Network Permanent changes to practices, processes, or relationships Enabling Changes Business Changes Business Driver IT Enablers Benefits Objectives Prerequisite changes needed for making business changes A Right-to-Left Approach

15. Benefits Dependency Network(Ends-based Problem Intervention) Business Driver 2. Identify the combination of IT enablers and business changes that could achieve each benefit 1. Define targets and potential benefits Enabling Changes Business Changes Remove existing problems or constraints IT Enablers Benefits Objectives ends means ways A Right-to-Left Approach Areas of greatest certainty Areas of least certainty

16. Benefits Dependency Network(Ways-based Innovation Intervention) 3. Assess how IT can enable the changes 2. Describe new ways of working and the associated benefits that might accrue 1. Create vision Business Driver Enabling Changes Business Changes Deliver innovation from new ways of working IT Enablers Benefits Objectives means ways ends 4. Assess the feasibility of each change and realizing the associated benefits A Right-to-Left Approach Areas of greatest certainty Areas of least certainty

17. Benefits Dependency Network(Means-based Innovation Intervention) 2. What changes would be needed to ways of working 1. What is the new capability that IT could provide 3. What objectives could be achieved and what benefits realized? Business Driver Enabling Changes Business Changes Deliver innovation from new IT IT Enablers Benefits Objectives means ways ends A Left-to-Right Approach Areas of greatest certainty Areas of least certainty

18. SGD Questions • Identify one problem-based intervention within a company in your group • Identify one innovation-based intervention within a company in your group. • What changes are/were needed to make the intervention successful? • Any examples of failures?

19. Value Analysis Identify Value(Intangible Benefits) Establish Maximum Cost Willing to Pay Build prototype if cost is acceptable Evaluate prototype Establish Cost of Full-Scale System Enhance functionality of functionality of full-scale system Build Full-Scale System if necessary Identify Benefits Needed to Justify Cost Central philosophy: Create a low cost version of system first. Allow user to identify potential intangible benefits. Allow developer to better estimate final cost.

20. Information Economics • Focuses on key organizational objectives • Uses a scoring methodology • Process • Identify all key performance issues • Assign each a weight based on importance • Every product being evaluated receives a score (0-100) on each factor • Score multiplied by weight • Overall highest total judged to be best product • More complicated methodologies are available (see http://www.expertchoice.com) Back

21. Management by Maxim • Used to help with infrastructure decisions for multi-unit, multi-divisional organizations • Infrastructure typically takes up about 50% of an IT budget • Creates synergies between units • Different units may have different evaluations for infrastructure • MbM brings corporate executives, IT executives, and business unit managers together for planning sessions to determine appropriate infrastructure investments.

22. MbM Process • Consider Strategic Context • Identify long-term goals, potential synergies where data sharing could help performance, degree of emphasis on inter-unit cooperation • Articulate business maxims • Short, well-defined goals in areas such as cost, quality, flexibility, growth, human resources • Identify IT maxims • Statements of IT strategies and goals required to support the business maxims • Business maxim: “price services at lowest cost” • IT maxim: use IT to reduce cost by eliminating duplicated efforts • Clarify firm’s view of IT infrastructure • None (independent operations) • Utility (sharing done to reduce costs) • Dependent (supports current strategies of business units) • Enabling (supports long-term goals of business units) • Specify infrastructure services • Identify infrastructure services required to achieve business and IT maxims.

23. Option Valuation • Similar to the idea of option valuation in the securities market. • It is possible that the cost of an IT investment exceeds its tangible benefits. • What if the project creates opportunities for other projects in the future (like the frequent flier program was the unexpected benefit of online airline reservation systems)? • The IT investment has options value that needs to be added to the other benefits • expected value of a IT investment is • Size of benefit x probability of its occurrence • Eg: 50% chance that investment would lead to $10m in new business ($5m benefit)

24. Balanced Scorecard(can you tell if you’re winning if you don’t keep score?) • Developed in the 1990s • Converts value drivers to series of metrics • Customer service • Innovation • Operational efficiency • Financial performance • Companies record and analyze metrics to see if they are meeting strategic goals • Cascades from top of organization downward • Ultimately, each individual has a personal scorecard linked to overall corporate objectives.

25. IT Scorecard • Allows for a greater alignment between business objectives and IT objectives • “Customer” is now a client user within company • Scorecard helps eliminate projects that make little contribution to strategic goal (useful in project prioritization) • Example Metrics from FirstEnergy • Developing “raving fans” – for IT, that means internal users • Three metrics • Percentage of projects completed on time and on budget. • Percentage of projects released to the customer by the agreed-upon delivery date. • Client satisfaction as indicated by customer surveys completed at the end of a project. • Project managers evaluated based on the metrics

26. Cost of failure • Some statistics • AMR Study (2003) of CRM projects • Project failure: 12 percent of CRM projects fail to go live. • System implementation: 47 percent of CRM projects go live, and the technology aspects of the project are considered a success, but business change and adoption fail. • Process and system adoption: 25 percent of CRM projects succeed in adoption and systems but still cannot quantify a specific quantified business benefit. • Performance improvement: 16 percent of projects deemed success and measurably influence business performance • Robbins-Gioia Survey (2001) of ERP projects • 51% felt ERP implementation was unsuccessful • 46% felt organization did not understand how to use the system to improve business

27. What can be done? • One, One Ten Rule? • No project should take more than one year, cost more than one million dollars, and involve more than ten developers • Carefully consider build vs. buy decisions (see the information economics slide)

28. Managerial Issues • Constant growth and change in technology (Moore’s Law) • Necessitates constant monitoring of technology changes • Shift from tangible to intangible benefits • IT not a sure thing • Use chargeback • No incentive to control IT costs unless charged; but system should not discourage experimentation with new technologies • Risk • IT projects tend to be risky. Evaluate that risk before committing to project

29. IT Portfolio Management • Based on Nobel prize winning work by Harry Markowitz • Risk-based approach to the selection and management of IT projects • Allocate resources to mitigate risk OR • Delay some projects to keep overall risk at an acceptable level.

30. Tenets of IT Portfolio Management • Define goals and objectives • Understanding and making trade-offs • Identify, minimize, diversify risk • Monitor portfolio performance • Have confidence that objectives will be achieved

31. VWoA Case (Next class)