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Managing and Using Information Systems: A Strategic Approach – Sixth Edition

Keri Pearlson, Carol Saunders, and Dennis Galletta

Chapter 8 The Business of IT

The Horner/Alcoa Story

High-performing tech worker—almost dismissed as CIO

What were the issues?

What did they expect from him?

What did he deliver at first?

What change did he make to become more valuable to Alcoa?

They expected him to give them useful information and also pinpoint where cost savings were likely

He delivered technical jargon and downplayed the importance of good cost figures, even though he provided technically solid IT services

He provided higher weight on “people, time, and money” and began using business language rather than tech language.

The Alcoa lesson: Business Demands

IT offerings need to be aligned with business demands

IT complexities should be translated to business needs

Merlyn’s Business-IT Maturity Model

What a Manager Can Expect From the IT Organization

A manager typically can expect some level of support in 14 core activities (Figure 8.2) – levels in parentheses

Developing and maintaining IS (1)

Managing supplier relationships (1)

Managing data, information, and knowledge (1, 2)

Managing Internet and network services (1, 2)

Managing human resources (1)

Operating the data center (1)

Providing general support (1)

Managers must learn what to expect from the IT organization so they can plan and implement business strategy accordingly.

What a Manager Can Expect From the IT Organization (Cont.)

Planning for business discontinuities (1)

Innovating current processes (2)

Establishing architecture platforms and standards. (2)

Promoting enterprise security (2)

Anticipating new technologies (3)

Participating in setting and implementing strategic goals (3)

Integrating social IT (3)

Managers must learn what to expect from the IT organization so they can plan and implement business strategy accordingly.

What The IT Organization Does Not Do

Does not perform core business functions such as:

Selling

Manufacturing

Accounting.

Does not set business strategy.

General managers must not delegate critical technology decisions.

Chief Information Officer (CIO) The Senior-Most IT Executive

Responsible for technology vision

Leads design, development, implementation, and management of IT initiatives

Is a business technology strategist or strategic business leader

Uses technology as the core tool in

creating competitive advantage

aligning business and IT strategies

The CIO is an executive who manages IT resources to implement enterprise strategy.

CIO’s Focus

CIO’s focus has shifted:

From efficiency to effectiveness in a constantly changing/competitive marketplace

Formerly: reported to the CFO. Now: reports to the CEO.

Shift over time towards helping executive team formulate business strategy

CTO, CPO, and Other Roles

CIO Can’t have all skills—can’t know everything!

Other roles are important:

CTO: Chief Technology Officer (tracks technologies)

CKO: Chief Knowledge Officer

CDO: Chief Data Officer

CAO: Chief Analytics Officer

CTO: Chief Telecommunications Officer

CNO: Chief Network Officer

CRO: Chief Resource Officer

CISO: Chief Information Security Officer

CPO: Chief Privacy Officer

CMO: Chief Mobility Officer

CSMO: Chief Social Media Officer

So Who Should Make the Decisions?

Ross & Weill say

The CEO should not make those decisions alone

C-level executives should not even make those decisions

Input is needed from both IT and the business units alike

Steering (or Executive) Committee solution

Building a Business Case - Components

Executive Summary

Overview and Introduction

Assumptions and Rationale

Project Summary

Financial Discussion and Analysis

Benefits and Business Impacts

Schedule and Milestones

Risk and Contingency Analysis

Conclusion and Recommendation

Appendices

Sample of benefits in a business case for adding chat function linked from Facebook page

Busy chat operators; busy Facebook page;

Customers seem happier

Sales improved by $250k; costs decreased by $50k after change

Facebook page likes; number of chats; Customer satisfaction scores moved from 3.3 to 4.1 (out of 5)

Converted 150 calls per day to chats; reaching 200 more customers per day

IT Portfolio Management

IT investments should be managed as any other investment.

Evaluate and approve IT investments as they relate to other potential investments of all kinds

Goals:

Pick the right mix of investments

Invest in the most valuable IT initiatives

Asset Classes

Weill and Aral say that there are four asset classes of IT investments:

Transactional systems – systems that streamline or cut costs on business operations.

Informational systems – any system that provides information used to control, manage, communicate, analyze or collaborate.

Strategic systems – any system used to gain competitive advantage in the marketplace.

Infrastructure systems – the base foundation or shared IT services used for multiple applications.

Average company’s IT portfolio profile (See Discussion Question 4)

46%

25%

18%

11%

Comparative IT portfolios for different business strategies (See discussion question 4)

Valuing IT Investments

Soft benefits, such as the ability to make future decisions, make it difficult to measure the payback of IT investment

IT is expensive, thus under close scrutiny.

IT is complex; calculating the costs is an art, not a science.

Payback period for infrastructure is much longer than other types of capital investments.

With necessary systems (due to laws, etc.), the payback period cannot be calculated

Many valuation methods are available…

Valuation Method	Description
Return on Investment (ROI)	ROI=
Net Present Value (NPV)	Discount the costs and benefits for each year of the system’s lifetime using present value factor
Economic Value Added (EVA)	EVA = net operating profit after taxes (capital x cost of capital)
Payback Analysis	Time that will lapse before accrued benefits overtake accrued and continuing costs
Internal Rate of Return (IRR)	Return of the IT investment compared to the corporate policy on rate of return
Weighted Scoring Methods	Costs and revenues/savings are weighted based on their strategic importance, accuracy/confidence, other opportunities

Financial Valuation Methods

IT Investment Monitoring

Old saying: “If you can’t measure it, you can’t manage it”

Management needs to achieve organizational benefits from IT investments

Must agree upon a set of metrics for monitoring IT investments.

Often financial in nature (ROI, NPV, etc.).

The Balanced Scorecard

Focuses attention on the organization’s value drivers (which include financial performance).

Assesses the full impact of corporate strategies on customers and workforce, as well as financial performance.

Allows managers to look at a business from four related perspectives:

How do our customers see us?

At what must we excel?

Can we continue to improve and create value?

How do we look to shareholders?

The Four Balanced Scorecard perspectives

The IT Balanced Scorecard

Using it within the MIS department helps senior IS managers

Understand their organization’s performance

Measure it in a way that supports its business strategy

Linked to the corporate scorecard

By ensuring that the measures used by IT are those that support the corporate goals.

IT Dashboards

Snapshot of metrics at a given point in time (often “right now”)

Offer “at a glance” idea of how things are going

Often colors depict conditions:

Areas with problems (red)

Areas in good shape (green)

In-between or average (yellow)

Sample Black & White Dashboard

ITDashboard.gov

Note: this might be too slow to do live in class

Architecture for Dashboards

Funding the IT department

How are costs of design, development, delivery and maintenance of IT systems recovered (or simply covered)?

Chargeback

Allocation

Corporate budget

The first two are done for management reasons

The latter covers costs using corporate coffers

Funding Method	Description	Why do it?	Why not do it?
Chargeback	Charges are calculated based on actual usage	Fairest method for recovering costs since it is based on actual usage	Must collect details on usage; often expensive and difficult
Allocation	Expenditures are divided by non-usage basis (revenues, headcount, etc.)	Less bookkeeping for IT	Users can question rates & basis of allocation Free riders
Corporate Budget	Corporate allocates funds to IT in annual budget - to general P&L	No billing to the businesses. No rates to compute. Encourages use of new technologies.	Have to compete with all other budgeted items for funds. Potential for overspending.

Comparison of IT funding methods

How to Determine Cost

Basic method: add up costs of hardware, software, network, and people involved in IS.

Real cost is not always easy to determine

Remains a mystery for many firms

Total Cost of Ownership (TCO)

Has become the industry standard.

Looks beyond initial capital investments to include costs often forgotten. For example:

technical support

administration

training

Estimates total annual costs per user for each potential infrastructure choice.

Provide the best foundation for comparing to other IT and non-IT investments.

TCO Component Breakdown

Shared components (servers and printers):

TCO divided among all users who access each

When only certain groups of users possess certain components, segment the hardware analysis by platform.

Soft costs, such as technical support, administration, and training are important to include

Soft Cost Areas	Example Components of Cost	Source
Technical support	Hardware phone support	Call center
	In-person hardware troubleshooting	IT operations
	Hardware hot swaps	IT operations
	Physical hardware repair	IT operations
	Total cost of technical support
Administration	Hardware setup	System administrator
	Hardware upgrades/modifications	System administrator
	New hardware evaluation	IT operations
	Total cost of administration
Training	New employee training	IT operations
	Ongoing administrator training	Hardware vendor
	Total cost of training
	Total soft costs for hardware

Figure 8.13 Soft cost considerations

Managing and Using Information Systems: A Strategic Approach – Sixth Edition

Keri Pearlson, Carol Saunders, and Dennis Galletta

Transactional

13%

Infrastructure

54%

Informational

20%

Strategic

13%

Transactional 13% Infrastructure 54%

Informational 20%

Strategic 13%