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Powerpoint-Chapter9.pptxChapter 9
Justifying and Managing Information Systems and Technology Investments
Outline
Investment and Priority Setting Policies
Justifying and Evaluating IS/IT Investments
Justifying Business Applications
Justifying Infrastructure Investments
Assessing and Managing Investment Risks
Managing the Portfolio of Investments
Setting Priorities amongst IS/IT Investments
Organizational IS/IT Portfolio and Investment Management Maturities
Investment and Priority Setting Policies
Investments in IS/IT compete with alternative investments such as buildings, plant, equipment, R&D, and advertising, for funding
IS/IT investments have traditionally been evaluated like capital projects such as plant and equipment, assuming a fixed cost offset against net revenue over the life of the application
IS/IT investments are now more like ‘new business ventures’
Increasingly organizations do consider IS/IT investments within the overall business investment or project portfolio
Many never actively compare the value of IS/IT options with other business investments
Justifying and Evaluating IS/IT Investments
Financial Appraisal of IS/IT Investments
Payback
Accounting return on investment (ROI)
Discounted payback
Discounted cash flow – internal rate of return (IRR)
Discounted cash flow – net present value (NPV)
Discounted cash flow – profitability index
Classifying IS/IT Investments: in Terms of How they Can be Justified
(See Next Slides)
Justifying and Evaluating IS/IT Investments
Financial Appraisal of IS/IT Investments
Payback - The payback method calculates how long it is expected to take to recover the original investment.
Accounting return on investment (ROI) - Based on the expected life of the investment, the overall average return is calculated as a percentage, which can be compared with alternative investments of the same funds such as the interest on a deposit account.
Discounted payback - This is like simple payback but allows for the reducing actual value of the cash flows over time by applying a discount rate (a negative interest rate) to the future years to represent them as present values.
Discounted cash flow – internal rate of return (IRR) - In this case a range of discounted rates are applied to find the rate that produces a break-even over the life of the investment – the higher the IRR the better the investment.
Discounted cash flow – net present value (NPV) - A rate of discount is selected to apply for all investments, as with discounted payback, and the net result of applying this to the cash flows over the investment life produces the residual value of the investment or ‘net present value’ – the higher the better.
Discounted cash flow – profitability index - The NPV for the project is calculated as before, but it is then divided by the cost of the original investment to produce a percentage which is the profitability index for the project.
Classifying IS/IT Investments: in Terms of How they Can be Justified
(See Next Slides)
Classifying IS/IT Investments: in Terms of How they Can be Justified
Three main types of application
Substitutive - technology replacing people, with economics being the main driving force, to improve efficiency. These are very similar to most support and some key operational applications
Complementary - improving organizational performance, productivity and employee effectiveness by enabling work to be performed in new ways; again overlapping with key operational and some strategic applications.
Innovative - achieving a competitive edge by changing trading practices and business relationships, creating new markets etc., as with many strategic applications.
Classifying IS/IT Investments: in Terms of How they Can be Justified
Five basic techniques for evaluating benefits
Traditional cost–benefit analysis - which allows for efficiency improvements in organizational processes and individual tasks, resulting from automation
Value linking - which estimates the improvement in business performance, not just savings made, from improving the linkages between processes or activities
Value acceleration - which estimates the improvement in business performance, not just savings made, from improving the linkages between processes or activities
Value restructuring - which considers the productivity improvement resulting from process and organizational change and change of job roles
Innovation evaluation - attempts to estimate the value to the business of new business models or new business practices leveraged from IS/IT
More Classifying IS/IT Investments: in Terms of How they Can be Justified
Four types of IS/IT investments
Renewal - to replace outdated infrastructure or applications to reduce costs or overcome obsolescence, which should deliver clear financial benefits or obviate specific business risks.
Process improvement - ‘low risk’ investments to improve performance of existing processes, which should be justified by ‘provable’ outcomes of changing how the processes are carried out.
Transformation - investments to support a new business model, which will be complemented by significant changes in the organization and the IS/IT investment cannot be justified in isolation from these other changes.
Experiments - investments in learning about new IS/IT-based opportunities or potential new business models.
More Classifying IS/IT Investments: in Terms of How they Can be Justified
Four different types of benefit
Transactional IT assets - which are typically used to cut process costs or enable increases in volume hence delivering a lower unit transaction cost
Informational IT assets - which are mainly used to provide information to managers and communication and analytical capabilities.
Strategic IT assets - that enable advantages to be gained by supporting entry into new markets or creating new products, services and processes.
Infrastructure IT assets - are those that are shared by many applications, which can lead to reduced costs through consolidation and a flexible base for future business initiatives.
Justifying Business Applications
Justifying Infrastructure Investments
Linking the IT Infrastructure with the Business Strategy
Building the Infrastructure Business Case
To reduce business and IT operating costs
To enable or even create growth in the volume of business
New or planned applications
New working practices
To create a new business capability
Assessing and Managing Investment Risks
Three main headings
Technical risks - are those associated with the chosen technologies and suppliers and their ability to deliver the functionality, resilience and performance required.
Financial risks - concern the predictability of the costs and confidence in the financial benefits.
Business change and organizational risks - nclude the capability of the organization, and in some cases external stakeholders, to carry out the enabling and business changes that are essential to realize each of the benefits.
Assessing and Managing Investment Risks
Variations in Risk Patterns for Different Types of Application Investments
High potential investments - investments are, by definition, high risk and the risks are mitigated by controlling the time and costs allowed for the evaluation.
Strategic investments - investments normally involve significant innovative change and the implementation of new ways of conducting business or using resources.
Key operational investments - investments are normally undertaken to improve existing essential processes and systems.
Support investments - investments are intended to improve organizational efficiency and eliminate unnecessary costs.
Managing the Portfolio of Investments
Three areas which organizations found problematic w/ Portfolio Approach
How many projects to include and on what criteria to base that decision
Whether to include future planned investments as well as current ones or those now being assessed through the authorization process
Mixed portfolios of projects and large multi-project programs
Setting Priorities amongst IS/IT Investments
Three factors need to be included in any assessment of priorities
What is most important to do, based on the identified benefits (desirability)
alignment with the business strategy
return on investment
functional or business unit operational priorities to avoid disadvantages
What is capable of being done, based on the resources available
Balancing the risks across different investment types (commercial, technical and financial)
Availability of infrastructure
Use of shared resources
IS/IT skills and business resources and knowledge available
What is likely to succeed
Setting Priorities across the Different Types of Investments in the Portfolio
Setting Priorities across the Different Types of Investments in the Portfolio
Setting priorities among key operational applications and most infrastructure investments is complex
Expected financial return
Achieving specific business objectives
Risks to current business performance addressed by the investment
New capability through infrastructure improvement
High potential applications are difficult to prioritize
The results will depend not just on the value of the idea, but also on the force with which it is pursued
Trying to prioritize based on limited evidence is not very reliable anyway
Organizational IS/IT Portfolio and Investment Management Maturities
Four levels of ‘IT portfolio management maturity’
Level 0 – Ad hoc
Decisions made about individual investments with no coordination
Level 1 – Defined
Consolidated view of investments
Consistently applied project evaluation and prioritizing processes
Often enabled through a PMO
Level 2 – Managed
IT investments individually linked to the business strategy in justification
Total IT spending reviewed in relation to expected contribution
Level 3 – Synchronized
Portfolio aligned with business strategy
Metrics to assess performance
Reward/risk ratio continuously assessed to prioritize projects and ‘weed out underperforming initiatives’
A Maturity Model of Investment Management
The levels of success in delivering benefits from IS/IT and management satisfaction with the business value derived from IS/IT
The comprehensiveness and effectiveness of organizational practices related to the benefits management process model over the whole investment life cycle
The organizational practices included are:
Project appraisal and selection and portfolio management
Identifying and quantifying benefits and costs
Business case development (including risk assessment)
Delivery planning (including technology, process, organizational change and benefits)
Evaluation and review of results (including time, cost, quality plus changes and benefits realized)
The four levels of organizational IT investment success and practice maturity
Level 1 – Unsuccessful
Majority of projects fail to achieve time, cost, quality (TCQ) and benefit targets
Little management confidence that IS/IT investments will improve business performance
To become more successful:
Priority is to manage the IT supply-side activities more consistently and professionally
Adopt and use proven project methodologies
Before organizations can expect greater success, they must improve project delivery
The introduction of a Project Management Office (PMO) can help ensure that proven methods are not only in place, but also used appropriately
The four levels of organizational IT investment success and practice maturity
Level 2 – Moderately Successful
This is mainly about improving project selection in order to deliver more business value from the capability in place
The majority of IS/IT investments fail to deliver the expected benefits, even though they are normally delivered close to time, cost and quality targets
Management are comfortable that IS/IT projects are well managed, but will not risk making the business changes needed to deliver the benefits available
To improve performance, these organizations should:
Develop a comprehensive portfolio management approach that takes into account both demand and supply-side factors when selecting which investments to
Develop more rigorous business cases
Change how IT and the business work together
Extend the review process to include the benefits and
The four levels (cont.)
Level 3 – Successful (but Inconsistent)
Many projects deliver the expected benefits
There are inconsistent levels of success across the investment portfolio
Inadequate approaches to implementation management in some projects
Ownership of the benefits by the business managers becomes possible
The four levels (cont.)
To further improve performance, organizations should:
Develop process and organizational change plans that are integrated with the technology delivery plan
Extend the range of benefit types that are included in the business cases
Develop benefit delivery plans with accountability for each benefit assigned to individual business managers
Increase the scope of the review process to consider not only benefits realized, but also the changes that were required to achieve them
Have an effective process that ensures lessons from all completed projects are passed on to future projects.
This can be summarized as the need to improve the management of benefit delivery to achieve the potential value created through better investment selection
Level 4 – Highly Successful
The majority of projects deliver the expected benefits
Achieving ongoing success in terms of both benefits realized and management satisfaction
