Information Systems Value

and

Financial Strategy

Chapter 14 SummaryChapter 14 Summary

1. Recognize the issues related to determining the business value of information systems.

2. Understand possible financial strategies that can be implemented to better manage the increasing amounts of money being spent on information systems.

Chapter ObjectiveChapter Objective

What Triggers a Possible What Triggers a Possible Problem?Problem?

Senior management asks the question:

What am I getting for that!

As information systems have become a more accepted

resource within many organizations, there are three trends:

1. There is a growing dependence on information systems to run the organization.

2. Information systems expenses and capital funding have become quite large.

3. The growth trends regarding IS expenditures becomes a topic of concern.

High Costs Get Senior High Costs Get Senior Management AttentionManagement Attention

The best answer lies within the context of business management and contribution to key factors that make a major contribution to the success of the business.

The Answer to the QuestionThe Answer to the Question

Evolution of Financial Strategy

Application Support

Motivation

Financial Justification

DP Planning

Organization

Initiation Expansion Control Maturity

I II III IV

Single Area Proliferation ContainmentOrganizational

StrategyPeople

DisplacementCost

Avoidance DP EfficiencyCompetitive Advantage

Little Reactive Directed Proactive

BudgetBusiness Case

Installation AuditCharge-Out

SystemManagement

Process

Finance Dept. Multiple Dept. CentralizedCentralized

Decentralized Distributed

Based on material from Gibson and Nolan, Harvard Business Review, January-February 1974, pp. 76-88.

The Evolution of Information Systems The Evolution of Information Systems JustificationJustification

Stage I: In the Beginning There Are BudgetsOrganizations include funding for information systems as part of a departmental budget.

Challenge: To do as much as possible while not exceeding the budget.

Problem: Use of IS is limited to the amount of the budget.

Stage IStage I

Stage IIStage II

Stage II: With Growth Comes The Need for a Business Case

Challenge: To create business case proposals that do a good job of reflecting the value to the business whether it be cost avoidance or displacement, efficiency, effectiveness or competitive advantage.

Problem: While most business cases reflect the impact of the proposed system over multiple years it is still a snap shoot in time and does not reflect the dynamics of the environment or the changing needs for the new system.

Stage III: Departments Should Pay for the IS Support They Receive

Challenge: To implement a charge-out approach that makes sense based on the intended role of information systems that is understood and accepted by user management.

Problem: To gain a sense of responsibility and accountability for IS costs while not discouraging doing things with IT that make sense in better running the business.

Stage IIIStage III

Stage IVStage IV

Challenge: To implement a new process based on factors that drive the success of the business that does a better job of articulating the value of information systems to senior management.

Problem: Requires time and resources that can be criticized as “justifying the air conditioner in a car that one doesn’t logically need to do if you live in Arizona.”

Stage IV: Time for a Management ProcessStage IV: Time for a Management Process

Four key elements that contribute to the overall success

of the organization:

1. Commitment planning that identifies specific goals and accountable managers.

2. Effort to minimize user emotion while establishing expectations regarding IS support.

3. Emphasis on an entrepreneurial attitude and approach within the IS organization and the company as a whole.

4. Regular communication regarding IS performance.

A Way to Manage Large IS A Way to Manage Large IS ExpendituresExpenditures

1. What prompts senior management to questions the value of information systems?

2. Identify and explain the four stages of the evolution of financial strategy including what is right about each approach and what is potentially wrong with it.

Possible Exam QuestionsPossible Exam Questions

Chapter 16 IntroductionChapter 16 Introduction

Total Quality Management Total Quality Management

and and

The Role of Information SystemsThe Role of Information Systems

Quick OverviewQuick Overview

We will examine how a Total Quality We will examine how a Total Quality Management (TQM) effort impacts the use of Management (TQM) effort impacts the use of information systems and how the information information systems and how the information systems organization supports TQM. systems organization supports TQM.

Why TQM?Why TQM?

Many U.S. companies such as Xerox and Many U.S. companies such as Xerox and General Motors faced major threats from General Motors faced major threats from better quality Japanese competition whose better quality Japanese competition whose sales prices were often lower. sales prices were often lower.

Fundamentals of Total Quality Fundamentals of Total Quality Management (TQM)Management (TQM)

Quality is a management process to run the business.

Fine-tuning a bad product will not change anything of any significance in most cases.

The core problem is managing a massive change in organizational behavior.

Elements of a TQM ProgramElements of a TQM Program

PeoplePeople

Business ProcessesBusiness Processes

Efficiency, Effectiveness, and Competitive Efficiency, Effectiveness, and Competitive

AdvantageAdvantage

TQM Versus ReengineeringTQM Versus Reengineering

A TQM program improves what is already in place, while a reengineering effort advocates an entirely new approach, a new beginning, a rejection of the traditional way of doing things.

The Role of Information The Role of Information SystemsSystems

in a TQM Programin a TQM Program Facts and data are needed for quality improvement.

Pursuit of quality and operational performance goals requires that process management be based upon reliable information, data, and analysis.

Challenges In Implementing A Challenges In Implementing A TQM ProgramTQM Program

Lack of leadership and direction. Difficulty of changing the company culture. Attitude problems. Choosing the best people. Understanding the business problems. Developing a compensation system.

ConclusionsConclusions

1. In today’s business environment a company’s fortunes rest on its ability to provide superior quality products at a good value.

2. TQM does not guarantee immediate, ultimate or sustainable business success. It is a tough, challenging, dynamic and ongoing effort.

Chapter 16Chapter 16

Total Quality Management Total Quality Management

and and

The Role of Information SystemsThe Role of Information Systems

A Definition of QualityA Definition of Quality

“Quality” is conformance to customer wants, needs and expectations, at a price he or she will pay.

Total Quality Management

Of the three letters in TQM, the T is most important. Total says that you maintain a balanced focus on major business factors and business results while guarding against becoming process myopic.

A Case Analysis

Leadership Through Quality at Xeroxor

Finding a Way to Save the Company thatHad Once Owned an Industry and Was

the Darling of the Stock Market

Xerox 914Xerox 914Introduced in 1959, the 914 copier was a money machine nonpareil.

It was also arguably the finest product ever produced by any company since it combined four technologies: chemical, optical, mechanical and electronics.

By the time it was retired in 1973, it was the biggest-selling industrial product of all time, and Xerox was in the dictionary as a synonym for photocopy.

Success spoiled Xerox. To sustain its rapid growth, it needed to move beyond copiers, but what could ever measure up to the 70% gross profit margins of the 914?

Xerox History

1959 1972 1979 1980 1983 1989 1990s

914

Copi

er In

trodu

ced

Com

petit

ion I

ncre

ases

Benc

hmar

king

Star

ted

Quali

ty C

ircles

Beg

an

Fuji

Xero

x W

on D

emin

g Aw

ard

Lead

ersh

ip T

hrou

gh Q

ualit

y

Initi

ated

Won

Bal

drid

ge A

war

d

ContinuousImprovement

Figure 16.1Source: Xerox Corp.

Off the Benchmark

Indirect/Direct Ratio 2X

Production Suppliers 9X

Assembly Line Rejections 10X

Product Lead Time 2X

Defects Per 100 Machines 7X

Quality Through LeadershipQuality Through LeadershipProgram at XeroxProgram at Xerox

The strategy for cultural change in The strategy for cultural change in Xerox that enables and empowers Xerox that enables and empowers people with quality tools and processes people with quality tools and processes to:to:

1. Meet customer requirements.1. Meet customer requirements.2. Achieve business priorities.2. Achieve business priorities.3. Continuously improve.3. Continuously improve.

The Plan - Leadership Through The Plan - Leadership Through QualityQuality

1983-the year of start-up activities1983-the year of start-up activities 1984-the year of awareness and 1984-the year of awareness and

understandingunderstanding 1985- the year of transition and 1985- the year of transition and

transformationtransformation 1986 the year when results would achieved1986 the year when results would achieved 1987 the year of approaching maturity1987 the year of approaching maturity

Xerox Policy StatementXerox Policy Statement

Xerox is a quality company. Quality is the Xerox is a quality company. Quality is the basic business principle for Xerox. Quality basic business principle for Xerox. Quality means providing our external and internal means providing our external and internal customers with innovative products and customers with innovative products and services that fully satisfy their requirements. services that fully satisfy their requirements. Quality is the job of every Xerox employee.Quality is the job of every Xerox employee.

Xerox’s OutcomeXerox’s Outcome

Initially – Failed to focus adequately on core work processes

and statistics.– Plan was not integrated with business processes.– Not tuned to the company culture and the need to

change it.– Did not pick the right quality czar at the start.– Did not push the operating units enough.

Xerox’s OutcomeXerox’s Outcome

Finally– Found the right cure to the ills of the company.– Quality was the right solution at the right time.– Had a committed senior management– IS was used effectively to complement changes.– Employee compensation was tied to quality.– The pursuit of the Baldridge Award was an

energizing effort within the company.

Important Supporting ElementsRecognition

andReward

Toolsand

Processes

TransitionTeam

Training Communi-cation

SeniorManagement

Behavior

Xerox is aTotal Quality

Company

Figure 16-3Source: Xerox Corp.

Information Systems SupportInformation Systems Support Xerox had over 375 major information systems

supporting the total business. Over 175 of these systems related specifically to

the management, evaluation and planning of quality.

The validity, accuracy and timeliness of information systems are assured by the use of a Data Systems Quality Assurance process during the design, construction and major upgrade of each information system.

What Xerox Did Wrong What Xerox Did Wrong 1. Early on, it failed to focus adequately on core work

processes and statistics.

2. It did not properly integrate the quality process as part of the business process.

3. It should have stated earlier in 1983 that customer satisfaction was the number one priority of the company. Improving profits and boosting market share were the other two objectives. (versus what traditionally emphasized factors?)

4. It should have been more attuned to the embedded culture of the company and the inherent difficulties in changing it.

5. It did not initially pick the right quality officer.

6. It did not push the operating units hard enough to focus on the TQM effort.

What Xerox Did RightWhat Xerox Did Right1. It made an appropriate diagnosis of how to cure the ills of

the company.

2. Quality was the right process for the right solution at the right time.

3. The necessary commitment was made by senior management.

4. A constituency was built starting at the top in a very calculated and deliberate way.

5. Information systems use was effectively aligned with its business objectives and processes to achieve them.

6. Executive compensation was tied to quality.

7. Innovations and successes of the TQM program were well publicized.

8. The pursuit of the Baldridge Award was an energizing effort within the company.

9. It achieved measured results.

Product and Operations Quality Results

Defects Per100 Machines

ProductionSuppliers

Production Line Defective Parts

Reduced Reduced Reduced

10X 10X 15X

Figure 16-2Source: Xerox Corp., Reprinted with permission

Xerox PerspectiveXerox Perspective1. It took Xerox nine years to really buy into quality

as a corporate way of life.2. It took five years to complete the TQM training

for all of its employees.3. The salary of every employee is tied to quality

improvements and profits.4. It was concluded that all of this was worth doing.

ConclusionsConclusions

• Management by fact is evidence of a quality operation and makes basic sense in many business situations.

• Computer-based systems are frequently needed to provide the facts.

• Quality can provide a competitive advantage but is probably a necessary factor to compete on a global basis.

Total Quality Management

How do you say to a long time, loyal, hard working employee that quality isn’t good enough?

Total Quality Management

1. We are good, but we must continue to improve.

2. Individually and/or departmentally we may be very good but we must be as good in the total efforts of the entire organization.

What You’d Get From 99.9% Suppliers

• At Least 20,000 Wrong Drug Prescriptions Each Year.• More than 15,000 Newborn Babies Dropped by Doctors or Nurses Each Year.• Unsafe Drinking Water at Least One Hour Each Month.

• No Telephone Service or Television Transmission for Nearly Ten Minutes Each Week. • Two Short or Long Landings at O’Hare Airport Each Day.

• Nearly 500 Incorrect Surgical Procedures Each Week.

• 2,000 Lost Articles of Mail Per Hour.

What You’d Get From Six Sigma Suppliers• One Wrong Prescription in 25 Years.

• Three Newborn Babies Dropped by Doctors or Nurses in 100 Years.

• Unsafe Drinking Water One Second Every Sixteen Years.

• No Telephone Service or Television Transmission for Nearly Six Seconds in 100 Years.• One Short or Long Landing in Ten Years in all the Airports in the U.S.• One Incorrect Surgical Procedure in Twenty Years.

• Thirty-five Lost Articles of Mail Per Year.

To Make TQM Work• The business leader must be visibly behind the

program.• Avoid tunnel vision by asking what change does for

customers.• Focus on a few critical goals.• Link changes to a clear financial payback and expect

results.• Recognize that an off-the-shelf TQM program

doesn’t work since every company has its uniqueness.

A WIN - WIN PROPOSITION

DELIGHTED CUSTOMERS

SATISFIED STOCKHOLDERS

PROUD EMPLOYEES

ENHANCED COMMUNITY

SUCCESSFUL PARTNERS

Figure 16-5