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IS Management and Evaluation of Alternate IT Architectures. Chap. 7 (Plus Extras!). Trends in IS Management. Technology-oriented Early years role was to get systems to work and keep them running Support-oriented - PowerPoint PPT Presentation
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IS Management and Evaluation of Alternate IT Architectures
Chap. 7 (Plus Extras!)
Trends in IS Management
Technology-oriented» Early years role was to get systems to work
and keep them running Support-oriented
» Later, it was oriented to deliver information to support management decision making
Strategy-oriented» Deploy systems to attain organizational goals
Trends affecting IS Management
Growth in distributed systems End-user computing Improvement in applications and
development tools Rise in outsourcing
Users vs. IT Professional Dominance
User Pressures» Pent-up demand» Speed up IT
processes» End-users move to IT» vendor pressures» More direct control
and support
IT Control Pressures» easier to manage
centralized IT units» maintain standards» centralize
maintenance» manage IT costs» coordinate strategy» maintain enterprise-
wide applications
CIO Responsibilities
Create and champion IT plan Implement IS architecture Understand the business, products and
markets Maintain IS department credibility &
moral Develop relationships and alliances
Creating an IS Vision
IS Planning» Where should we be in the future?» Exploring the present» Scouting the future» Clarify vision» Selling the vision
Difficulties of IS Planning
Aligning with business goals ******** Short technology improvement cycles How do projects fit within “portfolio” of IS
projects? Continuous improvement of IS
infrastructure Getting senior management buy-in
Tools and Methods of IS Planning
Stages of Growth Critical Success Factors (CSF) Investment Strategy analysis Benchmarking Scenario Approach Creative Problem Solving (CPS) Enterprise Modeling
Stages of Growth
Identified 4 stages of new technology assimilation1 Early Successes-lead to increased interest2 Proliferation - variety of apps tried out3 Controlled Proliferation - control cost and
waste of growth phase4 Mature use
Critical Success Factors
CSF proposed to support executive information needs (Rockart, HBR, 1979)
CSFs are “...the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization…”
Example, CSF for car rental company: availability of cars to match reservations.
Sources of CSF
Specific industry Individual company General environment Emerging situations
CSF in IT Planning
Used for IT planning, performance evaluation, information requirements determination
IT to achieve firm’s most important goals Benefits hard to justify Economical method of analysis
Limitations of CSF
No underlying theory No consistent, effective method for CSF
collection Potential to simplify firm Dependence on executive
understanding of CSF concept Interviewer bias
Investment Strategy Analysis
Based on portfolio planning and investment analysis
Four types of systems» institutional/internal» professional support» physical automation» external linking systems
N.B. Infrastructure investments continue
Evaluation Timing
Ex Ante—Which projects should we do? Ex Post—after committing resources
» During development—How is the project going?
» At implementation—Did we achieve our functional objectives
» After implementation—Did we achieve our business objectives
» Before subsequent investments
Ex Ante Evaluation
Expected benefits/costs Alignment with strategy Feasibility Risk
Ex Post Evaluation
Development success Performance Performance impacts Benefits/costs
Profitability Methods of Evaluation
Payback ROI Discounted Cash Flow
What kind of firm models might be used?
Cost-Benefit Analysis Techniques
How Much Will the System Cost?» Costs fall into two categories.
1 There are costs associated with developing the system.
Can be estimated from the outset of a project and should be refined at the end of each phase of the project.
2 There are costs associated with operating a system.
Can only be estimated once specific computer-based solutions have been defined (during the selection phase or later).
Estimated Costs for Client-Server System Alternative
DEVELOPMENT COSTS:
Personnel:2 System Analysts (400 hours/ea $35.00/hr) $28,0004 Programmer/Analysts (250 hours/ea $25.00/hr) $25,0001 GUI Designer (200 hours/ea $35.00/hr) $7,0001 Telecommunications Specialist (50 hours/ea $45.00/hr) $2,2501 System Architect (100 hours/ea $45.00/hr) $4,5001 Database Specialist (15 hours/ea $40.00/hr) $6001 System Librarian (250 hours/ea $10.00/hr) $2,500
Expenses:4 Smalltalk training registration ($3500.00/student) $14,000
New Hardware & Software:1 Development Server (Pentium Pro class) $18,7001 Server Software (operating system, misc.) $1,5001 DBMS server software $7,5007 DBMS Client software ($950.00 per client) $6,650
Total Development Costs: $118,200
PROJECTED ANNUAL OPERATING COSTS
Personnel:2 Programmer/Analysts (125 hours/ea $25.00/hr) $6,2501 System Librarian (20 hours/ea $10.00/hr) $200
Expenses:1 Maintenance Agreement for Pentium Pro Server $9951 Maintenance Agreement for Server DBMS software $525
Preprinted forms (15,000/year @ .22/form) $3,300
Total Projected Annual Costs: $11,270
Payback
Payback (# of years) =
Investments/Average annual net benefit
Not justified by theory Useful for small projects to demonstrate
obvious value, i.e., very short payoff equivalent to high ROI
Cost-Benefit Analysis Techniques- PBack
Is the Proposed System Cost-Effective?» Payback Analysis:.
Because systems development costs are incurred long before benefits begin to accrue, it will take some period of time for the benefits to overtake the costs.
After implementation, you will incur additional operating expenses that must be recovered.
Payback analysis determines how much time will lapse before accrued benefits overtake accrued and continuing costs.
» This period of time is called the payback period.
Cost-Benefit Analysis Techniques
Is the Proposed System Cost-Effective?» Payback Analysis:
– How do you determine the payback period? Adjust the costs and benefits for the time value of money
(that is, adjust them to current dollar values). » The present value of a dollar in year n depends on
something typically called a discount rate. » The discount rate is a percentage similar to interest
rates that you earn on your savings account. » The discount rate for a business is the opportunity
cost of being able to invest money in other projects.
Cost-Benefit Analysis Techniques
Is the Proposed System Cost-Effective?» Payback Analysis:
– How do you determine the payback period? (continued)
» The current value, actually called the present value, of a dollar at any time in the future can be calculated using the following formula:
PVn = 1(1 + i)n» where PVn is the present value of $1.00 n years from
now and i is the discount rate. Determine time period when lifetime benefits will overtake
the lifetime costs. » This is the break-even point.
Return on Investment
Return on Investment =
Annual net benefit/Investment amount
Use not justified by theory Convenient and easy to understand May result in rejection of positive value
projects
Cost-Benefit Analysis Techniques - ROI
– The return-on-investment (ROI) analysis technique compares the lifetime profitability of alternative solutions or projects.
– The ROI for a solution or project is a percentage rate that measures the relationship between the amount the business gets back from an investment and the amount invested.
– The ROI for a potential solution or project is calculated as follows:
ROI = (Estimated lifetime benefits - Estimated lifetime costs) / Estimated lifetime costs
– The solution offering the highest ROI is the best alternative.
Cost-Benefit Analysis Techniques -NPV
Is the Proposed System Cost-Effective?– The net present value of an investment alternative is
considered the preferred cost-benefit technique by many managers.
– After discounting all costs and benefits, subtract the sum of the discounted costs from the sum of the discounted benefits to determine the net present value.
If it is positive, the investment is good. If negative, the investment is bad.
– When comparing multiple solutions or projects, the one with the highest positive net present value is the best investment.
Contribution of NPV
Objective Congruence with value maximization Better than undiscounted cash flow,
simple payback, ROI
Limitations
Estimates of revenues and costs» manipulated to justify projects already
selected Estimations of project risk Second stage projects
Discounted Cash Flow (DCF)
where,NPV = Net Present ValueC = Investment at the start of the projectAt = Cash flow at tT = Project lifer = Risk-based discount rate for the project
NPV C Att
t
T
r
( )11
DCF Example
One period C = 10,000 A1 = 6,000 r = 10%
= -10,000 + 6,000/1.1 = -4545.4
NPV C Att
t
T
r
( )11
Value of Managerial Flexibility
DCF method assumes 2nd stage projects are undertaken
Actually won’t be undertaken if value less than 0 at time of investment decision
Relationship between Strategic and Finance Methods
Since expected value of investment in properly valued assets is zero, positive NPV indicates strategic advantage
If NPV>0 there should be a strategic reason
If investment results in strategic advantage, NPV will be positive
Use of finance based measures not uniformly avowed
Robson: Finance measures lead to “short term evaluations on a quantitative basis that favour risk aversion and cost lowering activities with the financial year as their natural horizon and so are inevitably inappropriate for the high risk long-term projects...”
Why?
Risk aversion» discount rate too high
Cost lowering activities» strategic benefits not fully valued
Long term projects» discount rate too high
On the other hand
Technologically enthusiastic managers may over-invest in IT» Just because something can be done
doesn’t mean that it should be done. Successful innovations, projects, and
products can be worth less than they cost
The middle course
Use a variety of evaluation methods, both quantitative and qualitative
Use qualitative methods to arrive at good estimates of value for quantitative methods
The middle course
Avoid unrealistically high discount rates, avoid unrealistically conservative valuation of strategic benefits—they can damage the firm by biasing investments toward short term gains and cost reduction and may result in under-investment in long term, innovative technology.
Feasibility Measures
Technical Feasibility» Can it be done?
Implementation Feasibility» Can we do it?
Economic Feasibility» Is it worth doing?
Feasibility Measures
Financial Feasibility» Can we finance the development process?
Operational Feasibility» Can we manage the system once
implemented? Cultural Feasibility
» Is it consistent with our organizational culture?
Use/Operations Measures
Reliability testing Maintenance feasibility