Laudon Feature 5

LEARNING OBJECTIVESAfter reading this chapter, youwill be able to:

1. Identify and describe theobjectives of project manage-ment and why it is so essentialin developing informationsystems.

2. Compare models for selectingand evaluating informationsystems projects and methods foraligning IS projects with thefirms business goals.

3. Evaluate models for assessingthe business value of informa-tion systems.

4. Analyze the principal risk factorsin information systems projects.

5. Select appropriate strategies for managing project risk andsystem implementation.

CHAPTER OUTLINE14.1 THE IMPORTANCE OF PROJECT MANAGEMENT

Runaway Projects and System Failure Project Management Objectives

14.2 SELECTING PROJECTS Management Structure for Information Systems

ProjectsLinking Systems Projects to the Business PlanEnterprise Analysis and Critical Success FactorsPortfolio AnalysisScoring Models

14.3 ESTABLISHING THE BUSINESS VALUE OFINFORMATION SYSTEMSInformation System Costs and BenefitsCapital Budgeting for Information SystemsCase Example: Capital Budgeting for a New Supply

Chain Management SystemReal Options Pricing ModelsLimitations of Financial Models

14.4 MANAGING PROJECT RISK Dimensions of Project RiskChange Management and the Concept of

ImplementationControlling Risk FactorsDesigning for the OrganizationProject Management Software Tools

14.5 HANDS-ON MISImproving Decision Making: Using Spreadsheet

Software to Analyze the Return on a New SystemInvestment: Dirt Bikes USA

Improving Decision Making: Using SpreadsheetSoftware for Capital Budgeting for a New CADSystem

Improving Decision Making: Using Web Tools forBuying and Financing a Home

LEARNING TRACK MODULEInformation Technology Investments and Productivity

Chapter 14

Project Management: Establishingthe Business Value of Systems andManaging Change

Interactive Sessions:

Managing IT in the Merger andAcquisition Game

Getting Buy-In and ROI fromCRM

553

G. Edwards is one of the oldest and largest full-service retail brokerages in the United States, offering securities and commodities brokerage, assetmanagement, trust services, mutual funds, insurance, and investment bankingthrough offices nationwide. Its in a very information-intensive and competitiveindustry where companies are expected to continually enhance existing

systems and bring new systems on board to support new products and services.When John Parker became A.G. Edwardss chief technology officer (CTO), the companys

information technology costs were too high, and information systems projects dragged on foryears. Most of these projects cost 54 percent more and took 54 percent longer than originalestimates. One to two percent were never completed, and the cost of writing them off took atoll on the companys bottom line. In 2002 alone, the company wrote off $46 million insoftware investments.

Parker, who had experience with fast-track projects as Northwest Airlines vice president ofinformation services from 1999 to 2001, was charged with turning A.G. Edwardss projectmanagement record around. Parker enlisted project management expert Ed Pilewski toimplement a standard plan framework for monitoring, measuring, and reporting on projectprogress.

The framework lists 25 high-level activities for managers to track during the course of aninformation systems project, such as performing requirements analysis and constructing testplans. It also highlights interdependencies between systems, such as new interfaces thatmight be required for a new system that exchanges data with other systems. The frameworkalso identifies the time each information systems group will work on a specific project eachmonth. Managers have the flexibility to detail the tasks that must be performed within eachactivity and how they will be carried out.

Software from Primavera provides project managers, planners, and developers withdashboards and progress reports on each project. They can use this tool to compare originalestimates with actual costs, determine if milestones have been met, list activities that require

A.G. EDWARDS TURNS AROUND ITS PROJECTMANAGEMENT

A.

completion, or view all pro-jects assigned to a specific in-formation systems group.

But good project manage-ment methods and tools arenot enough to guaranteesuccess. To be used effectively,they require strong leadershipand cooperative relationshipsbetween information systemsand end user managers.

Parker worked with A.G.Edwards senior executives toidentify the most importantprojects and to provide all ITmanagers with training toimprove confidence and lead-ership skills. He staged a seriesof quarterly meetings to teachline managers how to workwith budgets, provide vision,

554 Part Four Building and Managing Systems

and express opinions honestly yet diplomatically. He asked project managersreceptive to new ideas to participate in pilot projects using the standard planframework and then promote the methodology among their colleagues. Hemeasured project success rates and published the results in quarterly reports tosenior management.

It would appear that Parker has succeeded. In 2006, A.G. Edwardss projectsuccess rate (measured by the number of projects completed within time andbudget that deliver the expected business value) soared to 88 percent. There areno longer any failed projects that must be written off. By managing its ITprojects more effectively, the company reduced IT and telecom costs from $295million in 2002 to $242 million in 2005.

Sources: Meridith Levinson, When Failure Is Not an Option, CIO Magazine, June 1, 2006;P.M.O. Success Story: A.G. Edwards Case Study, www. elounge.eproject.com, accessed June14, 2006; and www.agedwards.com, accessed June 14, 2006.

One of the principal challenges posed by information systems is ensuringthey can deliver genuine business benefits. There is a very high failurerate among information systems projects because organizations haveincorrectly assessed their business value or because firms have failed tomanage the organizational change surrounding the introduction of newtechnology.

John Parker and his team at A.G. Edwards realized this and took specialpains to prepare managers and employees for the changes brought about bynew systems.

The chapter-opening diagram calls attention to important points raised bythis case and this chapter. A.G. Edwards is in an information-intensive industrywhere it must continually build new systems and enhance existing systems toremain competitive. Its inability to manage its information systems projectsraised operating costs and prevented the company from realizing a good

Chapter 14 Project Management: Establishing the Business Value of Systems and Managing Change 555

HEADS UPDuring your career, you will undoubtedly be asked to work on informationsystems projects to solve an important challenge for your firm. Whether theproject entails building a new information system or enhancing an existingsystem, you will need to know how to measure the business benefits of theseinvestments, and how to make sure that these systems work successfully in yourorganization. The success of your project will depend on how well it is managed.

If your career is in finance and accounting, you will help systems buildersuse financial models to justify investments in information systems projects.

If your career is in human resources, you will be working with employees tohelp them adjust to new job responsibilities, reporting relationships, andother changes associated with new systems.

If your career is in information systems, you will be evaluating the technol-ogy for new system projects and working with project management toolsand software to document and monitor project plans.

If your career is in manufacturing, production or operations management,you will participate in projects to develop or enhance supply chainmanagement systems and enterprise resource planning systems. Thesesystems can provide significant benefits, but they are among the mostdifficult to implement successfully because they require major changes to theorganization as well as new technology.

If your career is in sales and marketing, you will be working on projects todevelop or enhance customer relationship management (CRM) systems.CRM systems provide both tangible and intangible benefits, but arechallenging to implement because they typically require extensive businessprocess change.

return on its IT investments. The company was able to reduce project costs and completion times by using better project management planning andmonitoring methods, project management software tools, and by improving theproject management skills of its managers. Strong management leadership andbetter communication between information systems specialists and end userswere also essential.

14.1 THE IMPORTANCE OF PROJECT MANAGEMENThere is a very high failure rate among information systems projects. In nearly every organization, information systems projects take muchmore time and money to implement than originally anticipated, orthe completed system does not work properly. When an information

system fails to work properly or costs too much to develop, companies may notrealize any benefit from their information system investment, and the systemmay not be able to solve the problems for which it was intended. The develop-ment of a new system must be carefully managed and orchestrated, and theway a project is executed is likely to be the most important factor influencingits outcome (Wallace and Keil, 2004). Thats why its essential to have someknowledge about how to manage information systems projects and about howand why they succeed or fail.

T


RUNAWAY PROJECTS AND SYSTEM FAILUREHow badly are projects managed? On average, private sector projects areunderestimated by one-half in terms of budget and time required to deliverthe complete system promised in the system plan. A very large number ofprojects are delivered with missing functionality (promised for delivery inlater versions). The Standish Group consultancy, which monitors IT projectsuccess rates, found that only 29 percent of all technology investments werecompleted on time, on budget, and with all features and functions originallyspecified (Levinson, 2006). Between 30 and 40 percent of all softwareprojects are runaway projects that far exceed the original schedule andbudget projections and fail to perform as originally specified (Keil, Mann,and Rai, 2000).

As illustrated in Figure 14-1, a systems development project without propermanagement will most likely suffer these consequences:

Costs that greatly exceed budgets

Unexpected time slippage

Technical performance that is less than expected

Failure to obtain anticipated benefits

The systems produced by failed information projects are often not used inthe way they were intended, or they are not used at all. Users often have todevelop parallel manual systems to make these systems work.

The actual design of the system may fail to capture essential businessrequirements or improve organizational performance. Information may not beprovided quickly enough to be helpful; it may be in a format that is impossibleto digest and use; or it may represent the wrong pieces of data.

The way in which nontechnical business users must interact with the systemmay be excessively complicated and discouraging. A system may be designedwith a poor user interface. The user interface is the part of the system withwhich end users interact. For example, an online input form or data entryscreen may be so poorly arranged that no one wants to submit data or requestinformation. System outputs may be displayed in a format that is too difficult tocomprehend (Spier and Morris, 2003).

Web sites may discourage visitors from exploring further if the Web pages arecluttered and poorly arranged, if users cannot easily find the information theyare seeking, or if it takes too long to access and display the Web page on theusers computer.

Additionally, the data in the system may have a high level of inaccuracy or inconsistency. The information in certain fields may be erroneous or

FIGURE 14-1 CONSEQUENCES OF POOR PROJECT MANAGEMENT

Without proper management, a systems development project takes longer to complete and most oftenexceeds the allocated budget. The resulting information system most likely is technically inferior andmay not be able to demonstrate any benefits to the organization. Great ideas for systems oftenflounder on the rocks of implementation.


ambiguous, or it may not be organized properly for business purposes.Information required for a specific business function may be inaccessiblebecause the data are incomplete.

PROJECT MANAGEMENT OBJECTIVES A project is a planned series of related activities for achieving a specificbusiness objective. Information systems projects include the development ofnew information systems, enhancing existing systems, or projects for replacingor upgrading the firms information technology (IT) infrastructure.

Project management refers to the application of knowledge, skills, tools,and techniques to achieve specific targets within specified budget and timeconstraints. Project management activities include planning the work,assessing risk, estimating resources required to accomplish the work, organiz-ing the work, acquiring human and material resources, assigning tasks,directing activities, controlling project execution, reporting progress, andanalyzing the results. As in other areas of business, project management forinformation systems must deal with five major variables: scope, time, cost,quality, and risk.

Scope defines what work is or is not included in a project. For example, thescope of project for a new order processing system might include new modulesfor inputting orders and transmitting them to production and accounting butnot any changes to related accounts receivable, manufacturing, distribution, orinventory control systems. Project management defines all the work requiredto complete a project successfully, and should ensure that the scope of a projectnot expand beyond what was originally intended.

Time is the amount of time required to complete the project. Projectmanagement typically establishes the amount of time required to completemajor components of a project. Each of these components is further brokendown into activities and tasks. Project management tries to determine the timerequired to complete each task and establish a schedule for completing the work.

Cost is based on the time to complete a project multiplied by the cost ofhuman resources required to complete the project. Information systems projectcosts also include the cost of hardware, software, and work space. Project man-agement develops a budget for the project and monitors ongoing projectexpenses.

Quality is an indicator of how well the end result of a project satisfies theobjectives specified by management. The quality of information systemsprojects usually boils down to improved organizational performance anddecision making. Quality also considers the accuracy and timeliness ofinformation produced by the new system and ease of use.

Risk refers to potential problems that would threaten the success of aproject. These potential problems might prevent a project from achieving itsobjectives by increasing time and cost, lowering the quality of projectoutputs, or preventing the project from being completed altogether. Section14.4 describes the most important risk factors for information systems.

14.2 SELECTING PROJECTSCompanies typically are presented with many different projects for solvingproblems and improving performance. There are far more ideas for systemsprojects than there are resources. Firms will need to select from this group the

projects that promise the greatest benefit to the business. Obviously the firmsoverall business strategy should drive project selection.

MANAGEMENT STRUCTURE FOR INFORMATIONSYSTEMS PROJECTSFigure 14-2 shows the elements of a management structure for informationsystems projects in a large corporation. It helps ensure that the most importantsystems projects are given priority.

At the apex of this structure is the corporate strategic planning group and theinformation system steering committee. The corporate strategic planninggroup is responsible for developing the firms strategic plan, which may requirethe development of new systems.

The information systems steering committee is the senior managementgroup with responsibility for systems development and operation. It iscomposed of department heads from both end-user and information systemsareas. The steering committee reviews and approves plans for systems in alldivisions, seeks to coordinate and integrate systems, and occasionally becomesinvolved in selecting specific information systems projects.

The project team is supervised by a project management group composed ofinformation systems managers and end-user managers responsible for oversee-ing several specific information systems projects. The project team is directlyresponsible for the individual systems project. It consists of systems analysts,specialists from the relevant end-user business areas, application programmers,and perhaps database specialists. The mix of skills and the size of the projectteam depend on the specific nature of the system solution.


FIGURE 14-2 MANAGEMENT CONTROL OF SYSTEMS PROJECTS

Each level of management in the hierarchy is responsible for specific aspects of systems projects, andthis structure helps give priority to the most important systems projects for the organization.


LINKING SYSTEMS PROJECTS TO THE BUSINESS PLANIn order to identify the information systems projects that will deliver the mostbusiness value, organizations need to develop an information systems planthat supports their overall business plan and in which strategic systems areincorporated into top-level planning. The plan serves as a road map indicatingthe direction of systems development (the purpose of the plan), the rationale,the current systems/situation, new developments to consider, the managementstrategy, the implementation plan, and the budget (see Table 14-1).

The plan contains a statement of corporate goals and specifies howinformation technology will support the attainment of those goals. The reportshows how general goals will be achieved by specific systems projects. It identifies specific target dates and milestones that can be used later toevaluate the plans progress in terms of how many objectives were actuallyattained in the time frame specified in the plan. The plan indicates the keymanagement decisions concerning hardware acquisition; telecommunica-tions; centralization/decentralization of authority, data, and hardware; andrequired organizational change. Organizational changes are also usuallydescribed, including management and employee training requirements;recruiting efforts; changes in business processes; and changes in authority,structure, or management practice.

In order to plan effectively, firms need to inventory and document all oftheir information system applications and IT infrastructure components. Forprojects in which benefits involve improved decision making, managers shouldtry to identify the decision improvements which would provide the greatestadditional value to the firm. They should then develop a set of metrics toquantify the value of more timely and precise information on the outcome ofthe decision (see Chapter 12 for more detail on this topic).

ENTERPRISE ANALYSIS AND CRITICAL SUCCESSFACTORSTo develop an effective information systems plan, the organization must have aclear understanding of both its long- and short-term information requirements.Two principal methodologies for establishing the essential information require-ments of the organization as a whole are enterprise analysis and critical successfactors.

Enterpr i se Ana lys i s (Bus iness Systems P lann ing)Enterprise analysis (also called business systems planning) argues that thefirms information requirements can be understood only by examining theentire organization in terms of organizational units, functions, processes, anddata elements. Enterprise analysis can help identify the key entities andattributes of the organizations data.

The central method used in the enterprise analysis approach is to take alarge sample of managers and ask them how they use information, where theyget their information, what their objectives are, how they make decisions, andwhat their data needs are. The results of this large survey of managers areaggregated into subunits, functions, processes, and data matrices. Dataelements are organized into logical application groupsgroups of dataelements that support related sets of organizational processes.


TABLE 14-1 INFORMATION SYSTEMS PLAN

1. Purpose of the Plan

Overview of plan contents

Current business organization and future organization

Key business processes

Management strategy

2. Strategic Business Plan Rationale

Current situation

Current business organization

Changing environments

Major goals of the business plan

Firms strategic plan

3. Current Systems

Major systems supporting business functions and processes

Current infrastructure capabilities

Hardware

Software

Database

Telecommunications and Internet

Difficulties meeting business requirements

Anticipated future demands

4. New Developments

New system projects

Project descriptions

Business rationale

Applications role in strategy

New infrastructure capabilities required

Hardware

Software

Database

Telecommunications and Internet

5. Management Strategy

Acquisition plans

Milestones and timing

Organizational realignment

Internal reorganization

Management controls

Major training initiatives

Personnel strategy

6. Implementation Plan

Anticipated difficulties in implementation

Progress reports

7. Budget Requirements

Requirements

Potential savings

Financing

Acquisition cycle


Figure 14-3 is an output of enterprise analysis conducted by the SocialSecurity Administration as part of a massive systems redevelopment effort. It shows what information is required to support a particular process, whichprocesses create the data, and which use them. The shaded boxes in the figureindicate a logical application group. In this case, actuarial estimates, agencyplans, and budget data are created in the planning process, suggesting that aninformation system should be built to support planning.

The weakness of enterprise analysis is that it produces an enormous amountof data that is expensive to collect and difficult to analyze. The questionsfrequently focus not on managements critical objectives and where informationis needed but rather on what existing information is used. The result is atendency to automate whatever exists rather than developing entirely newapproaches to conducting business.

FIGURE 14-3 PROCESS/DATA CLASS MATRIX

This chart depicts which data classes are required to support particular organizational processes and which processes are the creators andusers of data.


Cr i t ica l Success FactorsThe strategic analysis, or critical success factors, approach argues that anorganizations information requirements are determined by a small number ofcritical success factors (CSFs) of managers. If these goals can be attained,success of the firm or organization is assured (Rockart, 1979). CSFs are shapedby the industry, the firm, the manager, and the broader environment. Forexample, CSFs for the automobile industry might include styling, quality, andcost to meet the goals of increasing market share and raising profits. Newinformation systems should focus on providing information that helps the firmmeet these goals.

The principal method used in CSF analysis is personal interviewsthree orfourwith a number of top managers identifying their goals and the resultingCSFs. These personal CSFs are aggregated to develop a picture of the firmsCSFs. Then systems are built to deliver information on these CSFs. (For themethod of developing CSFs in an organization, see Figure 14-4.)

The strength of the CSF method is that it produces less data to analyze thandoes enterprise analysis. Only top managers are interviewed, and the questionsfocus on a small number of CSFs rather than requiring a broad inquiry intowhat information is used in the organization. It is especially suitable for topmanagement and for the development of decision-support systems (DSSs) andexecutive support systems (ESSs). Unlike enterprise analysis, the CSF methodfocuses organizational attention on how information should be handled.

The methods primary weakness is that there is no particularly rigorous wayin which individual CSFs can be aggregated into a clear company pattern. In addition, interviewees (and interviewers) often become confused when

FIGURE 14-4 USING CSFs TO DEVELOP SYSTEMS

The CSF approach relies on interviews with key managers to identify their CSFs. Individual CSFs areaggregated to develop CSFs for the entire firm. Systems can then be built to deliver information onthese CSFs.


distinguishing between individual and organizational CSFs. These types of CSFsare not necessarily the same. What may be considered critical to a managermay not be important for the organization as a whole. This method is clearlybiased toward top managers, although it could be extended to elicit ideas forpromising new systems from lower-level members of the organization (Peffersand Gengler, 2003).

PORTFOLIO ANALYSISOnce strategic analyses have determined the overall direction of systemsdevelopment, portfolio analysis can be used to evaluate alternative systemprojects. Portfolio analysis inventories all of the organizations informationsystems projects and assets, including infrastructure, outsourcing contracts, andlicenses. This portfolio of information systems investments can be described ashaving a certain profile of risk and benefit to the firm (see Figure 14-5) similar toa financial portfolio.

Each information systems project carries its own set of risks and benefits.(Section 14.4 describes the factors that increase the risks of systems projects.)Firms would try to improve the return on their portfolios of IT assets bybalancing the risk and return from their systems investments. Although thereis no ideal profile for all firms, information-intensive industries (e.g., finance)should have a few high-risk, high-benefit projects to ensure that they staycurrent with technology. Firms in non-information-intensive industries shouldfocus on high-benefit, low-risk projects.

Most desirable, of course, are systems with high benefit and low risk. Thesepromise early returns and low risks. Second, high-benefit, high-risk systemsshould be examined; low-benefit, high-risk systems should be totally avoided;and low-benefit, low-risk systems should be reexamined for the possibility ofrebuilding and replacing them with more desirable systems having higherbenefits. By using portfolio analysis, management can determine the optimalmix of investment risk and reward for their firms, balancing riskier high-rewardprojects with safer lower-reward ones. Firms where portfolio analysis is alignedwith business strategy have been found to have a superior return on their ITassets, better alignment of information technology investments with businessobjectives, and better organization-wide coordination of IT investments(Jeffrey and Leliveld, 2004).

FIGURE 14-5 A SYSTEM PORTFOLIO

Companies should examine their portfolio of projects in terms of potential benefits and likely risks.Certain kinds of projects should be avoided altogether and others developed rapidly. There is no idealmix. Companies in different industries have different profiles.


SCORING MODELSA scoring model is useful for selecting projects where many criteria must beconsidered. It assigns weights to various features of a system and thencalculates the weighted totals. Using Table 14-2, the firm must decide amongtwo alternative enterprise resource planning (ERP) systems. The first columnlists the criteria that decision makers will use to evaluate the systems. Thesecriteria are usually the result of lengthy discussions among the decision-mak-ing group. Often the most important outcome of a scoring model is not thescore but agreement on the criteria used to judge a system.

Table 14-2 shows that this particular company attaches the most importanceto capabilities for sales order processing, inventory management, and ware-housing. The second column in Table 14-2 lists the weights that decision mak-ers attached to the decision criteria. Columns 3 and 5 show the percentage ofrequirements for each function that each alternative ERP system can provide.Each vendors score can be calculated by multiplying the percentage of require-ments met for each function by the weight attached to that function. ERPSystem B has the highest total score.

As with all objective techniques, there are many qualitative judgmentsinvolved in using the scoring model. This model requires experts whounderstand the issues and the technology. It is appropriate to cycle through the

TABLE 14-2 EXAMPLE OF A SCORING MODEL FOR AN ERP SYSTEM

ERP ERP ERP ERP SYSTEM A SYSTEM A SYSTEM B SYSTEM B

CRITERIA WEIGHT % SCORE % SCORE

1.0 Order Processing

1.1 Online order entry 4 67 268 73 292

1.2 Online pricing 4 81 324 87 348

1.3 Inventory check 4 72 288 81 324

1.4 Customer credit check 3 66 198 59 177

1.5 Invoicing 4 73 292 82 328

Total Order Processing 1,370 1,469

2.0 Inventory Management

2.1 Production forecasting 3 72 216 76 228

2.2 Production planning 4 79 316 81 324

2.3 Inventory control 4 68 272 80 320

2.4 Reports 3 71 213 69 207

Total Inventory Management 1,017 1,079

3.0 Warehousing

3.1 Receiving 2 71 142 75 150

3.2 Picking/packing 3 77 231 82 246

3.3 Shipping 4 92 368 89 356

Total Warehousing 741 752

Grand Total 3,128 3,300


scoring model several times, changing the criteria and weights, to see howsensitive the outcome is to reasonable changes in criteria. Scoring models areused most commonly to confirm, to rationalize, and to support decisions, ratherthan as the final arbiters of system selection.

14.3 ESTABLISHING THE BUSINESS VALUE OFINFORMATION SYSTEMS

Even if a system project supports a firms strategic goals and meets userinformation requirements, it needs to be a good investment for the firm. The value of systems from a financial perspective essentially revolves aroundthe issue of return on invested capital. Does a particular information systeminvestment produce sufficient returns to justify its costs?

INFORMATION SYSTEM COSTS AND BENEFITSTable 14-3 lists some of the more common costs and benefits of systems.Tangible benefits can be quantified and assigned a monetary value. Intangiblebenefits, such as more efficient customer service or enhanced decision making,cannot be immediately quantified but may lead to quantifiable gains in the longrun. Transaction and clerical systems that displace labor and save space alwaysproduce more measurable, tangible benefits than management informationsystems, decision-support systems, and computer-supported collaborative worksystems.

Chapter 5 introduced the concept of total cost of ownership (TCO), which isdesigned to identify and measure the components of information technologyexpenditures beyond the initial cost of purchasing and installing hardware andsoftware. However, TCO analysis provides only part of the information neededto evaluate an information technology investment because it does not typicallydeal with benefits, cost categories such as complexity costs, and soft andstrategic factors discussed later in this section.

CAPITAL BUDGETING FOR INFORMATION SYSTEMSCapital budgeting models are one of several techniques used to measurethe value of investing in long-term capital investment projects. Firms invest in capital projects to expand production to meet anticipated demandor to modernize production equipment to reduce costs. Firms also invest in capital projects for many noneconomic reasons, such as installingpollution control equipment, converting to a human resources database tomeet some government regulations, or satisfying nonmarket publicdemands. Information systems are considered long-term capital investmentprojects.

The principal capital budgeting models for evaluating information technologyprojects are:

The payback method

The accounting rate of return on investment (ROI)

The net present value

The internal rate of return (IRR)

Capital budgeting methods rely on measures of cash flows into and out ofthe firm. Capital projects generate cash flows into and out of the firm. The investment cost for information systems projects is an immediate cash outflow caused by expenditures for hardware, software, and labor. In subsequent years, the investment may cause additional cash outflowsthat will be balanced by cash inflows resulting from the investment. Cashinflows take the form of increased sales of more products (for reasons suchas new products, higher quality, or increasing market share) or reducedcosts in production and operations. The difference between cash outflowsand cash inflows is used for calculating the financial worth of aninvestment. Once the cash flows have been established, several alternativemethods are available for comparing different projects and deciding aboutthe investment.


TABLE 14-3 COSTS AND BENEFITS OF INFORMATION SYSTEMS

COSTS

Hardware

Telecommunications

Software

Services

Personnel

TANGIBLE BENEFITS (COST SAVINGS)

Increased productivity

Lower operational costs

Reduced workforce

Lower computer expenses

Lower outside vendor costs

Lower clerical and professional costs

Reduced rate of growth in expenses

Reduced facility costs

INTANGIBLE BENEFITS

Improved asset utilization

Improved resource control

Improved organizational planning

Increased organizational flexibility

More timely information

More information

Increased organizational learning

Legal requirements attained

Enhanced employee goodwill

Increased job satisfaction

Improved decision making

Improved operations

Higher client satisfaction

Better corporate image


CASE EXAMPLE: CAPITAL BUDGETING FOR A NEWSUPPLY CHAIN MANAGEMENT SYSTEMLets look at how financial models would work in a real-world businessscenario. Heartland Stores is a general merchandise retail chain operating ineight Midwestern states. It has 5 regional distribution centers, 377 stores, andabout 14,000 different products stocked in each store. The company is consid-ering investing in new software and hardware modules to upgrade its existingsupply chain management system to help it better manage the purchase andmovement of goods from its suppliers to its retail outlets. Too many items inHeartlands stores are out of stock, even though many of these products are inthe companys distribution center warehouses.

Management believes that the new system would help Heartland Storesreduce the amount of items that it must stock in inventory, and thus itsinventory costs, because it would be able to track precisely the status oforders and the flow of items in and out of its distribution centers. The newsystem would reduce Heartlands labor costs because the company would notneed so many people to manage inventory or to track shipments of goodsfrom suppliers to distribution centers and from distribution centers to retailoutlets. Telecommunications costs would be reduced because customerservice representatives and shipping and receiving staff would not have tospend so much time on the telephone tracking shipments and orders.Heartland Stores expects the system to reduce transportation costs byproviding information to help it consolidate shipments to retail stores and tocreate more efficient shipping schedules. If the new system project isapproved, implementation would commence in January 2007 and the newsystem would become operational in early January 2008.

The solution builds the existing IT infrastructure at the Heartland Stores butrequires the purchase of additional server computers, PCs, database software,and networking technology, along with new supply chain planning andexecution software. The solution also calls for new radio-frequency identifica-tion technology to track items more easily as they move from suppliers todistribution centers to retail outlets.

Figure 14-6 shows the estimated costs and benefits of the system. The systemhad an actual investment cost of $11,467,350 in the first year (year 0) and a totalcost over six years of $19,017,350. The estimated benefits total $32,500,000 aftersix years. Was the investment worthwhile? If so, in what sense? Financialmodels to evaluate the investment are depicted in Figure 14-7.

The Payback MethodThe payback method is quite simple: It is a measure of the time required topay back the initial investment of a project. The payback period is computed asfollows:

Original investment= Number of years to pay back

Annual net cash inflow

In the case of Heartland Stores, it will take more than two years to pay backthe initial investment. (Because cash flows are uneven, annual cash inflows aresummed until they equal the original investment to arrive at this number.) Thepayback method is a popular method because of its simplicity and power as aninitial screening method. It is especially good for high-risk projects in which theuseful life of a project is difficult to determine. If a project pays for itself in twoyears, then it matters less how long after two years the system lasts.


The weakness of this measure is its virtue: The method ignores the timevalue of money, the amount of cash flow after the payback period, the disposalvalue (usually zero with computer systems), and the profitability of theinvestment.

Account ing Rate of Return on Investment (ROI) Firms make capital investments to earn a satisfactory rate of return.Determining a satisfactory rate of return depends on the cost of borrowing

FIGURE 14-6 COSTS AND BENEFITS OF THE NEW SUPPLY CHAIN MANAGEMENT SYSTEM

This spreadsheet analyzes the basic costs and benefits of implementing supply chain management system enhancements for a midsize midwestern U.S. retailer. The costs for hardware, telecommunications, software, services, and personnel are analyzed over a six-year period.


money, but other factors can enter into the equation. Such factors include thehistoric rates of return expected by the firm. In the long run, the desired rate ofreturn must equal or exceed the cost of capital in the marketplace. Otherwise,no one will lend the firm money.

The accounting rate of return on investment (ROI) calculates the rate ofreturn from an investment by adjusting the cash inflows produced by theinvestment for depreciation. It gives an approximation of the accountingincome earned by the project.

To find the ROI, first calculate the average net benefit. The formula for theaverage net benefit is as follows:

(Total benefits Total cost Depreciation) = Net benefit

Useful life

This net benefit is divided by the total initial investment to arrive at ROI. Theformula is as follows:

Net benefit = ROI

Total initial investment

In the case of Heartland Stores, the average rate of return on the investmentis 2.93 percent.

FIGURE 14-7 FINANCIAL MODELS

To determine the financial basis for an information systems project, a series of financial models helps determine the return on investedcapital. These calculations include the payback period, the accounting rate of return on investment (ROI), the net present value, and theinternal rate of return (IRR).


The weakness of ROI is that it can ignore the time value of money. Futuresavings are simply not worth as much in todays dollars as are current savings.However, ROI can be modified (and usually is) so that future benefits and costsare calculated in todays dollars. (The present value function on mostspreadsheets can perform this conversion.)

Net Present Va lueEvaluating a capital project requires that the cost of an investment (a cashoutflow usually in year 0) be compared with the net cash inflows that occurmany years later. But these two kinds of cash flows are not directly comparablebecause of the time value of money. Money you have been promised to receivethree, four, and five years from now is not worth as much as money receivedtoday. Money received in the future has to be discounted by some appropriatepercentage rateusually the prevailing interest rate, or sometimes the cost ofcapital. Present value is the value in current dollars of a payment or stream of payments to be received in the future. It can be calculated by using thefollowing formula:

1 (1 + 1 interest)n = Present valuePayment xInterest

Thus, to compare the investment (made in todays dollars) with futuresavings or earnings, you need to discount the earnings to their present valueand then calculate the net present value of the investment. The net presentvalue is the amount of money an investment is worth, taking into account itscost, earnings, and the time value of money. The formula for net present valueis this:

Present value of expected cash flows Initial investment cost = Net presentvalue

In the case of Heartland Stores, the present value of the stream of benefits is$21,625,709, and the cost (in todays dollars) is $11,467,350, giving a net presentvalue of $10,158,359. In other words, for a $21 million investment today, thefirm will receive more than $10 million. This is a fairly good rate of return onan investment.

Interna l Rate of Return ( IRR)Internal rate of return (IRR) is defined as the rate of return or profit that aninvestment is expected to earn, taking into account the time value of money.IRR is the discount (interest) rate that will equate the present value of theprojects future cash flows to the initial cost of the project (defined here asnegative cash flow in year 0 of $11,467,350). In other words, the value of R (discount rate) is such that Present value Initial cost = 0. In the case ofHeartland Stores, the IRR is 33 percent.

Resu l t s o f the Cap i ta l Budget ing Ana lys i sUsing methods that take into account the time value of money, the HeartlandStores project is cash-flow positive over the time period under considerationand returns more benefits than it costs. Against this analysis, you might askwhat other investments would be better from an efficiency and effectivenessstandpoint and if all the benefits have been calculated.


REAL OPTIONS PRICING MODELSSome information systems projects are highly uncertain, especially invest-ments in IT infrastructure. Their future revenue streams are unclear and theirup-front costs are high. Suppose, for instance, that a firm is considering a $20million investment to upgrade its information technology infrastructureitshardware, software, data management tools, and networking technology. If thisupgraded infrastructure were available, the organization would have the tech-nology capabilities to respond more easily to future problems and opportuni-ties. Although the costs of this investment can be calculated, not all of the ben-efits of making this investment can be established in advance. But if the firmwaits a few years until the revenue potential becomes more obvious, it mightbe too late to make the infrastructure investment. In such cases, managersmight benefit from using real options pricing models to evaluate informationtechnology investments.

Real options pricing models (ROPMs) use the concept of options valua-tion borrowed from the financial industry. An option is essentially the right,but not the obligation, to act at some future date. A typical call option, forinstance, is a financial option in which a person buys the right (but not theobligation) to purchase an underlying asset (usually a stock) at a fixed price(strike price) on or before a given date.

For instance, on June 5, 2006, for $8.70 you could purchase the right (a calloption) maturing in January 2008 to buy a share of Procter & Gamble (P&G)common stock for $50 per share. If, by the end of January 2008, the price ofP&G stock did not rise above $50 per share, you would not exercise the option,and the value of the option would fall to zero on the strike date. If, however, theprice of Procter & Gamble common stock rose to, say, $100 per share, you couldpurchase the stock for the strike price of $50 and retain the profit of $50 pershare minus the cost of the option. (Because the option is sold as a 100-sharecontract, the cost of the contract would be 100 $8.70 before commissions, or$870, and you would be purchasing and obtaining a profit from 100 shares ofProcter & Gamble.) The stock option enables the owner to benefit from theupside potential of an opportunity while limiting the downside risk.

ROPMs value information systems projects similar to stock options, wherean initial expenditure on technology creates the right, but not the obligation, toobtain the benefits associated with further development and deployment of thetechnology as long as management as the freedom to cancel, defer, restart, orexpand the project. ROPMs give managers the flexibility to stage their ITinvestment or test the waters with small pilot projects or prototypes to gainmore knowledge about the risks of a project before investing in the entireimplementation. The disadvantages of this model are primarily in estimatingall the key variables affecting option value, including anticipated cash flowsfrom the underlying asset and changes in the cost of implementation. Modelsfor determining option value of information technology platforms are beingdeveloped (Fichman, 2004; McGrath and MacMillan, 2000).

LIMITATIONS OF FINANCIAL MODELSThe traditional focus on the financial and technical aspects of an informationsystem tends to overlook the social and organizational dimensions of informa-tion systems that may affect the true costs and benefits of the investment.Many companies information systems investment decisions do not adequatelyconsider costs from organizational disruptions created by a new system, such


as the cost to train end users, the impact that users learning curves for a newsystem have on productivity, or the time managers need to spend overseeingnew system-related changes. Benefits, such as more timely decisions from anew system or enhanced employee learning and expertise, may also be over-looked in a traditional financial analysis (Ryan, Harrison, and Schkade, 2002).

14.4 MANAGING PROJECT RISKWe have already introduced the topic of information system risks and riskassessment in Chapter 8. In this chapter, we describe the specific risks toinformation systems projects and show what can be done to manage themeffectively.

DIMENSIONS OF PROJECT RISKSystems differ dramatically in their size, scope, level of complexity, andorganizational and technical components. Some systems development projectsare more likely to create the problems we have described earlier or to sufferdelays because they carry a much higher level of risk than others. The level ofproject risk is influenced by project size, project structure, and the level oftechnical expertise of the information systems staff and project team.

Project size. The larger the projectas indicated by the dollars spent, the sizeof the implementation staff, the time allocated for implementation, and thenumber of organizational units affectedthe greater the risk. Very large-scale systems projects have a failure rate that is 50 to 75 percent higher thanthat for other projects because such projects are complex and difficult tocontrol. The organizational complexity of the systemhow many units andgroups use it and how much it influences business processescontribute tothe complexity of large-scale systems projects just as much as technicalcharacteristics, such as the number of lines of program code, length ofproject, and budget (Xia and Lee, 2004; Concours Group, 2000; Laudon,1989). In addition, there are few reliable techniques for estimating the timeand cost to develop large-scale information systems.

Project structure. Some projects are more highly structured than others. Theirrequirements are clear and straightforward so outputs and processes can beeasily defined. Users know exactly what they want and what the systemshould do; there is almost no possibility of the users changing their minds.Such projects run a much lower risk than those with relatively undefined,fluid, and constantly changing requirements; with outputs that cannot befixed easily because they are subject to users changing ideas; or with userswho cannot agree on what they want.

Experience with technology. The project risk rises if the project team and theinformation system staff lack the required technical expertise. If the team isunfamiliar with the hardware, system software, application software, ordatabase management system proposed for the project, it is highly likely thatthe project will experience technical problems or take more time to completebecause of the need to master new skills.

Although the difficulty of the technology is one risk factor in informationsystems projects, the other factors are primarily organizational, dealing withthe complexity of information requirements, the scope of the project, and howmany parts of the organization will be affected by a new information system.


CHANGE MANAGEMENT AND THE CONCEPT OFIMPLEMENTATIONThe introduction or alteration of an information system has a powerfulbehavioral and organizational impact. Changes in the way that information isdefined, accessed, and used to manage the organizations resources often leadto new distributions of authority and power. This internal organizationalchange breeds resistance and opposition and can lead to the demise of anotherwise good system.

A very large percentage of information systems projects stumble because theprocess of organizational change surrounding system building was not properlyaddressed. Successful system building requires careful change management.

The Concept o f Implementat ionTo manage the organizational change surrounding the introduction of a newinformation system effectively, you must examine the process of implementa-tion. Implementation refers to all organizational activities working toward theadoption, management, and routinization of an innovation, such as a newinformation system. In the implementation process, the systems analyst is achange agent. The analyst not only develops technical solutions but alsoredefines the configurations, interactions, job activities, and power relationshipsof various organizational groups. The analyst is the catalyst for the entire changeprocess and is responsible for ensuring that all parties involved accept thechanges created by a new system. The change agent communicates with users,mediates between competing interest groups, and ensures that the organ-izational adjustment to such changes is complete.

The Ro le o f End UsersSystem implementation generally benefits from high levels of user involve-ment and management support. User participation in the design and operationof information systems has several positive results. First, if users are heavilyinvolved in systems design, they have more opportunities to mold the systemaccording to their priorities and business requirements, and more opportuni-ties to control the outcome. Second, they are more likely to react positively tothe completed system because they have been active participants in the changeprocess. Incorporating user knowledge and expertise leads to better solutions.

The relationship between users and information systems specialists hastraditionally been a problem area for information systems implementationefforts. Users and information systems specialists tend to have differentbackgrounds, interests, and priorities. This is referred to as the user-designercommunications gap. These differences lead to divergent organizationalloyalties, approaches to problem solving, and vocabularies.

Information systems specialists, for example, often have a highly technical,or machine, orientation to problem solving. They look for elegant andsophisticated technical solutions in which hardware and software efficiency isoptimized at the expense of ease of use or organizational effectiveness. Usersprefer systems that are oriented toward solving business problems orfacilitating organizational tasks. Often the orientations of both groups are so atodds that they appear to speak in different tongues.

These differences are illustrated in Table 14-4 which depicts the typicalconcerns of end users and technical specialists (information systems designers)regarding the development of a new information system. Communicationproblems between end users and designers are a major reason why user


requirements are not properly incorporated into information systems and whyusers are driven out of the implementation process.

Systems development projects run a very high risk of failure when there is apronounced gap between users and technical specialists and when these groupscontinue to pursue different goals. Under such conditions, users are oftendriven out of the implementation process. Because they cannot comprehendwhat the technicians are saying, users conclude that the entire project is bestleft in the hands of the information specialists alone.

Management Support and CommitmentIf an information systems project has the backing and commitment of manage-ment at various levels, it is more likely to be perceived positively by both usersand the technical information services staff. Both groups will believe that theirparticipation in the development process will receive higher-level attentionand priority. They will be recognized and rewarded for the time and effort theydevote to implementation. Management backing also ensures that a systemsproject receives sufficient funding and resources to be successful. Furthermore,to be enforced effectively, all the changes in work habits and procedures andany organizational realignments associated with a new system depend onmanagement backing. If a manager considers a new system a priority, thesystem will more likely be treated that way by his or her subordinates.

Change Management Cha l lenges for Bus iness ProcessReeng ineer ing, Enterpr i se App l icat ions , and Mergersand Acqu is i t ionsGiven the challenges of innovation and implementation, it is not surprising tofind a very high failure rate among enterprise application and business processreengineering (BPR) projects, which typically require extensive organizationalchange and which may require replacing old technologies and legacy systemsthat are deeply rooted in many interrelated business processes. A number ofstudies have indicated that 70 percent of all business process reengineeringprojects fail to deliver promised benefits. Likewise, a high percentage ofenterprise applications fail to be fully implemented or to meet the goals of theirusers even after three years of work.

Many enterprise application and reengineering projects have been under-mined by poor implementation and change management practices that failedto address employees concerns about change. Dealing with fear and anxietythroughout the organization; overcoming resistance by key managers; changingjob functions, career paths, and recruitment practices; and training have posedgreater threats to reengineering than the difficulties companies facedvisualizing and designing breakthrough changes to business processes. All of

TABLE 14-4 THE USER-DESIGNER COMMUNICATIONS GAP

USER CONCERNS DESIGNER CONCERNS

Will the system deliver the information I need for my work? How much disk storage space will the master file consume?How quickly can I access the data? How many lines of program code will it take to perform this

function?

How easily can I retrieve the data? How can we cut down on CPU time when we run the system?

How much clerical support will I need to enter data into the system? What is the most efficient way of storing these data?

How will the operation of the system fit into my daily business schedule? What database management system should we use?


the enterprise applications require tighter coordination among differentfunctional groups as well as extensive business process change (see Chapter 9).

Projects related to mergers and acquisitions have a similar failure rate.Mergers and acquisitions are deeply affected by the organizationalcharacteristics of the merging companies as well as by their IT infrastructures.Combining the information systems of two different companies usuallyrequires considerable organizational change and complex systems projects tomanage. If the integration is not properly managed, firms can emerge with atangled hodgepodge of inherited legacy systems built by aggregating the sys-tems of one firm after another. Without a successful systems integration, thebenefits anticipated from the merger cannot be realized, or, worse, the mergedentity cannot execute its business processes and loses customers. TheInteractive Session on Management on explores this topic.

CONTROLLING RISK FACTORSVarious project management, requirements gathering, and planning method-ologies have been developed for specific categories of implementation prob-lems. Strategies have also been devised for ensuring that users play appropriateroles throughout the implementation period and for managing the organiza-tional change process. Not all aspects of the implementation process can be eas-ily controlled or planned. However, anticipating potential implementationproblems and applying appropriate corrective strategies can increase thechances for system project success.

The first step in managing project risk involves identifying the nature andlevel of risk confronting the project (Schmidt, Lyytinen, Keil, and Cule, 2001).Implementers can then handle each project with the tools and risk-manage-ment approaches geared to its level of risk (Iversen, Mathiassen, and Nielsen,2004; Barki, Rivard, and Talbot, 2001; McFarlan, 1981).

Managing Techn ica l Complex i tyProjects with challenging and complex technology to master benefit frominternal integration tools. The success of such projects depends on how welltheir technical complexity can be managed. Project leaders need both heavytechnical and administrative experience. They must be able to anticipateproblems and develop smooth working relationships among a predominantlytechnical team. The team should be under the leadership of a manager with astrong technical and project management background and team membersshould be highly experienced. Team meetings should take place frequently.Essential technical skills or expertise not available internally should be securedfrom outside the organization.

Formal P lann ing and Contro l Too l sLarge projects benefit from appropriate use of formal planning tools andformal control tools for documenting and monitoring project plans. The twomost commonly used methods for documenting project plans are Gantt chartsand PERT charts. A Gantt chart lists project activities and their correspondingstart and completion dates. The Gantt chart visually represents the timing andduration of different tasks in a development project as well as their humanresource requirements (see Figure 14-8). It shows each task as a horizontal barwhose length is proportional to the time required to complete it.

I N T E R A C T I V E S E S S I O N : M A N A G E M E N T

In 2005, there were 7,736 mergers and acquisitionsin the United States, and the average value of M&Ashas risen to a record $385.6 million in the first half of2006. Due diligence is the concept used to describewhat acquirers should perform before they make anacquisition. Technically, for public firms, due dili-gence is a legal requirement of senior managementto ensure the financial and business statements offirms they are acquiring are accurate and complete.

In the past, acquiring firms have lost a great deal ofmoney by ignoring a very important element of theacquired firms business, namely, its informationsystems. Because M&As are typically entered into forfinancial reasons (greater market share, elimination ofcompetitors, greater efficiency and profitability), andare led by financial managers, it is understandablethat sizing up the target companys IT infrastructure islast on the list of due diligence activities.

But there is a price to pay for ignoring the IT/ISelement in mergers. When Wells Fargo purchasedits rival First Interstate, it created an IT nightmare.Wells Fargo closed down the First Interstatebranches and ATMs, costing the bank over $100million as 20 percent of First Interstate customersclosed their accounts.

There are a number of systems-related risks inM&As. The target company may have stoppedspending on maintenance years ago to decrease costsand increase profits. It may have fallen behindcompetitors in new applications. Its software licensesmay not be transferable to the new company withoutsignificant new fees. The infrastructure may beoutdated. The target companys systems may betotally incompatible with the acquirers systems. One important reason Logicalis, an IT integrationand consulting company, backed off acquiring avalue-added reseller was that the companys CRMsystem was incompatible with its own.

So how do companies perform due diligence inthe information systems area? What are somemanagement tactics for dealing with the merger oftwo or more very different IT infrastructures? Thefirst step is to classify the assets your firm is aboutto acquire, create an inventory of these assets, andestablish the value of these systems to the newlymerged firm. For instance, you could divide thetarget firms IT assets into four categories:

MANAGING IT IN THE MERGER AND ACQUISITION GAME

transactional systems that perform the basictransactions of the firm; informational systems thatinform management about the state of operations;strategic systems that differentiate the firm in themarketplace; and basic infrastructure that includesboth the hardware and software installed, as well asthe services provided by the IS group to thebusiness.

Once you have created an inventory of the targetfirms IT assets, you will need to value their potentialcontribution to the new firm. There are four options:keep the target company systems if they are betterthan your own; keep your own systems and retirethe target company systems if yours are better;choose the best of both companies systems; or usethe M&A to build an entirely new infrastructure.

In general, firms rarely decided to build a newinfrastructure completely. Most commonly, theacquiring firms shut down systems of the acquiredcompany and extend the reach of their own systems.Target firms are usually smaller and less capitalizedthan acquiring firms and have systems that lagbehind those of the acquiring firm. Moreover, thefinancial rationale for many mergers is scaleeconomies. The argument is that the existing IT/ISinfrastructure of the acquiring firm can be expandedwith minimal cost, while the merged companies rev-enues will increase many fold. The same fixed costsin infrastructure will be able to support a muchlarger and more profitable business.

But the evidence that managers at acquiringfirms really understand the risks of mergers andacquisitions is not encouraging. Studies of M&Aactivity over the past 75 years show that about 60percent actually destroy shareholder value andresult in falling stock prices for the acquiring com-pany. The reasons are that the acquiring firm over-values the assets of the target firm and systemati-cally underestimate the risks of the acquisition,especially the costs of merging the operationalactivities and information system infrastructures oftwo firms.

Sources: Eric Chabrow, IT Plays Linchpin Role in High-StakesM&As, Information Week, June 26, 2006; Spencer Mcllmurray,M&A Survival Kit: Relearning Enterprise Addition andSubtraction, CIO Magazine, October 24, 2006; Nick Moore, The New Role of the CIO in M&A Due Diligence, SoftwareMag.com, July, 2006.



C A S E S T U DY Q U E S T I O N S

1. What are some of the risks involved when onefirm acquires another firms IT infrastructure?

2. Why do firms often fail to take the target firmsinformation systems and IT infrastructure intoaccount when purchasing other firms?

3. How would you go about assessing the value ofanother firms IT infrastructure and operationalcapabilities? What questions would you ask?

1. Bain and Company is one of the premierebusiness consulting firms specializing in adviceabout mergers and acquisitions. Visitwww.Bain.com and explore the advice on how toconduct a successful merger by clicking on theConsulting Expertise tab, and then selectingMergers & Acquisitions. Read this page, thenclick on Deals Done Right. Why does Bain advisemanagers to stay close to their core business?Why might this advice ease the change ininformation systems infrastructure when mergerstake place? What does Bain recommend aboutintegration of the business and how would thisaffect IS/IT decisions?

2. On the Web, explore the IT/IS integration issuesraised by one of these mega mergers of the pastfew years: Proctor & Gamble/Gillette;UJF/Mitsubishi Tokyo Financial,HEXAL/Novartis, or Kellog/Keebler. You canexplore these mergers using Google searches suchas Kellogg Keebler merger.

M I S I N A C T I O N

This project team of professionalsis using computing tools toenhance communication,analysis, and decision making.


FIGURE 14-8 A GANTT CHART

The Gantt chart in this figure shows the task, person-days, and initials of each responsible person, as well as the start and finish dates foreach task. The resource summary provides a manager with the total person-days for each month and for each person working on the pro-ject to manage the project successfully. The project described here is a data administration project.


Although Gantt charts show when project activities begin and end, they dontdepict task dependencies, how one task is affected if another is behind schedule,or how tasks should be ordered. That is where PERT charts are useful. PERTstands for Program Evaluation and Review Technique, a methodology developedby the U.S. Navy during the 1950s to manage the Polaris submarine missileprogram. A PERT chart graphically depicts project tasks and their interrelation-ships. The PERT chart lists the specific activities that make up a project and theactivities that must be completed before a specific activity can start, asillustrated in Figure 14-9.

The PERT chart portrays a project as a network diagram consisting ofnumbered nodes (either circles or rectangles) representing project tasks. Each node is numbered and shows the task, its duration, the starting date, andthe completion date. The direction of the arrows on the lines indicates thesequence of tasks and shows which activities must be completed before thecommencement of another activity. In Figure 14-9, the tasks in nodes 2, 3, and4 are not dependent on each other and can be undertaken simultaneously, buteach is dependent on completion of the first task. PERT charts for complexprojects can be difficult to interpret, and project managers often use bothtechniques.

These project management techniques can help managers identifybottlenecks and determine the impact that problems will have on projectcompletion times. They can also help systems developers partition projects

FIGURE 14-9 A PERT CHART

This is a simplified PERT chart for creating a small Web site. It shows the ordering of project tasks and the relationship of a task withpreceding and succeeding tasks.


into smaller, more manageable segments with defined, measurable businessresults. Standard control techniques can successfully chart the progress of theproject against budgets and target dates, so deviations from the plan can bespotted.

Increas ing User Invo lvement and Overcoming UserRes i s tanceProjects with relatively little structure and many undefined requirements mustinvolve users fully at all stages. Users must be mobilized to support one of manypossible design options and to remain committed to a single design. Externalintegration tools consist of ways to link the work of the implementation team tousers at all organizational levels. For instance, users can become active membersof the project team, take on leadership roles, and take charge of installation andtraining. The implementation team can demonstrate its responsiveness to users,promptly answering questions, incorporating user feedback, and showing theirwillingness to help (Gefen and Ridings, 2002).

Participation in implementation activities may not be enough to overcomethe problem of user resistance to organizational change. Different users may beaffected by the system in different ways. Whereas some users may welcome anew system because it brings changes they perceive as beneficial to them,others may resist these changes because they believe the shifts are detrimentalto their interests.

If the use of a system is voluntary, users may choose to avoid it; if use ismandatory, resistance will take the form of increased error rates, disruptions,turnover, and even sabotage. Therefore, the implementation strategy must notonly encourage user participation and involvement, but it must also addressthe issue of counterimplementation (Keen, 1981). Counterimplementation isa deliberate strategy to thwart the implementation of an information system oran innovation in an organization.

Strategies to overcome user resistance include user participation (to elicitcommitment as well as to improve design), user education and training,management edicts and policies, and better incentives for users who cooperate.The new system can be made more user friendly by improving the end-userinterface. Users will be more cooperative if organizational problems are solvedprior to introducing the new system.

The Interactive Session on Organizations illustrates how one company usedthese techniques to build user support for a new customer relationshipmanagement system (CRM). CRM system projects often encounter userresistance because they typically require marketing and sales staff to shareinformation and change the way they work.

DESIGNING FOR THE ORGANIZATIONBecause the purpose of a new system is to improve the organizationsperformance, information systems projects must explicitly address the waysin which the organization will change when the new system is installed,including installation of intranets, extranets, and Web applications. Inaddition to procedural changes, transformations in job functions, organiza-tional structure, power relationships, and the work environment should becarefully planned.

Areas where users interface with the system require special attention, withsensitivity to ergonomics issues. Ergonomics refers to the interaction of peopleand machines in the work environment. It considers the design of jobs, health


The idea behind customer relationship management(CRM) seems simple enough: to centralize and sharethroughout the firm information about customers inorder to maximize sales and profitability. For avariety of reasonsmost having to do withimplementation issuesachieving these objectivesproves difficult.

Consider the case of Wallace, Welch & Willingham(WWW), a Florida-based insurance company. Thefirm decided to purchase a contemporary CRM sys-tem after its existing patchwork of file cards,rolodexes, and accounting packages failed to producea coherent view of the customer. The job of imple-menting went to the IT Director, Kirstin Johnson.The firm has two lines of business: commercial andresidential insurance, and a 20-person sales force.Each of the sales reps kept their own customer infor-mation on index cards, and sale information wasstored on their personal spreadsheets and thenuploaded to an accounting application when saleswere finally booked and payments received. Therewas no ability to share information. Sales reps werepaid on commission and received a percentage of theannual insurance revenue.

When sales people left the firm, they took thecustomer information with them, or just left it intheir desks. The sales manager would assign a fewsale reps to search through the empty desks ofdeparted employees to find potential workableleads.

In the search for a vendor, Johnson faced two bar-riers: finding the right vendor, and understanding thecosts before committing to a single vendor. She spentseveral weeks interviewing CRM users in other firmsto identify which vendors were most respected. Cost was another matter: it was painfully difficult tofigure out how much licensing a system would reallycost in day-to-day use. There were per-seat models,pay-for-use models, and hosted on-demandsolutions where you paid by the month dependingon how much your sales force used the system. She finally went with the on demand solutionbecause it did not involve installing any newsoftware or hardware at WWW, and seemed the leastexpensive way to go. The main vendors were SageCRM SalesLogix and salesforce.com. Ultimately, shechose SalesLogix because it allowed her a choice: shecould start with an on-demand, online model and

GETTING BUY-IN AND ROI FOR CRMthen later install the system on in-house servers ifthat became less expensive and more suitable.

Getting buy-in from the sales force was the mostdifficult barrier to implementation. For starters, she shut down the ability of sales people to use theaccounting system for entering customer information,and forced them to enter customer data and establishfiles for all their customers on the SalesLogix system.If sales people did not file their customer prospectinginformation on the new system, it was assumed theywere not doing their jobs, and this would show up inbi-annual performance reviews. Her logic was iftheres no driving force behind using the system,people can just ignore it.

Staff resistance sprung up immediately. Sales repsworried their information would be lost on anotherfirms Web site; they felt the system could not handleall the information they wanted to put in it; manyfelt the system would blow up someday ifSalesLogix went out of business, or was purchased byanother firm. The firms largest revenue producingsales rep refused to use the new system. Instead, heprinted out customer notes using a word processorand distributed them to other sales reps. He createdhis own manual paper-based CRM! When other repssaw this, they asked Why should I use the new sys-tem? Everyone wanted to continue doing their ownthing.

Recognizing that sales reps dont like to takeorders from the IT department, and that sales reps inmany firms are the major producers of revenue thatno one wants to disturb, Johnson called out to thesales manager for help. The sales manager wassympathetic, and told the recalcitrant user to eitheruse the SalesLogix system or face severeconsequences. After that, the leading revenue-producing sales rep started using the system, and infact became its champion supporter.

After a year of training, educating, and cajoling,the implementation effort finally achieved itsambition of centralizing customer information, andcreating a platform where the information could beshared, and where it was protected from highturnover in the sales force. Customer informationwas, for the first time, information that belonged tothe firm, not the sales reps. This in itself was quite arevolution.

I N T E R A C T I V E S E S S I O N : O R G A N I Z AT I O N S


1. Why was the director of IT assigned the job ofimplementing a CRM system? Would this job bebetter performed by the sales manager?

2. Why were sales reps reluctant to share customerinformation with other sales reps? What strategiesdid Kirstin Johnson use to overcome userresistance? How would you recommend the firmovercome this problem?

3. What do you think the metrics for CRM successshould be in a firm like this? How would youchange the sales rep compensation plan tosupport more effective use of the CRM system?

1. Go to the Sage CRM SalesLogix Web site atwww.saleslogix.com. Explore the product descrip-tion for SalesLogix. What kinds of firms is thisproduct aimed at? What kinds of functionality isprovided in the suite of SalesLogix programs?What is the advantage of a hosted solution versusan on-demand solution?

2. At the SalesLogix Web site, explore the companysmobile solutions by playing the mobile solutionFlash demo. How could firms take advantage ofSalesLogix mobile solutions? What are some of therisks of a mobile solution?

3. On the SalesLogix Web site, identify and review asuccess case study (usually displayed on the homepage). What are the major themes emphasized inthe case?

C A S E S T U DY Q U E S T I O N S M I S I N A C T I O N

But other worries remain for Johnson and thefirm. As system use goes up, so do costs, and it hasbeen difficult to put a hard number on the benefitsof information integration. How do you measurethe benefits of CRM: the number of prospectscontacted, sales made, customers retained, size ofpurchase, or some other metric? Not knowing aheadof time how you measure success often makes itdifficult after the fact to claim success. How muchis it worth for the firm to actually own thecustomer information and control it? Is thispriceless, or is it just a nice thing?

For most enterprise implementations, the cost ofimplementing is typically two to three times the costof the software and hardware. Once initial imple-

mentation is achieved, it does not end, but insteadthere needs to be an ongoing training and educationeffort to explain new features and to ensure realvalue is produced for the firm. There are alsoconcerns about vendors: what if the chosen vendor isnot financially stable and you need to switch toanother? The switching costs of enterprise softwarecan be quite high. Eventually, the firm would like tointegrate the information in SalesLogix system with the sales information in the older financialaccounting system, but there is no inexpensive wayto do this.

Sources: Colin Beasty, Barriers to CRM Success, CRM Magazine,May 1, 2006; Susannah Patton, Customer Service: Answering theCall, CIO Magazine, June 1, 2006; and Bill Donlan, Anatomy of aSuccessful CRM Implementation, CIOupdate.com, July 11, 2005.

issues, and the end-user interface of information systems. Table 14-5 lists theorganizational dimensions that must be addressed when planning andimplementing information systems.

Although systems analysis and design activities are supposed to include anorganizational impact analysis, this area has traditionally been neglected. Anorganizational impact analysis explains how a proposed system will affectorganizational structure, attitudes, decision making, and operations. To inte-grate information systems successfully with the organization, thorough andfully documented organizational impact assessments must be given moreattention in the development effort.


Soc iotechn ica l Des ignOne way of addressing human and organizational issues is to incorporatesociotechnical design practices into information systems projects. Designersset forth separate sets of technical and social design solutions. The social designplans explore different workgroup structures, allocation of tasks, and the designof individual jobs. The proposed technical solutions are compared with theproposed social solutions. The solution that best meets both social andtechnical objectives is selected for the final design. The resulting sociotechnicaldesign is expected to produce an information system that blends technicalefficiency with sensitivity to organizational and human needs, leading to higherjob satisfaction and productivity.

PROJECT MANAGEMENT SOFTWARE TOOLSCommercial software tools that automate many aspects of project managementfacilitate the project management process. Project management softwaretypically features capabilities for defining and ordering tasks, assigningresources to tasks, establishing starting and ending dates to tasks, trackingprogress, and facilitating modifications to tasks and resources. Many automatethe creation of Gantt and PERT charts.

Some of these tools are large, sophisticated programs for managing very largeprojects, dispersed work groups, and enterprise functions. These high-end tools can manage very large numbers of tasks and activities and complexrelationships.

Microsoft Project has become the most widely used project managementsoftware today. It is PC-based, with capabilities for producing PERT and Ganttcharts and for supporting critical path analysis, resource allocation, projecttracking, and status reporting. Project Guide wizards are available to assist usersin defining a project, listing tasks, setting deadlines, specifying workers andassociated costs, choosing calendar templates, and saving a baseline version ofthe project plan. Project also tracks the way changes in one aspect of a projectaffect others.

Microsoft Project now has an Enterprise Project Management Solutionversion with a server component that helps large enterprises manage projectsin many different locations. Project also provides a Web-based front end so thatusers can work with Web browser software to add project resources. Productssuch as EasyProjects.NET and Vertabase are also useful for firms that wantWeb-based project management tools.

TABLE 14-5 ORGANIZATIONAL FACTORS IN SYSTEMS PLANNING ANDIMPLEMENTATION

Employee participation and involvement

Job design

Standards and performance monitoring

Ergonomics (including equipment, user interfaces, and the work environment)

Employee grievance resolution procedures

Health and safety

Government regulatory compliance


14.5 HANDS-ON MISThe projects in this section give you hands-on experience using spreadsheetsoftware to perform capital budgeting analyses for new information systemsinvestments and using Web tools to analyze the financing for a new home.

Improv ing Dec i s ion Making: Us ing SpreadsheetSoftware to Ana lyze the Return on a New SystemInvestment

Software skills: Spreadsheet formulas and functionsBusiness skills: Capital budgeting

This project provides you with an opportunity to use spreadsheet software touse the capital budgeting models discussed in this chapter to analyze the returnon a new information system investment for a real-world company.

Dirt Bikess management would like to analyze the return on its investmentin its employee training and skills tracking system described in Chapter 13. The system runs on the human resources specialists PCs using PC databasesoftware. Because the entire corporate administrative staff recently receivednew desktop PC systems with database and other productivity software, thereare no additional hardware and software purchase costs. The main costsinclude the initial cost of designing and implementing the database (businessstaff cost of $5,000; information systems staff cost of $15,000), gathering andadding employee skills and training data to the database ($5,500 initial dataconversion cost plus $1,000 annual data entry costs), and ongoing maintenanceand support ($3,000 annually). Human resources staff members believe thenew application could save each of them two hours of work per week. (Theirannual salaries are $37,000 and $42,000 each.) The company would also saveabout $11,000 annually in employee recruiting costs because it would be able tofill many vacant positions with existing employees, thereby reducing its costsfor recruiting outside the company. The system would not be installed until theend of 2007 and would return benefits from 2008 to 2012.

Prepare a report for management analyzing the return on the investment forthis system over a five-year period using the following capital budgetingmodels: net present value, ROI, IRR, and payback method. Assume a 5 per-cent interest rate for your net present value calculations. Use spreadsheetsoftware for your calculations.

(Optional) Use electronic presentation software to summarize your findingsfor management.

Improv ing Dec i s ion Making: Us ing SpreadsheetSoftware for Cap i ta l Budget ing for a New CAD System

Software skills: Spreadsheet formulas and functionsBusiness skills: Capital budgeting

This project provides you with an opportunity to use spreadsheet software touse the capital budgeting models discussed in this chapter to analyze the returnon an investment for a new computer-aided design (CAD) system.

Your company would like to invest in a new CAD system that requires pur-chasing hardware, software, and networking technology, as well as expendi-tures for installation, training, and support. The Laudon Web site for Chapter 14and Student CD-ROM contain tables showing each cost component for the new


system as well as annual maintenance costs over a five-year period. You believethe new system will produce annual savings by reducing the amount of laborrequired to generate designs and design specifications, thus increasing yourfirms annual cash flow.

Using the data provided in these tables, create a worksheet that calculatesthe costs and benefits of the investment over a five-year period and analyzesthe investme

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