IS Management and Evaluation of Alternate IT Architectures Chap. 7 (Plus Extras!)

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