Mis jaiswal-chapter-12

Chapter 12

Information Systems for Business Effectiveness

Changes in the Information Systems Environment

• Information technology (IT) as a lever of competitive advantage

• The IT outsourcing bandwagon effect characterized by consideration of information as a ‘utility’ just like electric power or phone connection

• The e-everything phenomena with the emergence of Internet and electronic commerce

• The cost of IT has plunged since the 1960s resulting in enormous investments in IT applications that have stimulated increasingly complex organizational change

Why is information systems expenditure difficult to quantify?• Shift of IT applications from automation to IT acting as a business enabler: - automation yields measurable benefits in terms of cost savings - justification of ROI from IT expenditure as part of a strategic move involves assessing and taking a business risk where the benefits are intangible returns • High cost of IT infrastructure: - 60% of the total investment made on information systems is the cost of systems hardware and software and development costs for IT infrastructure - these systems provide the infrastructure that enables subsequent computer applications and as a result may or may not yield any specific benefit in the foreseeable future • Indirect and intangible benefits:- information technology helps in improving performance, productivity, customer satisfaction, and value to the customer - such benefits are very difficult to quantify and thus are called intangible benefits from information technology

IT Metrics

Cost effectiveness approach

• The net present value (NPV) approach is often used by financial experts to justify the expenditure made on information technology

• Steps:1. calculate the present value of the expected stream of cash that the investment will generate 2. calculate the present value of the stream of expenditures

required to undertake the project 3. arrive at the difference between the two (known as the net

present value of the investment) 4. the manager can go ahead and invest if NPV is greater than

zero

• This approach is true for most of the capital investments

• In information technology investments the results are seen only after a period of 3-4 years provided the information technology investment is implemented properly

• NPV calls for estimates of costs and revenues over the entire life of the project which is difficult to assess

• Changes in costs and revenues also cannot be predicted

• NPV takes into account the entire life of the project

• NPV is not able to take into account short-term uncertainties

Cost effectiveness approach contd.

The Business value approach

• Business value = productivity, profitability, and consumer value • Business Value approach takes root from three theories: the theories of production, competitive strategy , and consumer - IT spending is directly related to substantial increases in net output and consumer surplus, but unrelated to supranormal business profitability - IT spending indirectly affects productivity because IT helps firms reduce consumption of other inputs such as ordinary capital ,labor and establishment costs - IT creates value, intensifies competition and reduces profitability - IT should be used to generate business value rather than to generate business profits

• Information Systems Infrastructure by itself cannot generate returns

• It is the IT chargeback is an example of transfer pricing – a familiar concept in most decentralized organizations

• Information technology investment is made for building an organization wide IT infrastructure

• IT chargeback method relies on usage- based charges and helps managers make effective decisions on IT investment and use

IT Chargeback approach

The Balanced scorecard approach

• Balanced scorecard: a set of measures that give the top managers a fast but comprehensive view of business

• The approach allows managers to look at the business from four important perspectives: - customer- internal- innovation and learning - financial

• Provides a method to consider all the operational measures together

• Indicates if the improvement in one area can be achieved through focus and investment in some other area

• Ensures that performance measurement is consistent with the initiatives in companies: - cross-functional integration - customer supplier partnerships - global scale - continuous improvement - team accountability

The Balanced scorecard approach

• Capital investments create and exploit profit opportunities

• Opportunities include “options” • Options are characterized by

irreversibility and uncertainty • The choice of timing alters the

investment decision in critical ways• The approach stresses opportunities to

invest and decisions to exploit opportunities

• The approach depends upon the firms how to exercise those options optimally and at the right time

• Options approach does not ignore the value of creating options

• An investment opportunity in information systems has the option to invest now or in the future

The Options Approach

Benchmarking: process of improving performance by continuously identifying, understanding, and adapting outstanding practices and processes found inside and outside the organization

A tool that aids organizations in searching for best practices that lead to superior performance and in achieving these best practices

Focuses on how to improve any given organisation process, product or service by exploiting “best practices”

The Benchmarking Approach

The Benchmarking Approach

Step1:

- identify the need - the type of IT investment and the IT metric will depend

on strategic moves, improvements in

productivity and performance, value addition to the

product, and gaining leverage

Step2: - identify the type of application - find out whether the application focuses on the infrastructure, process, user (employee), or customer - metrics will change depending upon the type of

application

Maximizing Returns from IT Investments

Step 3: - identify the user

- find out if the application will be used by a single

function, multiple functions , or all over the

organization Step 4:

- identify the approach to measure returns - if part of a strategic move then the options approach is

the most suitable - if IT investment is made to the improve performance of

the organization then the scenario, business value, and

performance approaches would be more suitable

Maximizing Returns from IT Investments contd

Building the IT Metrics Dictionary

A metrics dictionary is an encyclopedia of measurement terms and calculations used by the enterprise, business units, and IT units to manage processes, products, and resources. For example, “return on sales”

The need for measuring returns from Information Technology investments inspired most business-unit managers to create informal metrics

The need of the day is to convert these informal definitions and business models to create a formal metrics dictionary which will help quantify the intangible benefits like customer satisfaction ,response time , better services, etc,.

The metrics dictionary created for the three domains: enterprise, business unit, information technology provides the nouns for the IT valuation language

Building the IT Metrics Dictionary contd

Building the IT Metrics Dictionary