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THE NEED TO MEASURE THE VALUE OF INFORMATION TECHNOLOGY MODUL 1. SESSION 2 – 3. Matakuliah : M0624/Information Technology Valuation Tahun : 2008. INTRODUCTION.
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THE NEED TO MEASURE THE VALUE OF INFORMATION TECHNOLOGYMODUL 1. SESSION 2 – 3 Matakuliah : M0624/Information Technology Valuation Tahun : 2008
INTRODUCTION THE RATE OF CHANGE IN TODAY’S BUSINESS ENVIRONMENT HAS PUSHED THE NEED FOR TECHNOLOGIES AND ACCEPTANCE OF THEM TO A CONTINUOUSLY ACCELERATING PACE. THE NEW TECHNOLOGIES ARE ENABLING ORGANIZATIONS TO BE FLATTER, AND MORE FLEXIBLE, REDEFINING OUR NOTIONS ABOUT EVERYTHING FROM R&D TO DISTRIBUTION, AND IN THE PROCESS MAKING POSSIBLE SMARTER, MORE CUSTOMIZED PRODUCTS AND SERVICES.
INTRODUCTION ORGANIZATIONS SPEND ENORMOUS SUMS OF MONEY ON COMPUTER HARDWARE. SOFTWARE, COMMUNICATION NETWORKED, DATABASES, SPECIALIZED PERSONNEL, COLLECTIVELY KNOWN AS INFORMATION TECHNOLOGY. LEADING EDGE COMPANIES ALL OVER THE WORLD IN ALL INDUSTRIES HAVE INCREASED THEIR OVERALL IT EXPENDITURES BY DOUBLE-FIGURE PERCENTAGE ANNUALY. MANY ORGANIZATIONS CURRENTLY OBSERVE THAT UP TO 50% OF THEIR TOTAL CAPITAL EXPENDITURE IS FOR IT.
INTRODUCTION • THERE IS A GREAT DEAL OF QUESTIONING AND SOUL-SEARCHING ABOUT THE PAYOFF OF THESE LARGE INVESTMENTS IN IT. THE QUESTIONS ARE: • DOES IT YIELD TANGIBLE PRODUCTIVITY, OR STRATEGIC BENEFITS? • ARE THEY MEASUREABLE?
ATTEMPS TO MEASURE THE VALUE OFIT BRYNJOLFSSON (1993), A LEADING RESEARCHER IN THE FIELD OF IT ECONOMICS: “THE RELATIONSHIP BETWEEN INFORMATION TECHNOLOGY AND PRODUCTIVITY – THE FUNDAMENTAL ECONOMIC MEASURE OF A TECHNOLOGY’S CONTRIBUTIONS – IS WIDELY DISCUSSED BUT LITTLE UNDERSTOOD”
MANAGING THE COSTS/BENEFITSEQUATIONS OF IT HISTORICALLY, IT SPENDING IN BUSINESS WAS CONSIDERED AN ADMINISTRATIVE EXPENSE RATHER THAN A BUSINESS INVESTMENT. MANY OF TODAY’S IT APPLICATION ENABLE AND SUPPORT FAR REACHING CHANGES IN THE INDUASTRY AND BUSINESS STRUCTURE, AND CAN HAVE A HUGE IMPACT ON ORGANIZATIONAL FORMS, INTERFACES WITH SUPPLIERS AND CUSTOMERS, DISTRIBUTION CHANNELS, PRODUCTS, SERVICES AND MARKETS.
IT COSTS THERE ARE AT LEAST 3 RELATED REASONS FOR MANAGEMENT CONCERN ABOUT COST SIDE OF THE COST/BENEFIT EQUATION OF IT : IT SPENDING IS SUBSTANTIAL IT IS UNCLEAR HOW LARGE THE GROWTH IN IT INVESTMENT REALLY IS A GROWING PORTION OF THE IT EXPENDITURES IS INVISIBLE AND THEREFORE NOT MANAGED (ACTIVELY) BY UPPER MANAGEMENT
IT COSTS TRACING AND TRACKING THE COSTS OF IT IS BECOMING MORE TROUBLESOME IN MOST ORGANIZATIONS, PARTICULARLY BECAUSE A GROWING PORTION OF THE EXPENDITURE IN IT IS “HIDEN” BY USER DEPARTMENTS. THIS MEANS THAT ACTUAL IT COSTS ARE NOT TRACEABLE AND NOT INCLUDED IN CENTRAL BUDGETS, SO BOTH THE ACTUAL EXPENDITURE LEVEL AND ITS GROWTH RATE ARE UNKNOWN. THE MORE DECENTRALIZED THE ORGANIZATION IS THE MORE HIDDEN THE IT COSTS MIGHT BE.
IT BENEFITS WHILE THE COST SIDE OF THE COST/BENEFIT EQUATION OF IT MAY BE DIFFICULT TO MANAGE AND MEASURE, THE BENEFIT SIDE IS EVEN TOUGHER. SOME OF THE COMPLICATING FACTORS IN THE MEASUREMENT OF IT BENEFIT MENTIONED BY KEEN, A WELL-KNOWN WRITER ON THE SUBJECT OF IT: IT SPENDING DOES NOT DIRECTLY CREATE BENEFITS THE SAME INVESTMENT IN THE SAME IT TECHNOLOGY CAN HAVE DIFFERENT OUTCOME
IT BENEFITS • MANY OF THE VALUE ADDED BENEFITS OF IT DO NOT SHOW UP IN THE ACCOUNTING SYSTEMS. BRYNJOLFSONN AND KEEN, SAID THAT COMMON CAUSES OF SHORTFALL IN MEASURING THE BENEFITS OF IT ARE: • IN SUFFICIENT MANAGEMENT (INCLUDING PLANNING) OF IT AND THE VALUE OF IT; • INAPPROPRIATE MEASURES TO DETERMINE THE VALUE OF IT; • LACK OF FRAMEWORKS TO MEASURES THE VALUE OF IT.
MEASURING THE VALUE OF IT LORD KELVIN, A SCIENTIST SAID: “IF YOU CAN MEASURE IT, YOU CAN MANAGE IT. IF YOU CAN NOT MEASURE IT, YOU CANNOT MANAGE IT” A DASHBOARD OF VITAL PERFORMANCE INDICATORS PROVIDES MANAGEMENT WITH A TOOL TO GAUGE HOW THE COMPANY IS FARING IN TERMS OF FINANCIAL PERFORMANCE, CONTINUOUS INNOVATION, CUSTOMER CARE, COMPETITIVENESS, ORGANIZATIONAL CONTROL, ETC. THE APPLICATION OF IT IS ONE OF THOSE FACTORS
MEASURING THE VALUE OF IT • THE MEASUREMENT OF IT’S IMPACT SEEMS TO BE DIFFICULT. EVOLVING INFORMATION TECHNOLOGY DOES NOT STAND ON ITS OWN, BUT INTERWOVEN WITH MANY ASPECTS OF DOING BUSINESS. • IT DELIVERY PROCESSES ARE VARIED AND THE TECHNOLOGY IS INCREASINGLY COMPLEX.
MEASURING THE VALUE OF IT WITH REGARD TO IT, IMPORTANT LESSONS CAN BE LEARNED FROM SYSTEMS OF MANAGEMENT ACCOUNTING, COST MEASUREMANT, AND COST MANAGEMENT. AS IN MANAGEMENT ACCOUNTING AND MANAGEMENT CONTROL, A SYSTEMATIC APPROACH TO MEASURING THE VALUE OF IT SHOULD BE CAPABLE OF FULFILLING BASIC FUNCTION OF PERIODIC ASSESSMENT AND OF SUPPLYING FEEDBACK OF THE HEALTH OF THE APPLICATION AND SUPPLY PROCESSES.
IT VALUE MEASUREMENT APPROACH TO LAUNCH EFFECTIVE, SYSTEMATIC AND CONSISTENT MEASUREMENT OF IT, MANAGEMENT MUST: • CLEARLY UNDERSTAND WHAT TO MEASURE • SELECT A SET OF KEY MEASURES FOR IT VALUE TO ASSESS THE MANY FACETS OF THE APPLICATION AND SUPPLY OF IT; • IMPLEMENT AN EFFECTIVE MEASUREMENT PROGRAM INTO ORGANIZATION • DEVELOP NORMS FOR THE APPLICATION AND SUPPLY OF IT.
Business planning & control Planning objectives IT planning & control Measuring result IT supply planning & control Implement Define Measurement Program Us Them Manage Figure 1.1: Effective IT Measurement Link IT planning to IT valuation, … measure IT, and benchmark IT
BTRIPLEE • IT CONTRIBUTES TO BUSINESS OBJECTIVES AND TO BUSINESS STRATEGY, CALLED THE BUSINESS VALUE OF IT • IT EFFECTIVELY SUPPORT BUSINESS PROCESSES, ACTIVITIES AND EMPLOYEES, CALLED THE EFFECTIVENESS OF IT • IT SUPPLY ALIGNS WITH BUSINESS REQUIREMENTS, CALLED EFFECTIVENESS OF IT SUPPLY, AND IS SUPPLIED AT MINIMUM COST, CALLED THE EFFICIENCY OF IT SUPPLY
BTRIPLEE BECAUSE MEASUREMENT AND MEASURES INFLUENCE PEOPLE’S MOTIVATIONS AND ATTITUDE, A MEASUREMENT PROGRAM MUST BE SYSTEMATICALLY AND COHESIVELY INTRODUCED AND MAINTAINED, TO ATTAIN THE LONG LASTING AND EMBEDDED IMPROVEMENT SOUGHT. COMPANIES MAY ENGAGE IN COMPARATIVE ANALYSIS, MEASURING THEIR VALUE OF BUSINESS AND TECHNOLOGY PEERS, SUCH BENCHMARKING APPROACH.
