IS Management and Evaluation of Alternate IT Architectures

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

2. 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

3. Trends affecting IS Management • Growth in distributed systems • End-user computing • Improvement in applications and development tools • Rise in outsourcing

4. 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 Users vs. IT Professional Dominance

5. 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

6. Creating an IS Vision • IS Planning • Where should we be in the future? • Exploring the present • Scouting the future • Clarify vision • Selling the vision

7. 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

8. 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

9. Stages of Growth • Identified 4 stages of new technology assimilation • Early Successes-lead to increased interest • Proliferation - variety of apps tried out • Controlled Proliferation - control cost and waste of growth phase • Mature use

10. 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.

11. Sources of CSF • Specific industry • Individual company • General environment • Emerging situations

12. 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

13. 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

14. 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

15. 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

16. Ex Ante Evaluation • Expected benefits/costs • Alignment with strategy • Feasibility • Risk

17. Ex Post Evaluation • Development success • Performance • Performance impacts • Benefits/costs

18. Profitability Methods of Evaluation • Payback • ROI • Discounted Cash Flow What kind of firm models might be used?

19. Cost-Benefit Analysis Techniques • How Much Will the System Cost? • Costs fall into two categories. • 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. • 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).

21. 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

22. 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.

23. 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.

24. 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.

26. 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

27. 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.

28. 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.

30. Contribution of NPV • Objective • Congruence with value maximization • Better than undiscounted cash flow, simple payback, ROI

31. Limitations • Estimates of revenues and costs • manipulated to justify projects already selected • Estimations of project risk • Second stage projects

32. Discounted Cash Flow (DCF) where, NPV = Net Present Value C = Investment at the start of the project At = Cash flow at t T = Project life r = Risk-based discount rate for the project

33. DCF Example • One period • C = 10,000 • A1 = 6,000 • r = 10% • = -10,000 + 6,000/1.1 = -4545.4

34. 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

35. 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

36. 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...”

37. Why? • Risk aversion • discount rate too high • Cost lowering activities • strategic benefits not fully valued • Long term projects • discount rate too high

38. 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

39. 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

40. 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.

41. Feasibility Measures • Technical Feasibility • Can it be done? • Implementation Feasibility • Can we do it? • Economic Feasibility • Is it worth doing?

42. 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?

44. Use/Operations Measures • Reliability testing • Maintenance feasibility