1 / 12

A Methodology for IT Investment Management

A Methodology for IT Investment Management. FIN 545: Financial Decision-Making for IT May 3, 2000. Critical Intuition. Why should we use a real options view to value investments in IT projects (as opposed to traditional NPV analysis)?

lexi
Download Presentation

A Methodology for IT Investment Management

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. A Methodology for IT Investment Management FIN 545: Financial Decision-Making for IT May 3, 2000

  2. Critical Intuition • Why should we use a real options view to value investments in IT projects (as opposed to traditional NPV analysis)? • deferment, staged investment, contraction or expansion, abandonment, follow-on projects (or growth options) • How should IT investments be designed and managed to ensure alignment with corporate strategy? • What more (than technology) is needed to realize the full potential of IT?

  3. Aligning of the Goals of IT Investments with a Firm’s Overall Business Vision Business Vision Identify current and desired business capabilities Design an investment program (e.g., identify a set of real options that will help acquire these desired capabilities) Estimate costs and benefits Determine Market Value

  4. A Business Capability Is Built By Investment in “Operating Drivers” Organizational Component (e.g., relationships with other firms and internal structure) Process (e.g., workflows, procedures, management controls) Technology (e.g., IT) Business Capability

  5. Rich and Nigel’s Vision:Capture Profitable Market Share 14% APR Number of Customers Customer Profitability

  6. The Desired Business Capability • Micro-segmentation and micro-marketing skills • identify the best, most profitable customers • cream-skim these profitable (or low cost to serve) customers from banks through targeted marketing and differential pricing strategies (as opposed to traditional uniform pricing or one-size fits all approach) • Now the hard part -- how do they achieve this business capability?

  7. Current Bank Capabilities in 1988 • Small number of credit card products • essentially a “one-size-fits-all” strategy • Economies of scale (--> improve margins) • acquire more market share and more customers to spread fixed costs across more customers --> lower per customer costs and high margins • big goal = increase market share • Marketing vs. Credit departments • Outsource customer contact, IT, and data processing to outside vendors

  8. The Necessary Operating Drivers for Rich and Nigel’s Vision Eliminate outsourcing of data processing (control over systems) Develop database management systems Turn off bank’s credit scoring models Statistical / Analytical Software “Test and learn” methodology Integrate the Marketing Dept. and Credit Departments (change internal incentives) Allow for slow turnaround Top management support during initial losses Account management Hire “best” graduate students with tenacity and problem solving skills Micro-segmentation and micro-marketing skills

  9. Aligning of the Goals of IT Investments with a Firm’s Overall Business Vision Business Vision Identify current and desired business capabilities Design an investment program (e.g., identify a set of real options that will help acquire these desired capabilities) This really represents options to transform existing operating drivers and to invest in operating drivers necessary to achieve the business capability (which will potentially create value if market conditions work out Estimate costs and benefits Determine Market Value

  10. Capital One • The Initial Period (Oct 1988 - Dec 1991) • made the investments and began “test and learn” • charge-offs from 1989 solicitations > 9.5% • doubled the charge-offs of the bank’s portfolio • forecast profits for 1992 of credit card operations = zero • but they continued to increase testing (617 in 1991) • Middle Period • the balance transfer product • “they found the sweet spot - the elusive low-risk revolver” • high growth in accounts, big improvements in the percent charge-off • credit card accounted for 2/3 of the bank profits • stock price soared

  11. Current Period • What has led to their success? • “Development of new and different strategies by exploiting fundamental differences between itself and its competitors in technology, organizational structure, corporate culture, and the use of information” • “In the long run, we see our destiny not merely as a credit card company, but as an information-based marketing company offering a variety of products in information-rich industries • They must now make a new set of investments • gain industry experience • develop systems and operating infrastructure • create the initial tests (allow them to incubate and refine them before profitable rollout can be attempted)

  12. Summary • Strategy drives technology • the vision of the company will help determine a set of desired business capabilities which will then imply investments in technology, process, and organizational structure • Technology drives strategy • but don’t forget that IT is an enabler • advances in IT make new strategies possible • IT and strategy are tightly intertwined and must be considered carefully

More Related