Managing and Using Information Systems:
A Strategic Approach – Sixth Edition
Keri Pearlson, Carol Saunders, and Dennis Galletta
© Copyright 2016 John Wiley & Sons, Inc.
Chapter 8 The Business of IT
The Horner/Alcoa Story
• High-performing tech worker—almost dismissed as CIO
• What were the issues? • What did they expect from him? • What did he deliver at first? • What change did he make to become more
valuable to Alcoa?
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The Alcoa lesson: Business Demands
• IT offerings need to be aligned with business demands
• IT complexities should be translated to business needs
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Merlyn’s Business-IT Maturity Model
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What a Manager Can Expect From the IT Organization
A manager typically can expect some level of support in 14 core activities (Figure 8.2) – levels in parentheses
1. Developing and maintaining IS (1)
2. Managing supplier relationships (1)
3. Managing data, information, and knowledge (1, 2)
4. Managing Internet and network services (1, 2)
5. Managing human resources (1)
6. Operating the data center (1)
7. Providing general support (1)
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What a Manager Can Expect From the IT Organization (Cont.)
8. Planning for business discontinuities (1)
9. Innovating current processes (2)
10.Establishing architecture platforms and standards. (2)
11.Promoting enterprise security (2)
12.Anticipating new technologies (3)
13.Participating in setting and implementing strategic goals (3)
14.Integrating social IT (3)
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What The IT Organization Does Not Do
• Does not perform core business functions such as: • Selling • Manufacturing • Accounting.
• Does not set business strategy. • General managers must not delegate critical
technology decisions.
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Chief Information Officer (CIO) The Senior-Most IT Executive
• Responsible for technology vision
• Leads design, development, implementation, and
management of IT initiatives
• Is a business technology strategist or strategic
business leader
• Uses technology as the core tool in
• creating competitive advantage
• aligning business and IT strategies
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CIO’s Focus
• CIO’s focus has shifted:
• From efficiency to effectiveness in a constantly
changing/competitive marketplace
• Formerly: reported to the CFO. Now: reports to
the CEO.
• Shift over time towards helping executive team
formulate business strategy
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CTO, CPO, and Other Roles
• CIO Can’t have all skills—can’t know everything! • Other roles are important:
• CTO: Chief Technology Officer (tracks technologies) • CKO: Chief Knowledge Officer • CDO: Chief Data Officer • CAO: Chief Analytics Officer • CTO: Chief Telecommunications Officer • CNO: Chief Network Officer • CRO: Chief Resource Officer • CISO: Chief Information Security Officer • CPO: Chief Privacy Officer • CMO: Chief Mobility Officer • CSMO: Chief Social Media Officer
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So Who Should Make the Decisions?
• Ross & Weill say • The CEO should not make those decisions alone • C-level executives should not even make those
decisions • Input is needed from both IT and the business units
alike • Steering (or Executive) Committee solution
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Building a Business Case – Components
• Executive Summary
• Overview and Introduction
• Assumptions and Rationale
• Project Summary
• Financial Discussion and Analysis
• Benefits and Business Impacts
• Schedule and Milestones
• Risk and Contingency Analysis
• Conclusion and Recommendation • Appendices
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Sample of benefits in a business case for adding chat function linked from Facebook page
Busy chat operators; busy Facebook page; Customers seem happier
Sales improved by $250k; costs decreased by $50k after change
Facebook page likes; number of chats; Customer satisfaction scores moved from 3.3 to 4.1 (out of 5)
Converted 150 calls per day to chats; reaching 200 more customers per day
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IT Portfolio Management
• IT investments should be managed as any other investment.
• Evaluate and approve IT investments as they relate to other potential investments of all kinds
• Goals: • Pick the right mix of investments
• Invest in the most valuable IT initiatives
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Asset Classes
• Weill and Aral say that there are four asset classes of IT investments: • Transactional systems – systems that streamline or cut
costs on business operations.
• Informational systems – any system that provides information used to control, manage, communicate, analyze or collaborate.
• Strategic systems – any system used to gain competitive advantage in the marketplace.
• Infrastructure systems – the base foundation or shared IT services used for multiple applications.
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Average company’s IT portfolio profile (See Discussion Question 4)
Transactional
13%
Infrastructure
54%
Informational
20%
Strategic
13%
46%
25%
18% 11%
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Comparative IT portfolios for different business strategies (See discussion question 4)
Valuing IT Investments
• Soft benefits, such as the ability to make future decisions, make it difficult to measure the payback of IT investment • IT is expensive, thus under close scrutiny. • IT is complex; calculating the costs is an art, not a science.
• Payback period for infrastructure is much longer than other types of capital investments.
• With necessary systems (due to laws, etc.), the payback period cannot be calculated
• Many valuation methods are available…
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Valuation Method Description
Return on Investment (ROI) ROI= 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 −𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Net Present Value (NPV) Discount the costs and benefits for each year of the
system’s lifetime using present value factor 1
1 + 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 𝑦𝑒𝑎𝑟𝑠
Economic Value Added (EVA) EVA = net operating profit after taxes
(capital x cost of capital)
Payback Analysis Time that will lapse before accrued benefits overtake
accrued and continuing costs
Internal Rate of Return (IRR) Return of the IT investment compared to the corporate
policy on rate of return
Weighted Scoring Methods Costs and revenues/savings are weighted based on their
strategic importance, accuracy/confidence, other
opportunities
Financial Valuation Methods
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IT Investment Monitoring
• Old saying: “If you can’t measure it, you can’t manage it”
• Management needs to achieve organizational benefits from IT investments
• Must agree upon a set of metrics for monitoring IT investments.
• Often financial in nature (ROI, NPV, etc.).
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The Balanced Scorecard
• Focuses attention on the organization’s value drivers (which include financial performance).
• Assesses the full impact of corporate strategies on customers and workforce, as well as financial performance.
• Allows managers to look at a business from four related perspectives:
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How do our customers see us?
At what must we excel?
Can we continue to improve and create value?
How do we look to shareholders?
The Four Balanced Scorecard perspectives
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The IT Balanced Scorecard
• Using it within the MIS department helps senior IS managers • Understand their organization’s performance
• Measure it in a way that supports its business strategy
• Linked to the corporate scorecard • By ensuring that the measures used by IT are those that
support the corporate goals.
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IT Dashboards
• Snapshot of metrics at a given point in time (often “right now”)
• Offer “at a glance” idea of how things are going
• Often colors depict conditions: • Areas with problems (red) • Areas in good shape (green) • In-between or average (yellow)
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Sample Black & White Dashboard
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ITDashboard.gov
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Architecture for Dashboards
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Funding the IT department
• How are costs of design, development, delivery and maintenance of IT systems recovered (or simply covered)?
• Chargeback • Allocation • Corporate budget
• The first two are done for management reasons
• The latter covers costs using corporate coffers
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Funding
Method
Description Why do it? Why not do it?
Chargeback Charges are
calculated based
on actual usage
Fairest method for
recovering costs
since it is based on
actual usage
Must collect
details on usage;
often expensive
and difficult
Allocation Expenditures are
divided by non-
usage basis
(revenues, headcount, etc.)
Less bookkeeping
for IT
Users can
question rates &
basis of allocation
Free riders
Corporate
Budget
Corporate
allocates funds to
IT in annual
budget – to
general P&L
No billing to the
businesses.
No rates to compute.
Encourages use of
new technologies.
Have to compete
with all other
budgeted items
for funds.
Potential for
overspending.
Comparison of IT funding methods
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How to Determine Cost
• Basic method: add up costs of hardware, software, network, and people involved in IS.
• Real cost is not always easy to determine • Remains a mystery for many firms
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Total Cost of Ownership (TCO)
• Has become the industry standard.
• Looks beyond initial capital investments to include costs often forgotten. For example: • technical support
• administration
• training
• Estimates total annual costs per user for each potential infrastructure choice.
• Provide the best foundation for comparing to other IT and non-IT investments.
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TCO Component Breakdown
• Shared components (servers and printers): • TCO divided among all users who access each
• When only certain groups of users possess certain components, segment the hardware analysis by platform.
• Soft costs, such as technical support, administration, and training are important to include
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Soft Cost Areas Example Components of Cost Source
Technical support Hardware phone support Call center In-person hardware troubleshooting IT operations
Hardware hot swaps IT operations Physical hardware repair IT operations Total cost of technical support
Administration Hardware setup System administrator
Hardware upgrades/modifications System administrator
New hardware evaluation IT operations Total cost of administration
Training New employee training IT operations Ongoing administrator training Hardware vendor
Total cost of training Total soft costs for hardware
Figure 8.13 Soft cost considerations
© 2016 John Wi ley & Sons, Inc. 35
Managing and Using Information Systems:
A Strategic Approach – Sixth Edition
Keri Pearlson, Carol Saunders, and Dennis Galletta
© Copyright 2016 John Wiley & Sons, Inc.