MIS 301Information Systems in Organizations

Dave Salisburysalisbury@udayton.edu (email)

http://www.davesalisbury.com/ (web site)

Planning, Justifying & Paying for IS

Discuss the importance of aligning information systems plans and business plans.

Discuss the major issues addressed by information systems planning.

Identify the major aspects of the economics of information technology.

Describe approaches for evaluating IT investment, and briefly describe methods of justifying IT investment.

Identify the advantages and disadvantages of outsourcing.

Four Phases of IT/IS Planning

Strategic IT Planning Information Requirements Analysis Resource Allocation Project Planning

IT Planning — A Critical Issue for Organizations

Business-led approach: The IT investment plan is defined on the basis of the current business strategy.

Method-driven approach: The IS needs are identified with the use of techniques and tools.

Technological approach: Analytical modeling and other tools are used to execute the IT plans.

Administrative approach: The IT plan is established by a steering committee.

Organizational approach: The IT investment plan is derived from a business-consensus view of all stakeholders in the organization

IT Planning — A Critical Issue for Organizations Continued

Strategic IT planning: Establishes the relationship between the overall organizational plan and the IT plan.

Information requirements analysis: Identifies broad, organizational information requirements to establish a strategic information architecture that can be used to direct specific application development.

Resource allocation: Allocates both IT application development resources and operational resources.

Project planning: Develops a plan that outlines schedules and resource requirements for specific IS projects.

Applications Portfolio

Phase 1-Planning

IT Alignment with Organizational Plans: identify information systems applications that fit organizational objectives and priorities

Analyze environment and relate to IT External environment - industry, supply chain,

competition Internal environment (competencies, value

chain, organizational structure) Complexity of alignment increases with

the complexity of the organization

Planning Models

Business Systems Planning (BSP) Business processes Data classes

Critical success factors (CSFs) – those few things that MUST go correctly for system success.

What objectives are central to your organization? What are the critical factors that are essential to

meeting these objectives? What decisions or actions are key to these critical

factors? What variables underlie these decisions, and how are

they measured? What information systems can supply these measures?

Critical Success Factors

Phase 2-Requirements Analysis

Information requirements analysis Analysis of the information needs of users Ensure that the various information systems,

databases, and networks support the requirements identified in Phase 1.

More comprehensive level of analysis Data needs (e.g., in a data warehouse or a data center) requirements for the intranet, extranet, and corporate

partners Identifies high payoffs IT projects Provides an architecture that leads to a

cohesive, integrated systems

Phase 3-Resource Allocation

Developing plans for Hardware, software, data networks and

communications Facilities, personnel, and financial plans

Difficult and in many cases a political process. opportunities and requests for spending far

exceed the available funds. some projects and infrastructures are

necessities, and therefore not negotiable Do we outsource some of this?

Phase 4-Project Planning

Specific applications can be planned, scheduled, and controlled.

Vendor management and control Outsourcing decisions Specific Requirements

Precisely what we are going to do Start and end dates Resources and authority Specific tasks & responsibilities

Tools exist for planning and control: PERT & CPM Gantt Charts

IT Architectures & Infrastructure

Information technology architecture refers to the overall structure of all information systems in an organization.

Applications for management levels Applications for functions Infrastructure

Factors that influence use of IT infrastructure levels

Information intensity Strategic focus Industry Market volatility Business unit synergy Strategy and planning

IT Architectures

Architectural choices are: Centralized computing Distributed computing Blended computing

End-user configurations (workstations): Centralized computing with the PC functioning as

“dumb terminals” or “not smart” thin PCs. A single-user PC that is not connected to any other

device. A single-user PC that is connected to other PCs or

systems, using a telecommunications connections. Workgroup PCs connected to each other in a small

P2P network. Distributed computing with many PCs fully

connected by LANs via wireline or Wi-FI.

IT Planning Challenges Interorganizational Systems (IOS)

Involve several organizations - may be complex IT planners should focus on groups of customers, suppliers,

and partners Multinational Corporations Different laws, politics and society Tend to decentralize IT planning and operations Other Problems for IT Planning

Cost, ROI justification Time-consuming process Obsolete methodologies Lack of qualified personnel Poor communication flow Minimal top management support Turbulent, uncertain environments

Computing Power vs. Benefits

Enables most organizations to decrease costs thereby enhancing efficiency

Enables creative organizations to find new uses for information technology and enhance their effectiveness

What is the payoff from IT investments? How can it be measured? Productivity Benefits Costs Other economic aspects of IT

Moore’s Law

 Measuring Benefits and Costs Infrastructure versus specific applications

IT infrastructure provides the foundations for IT applications data center Networks data warehouse knowledge base

Long-term, shared investments, spread across IT applications are specific systems and programs for

specific tasks Payroll inventory control order taking

Some departments, not others Evaluating IT investments

Value of information in decision-making Traditional Cost-Benefit analysis (tangibles) Scoring Matrix or Scorecard (intangibles)

 Evaluating the value of information

Difference between the net benefits (benefits adjusted for costs) of decisions made using information and the net benefits of decisions made without information

Assumption: Systems that provide relevant information to support decision making will result in better decisions, and therefore they will contribute toward ROI. However, this may not always be the case.

How to justify IT economically

Financial Cost-benefit analyses Net Present Value (NPV)

convert future values of benefits to their present-value eqivalent

Discounted at the organization’s cost of funds Compare the present value of the figure benefits to the

cost required to achieve these benefits Return on Investment (ROI)

measures the effectiveness of management in generating profits with its available assets

Calculated by dividing net income attributable to a project by the average assets invested in the project

How do you decide the costs and benefits, particularly of options not taken?

Evaluating and Justifying IT Investments IT investments pose different problems Expected value (EV) of possible future benefits by

multiplying the size of the benefit by the probability of its occurrence.

Relationship between intangible IT benefits and performance is not clear

Appraisal methods Financial (NPV & ROI) methods consider only impacts that can

have monetary value. They focus on incoming and outgoing cash flows.

Multi-criteria (information economics and value analysis) appraisal methods consider both financial and non-financial impacts that cannot be expressed in monetary terms. These methods employ quantitative and qualitative decision-making techniques.

Ratio (IT expenditures v. total turnover) methods used several ratios to assist in IT investment evaluation.

Portfolio methods apply portfolios (or grids) to plot several investment proposals against various decision-making criteria.

“Costing” IT Investments - evaluating

Placing a dollar value on the cost of IT investments is not simple – consider fixed costs.

Life Cycle Cost; costs for keeping it running, dealing with bugs, and for improving and changing the system

There are multiple kinds of values (tangible and intangible)

Improved efficiency Improved customer relations The return of a capital investment measured in

dollars or percentage etc.

Probability of obtaining a return depends on the probability of implementation success

Intangible benefits – evaluating

Intangible benefits increased quality faster product development greater design flexibility better customer service improved working conditions for employees. Difficult to quantify them with a monetary value Complex but potentially substantial

Evaluating Intangible Benefits Make rough estimates of monetary values for all

intangible benefits, and then conduct a NVP or similar financial analysis.

Scoring Matrix or Scorecard

Handling Intangible Benefits (Sawhney)

Supplement hard financial metrics with soft ones.

Identify short-term benefits that can justify the initial investment in the project.

Keep an open mind about where the payoff from IT and e-business projects may come.

Business Case Approach – evaluating

A business case - document used by managers to garner funding for specific projects

Bridge between the initial plan and its execution to clarify how the organization will use its resources justifying the investment to manage the risk determine the fit of an IT project with the

organization’s mission

Investment justification - evaluating

Total cost of ownership

Total cost of ownership (TCO) includes: Acquisition cost (hardware & software) Operations costs (maintenance, training, operations,

etc.) Control cost (standardization, security, central services)

Total Cost of Ownership – PC’s

Desktop hardware Software Servers Systems

management Storage

management

Operations labor Help desk costs Communications Development End user costs Hidden costs

One representative sample…

Thin clients versus thick clients Thin clients (minimal storage, a.k.a.

networked PC) - $ 3,787 per year Thick clients (traditional PC) - $ 6,880 per year

Multiply that difference by say, 500-1000, and I think you see a trend developing

Why do we spend money on Flat Panels?

Information economics

Organizational objectives Intangible benefits Scoring methodologies

Evaluate alternatives by assigning weights and scores

Identifies all key performance issues Assigns weights Scores each issue Multiply score by weighting factor and totaled Highest weighted score is judged best

Real option valuation and assessing the value of an IT Investment

Recognizes IT investments can increase future performance

Looks for opportunities embedded in capital projects Looks at opportunity cost Common types of real options

Expand a project (so as to capture additional cash flows) Terminate a project that is doing poorly (to minimize

losses) Accelerate or delay a project

Appropriate when: most decisions based on the assumption that investments

are strategic expected returns cannot be readily measured in monetary

terms A lot of web-based systems might fit into this category

Tracking/allocating the costs of IT/IS

Accounting systems should provide an accurate measure of total IT costs for management control

Users should be charged for shared IT investments and services in a manner that is consistent with the achievement of organizational goals

Chargeback All expenses go into an overhead account. With this

approach, IT is “free” and has no explicit cost, so there are no incentives to control usage or avoid waste.

Cost recovery is an approach where all IT costs are allocated to users as accurately as possible, based on cost and usage levels.

Behavior-oriented chargeback systems set IT service costs in a way that meets organizational objectives, even though the changes may not correspond to actual costs.

“Costing” IT – Economic Strategies

Outsourcing A strategy for obtaining the economic benefits of IT

and controlling its costs by obtaining IT services from outside vendors rather than from internal IS units within the organization.

Offshore outsourcing of software development ASPs & Utility Computing – Application service

providers manage and distribute software-based services and solutions from a central, off-site data center via the Internet.

Management service provider – a vendor that remotely manages and monitors enterprise applications.

Outsourcing Benefits & Concerns Benefits

Avoid heavy capital investment, flexibility

Improve cash flow and cost tracking

Economies of scale Better access to latest

technologies & skillsets More choice of platforms

and software Faster development Focus on own “knitting” Less IT/IS staffing issues Clearly defined service

levels Load balancing

Concerns No strategic advantage

from IT/IS Control over application

development Dependent on vendor

viability Creates potential

redundancies Provider will service

other companies (maybe competition), diluting their interest in you

The loss of talent generated internally in IT/IS

Employees may react badly

Security concerns