Full life-cycle management and the IT Management … · · 2012-11-06Full life-cycle management...

Chapter 5 in: IT Management, D. Remenyi and A. Brown, Butterworth-Heinemann, 2002

1

Full life-cycle management and the IT Management paradox

Egon Berghout, University of GroningenMenno Nijland, London School of Economics

In this Chapter the concept of full life-cycle management is described. Full life-cyclemanagement is a series of notions and techniques, which are essential to maintain controlover the information function in an organisation. Furthermore, a survey is describedproviding an overview of the extent to which the elements of full life-cycle management areactually applied in practice.

This Chapter illustrates that IT Management is still an underdeveloped area, both in theoryand in practice. Many suggestions for improvements are given on the basis of the concept offull life-cycle management.

1 Introduction

IT management does not have an impressive reputation when it comes to fulfilling promises.Of course, IT never builds identical information systems in an identical organisational contextand, therefore, IT projects always involve risks and uncertainty. These risks and uncertainty,however, decrease during the project. Unfortunately, so do the possibilities to adapt theinformation system to the wishes of the organisation. Often, many requirements only becomeapparent when the information system is already in use.

The problem described above is here defined as the ‘IT management paradox’. At thebeginning of a project when there are still many possibilities to change the functionality of aninformation system, members of the organisation often insufficiently understand thesepossibilities and their implications. At the moment that the information system is operationaland the implications become clear, substantial modifications are hardly possible.

Many techniques, such as prototyping, have been developed to resolve this problem and thesework to some extent. However, incremental or spiral development techniques are alwaysfocussed on delivering the best possible information system given the approved project. Theimportant link between the identification and approval of these projects and the actualimplementation and subsequent operations is, however, often missing. In other words, inmany cases we are simply developing the wrong systems, or justifying proposals againstincomplete analysis. Prototyping techniques have a too narrow perspective of the system life-cycle to be able to actually resolve the IT management paradox.

The fact that this is often the case can be illustrated with how cost/benefit analysis is regularlyused. In practice, costs often only include development costs. Sometimes costs are evenlimited to the costs of developing the hardware and software of the information system.Development costs typically include 20%-40% of the life-cycle costs of an informationsystem (most costs are incurred in the operational stage of the information system). Hardwareand software development costs typically include 5%-10% of the life-cycle costs of aninformation system.


2

In cost/benefit analysis these costs are compared to the perceived benefits of the informationsystem and normally include estimations of strategic benefits and organisational efficiencies.Benefits, by definition, can only be derived during the operational stage of the informationsystem (because there are no benefits during development). Consequently, we are currentlyevaluating systems on the basis of less than half of their lifetime costs and, consequently, a lotof the information systems that are currently built should never have been approved. Thenotion of full life-cycle management is introduced in this Chapter to support resolving thistype of problems.

2 Full life-cycle management

In full life-cycle management a comprehensive set of methods and techniques is offered tomanage information systems along the system’s life-cycle. Furthermore, information is sharedamong life-cycle stages. A number of approaches to life-cycle management have beenpublished (Swinkels, 1997; Willcocks, 1994; Thorp, 1998). This Chapter draws upon work ofSwinkels and Berghout, Klompe and Nijland (Centre of IT Economics Research, Universityof Groningen).

The three major life-cycle activities are defined first. These activities are:1. Planning stage2. Development stage3. Operation stage

In the planning stage the importance of IT is compared to that of other business investmentopportunities, new IT projects are identified and priorities between individual IT projects aredetermined. In the development stage the prioritised proposals are subsequently designed,built, tested and implemented. In the operation stage the information systems are keptoperational and maintained. All three stages have their own typical cost/benefit problems andin order to establish an efficient and effective IT management, one needs extensiveinformation exchange.

Init ialcost

Init ialcost

BenefitsBenefitsOperational

costOperational

cost

Figure 1: Incomplete cost/benefit analysis in practice


3

In this Chapter the life-cycle activities are subsequently discussed, together with theirinterrelation. Furthermore, a state-of-the-art overview is given using nine case studies in thefinancial services industry. There is insufficient space for an in-depth discussion of thevarious techniques that should preferably be used for the particular life-cycle activities. Thesetechniques are only referred to.

We will argue that excellence of operations in only one or two life-cycle activities is relativelypointless and efficient and effective use of IT can only be achieved through full life-cyclemanagement. Figure 2 illustrates the concept of full life-cycle management and the mostprominent cost/benefit issues.

3 Planning stage

In the planning stage the priority of IT compared to other business investment opportunities isdetermined, new IT projects are identified and priorities between individual IT projects aredetermined.

Data of the current status of operational systems are an important input for this activity. Howwell do current operational systems perform, what is their current technical and functionalquality, and what is the estimated effect of improvements? An analysis of the currentoperational systems provides a bottom-up analysis of IT planning. Besides a bottom-upapproach, Earl defines two other approaches, the top-down and inside-out approaches (Earl,1989).

In a top-down planning process, priorities regarding IT are established on the basis oforganisational goals. In an inside-out planning process, priorities are established on the basisof new IT developments. A top-down analysis starts with a strategic analysis of the

How can we controlHow can we controlcosts and maximisecosts and maximise

benefits of operationalbenefits of operationalinformation systems?information systems?

How can we identifyHow can we identifyand prioritise the mostand prioritise the most

valuable IT projects?valuable IT projects?

Exploiting

Planning

Developing

How can we manageHow can we managebenefits and burdensbenefits and burdensduring development?during development?

Figure 2: Three main activities of full life-cycle manangement


4

environment of the organisation. Porter’s framework of competitive forces can be helpful here(Porter, 1980). Typical questions that need to be addressed are:

• What business are we in? What differentiates us from our competitors? Why do customersactually buy from us?

• What will be the major changes in our line of business in the coming few years? To whatextent will products or markets change? Is our market rivalled by other products or newcompetitors?

• What will be our strategic focus for the coming years? Will this goal primarily beachieved through product innovation, new markets or efficiency of operations?

• To what extent can IT assist in this strategy? For example, can we use an e-marketstrategy, or add new services to products, or establish major cost savings in labour.

The method of Bedell is suggested to be used for the bottom-up analysis and prioritisation ofIT and non-IT (Bedell, 1985). Inside-out strategies are typically supported by external ITconsulting groups. Deliverable of the planning activity is a ranking of IT project priorities.

The planning stage supports the notion that IT resources should be directed towards the mostbeneficial areas. Consequently, this is also true for the planning activity itself, where most ofthe effort to identify project proposals is directed to those organisational areas where theexpected gains are the highest. Bedell’s method supports this notion.

The identified project proposals can be prioritised using methods such as InformationEconomics (Parker et al.,1988); Balanced IT Scorecard (Grembergen, 2000) and InvestmentPortfolio (Berghout, 1997).

4 Development stage

In the development stage the prioritised proposals are subsequently designed, built, tested andimplemented. Suggesting that development simply means working through the list ofprioritised proposals would, of course, be an enormous oversimplification. This would requireindefinite resources of developers that are perfectly skilled in any technology and anybusiness area, and users, who precisely define what they require. Unfortunately, the planningproblems in information system development are complex and priorities will change assystems develop and so will the business environment.

In order to keep track of the cost and benefits of the information systems under development,at least the following activities should be managed:

1. Management of cost, through active resource management.2. Management of benefits, through active management of the functionality of the

information systems under development.3. Management of the time schedule.

Management of cost

The resources required to build the information system comprise the cost of the informationsystem. The resources typically include hardware, software and all labour time associatedwith the project (both IT and non-IT). As the system develops, a better understanding of thecost will be established. There will be few occasions where the actual costs are similar to


5

those envisioned, as there will always be technical problems, functional changes or planningproblems.

Gathering cost data throughout the development phase has, therefore, several objectives:

• assembling data for future projects;• controlling the development activities;• evaluating cost and benefits of the project under development.

The last point is often of major concern in an IS project, as increases in the development costof a factor three or more regularly occur. Often, the rational of a project should bereconsidered.

This reconsideration is identical to the investment analysis of the planning activity of full life-cycle management. In the planning stage the overall costs and benefits of projects areevaluated and compared to those of other proposals. Consequently, this is not a projectmanagement activity. Project managers are rarely in a position to compare their projects toothers. Let alone compare all projects to the strategic objectives of the organisation. Whencost and benefits change to a certain extent, the project requires another review, which issimilar to the justification that is part of the planning stage. There is, however, no golden ruleto determine this ‘certain extent’. Regular reporting of project managers to management arean essential element here.

Management of benefits

The benefits of information systems are associated with the envisioned functionality. In otherwords, the information system performs particular tasks, these tasks have particular efficiencyor strategic consequences and these consequences result in benefits that should outweigh theanticipated cost. This also implies that cost and benefits appear in a very dissimilar form in anorganisation and this complicates management of benefits and comparison with coststhroughout development. Both these issues will be subsequently discussed.

As the information system develops, there will normally be requests for other (additional)functionality. Normally, these requests will also imply additional benefits and, therefore, theyshould often be granted. However, granting additional functionality normally also impliesdelaying the delivery of the information system and this could imply major costs. As theinformation system is under development, the competitive situation of the organisationchanges: companies merge, or competitors may launch new products. These changes mightchallenge the original rational or priority of the system under development. Short deliverycycles are therefore a commonly accepted principle in the management of IS projects andshould be given a high priority against adding functionality.

Senior management should be involved when conditions change to such an extent that theoriginal cost/benefit appraisal could be challenged. From a managerial perspective the coststhat have been incurred until that point in time are irrelevant. The (new) anticipated benefitsshould be compared with the remaining development costs and operating costs at all times.

Management of time schedule


6

The final element that requires management attention is the time schedule. As delivery time isa major issue when developing information systems, so is the allocation of people to projects.Planning both milestones and final goals is essential, not only for the realisation phase of theproject, but also for the exploitation phase. During realisation milestones are used to monitorthe outcomes of the project, while during exploitation they can be used to monitor investmentresults, for example to check whether qualitative goals have been reached. Experience datafrom previous projects is one of the few means to help in the planning stage.

Conclusions regarding the development activity

Managing information system development from a cost/benefit perspective requires control offunctionality, resources and planning. The actual functionality determines the benefits, theresources determine the costs and planning influences both cost and benefits.

Senior management cannot be bothered with all changes that definitely will occur duringdevelopment. However, at a certain point these changes will also affect the priority of theproject compared to those of others or even the rational of the project. Management of systemdevelopment, therefore, also includes senior management attention. However, it is hard todraw an exact line between operational project management and strategic reconsideration ofprojects.

5 Exploitation stage

The exploitation of information systems differs from development in many ways:

• the organisation of this stage is production-like;• system changes are normally minor (since major changes are considered new

investments);• ‘disabling’ functionality is often of major concern, such as security and availability issues

(compared to ‘enabling’ functionality during the development stage).


7

From a cost/benefit perspective the exploitation activity is of major concern as all benefits arereaped during exploitation and the majority of the costs are then incurred (normally between60%-80% of the overall life-cycle costs). However, although the cost figures might beimpressive, the possibilities to restrict the costs or increase the benefits could very well beminimal. Most costs and benefits will be lump sum and changes would endanger thecontinuity of the various information systems. Research indicates that on averageapproximately 10% of the costs and benefits can be influenced in this stage (Klompé, et al.1999). Cost allocation and charge out are the most obvious methods to manage costs in this

activity. Service-level agreements are the most obvious method to manage benefits in thisactivity. In Figure 3 an evaluation method for the operational activity is illustrated, which isdeveloped by KPMG and Delft University (Kesarlal, 1997).

Information systems also have an end of life. Identifying this point in time is part of theexploitation stage. Evaluating all operational information systems and removing those that areno longer used or cost-efficient has proven to be a very economical activity.

6 Full life-cycle management revisited

In the previous Sections of this Chapter the concept of full life-cycle management wasdiscussed. This concept consists of various interrelated activities. Throughout thedevelopment of the information system, from first conceptualisation through exploitation toabolishment, the notion of the costs and benefits of a particular information system will

IT Budgetting

Registration of IT Costs

Cost Charging

Cost Ratio Analysis

Business Perfomance Analysis

Service Level Management

Service Level Agreements

User Information Satisfaction

Costs Management Benefits Management Business Average Score

Figure 3: Cost/benefit managent of operating activity


8

improve. However, the number of possibilities to influence these costs and benefits will,unfortunately, decrease. This is referred to as the IT management paradox: by the time thecontents and consequences of the information system are clear, few possibilities are left toinfluence them.

This paradox should encourage and not discourage to actually manage informationtechnology. In this Chapter the notion of full life-cycle management was developed furtherand several techniques were discussed.

A more detailed life-cycle is illustrated in Figure 4. The planning stage consists ofprioritisation of IT against non-IT and the prioritisation between IT projects. The developmentstage consists of designing, building, testing and implementing of IS projects. Theexploitation stage consists of operating, maintaining and abolishing of operational informationsystems.

The various activities can only be adequately performed when information from otheractivities is available. For example, operational costs typically make up 60% - 80% of the life-cycle cost of an information system. Not including these cost in the investment appraisal ofthe planning stage implies that many uneconomical projects will be approved. Building upexperience data is, therefore, an important element of full life-cycle management.

Aiming at for excellence in only parts of the life-cycle seems to be relatively pointless, asexcellence can only be realised on the basis of information about the various other activities.

7 Full life-cycle management in practice

One might ask to what extent concepts of full life-cycle management are currently applied inpractice? Therefore, this Section describes the state of the art in IT management at ninefinancial services institutions. Overall, we concluded that although organisations want toimprove their IT cost/benefit management, they allow many opportunities to pass by. It isremarkable, for example, that still few organisations take the opportunity to evaluate their IT

Exploiting

Planning DevelopingDesign

BuildandTest

Imple-ment

Operate

Maintain

Aban-don

Identifyprojects

Justifyprojects

Evaluate

Figure 4: Overview of life-cycle management activities


9

investments after implementation. The attitude towards cost/benefit management remainsprimarily incident driven.

The outline of this Section is as follows. First, the research method is discussed. The modelused is based on the life cycle, divided in five parts: identification, justification, realisation,exploitation and evaluation. These five parts are described in detail in the appendix of thischapter. Second, the research results of the nine case studies are given. The paper ends withconclusions regarding the quick scan tool and general findings within the area of IT cost andbenefit management.

7.1 Research method

The presented overview is based on quick scans, which were held at nine major financialservices organisations in the Netherlands. The quick scan consists of semi-structuredinterviews. Three interviews are held at each organisation, with:

• Strategic management, among other things responsible for organisation-wide ITdeployment, as well as responsible for making general strategic decisions.

• IT management, with the main responsibility to offer IT services which are in conformitywith the market.

• Line management, among other things responsible for the realisation of benefits from ITin the business processes.

All these management types have a direct link to the IT investment process and therefore areincluded in the research (Rockart, 1991, Applegate, 1996). By involving three individualswithin one organisation, each with a different role and different perspectives on IT, a broaderand more informed view of the IT cost/benefit management is obtained.

7.2 Research findings

Using the quick scan in the three interviews, it is determined whether an organisationaddresses all requirements of a particular life-cycle activity. The three quick scan results areeventually combined in one conclusion about the IT cost/benefit management of theorganisation. According to the number of requirements it has implemented, an overalldiagram of the organisation can be drawn which represents how well it manages costs andbenefits of IT. A typical outcome of the quick scan is illustrated in Figure 5.


10

In addition to the diagram in Figure 5, a detailed explanation is presented to elaborate on thescores for the five activities. It explains which aspects present themselves for cost/benefitmanagement improvement. Presenting the results in a diagram provides a good base forcommunication within the organisation. To implement all aspects of the quick scan is notmeant to be an absolute goal for every organisation, but rather the quick scan can givesuggestions how to improve parts of IT cost/benefit management. Since improvementsthemselves are investments, they should be analysed for appropriateness given the particularcontext of the organisation. The overall findings of the nine financial organisations areelaborated upon in the remaining Sections of this Chapter. All major life-cycle stages willsubsequently be discussed.

7.3 Identification activity in practice

An overview of the conclusions regarding the identification activity is given in Figure 3. Allorganisations have a bottom-up as well as a top-down identification process. This means thatIT investment proposals come from both an operational level and a strategic level. At theoperational level ideas are generated by examining the business processes and (shortcomingsin) existing information systems. Changing business strategies also have their impact on theIT strategy, which initiates new IT investments. Lastly, most organisations consult externaladvisors to inform them about new technologies and their possible impact.

However, most organisations do not distinguish a distinct identification activity, which isseparate from the justification activity. As a result, proposals are not gathered at a single pointin time. Identification is rather a continuous process. Moreover, in these organisations ITproposals emerge either out of problems and difficulties with IT, or from spontaneous ideaswhich are not well thought out. The proposals are justified directly afterwards. What takesplace is not pro-active explicit searching for IT proposals, but purely reactive activities. As aresult many opportunities are missed, either because they were not discovered or because

Organisation

Identification

Justification

RealisationExploitation

Evaluation

Performance Maximum

+ Operational costs of systems are known+ System failure reports are available- No Service Level Agreements between IT and business operations

+ Detailed project planning+ Costs, time and functionality are managed- Considerable exceeding of time and costs

+ Strategic management envolved in justifaction of IT proposals- Costs of exploitation are not considered- Formal investment method is absent

+ Periodical analysis ofinformation systems+ Assessment of marketand competition+ Clear guidelines for ITinvestment proposals

- No comparison between investment results and set goals- No IT cost / benefit improvement due to experience

Figure 5: Example of diagram resulting from a quick scan assessment


11

resources had already been given to necessary investments to resolve problems. Discoveredideas are so-called must-do investments. There is no choice: the organisation is forced toinvest in the proposals. In this line, strategic management is seldom involved in theidentification of IT investment proposals. It waits for the IT ideas and proposals to emergefrom the organisation. Consequently, IT proposals often come from only one side of theorganisation. This side is either the IT side, which promotes IT investments but often lacks theinsight in real needs for business processes, or the business side, which often lacksunderstanding of IT limitations. Lastly, the research shows that none of the organisationsmake use of proper guidelines for IT investment proposals. As a result the proposals are ofvarious quality, and are difficult to compare.

7.4 Justification activity in practice

An overview of the conclusions regarding the justification activity is given in Figure 4. Theresearch shows that in contrast to some years ago (Keen, 1991), nowadays strategicmanagement is involved in the justification activity. The increasing costs and risks of ITinvestments demand the participation of the strategic management during the justification. Inthis justification tangible and intangible costs and benefits are considered. An illustrativeexample of this is that a major bank decided to give priority to an investment to improve thelayout of their bank receipts, an investment which would bring in no direct financial benefits,instead of opting for an investment which would yield considerable financial profit.

However, due to a lack of general criteria for investment proposals, organisations find that itis difficult to compare the proposals. Priorities are therefore determined on the basis of(incomplete) information about the proposals, and the ‘vision’ that the strategic managementhas of a proposal, instead of on the basis of a formal decision process with clear criteria thatapply to all proposals. Besides that, cost/benefit analyses are often incomplete. Examples ofthis are missing estimations of exploitation costs. Furthermore, only a small number oforganisations estimate the costs that occur due to implementation of the information systemsin the business processes.

A substantial problem in most justification processes is that investment goals are not set insuch a way that it can be checked afterwards if these goals have been achieved. They are notverifiable or measurable. There is a tendency to state goals in a qualitative way (‘better thanthe current situation’) instead of a quantitative way (‘an improvement of 15%’). Consequentlywe see in the evaluation activity that it is very difficult to say whether an investment wassuccessful or not. IT cost/benefit management improvement remains difficult if it is not clearif and why IT investments failed.

- The identification is reactive instead of pro-active.

+ All organisations have a bottom-up identificationprocess.

- Strategic management is not involved in theidentification activity.

+ Most organisations have a top-downidentification process.

- IT proposals come from one part of theorganisation.

+ Almost all organisations use external sources tofind new IT proposals.

- Guidelines for IT proposals are missing.

Figure 6: Conclusions regarding identification activity


12

7.5 Development in practice

Although all organisations make detailed time schedules and estimations of budgets, most ITprojects exceed these time and cost estimations. Especially sizeable projects often run behindtheir initial schedule. The research shows three majors causes:

1. Project goals are not fixed, and change during project execution.2. The estimates of time and costs are not realistic.3. Risks are involved that were not anticipated.

As seen in the justification activity, goals are not set properly. Because of their vagueness theychange during the project, resulting in projects that never reach their goals. These ‘everlastingprojects’ do not deliver an operational system. One way to tackle this problem is to deliver thesystem before major system adaptations are made. Although this approach gives systems thathave to be adapted to new needs, at least there are some products which can be used in thebusiness. Beside the too optimistic estimates of time and costs, another cause of delays insystem delivery is the problem that operational risks have not been identified properly beforean IT project is started, and thus unexpected problems arise during realisation.

Opportunities to improve realisation by doing subsequent calculations and use of documentedexperiences are uncommon. Lastly, the quality of most systems is regarded to be of a lowlevel at the time they come into exploitation; they seldom meet the high expectations held bythe end users or line management.

- Goals are not verifiable or measurable. + All organisations have eye for tangible andintangible costs and benefits.

- Criteria are not used or different for eachproposal.

+ In all organisations strategic management isinvolved in the justification activity.

- IT cost/benefit analyses are often incomplete.

Figure 7: Conclusions regarding justification activity

- Project plans and time schedules are toooptimistic.

+ All organisations make time schedules and planbudgets.

- Financial estimates are incomplete. + Most organisations use formal developmentmethods to structure the realisation process.

- Documented experiences are not reused.- Subsequent calculations are uncommon.- The quality of delivered systems leaves much to

be desired.- Project goals are not fixed.- Operational risks are not identified.

Figure 8: Conclusions regarding realisation activity


13

7.6 Exploitation in practice

The majority of organisations register exploitation costs for each information system.However, two out of nine organisations only know the overall exploitation costs. They do notknow how much each information system contributes to the total sum.

Almost all organisations had appointed somebody to each information system, who isresponsible for the effective use of the system. It is however remarkable that in general noconnection between the system and the initial goals is made. A well performed exploitationshould focus on achieving the set goals, not only on keeping the system operational.

Most of the organisations do not use Service Level Agreements. There is no formal agreementwhich states how systems should perform. Furthermore, in general there is no charging of ITcosts to the business processes. Consequently it is difficult to know which costs are made tosupport the business process. Because benefits and costs are not considered at the businessprocess, it is difficult to determine whether the system is still profitable. An overview of thefindings regarding the exploitation activity is given in Figure 9.

7.7 Evaluation in practice

Most organisations do not evaluate. For example, they seldom look back whether the ITinvestment has really met expected goals. The three main reasons for this are:

1. Due to vague project goals it is difficult to determine if goals have been reached.2. The results of one investment, so is said, cannot be isolated from other investment results.3. Due to limited IT resources, IT capacity is rather used for new projects than for evaluating

old investments.

Consequently organisations do not know if a particular IT investment can be called a success.However, such an evaluation is necessary to determine how IT cost/benefit management canbe improved. An analysis of the investment could lead to system improvement proposals orbetter IT economic processes for IT decision making, system development and systemexploitation.

- Most organisations do not use Service LevelAgreements.

+ Most organisations know the exploitation costsper information system.

- IT costs are not charged to the businessprocesses.

+ Most organisations have arranged theresponsibility of the information systems.

- Exploitation is not focused on achieving theinvestment goals, but on keeping the systemoperational.

Figure 9: Conclusions regarding exploitation activity


14

A small number of organisations, who evaluate slightly better, make use of a formal methodto evaluate some aspects from the IT investment process. For example, they use the CapabilityMaturity Model (CMM) to evaluate and improve the realisation activity. Or they usebenchmarks or a Total Cost of Ownership (TCO) model to evaluate the exploitation activity.This way they improve their IT cost/benefit management.

7.8 Conclusions full life-cycle management

In this research the concept of full life-cycle management was used to assess the managementof IT costs and benefits. Based on the observation that throughout the life-cycle ofinformation systems, the costs and benefits become both more clear but also harder toinfluence, a quick scan instrument was developed to present opportunities to get a better gripon IT costs and benefits during the whole life-cycle of information systems.

The quick scan was deployed in nine financial organisations and indicates that in contrast to anumber of years ago, nowadays senior management is actively involved in the IT cost/benefitmanagement. This is probably caused by the increasing costs, risks and potential benefits ofIT investments. Although organisations confirm the importance of a well-performed ITcost/benefit management, in general quite a few aspects of their IT cost/benefit managementwere open to improvement.

The quick scan tool which is applied in this paper appears to be an efficient tool for analysis.In all cases, the case study conclusions were confirmed by senior management and theanalysis effort was experienced as worthwhile.

The most important conclusions regarding costs and benefits management are:

• Identification of project proposals: instead of a pro-active identification of IT proposals,most organisations have a more reactive attitude towards IT investments. Only when ITproblems arise, a clear identification process is visible. Otherwise IT investment proposalsare not sought. As a consequence, most IT proposals are necessary to solve a problem andthere is no real choice about investing or not.

• Justification of project proposals: investment goals are not verifiable or measurable. It istherefore difficult to assess if an IT investment has been successful.

• Realisation of projects: IT projects last too long and cost too much due to unclear projectgoals, too optimistic estimations and the occurrence of unanticipated problems.

- Evaluation is missing due to the fact that goalsare not measurable.

+ Some organisations make use of some kind offormal method to evaluate the investmentprocess.

- Influences of other investments cannot beisolated.

- IT capacity rather used for new projects than forevaluation.

Figure 10: Conclusions regarding exploitation activity


15

• Exploitation of operational information systems: in general the focus lies on maintainingthe information systems operational, not on using the systems to achieve investment goals.

• Evaluation of cost/benefit management: because the results of many IT investments arenot assessed, organisations do not know how to manage their IT costs/benefits better.

Though these results are interesting in their own right, the real benefit of the quick scan tool isnot to arrive at general findings, but to suggest specific points for improvement to particularorganisations. The merit of the quick scan tool is the possibility to locate specific lacks in ITcost/benefit management, present them in a communicative manner, and give a basis forimprovement.

The case studies support the assumption that excellence of operations can only be achievedwhen all activities of full life-cycle management are addressed. Simply, because informationof other activities is required to achieve some form of overview. The different parts in the life-cycle model require input from other parts. For example, to come to a good evaluation (during‘evaluation’), information such as justification criteria (during ‘justification’) are needed.

By using the quick scan, we address the IT Management Paradox by influencing IT costs andbenefits not only at an early stage of the life-cycle when the effect of influence is the mostsubstantial, but also during the full lifecycle. Because of the dependencies between thedifferent elements in the lifecycle, this full life-cycle approach presents the opportunity to useexperiences over time and thus to mature our management of IT costs and benefits.


16

Appendix: Quick scan elements in detail

With the Information Economics Life-cycle (Swinkels, 1997) approach as a basis, a quickscan instrument has been developed with the purpose to gain insight in the way organisationshandle IT cost/benefit management. The quick scan instrument requires that the life-cycle isdeveloped in more detail. Using multiple general sources of literature on IT evaluation and ITeconomics (e.g. Willcocks, 1994, Farbey et al., 1993, Remenyi, et al. 1993, Hogbin, 1987,Parker and Benson, 1988) and more specific sources on the life-cycle model (e.g. Berghout etal., 1996, Irsel and Swinkels, 1992) and interviews with members of the WorkgroupInformation Economics, who initially developed the Information Economics life-cycleconcept, a model is created which details the main activities of the life-cycle into a number ofrequirements for a well-performed activity.

IdentificationThis activity is concerned with discovering all investment proposals where IT can benefit theorganisation. The ideas for investments can be found by a top-down, bottom-up and an inside-out approach (Earl, 1989). Examples of these approaches are: IT investment proposals derivedfrom business goals (top down), proposals due to failing information systems (bottom up) andproposals that are presented by innovative use of IT (inside out).The importance of identification lies in the fact that during the next activity (justification) achoice should be made from the ideas and plans that have been discovered. When importantideas are overlooked due to bad identification, important opportunities might be missed. Thus,the identification activity is necessary to identify all attractive IT investment proposals.

The main requirements for a well-performed identification are:• senior management should be involved in this stage and determine the direction in which

new IT investment proposals should be sought. It is the role of the senior management toset the general direction of the company. As these days IT is becoming more and more ofstrategic importance, the involvement of strategic management in this activity is essential.

• all operational information systems should be periodically checked to see whether it isnecessary to discard them or improve them. To minimise the threat that operationalsystems suddenly fail, a periodic check of systems is necessary. Such a check could givethe impulse for discarding an information system or for additional IT investments toimprove the current situation. It enables a pro-active reaction to possible threats.

• a well-performed identification considers all three possible sources of new IT proposals:top down, bottom up and inside out. Though the majority of proposals may come from onesource, all three sources should be referred to. This entails analysing business goals,existing business processes, operational information systems and looking for ITpossibilities.

• besides the internal IT opportunities, the organisation should pay attention to the externaldevelopments with respect to competition, customers, changes in society, governmentregulations and advice from external parties. External ideas, opportunities and threatsshould be identified. For example, for most financial companies a change in thegovernment’s policy can have a major impact on the organisation of information.

• it is essential that one person (or department) is responsible for pro-active identification.If no one is responsible for identification, the identification process will be withoutstructure (or nonexistent). Most likely many IT investment proposals will be overlooked:either they remain undiscovered or are carried out without entering the IT decisionprocess.


17

• guidelines should be used which have to met by all IT investment proposals. To attain acertain quality of proposals, clear guidelines should be used which can specify definednorms (such a financial norms) or norms concerning content (such a certain aspects thathave to be addressed in each proposal). The guidelines should be known by all who areinvolved in the IT investment decision-making process.

• persons (or departments) should get the time and resources to generate proposals.Clearly, only when people get the resources to draw up proper IT proposals, theidentification will turn out the best IT investment proposals.

JustificationThe justification activity is used to justify IT investment proposals and to weigh the differentproposals against each other, so that limited organisation resources can be distributed amongthe most attractive proposals. To make an accountable decision, a number of (predefined)criteria can be used to score each proposal. The criteria can be financial (e.g. Return OnInvestment figures) and non-financial (e.g. strategic match).

The main requirements for a well-performed justification are:• three aspects should always be regarded in each proposal: costs (including time), benefits

and risks. One can have all kinds of different criteria to justify IT investments, as long asthe criteria cover the costs, benefits and risks of the investment.

• distinctive criteria should be used to justify the execution of IT investments. Due to limitedresources only a small number of IT investment proposals can actually be realised.Therefore the proposals should somehow be compared to each other to determine whichproposals should have priority. By distinguishing criteria all proposals can be matched.

• a distinction should be made between the investment’s impact on the business domain andthe IT domain. Because there is a considerable difference between investments ininformation systems and in the technical infrastructure, there should be an awareness thatinvestments can have an impact on different domains. Investments in information systemscan result in direct benefits for business processes (the business domain), whereasinvestments in the technical infrastructure (IT domain) mostly do not. However theinvestments in the IT domain are crucial to do (future) IT investments. Consequently bothtypes of investments are equally important, but may have very different kinds of benefits.

• strategic management should be involved in justification. IT investments are characterisedby high costs and high risks, but also high potential benefits. Furthermore, many ITinvestments have a company-wide impact. These are reasons why the strategicmanagement should be involved in justification and make clear decisions concerning IT.

• there should be well-founded (overall) estimations of all tangible and intangible costs(including initial investment costs and exploitation costs) and benefits. All costs andbenefits should be quantified as much as possible. This is especially difficult for theintangible costs and benefits. A quantified estimation is often more usable in thejustification process than qualitative statements (such as ‘much more’ or ‘much better’).These quantified estimations do not always have to be financial figures, but can also beestimations of numbers (like product numbers), time estimations (like time to develop),etc. Although in this stage the estimations may be overall estimations, they have to bewell-founded. Of course all costs have to be regarded, including the initial costs and theannually returning exploitation costs.

• justification should be performed according to a formal justification process. For aneffective justification a formal process should be used. A formal process is characterisedby documented procedures, which are followed in practice. The main benefit of a formal


18

process is that it can be adapted using experiences from previous IT investments so itbecomes more effective.

• project goals should be verifiable and measurable. It is important that it is possible todetermine if goals have been reached. There are three reasons for this: firstly, duringrealisation it is always clear which goal should be reached and one can work towards thatgoal. Secondly at the end of the IT project it is possible to say whether an investment wassuccessful. Thirdly if an investment was not successful, the reasons for failure are moreclear.

• IT and line management should be involved in justification. IT management and linemanagement both have different points of view on IT investments. IT management ismostly responsible for providing information about the possibilities and limitations of IT.Line management is mostly responsible for providing information about the needs for thebusiness processes. Participation of both managements guarantees the support which isneeded to bring the IT investment to a successful ending.

• it should be known how different proposals interact with each other. Most IT projectsinteract with each other, either as opposing factors (because they share resources) or ascomplementing ones (because one project has results, which can be used by the other).The interaction of proposals should therefore be taken into account.

RealisationDuring the realisation of the investment, the aims and goals that were set during justificationshould be achieved against minimal costs. The investment proposal is implemented during anIT project. This not only implies a technical implementation of the system, but also theintegration of the system in the business process. All related costs should be monitored. Thisincludes indirect costs such as the costs that occur due to the reorganisation of the businessprocesses.

The main requirements for a well performed realisation activity are:• a time schedule and well-founded detailed estimations of all costs. The overall estimations

during justification should now be detailed. As a result there will be a project plan with adetailed time schedule and budget.

• measurable targets with respect to functionality of the system. The project goals fromjustification should be translated to functional goals. The goals describe what functionalityand performance the information system will have.

• measurable milestones during the project. Milestones are necessary to monitor the projectand be able to adjust where required.

• there should be continuous monitoring of costs, time and functionality. To determinewhether a project needs adjustment, one needs to measure the costs, time and functionalityand compare these to the preceding plan. These three aspects can be used to steer aproject. For example, in most cases one can cut costs by discarding functionality. Or, atthe price of higher costs, a project can be delivered faster.

• subsequent calculation. After the project has finished, a report should be made whichexplains the differences between actual costs and planned costs. This is not only useful toevaluate the project, but also gives insight in the way things can be done more effectivelyin the future.

• operational risks should be assessed at the start of the project and monitored during theproject. Most project problems can only be successfully solved if they have beenidentified at the start of the project. They should be monitored during the execution of theproject.


19

• a structured development method should be used (e.g. SDM). Developing an informationsystem according to a structured method has two advantages: firstly, none of the importantdevelopment stages will be overlooked. Secondly, the method can be easily adapted whenresults are not satisfactory.

• problems and budget or time exceedings should be reported to management. The soonerproblems are known, the sooner actions can be taken. There should be some mechanismduring realisation where management is informed about such problems.

• a structured scheduling method should be using while planning the project (e.g. functionpoint analysis). Methods like the function point analysis, the COCOMO method orcomparable methods give insight in the efforts an IT investment requires. By using thesame method structurally, an organisation can adapt it to make increasingly betterestimations.

• problems occurring during project execution should be written down in reports, so thatknowledge can be used. It is not uncommon projects encounter the same problems as pastprojects. If knowledge about these problems is used, they can be avoided or correctedearlier on.

ExploitationThe primary target of the exploitation activity is to optimise the support of existing systems tothe business processes. This entails minimising operation costs, and maximising the use of thepossibilities of the systems. A well-performed exploitation addresses the initial investmentgoals, while monitoring all exploitation costs. During exploitation the business reaps thebenefits of the system.

The main requirements for a well-performed exploitation activity are:• operational systems should be kept operational, so that expected benefits can be realised.

The investment goals should be reached by making sure that the operational systemsremain operational and contribute to the set goals.

• the most important exploitation costs should be registered for each information system.During exploitation operational systems should be kept operational, and thus guaranteethat expected benefits can be attained. The costs of exploitation form a considerable partof all investment costs. Insight in these costs can help to determine if an informationsystem still is profitable by comparing resulting costs to benefits and expected costs. Alsothis insight helps to determine all investment costs of future IT investments. Importantexploitation costs are costs of software, hardware, technical staff and costs that occur inthe business process due to exploitation of the system.

• differences between results of costs, benefits and performance and their expectationsshould be reported and documented. As was the case with realisation, the same applieshere: an organisation can only learn and subsequently improve its cost/benefitmanagement by reporting the problems that occurred. Only when problems are signalised,proper actions can be taken to improve the situation.

• the most important system performances of each information system should be registered.To monitor the performance of the information systems several aspects of an informationsystem should periodically be recorded. Depending on the kind of information system,these aspects can be: response time, number of technical problems, downtime of thesystem, number of problems reported to the help desk concerning the system, etc.Changing performances can indicate a problem, and can require changes to the systemsand maybe even additional IT investments to increase the performance. In this last case,the exploitation provides an IT proposal as input for identification.


20

• IT costs should be charged to the business processes. To decide if an information systemis (still) profitable, it is wise to study both costs and benefits at the same point: at thebusiness process level. If benefits and costs are clear, it can be decided if the benefits ofthe system still outweigh its costs. To gain insight in the actual costs, all IT costs shouldbe charged to the business process, because that is the point where the benefits are mostvisible. According to Earl (Earl 1989), charging the IT to the business process does notalways have to mean that the business actually pays for IT.

• Service Level Agreements should be formulated between the IT department and userorganisation for each information system. They should be checked periodically. On theone hand the IT costs should be charged to the business processes, but on the other handthe information system should also perform in accordance with predefined agreements.Only when the system works as specified, it can be successfully exploited in the businessprocess. Service Level Agreements are used to record agreements about the performanceof the system.

• each information system should have an exploitation budget. Practice shows thatoperational systems often need some minor adjustments to make them fully functional. Tobe able to make these adjustments a (small) budget should be available to eachinformation system.

• for each information system somebody should be responsible. When the system isimplemented in the organisation, somebody should be appointed who is be responsible forensuring that the system keeps running and who can assure its effective use.

EvaluationBy comparing the outcomes to the set goals, an IT investment can be evaluated. If goals arenot met (any longer), systems should be discarded. Furthermore, by evaluation the wholeinvestment cycle and its outcomes, improvements can be implemented in the IT investmentprocess. In this way proposals can become more realistic, justification can be based on bettercriteria, realisation can yield better results and exploitation can be more effective. Through athorough evaluation, an organisation can learn about and improve its IT cost/benefitmanagement.

The main requirements for a well-performed evaluation activity are:• a quantitative analysis of the benefits should be carried out. All benefits which can be

measured should be subjected to a quantitative analysis. Especially during justification thegoals that where formulated in a measurable way should be analysed.

• a qualitative analysis of the project benefits should be carried out. Effects that cannot bemeasured directly can be retrieved using qualitative measures, including interviews withcustomers or users, analysis of complaints or external benchmarks or audits.

• the results of the system exploitation should be compared to its goals. Differences shouldbe registered. The question to answer is: have we reached our goals by making this ITinvestment? If goals are not met, the system may possibly be adapted so that benefits canstill be derived. Additional investments may also be decided upon, to make the existingsystem more profitable.

• a cost analysis should be performed. By comparing the registered costs during realisationand exploitation to the cost estimations during justification conclusions can be drawnabout the quality of the IT cost/benefit management. Improvements in either the decisionprocess or the investment implementation can be the result.

• the reports about realisation and exploitation should be reviewed: what are thedifferences between the targeted and resulting costs and benefits, and where do thesedifferences come from? Such an analysis is used to improve IT cost/benefit management.


21

Two possible conclusions can be: the estimations were not correct and should be adjustedin the future, or the implementation of the investment failed and some activities should beimproved.

• strategic management should be involved in the evaluation of IT cost/benefit management.Strategic management should always take the initiative to evaluate and improve ITcost/benefit, because IT and line management do not take this initiative. IT management isnot directly interested in a cost-effective IT use, because this means a shift of ITresponsibility to line management. Line management is also not interested in this shift,because it becomes responsible for the results of IT applications.

• a periodical analysis of the complete IT cost/benefit management should be carried out.All activities in the IE life-cycle should be periodically analysed to see if they areperformed effectively and efficiently. A good approach is to use formal methods to assesseach of the five activities. An example of such a method is the Capability Maturity Model(Paulk et al., 1993) to assess the realisation activity. Furthermore benchmarks can be usedto determine if specific information systems are used efficiently.

• written procedures should be used detailing how each of the five stages should take place.Only when formal procedures exist, that lay down how an activity should be carried out, itis possible to actually improve work procedures so that they become more effective.Informal procedures are hard to adapt.


22

References

Ahituv, N. (1980). A systematic approach towards assessing the value of an informationsystem, MIS Quarterly, December.Applegate, L. M. et al., (1996). Corporate information systems management: the issues facingsenior executives. Homewood,Ill., Irwin.Bedell, E.F. (1985), The computer solution: strategies for success in the information age,Dow-Jones Irvin.Berghout, E.W. (1997), Evaluation of information system proposals: design of a decisionsupport method, PhD Thesis Delft University of Technology.Berghout, E. W. et al. (1996). Lecture notes: Information Management / InformationEconomics. Delft, Delft University of Technology.Brynjolfsson, E. (1993). “The productivity paradox of information technology.”Communications of the ACM 36(12): 67-77.Clemons, E.K. (1991). Evaluation of strategic investments in information technology,Communication of the ACM, 34(1): 23-36.Earl, M. J. (1989). Management strategies for information technology. New York, Prentice-Hall.Farbey, B., D. Targett, et al. (1993). How to assess your IT investment: a study of methodsand practice. Oxford, Boston: Butterworth-Heinemann.Grembergen, 2000.Hogbin, G. and D. Thomas (1987). Investing in Information Technology: Managing theDecision-making Process. London, McGraw - Hill book company.Irsel, H. G. P. v. and G. J. P. Swinkels (1992). “Investeren in informatietechnologie: Take ITor leave IT (Investing in Information Technology: Take IT or leave IT; in Dutch).” Informatie34: 624-636.Keen, P. G. W. (1991). Shaping the future: business design through information technology.[Boston, Mass.], Harvard Business School Press.Kesarlal, J., (1997), Management and Control of Operational Information Systems, MScThesis, TU Delft.Klompe, R, E. Berghout and M. Looijen (1999), Cost/benefit evaluation of operational ICT inlarge financial orgaisations, Proceedings 6th European Conference on InformationTechnology Evaluation, MCIL (Reading).Parker, M. M. and R. J. Benson (1988). Information economics: linking business performanceto information technology. Englewood Cliffs, NJ, Prentice Hall.Paulk, M. C., et al., (1993). Capability Maturity Model for Software, Version 1.1. Pittsburg,Software Engineering Institute.Porter, M., Competitive Strategy, Free Press, 1980.Remenyi, D., et al., (1993). A guide to measuring and managing IT benefits. Manchester,NCC Blackwell.Rockart, J. F., et al., (1991). The information technology function of the 1990s: a uniquehybrid. Cambridge, Mass., Center for Information Systems Research Sloan School ofManagement Massachusetts Institute of Technology.Swinkels, F. G. J. P. (1997). Managing the life-cycle of Information and CommunicationTechnology investments for added value. European Conference on the Evaluation ofInformation Technology, Delft, the Netherlands, Delft University Press.Thorp, J. (1998). The information paradox : realizing the business benefits of informationtechnology. Toronto, McGraw-Hill Ryerson.


23

Willcocks, L. (1994). Information management : the evaluation of information systemsinvestment. London; New York, Chapman & Hall.Willcocks, L. (1996). The evaluation and management of information systems investments:from feasibility to routine operations. Investing in information systems : evaluation andmanagement. L. Willcocks. London; New York, Chapman & Hall: 15-34.Willcocks, L. and S. Lester (1999). Beyond the IT productivity paradox. Chichester, England;New York, Wiley.

Full life-cycle management and the IT Management … · · 2012-11-06Full life-cycle management...

Documents

Transcript of Full life-cycle management and the IT Management … · · 2012-11-06Full life-cycle management...