SESSION 13 UNDERSTANDING THE BUSINESS VALUE OF SYSTEMS AND MANAGING CHANGE.

SESSION 13SESSION 13

UNDERSTANDINGUNDERSTANDING

THE BUSINESSTHE BUSINESS

VALUE OF SYSTEMSVALUE OF SYSTEMS

AND MANAGING CHANGEAND MANAGING CHANGE

Capital budgetingCapital budgeting

• Process of analyzing and selecting Process of analyzing and selecting various proposals for capital expendituresvarious proposals for capital expenditures• The payback methodThe payback method• ROIROI• Cost benefit ratioCost benefit ratio• NPVNPV• Profitability IndexProfitability Index• IRRIRR

Traditional Capital Budgeting Models

• Do not express the risks and uncertainty Do not express the risks and uncertainty of own cost and benefits estimatesof own cost and benefits estimates• Costs and benefits do not occur in the Costs and benefits do not occur in the

same time frame for ISsame time frame for IS• Technology changes causing estimates Technology changes causing estimates

to varyto vary• Intangible benefits are difficult to Intangible benefits are difficult to

quantifyquantify• IS life expectancy is shorter than IS life expectancy is shorter than

manufacturing systemsmanufacturing systems

Limitations of Financial Models

Traditional Capital Budgeting Models

Heartland StoresGeneral merchandise retail chain upgrading supply chain management system

Reduce inventory costs: Items stocked in inventory

Reduce labor costs: Inventory and tracking personnel

Reduce telecommunication costs: Less time on phone tracking inventory and shipments

Reduce transportation costs: Consolidating shipments, more efficient shipping schedules

Understanding the Business Value of Information Systems

Case Example: Capital Budgeting for a New Supply Chain Management System


Costs and benefits of the new supply chain management system

Figure 14-1


Financial models

Figure 14-2


Payback Method

Time required to pay back initial investment of project


Original investment

= Number of years to pay backAnnual net cash

inflow


Accounting Rate of Return on Investment (ROI)

Desired rate of return must equal or exceed cost of capital

(Total benefits – Total cost – Depreciation)=

Net benefitUseful life


Net benefit= ROI

Total initial investment


Net Present Value

Compare investment with future savings and earnings


Present value of expected cash flows

- Initial investment cost

= Net present value


Cost-Benefit Ratio

Ratio of benefits to cost


Total benefits= Cost-benefit ratio

Total costs


Profitability Index

Allows ranking of different possible investments


Present value of cash inflows=

Profitability indexInvestment


Internal Rate of Return (IRR)

Rate of return, or profit, that an investment is expected to earn

Discount (interest) rate that will equate the present value of the projects future cash flows to the initial investment cost


Portfolio AnalysisPortfolio Analysis

• Analysis of portfolio of potential Analysis of portfolio of potential applications within a firm applications within a firm

• Determines risks and benefitsDetermines risks and benefits

• Selects among alternatives for information Selects among alternatives for information systemssystems

Strategic Considerations

A System Portfolio

Figure 14-3


Scoring ModelsScoring Models

• Method for deciding among alternative Method for deciding among alternative systems based on a system of ratings systems based on a system of ratings

Real Options Pricing ModelsReal Options Pricing Models

• Models for evaluating information Models for evaluating information technology investments with uncertain technology investments with uncertain returns returns


Knowledge Value–Added ApproachKnowledge Value–Added Approach

• Focuses on knowledge input into a Focuses on knowledge input into a business process business process

• Determines costs and benefits of changes Determines costs and benefits of changes in business processes from new in business processes from new information systemsinformation systems


Productivity :Productivity :Measure of firm’s efficiency Measure of firm’s efficiency in converting inputs to outputsin converting inputs to outputs

• Productivity paradoxProductivity paradox

Information Technology Investments and Productivity

System failureSystem failure

• Information system does not perform as Information system does not perform as expected, is not operational at a specified expected, is not operational at a specified timetime

• Poor design, inaccurate data, excessive Poor design, inaccurate data, excessive expenditure, breakdown in operationsexpenditure, breakdown in operations

IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM

SUCCESS AND FAILURE

Information System Problem Areas

Information System Problem Areas

Figure 14-4


SUCCESS AND FAILURE

ImplementationImplementation

• Organizational activities working towards Organizational activities working towards adoption, management, and routinization adoption, management, and routinization of innovationof innovation

Change Management and the Concept of Implementation


SUCCESS AND FAILURE

• Role of users in implementation processRole of users in implementation process

• Degree of management support for Degree of management support for implementation effortimplementation effort

• Level of complexity and risk of Level of complexity and risk of implementation projectimplementation project

• Quality of management of implementation Quality of management of implementation processprocess

Causes of Implementation Success and Failure


SUCCESS AND FAILURE

Factors in Information System Success or Failure

Figure 14-5


SUCCESS AND FAILURE

User–designer communications gapUser–designer communications gap

• Different backgrounds, interests, and Different backgrounds, interests, and priorities priorities

• Impedes communication and problem Impedes communication and problem solving among end users and information solving among end users and information systems specialistssystems specialists

User Involvement and Influence


SUCCESS AND FAILURE

• Project requires backing and commitment Project requires backing and commitment of management at various levels of management at various levels

• Perceived positively by both users and Perceived positively by both users and technical information services stafftechnical information services staff

Management Support and Commitment


SUCCESS AND FAILURE

• Project size:Project size: Larger project has greater Larger project has greater riskrisk

• Project structure:Project structure: Clear and Clear and straightforward requirements help define straightforward requirements help define outputs and processes outputs and processes

• Experience with technology:Experience with technology: Project Project risk rises if project team and information risk rises if project team and information system staff lack required technical system staff lack required technical expertiseexpertise

Level of Complexity and Risk


SUCCESS AND FAILURE

Improper management leads to:Improper management leads to:

• Cost overruns Cost overruns

• Unexpected time slippageUnexpected time slippage

• Technical shortfalls Technical shortfalls

• Failure to obtain anticipated benefitsFailure to obtain anticipated benefits

Management of the Implementation Process


SUCCESS AND FAILURE

Consequences of Poor Project Management

Figure 14-6


SUCCESS AND FAILURE

• Managing Technical Complexity:Managing Technical Complexity: Usage of internal integration tools to Usage of internal integration tools to ensure operation of implementation team ensure operation of implementation team

• Formal Planning and Control Tools:Formal Planning and Control Tools: Structures and sequences tasks, monitors Structures and sequences tasks, monitors progress towards fulfillment of goals progress towards fulfillment of goals

Controlling Risk Factors

• Increasing User Involvement and Increasing User Involvement and Overcoming User Resistance:Overcoming User Resistance: Linking Linking work of implementation team to that of work of implementation team to that of users at all organizational levelsusers at all organizational levels

Controlling Risk Factors

SESSION 13 UNDERSTANDING THE BUSINESS VALUE OF SYSTEMS AND MANAGING CHANGE.

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