measures of the business value of it modul 4. session 13-16 matakuliah: m0624/information technology...
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MEASURES OF THE BUSINESS VALUE OF IT MODUL 4. SESSION 13-16
Matakuliah : M0624/Information Technology ValuationTahun : 2008
Bina Nusantara
INTRODUCTION• IN ANY BUSINESS A “DASHBOARD” OF VITAL
PERFORMANCE INDICATORS IS NEEDED TO GAUGE HOW THE COMPANY IS FARING. SUCH A DASHBOARD, CONSISTING OF THE APPROPRIATE MEASURES TO INDICATE STRENGTHS AND WEAK-NESSES, PROVIDES TO A GUIDE FOR MANAGE-MENT AND FORMS THE CORE OF PLANNING AND CONTROL.
• A DASHBOARD ALLOWS MANAGEMENT TO VALUA-TE THE CONTRIBUTION OF SEVERAL FACTORS THAT IMPACT THE OVERALL PERFORMANCE OF THE ORGANIZATION.
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INTRODUCTION
• TO VALUATE IT, A DASHBOARD OF RELEVANT PERFORMANCE INDICATORS FOR IT MUST BE DEVELOPED. THE BTRIPLEE FRAMEWORK OFFERS THE STRUCTURE OF THE DASHBOARD AND IDENTIFIES THE DISTINCT BUT INTERDEPENDENT LEVELS OF BUSINESS VALUE OF IT, EFFECTIVENESS OF IT, AND EFFECTIVENESS AND EFFICIENCY OF IT SUPPLY.
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INTRODUCTION• MEASURING THE BUSINESS VALUE OF IT IS CONCERNED
WITH THE RELATIONSHIP BETWEEN THE COSTS OF IT AND ITS CONTRIBUTION TO THE IMPROVEMENT OF:
A.FINANCIAL PERFORMANCE: SUCH AS PROFITABI-LITY, PRODUCTIVITY, EARNINGS, ETC
B.BUSINESS PERFORMANCE: SUCH AS COMPETI-TIVENESS, NEW PRODUCT SALES, PRODUCT DEVELOPMENT LEAD TIMES, ETC
C.STRATEGIC PERFORMANCE, MEASURED BY INDICATORS THAT MATCH SPECIFIC MANAGEMENT OBJECTIVES (MANAGEMENT’S CRITICAL SUCCESS FACTORS)
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IT Costs
Operations
Maintenance
Development $1.00
Operations
Maintenance
Redevelopment of existing functionality
Development of new functionality
Year 1 Year 2 Year 3 Year 5Year 4
Fixed costs
Variablecosts
$0.40
$0.20
Annual Growth of Operations Costs
Annual Growth of Maintenance Costs
Figure 4.1: Costs Dynamic of IT
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DYNAMICS OF IT COST• TO MANAGE AND MEASURE THE VALUE OF IT, ATTENTION
SHOULD BE GIVEN TO THE COST SIDE OF YTHE COST-VALUE EQUATION.
• THESE PATTERN SUGGEST THAT EVERY DOLLAR SPENT ON IT DEVELOPMENT AUTOMATICALLY GENERATES FOLLOW-ON COSTS FOR IT MAINTENANCE AND IT OPERATIONS.
• ACCORDING TO KEEN (EARLY ‘90): EACH DOLLAR OF NEW DEVELOPMENT GENERATES 20 CENTS OF MAINTENANCE AND 40 CENTS OF OPERATIONS IN EACH SUBSEQUENT YAER.
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DYNAMICS OF IT COST
• ORGANIZATIONS HAVE OPTIONS FOR DEALING WITH THE DYNAMICS OF IT COST. THIS IS IMPORTANT TO UNDERSTAND BOTH AT THE TIME OF PLANNING FOR IT (EX-ANTE) TO DETERMINE WHAT TO DO AND AT THE TIME OF VALUATING IT AFTERWARDS (EX-POST) TO PLACE IT COSTS IN THE CONTEXT OF PAST DECISIONS.
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Year 1 Year 2 Year 3 Year 4 Year 5
Development 10.0
Maintenance &
operations
30.0
Cut development costs, overall IT budget remains
the same
Keep development costs at the same level
Grow development costs by 10%
per year
40.0
46.0
40.040.0
52.0
40.0
58.0
64.0
47.0
54.362.8
71.9
4.0 1.6 1.0 0.7
36.0 38.4 39.0 39.3
10.0
10.0
10.010.0
36.042.0
48.054.0
11.0
14.4
13.312.1
36.0
42.249.5
57.5IT Costs ($)
Figure 4.2: Options to Deal with Costs Dynamics of IT
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DYNAMICS OF IT COST3 SCENARIOS FOLLOW, AS INDICATED IN FIG 4.2• CUT DEVELOPMENT COSTS: IF THE OVERALL IT
BUDGET IS TO REMAIN THE SAME OVER THE PERIOD OF 5 YEARS, DEVELOPMENT COSTS MUST BE CUT BY A CUMULATIVE 93% OVER THE PERIOD, ONLY 7% OF THE ORIGINAL DEVELOPMENT BUDGET WILL REMAIN.
• KEEP DEVELOPMENT COSTS AT THE SAME LEVEL, THE COMPOUNDED IT BUDGET GROWS 15% PER YEAR OVER 5 YEARS AS A RESULT
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DYNAMICS OF IT COST• GROW DEVELOPMENT COSTS: GROWTH OF
DEVELOPMENT COSTS OF 10% PER YEAR RESULT IN A COMPOUNDED GROWTH OF THE IT BUDGET OF 18% PER YEAR.
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DYNAMICS OF IT COST
3 FACTORS SHOULD BE CONSIDERED WHEN EVALUATING THE STATISTICTS:
1. IT ANNUAL BUDGET ESTIMATES THAT HIDEN COST EQUAL 30-50% OF KNOWN SPENDING.
2. TECHNOLOGY HAS BECOME CHEAPER, WHILE MANY IT SUPPLY ORGANIZATIONS HAVE INCREASED THEIR EFFICIENCY LEVELS, ESPECIALLY IN THE COMPUTER OPERATIONS AREA, BY COMBINING DATA CENTERS AND BY OUTSOURCING PARTS OF THEIR DATA CENTER ACTIVITIES.
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DYNAMICS OF IT COST
3. E-BUSINESS IS DRAMATICALLY CHANGING THE WAY BUSINESS OPERATE AND THE NECESSARY INVESTMENT TO MAKE THIS HAPPEN IS NOT SMALL.
Bina Nusantara 1960 1970 1980 1990 2000 2010
0%
6,0%
3,0%
1,5%
12,0%
S/360 Mainframe
PC – Client/ Server
Web-internet
North America
Western Europe
Asia/Pacific (Dev. Economies)
Figure 4.3: Annual Rate of IT Budget Growth
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DYNAMICS OF IT COST
GENERALLY, IT COSTS ARE CATEGORIZED INTO THE ACTIVITIES OF:
1. DEVELOPMENT OF NEW IT CAPABILITIES2. MAINTENANCE OF EXISTING IT CAPABILITIES3. OPERATING IT CAPABILITIES (OPERATIONS)4. END-USER COMPUTING SUPPORT5. PLANNING AND ADMINISTRATION OF IT AND IT
ACTIVITIES
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ActivityActivity 1991 1993 1995 1997 1999
Development/ Major enhancements
Maintenance/ minor enhancements
Production / Operations
End user computing/ Help desk
Planning, administration, other
9
16
47
10
18
15
20
44
11
10
16
19
43
11
11
19
23
29
18
11
18
25
26
21
10
100 100100 100 100
Figure 4.4: IT Spending by Activity (%)
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Resource1991 1993 1995 1997 1999
Hardware
Software
Personnel
Outside services
Datacom and other
29
8
40
12
11
26
8
36
19
11
26
8
37
18
11
22
13
35
16
14
18
13
37
11
20
100 100100 100 100
Figure 4.5: IT spending by Resource (%)
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MEASURES OF FINANCIAL PERFORMANCES THROUGH IT
SOME MEASUREMENTS:1. ROM (RETURN ON MANAGEMENT): FINANCIAL
RESULTS OF THE BUSINESS MINUS THOSE ITEMS THAT OUTSIDE THE CONTROL OF MANAGEMENT.
2. ROA (RETURN ON ASSET)3. ROE (RETURN ON EQUITY)4. ROI (RETURN ON INVESTMENT)
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MEASURES OF FINANCIAL PERFORMANCES THROUGH IT
IT INVESTMENT:• IT BUDGET AS % OF REVENUE• VALUE OF AN ORGANIZATION’S IT EQUIPMENT AS
% OF REVENUE• % OF IT BUDGET SPENT ON IT STAFF• % OF IT BUDGET SPENT ON TRAINING OF IT STAFF• NUMBER OF PERSONAL COMPUTERS AND
TERMINALS AS % OF TOTAL EMPLOYEES
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MEASURES OF FINANCIAL PERFORMANCES THROUGH IT
STRATEGIC AND ECONOMIC PERFORMANCE:1. ROI2. ROS (RETURN ON SALES)3. REVENUE GROWTH4. SALES BY TOTAL ASSETS5. SALES BY EMPLOYEE
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Value of IT equipment as % of revenue
% of IT budget spent on IT staff training
No. of PCs and terminals as % of total employees
Return on Assets
Sales by Total Assets
Sales by Employee
Return on Sales
Return on Investment
Figure 4.6: Relationships between IT Investment Radios and Financial Performance Ratios
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MEASURES OF BUSINESS PERFORMANCES THROUGH IT
• BUSINESS PERFORMANCE IS ACHIEVED THROUGH BUSINESS ACTIVITIES, GROUPED TOGETHER IN BUSINESS PROCESSES, AND THROUGH THE ORGANIZATIONS AND ALLOCATION OF RESOURCES OF THESE BUSINESS PROCESSES.
• APPLIED OF THE BALANCED SCORECARD CONCEPT
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MEASURES OF BUSINESS PERFORMANCES THROUGH IT
4 BASIC QUESTIONS FROM MANY PERSPECTIVES:• HOW DO CUSTOMERS SEE US? (CUSTOMERS
PERSPECTIVE)• WHAT MUST WE EXCEL AT? (INTERNAL
PERSPECTIVE)• CAN WE CONTINUE TO IMPROVE AND ADD VALUE?
(INNOVATION AND LEARNING PERSPECTIVE)• HOW DO WE LOOK TO SHAREHOLDERS?
(FINANCIAL PERSPECTIVE)
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Goal Measures
Goal Measures
Goal Measures
Goal Measures
Financial Perspective
Customer Perspective Internal Perspective
Innovation Perspective
Figure 4.7: The Balanced Scorecard
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MEASURES OF BUSINESS PERFORMANCES THROUGH IT
• THE ADVANTAGES OF USING BALANCED SCORECARD TO RELATE IT COSTS TO BUSINESS PERFORMANCE INDICATORS:
A.THE SCORECARD BRINGS TOGETHER MANY OF THE SEEMINGLY DISPARATE ELEMENTS OF A COMPANY’S POSSIBLE COMPETITIVE INITIATIVES: BECOMING CUSTOMER ORIENTED, SHORTENING RESPONSE TIME, IMPROVING QUALITY, EMPHASIZING TEAM WORK, REDUCING NEW LAUNCH TIMES, MANAGING ORGANIZATIONAL LEARNING, ETC
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MEASURES OF BUSINESS PERFORMANCES THROUGH IT
B. THE SCORECARD GUARDS AGAINST SUBOPTIMIZATION BY FORCING SENIOR MANAGERS TO CONSIDER ALL THE OPERATIONAL MEASURES TOGETHER.
C. IT COST ARE DIRECTLY LINKED TO THE BUSINESS PERFORMANCE INDICATORS WITH WICH MANAGEMENT IS ALREADY FAMILIAR .
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Performance indicator
IT Costs ($m)
Revenues ($m)
Operating costs ($m)
Number of passengers ($m)
Number of freq. flyers ($m)
IT costs as % revenue
IT costs as % operating costs
IT costs per passenger
IT costs per frequent flyer
Revenue per passenger
Operating costs per passenger
Trend (%)
33
50
39
23
233
-11
-3.5
9
-60
22
14
Year 1 Year 2 Year 3 Year 4
15 17 18 20
300 350 400 450
280
600
60
315
640
100
350
690
150
390
735
200
5.00
5.35
25.00
250.00
4.85
5.40
26.50
170.00
4.60
5.30
27.00
120.00
4.45
5.15
27.20
100.00
612
531
580
507493
547
466
500
Financial Perspective
Internal Perspective
Customer Perspective
Innovation Perspective
Relating IT costs to the:
Figure 4.8: Relating Costs to the Balanced Scoreboard of an Airline
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MEASURES OF BUSINESS PERFORMANCES THROUGH IT
FROM FIG 4.8:• GROWING REVENUES REPRESENTS THE FINANCIAL
PERSPECTIVE• OPERATING COSTS REPRESENTS THE INTERNAL
PERSPECTIVE; THEY INCREASE BUT AT A LOWER RATE THAN REVENUES, SHOWING INTERNAL EXCELLENCE
• GROWING NUMBER OF PASSENGER REPRESENTS THE CUSTOMER PERSPECTIVE, ASSUMING THAT THE GROWTH RESULTS FROM CUSTOMER SATISFACTION
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MEASURES OF BUSINESS PERFORMANCES THROUGH IT
• EXPANDING NUMBER OF MEMBERS OF A NEW PRODUCTS, THE SO-CALLED FREQUENT FLYER PROGRAM, REPRESENT THE INNOVATION AND LEARNING PERSPECTIVE. MEASURES OF FINANCIAL PERFORMANCES THROUGH IT
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MEASURES OF STRATEGIC PERFORMANCES THROUGH IT
THE 3RD DIMENSION OF BUSINESS OF IT DEALS WITH THE QUESTIONS TO WHAT EXTENT IT COSTS ARE DISTRIBUTED OVER THE LIMITED, BUT MOST IMPORTANT, AREA CSF IN WHICH RESULTS ARE EXPECTED TO GENERATE STRATEGIC SUCCESS.
• 1ST ORGANIZATIONAL OBJECTIVES ARE DETER-MINED. THESE ARE HIGHLY COMPANY SPESIFIC, AND DIFFER BECAUSE OF THE STRUCTURE OF THE PARTICULAR INDUSTRY, THE COMPANY’S COMPETITIVE STRATEGY, ITS INDUSTRY POSITION AND GEOGRAPHIC LOCATION AND MANY OTHER EXTERNAL AND INTERNAL FACTORS.
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MEASURES OF FINANCIAL PERFORMANCES THROUGH IT
• 2ND CSF ARE DETERMINED AND RANKED. LIMITING SEARCH FOR CSF TO 1 OR MORE OF 4 PERSPECTIVE: PRIORITY PRODUCTS OR SERVICES, PRIORITY PROCESSES, PRIORITY BUSINESS PROCESSES, AND PRIORITY JOB FAMILIES.
• 3RD THE LEVEL OF ANNUAL IT COSTS ARE DETERMINED FOR EACH OF THE CSF.
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Maintenance & Operation
Mandatory Development
IT Infrastructure & Research Business
Improvement
Rejuvenate Product portfolio
Develop Eastern European Market
Payroll
Business Redesign
New IT DevelopmentGoing Concern IT
Classes of IT
General Ledger
Critical to business Success
No critical to business Success
IT Costs
Figure 4.9: IT Costs by Critical Success Factor
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MEASURES OF FINANCIAL PERFORMANCES THROUGH IT
3 CLASSES OF IT COSTS:A. IT COST TO MAINTAIN THE ORGANIZATION’S STATUS
QUO, CALLED GOING CONCERN COSTS: THE COSTS OF IT MAINTENANCE AND IT OPERATIONS ADDED TOGETHER.
B. IT INFRASTRUCTURED AND IT RESEARCH COSTS, THAT ARE GENERALLY CORPORATE WIDE INVESTMENTS IN A “CORE COMPETENCE” OF THE ORGANIZATIONS, ENABLING OTHER IT INVESTMENTS TO CREATE DIRECT VALUE.
C.DEVELOPMENT COSTS OF NEW IT APPLICATIONS.
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CONCLUSION
• THE KEY TO DETERMINING THE BUSINESS VALUE OF IT IS TO APPLY AN AGGREGATED APPROACH TO CORRELATE IT COSTS WITH THE PERFORMANCE OF THE ORGANIZATIONS.
• IMPROVED PERFORMANCE IS EXPRESSED AS IMPROVED FINANCIAL PERFORMANCE, IMPROVED BUSINESS PERFORMANCE AND REALIZED STRATEGIC GOALS.
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CONCLUSION
• IT IS RECOMMENDED:A. 1ST DETERMINED THE DYNAMICS OF IT COSTS OF A
PARTICULAR ORGANIZATION BY MEASURING OVERALL IT COSTS AS A % OF REVENUE, ANNUAL GROWTH OF IT COSTS, IT COSTS BY RESOURCE (PERSONNEL AND TECHNOLOGY), AND IT COSTS BY ACTIVITY (DEVELOPMENT, MAINTENANCE AND OPERATION). THEY PROVIDE AN INSIGHT IN IT COST PATTERNS AND MAY REVEAL ABNORMALITIES IN TRENDS.
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CONCLUSIONB. 2ND TO DETERMINE THE VALUE OF IT MEASURED
BY IMPROVED ECONOMIC PERFORMANCE OF PARTICULAR ORGANIZATION, IT COST MUST BE RELATED WITH FINANCIAL PERFORMANCE MEASURES.
C. 3RD TO VALUATE THE CONTRIBUTION OF IT TO IMPROVE BUSINESS PERFORMANCE IT IS RECOMMENDED TO RELATE IT COSTS WITH MULTIPLE BUSINESS MEASURES FOR DIFFERENT CATEGORIES OF BUSINESS PERFORMANCE TO REFLECT THE DIFFERENT ACTIVITIES AND OBJAECTIVES OF THE BUSINESS IN A BALANCED WAY.
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CONCLUSION
• A REFINEMENT OF THE APPROACH OF VALUATING IT IN TERMS OF BUSINESS PERFORMANCE IS TO MEASURE THE CONTRIBUTION OF IT IN REALIZING STRATEGIC GOALS.
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• THE END OF SESSION 13 - 16