The PlanThe Plan

Exam prep session today with Kim Glesser at 5:15.

Final Exam – Saint Patrick’s Day – March 17 – 12-3

Today—finish IS Organization and Personnel and start IS Value and Financial Strategies

1. Thursday—finish IS Value and start IS Planning

2. Tuesday—Finish IS Planning and TQM & IS

3. Thursday—Bob Sanguedolce, CIO at eBay

4. Tuesday—Student Presentations

5. Thursday—Final Chapter

What do you think?What do you think?

Diversification or Worsification!?

The truth about Intel lies ahead.

INTEL

Microprocessors

Flash MemoryChipset

Network DevicesMotherboard

AMDMotorola

VIATransmeta

VIAAMDALi

nVidiaSiS

ASUSABIT

MicronSamsung

3ComNortelCisco

PC Component Industry

Engineering Product Design Manufacturing Sales/Distribution Business

Information Systems

Company Structure

Independent Alliances Joint Ventures/Subsidiaries

Sales/Distribution Strategy

Distributors Independent Dealers Franchised Dealers

Manufacturing Strategy

Vertically Integrated Vendor Emphasis Outsource

Market Strategy

North American Europe Japan/Asia Latin America

Law Enforcement Military Recreational Professional Young Adult

Product StrategyType/Purpose/Size

Heavyweight Off-Road Dual Purpose Road Racing Café Racer Price Strategy

Entry Level Moderate Premium

Business Strategy Model - Motorcycle Manufacturing Industry

General Interest Financial Sports

Local News

National News

International News

Product Strategy

Advertiser Target Audience

Retail Industry ClassifiedSpecialized Advertisers

Market Focus

Local Regional Multi-Regional National

Regional or National

Correspondents

Foreign Correspondents

Newspaper Alliances

Information Sources

Entertainment

Special Interest

General Business

International

Local Editorial Staff

Wire Service

Business Strategy Model for the Newspaper Industry

Delivery StrategyHome and Business

DeliveryRetail Sales Mail Delivery Internet

Online

Company Structure Strategy

Independent AlliancesJoint Ventures and/or

Subsidiaries

Information Systems StrategySelf Develop Self Sufficient

Application Package Self Sufficient

OutsourceConsultants & Systems Integrators

Editorial System Publishing System Business Systems

Publishing Strategy

Internal Publishing System Outsource the printing processSub-contract

US Advertising Spending

0% 10% 20% 30% 40% 50%

Radio

Broadcast TV

Cable TV

Direct Mail

Others

Internet

Newspapers1960

1970

1980

1990

2000

2001

ATP ATP

A common mistake regarding substitutes is to miss “outsourcing.”

Remembering that a substitute is an alternative to doing business with the SBU or its rivals, to outsource the management of a company’s PC operations can fundamentally change the relationship with Dell, Microsoft, Oracle or even Sun.

The Internet has added two additional business resources in the form of extranets and intranets.

Business papers are not written in first person!

Chapter 12 SummaryChapter 12 Summary

Using Information Systems to Compete: A Success Factor Profile

Use of The Success Factor ProfileUse of The Success Factor Profile

1. As a basis for an initial planning process to focus information systems on competitive issues.

2. As an assessment of the progress of new systems and how they are meeting competitive objectives.

3. As an audit device for mature systems to make sure the company has not missed a shift in the dynamics of the organization.

Success Factor ProfileSuccess Factor Profile

The Success FactorsThe Success Factors

In evaluating the factors in the profile as they relate to a specific organization.

1. How important are each of these factors as they relate to gaining a competitive advantage?

2. Who should play a key role?

3. Where are the current strengths and what areas must be improved?

The Success FactorsThe Success Factors Business Vision is the photograph for the future

of the business. Culture is the senior management value systems

and needs to become “the way we do things around here.”

Risk Management addresses where the organization is willing to take risks.

Planning Implementation suggests that the strategic, operational and financial plans should drive the priorities of the information systems organization.

The Success FactorsThe Success Factors

Information Systems Integral to the Business emphasizes that Information Systems have become an integral part of a major business process.

Information Systems Justification Process addresses the economic justification and financial strategies important to any information systems effort.

Executive and Information Systems Management Partnership

Executive Information Systems Experience states that IS experience among executives is important and plays an important role.

The Success FactorsThe Success Factors Operational Automation indicates that a major

business process has been automated through the use of computer-based systems. i.e. manufacturing.

Linkage to Suppliers and/or Other Business Partners the use of an extranet.

Linkage to Customers through the use of an extranet. Linkage to Customer Service is the repair and

customer service part of the value chain. Pervasive Computing Literacy states that broad scope

computer capabilities are important to the organization’s ability to utilize and leverage the use of information systems.

The Success Factors The Success Factors

Information Systems Architecture is the blueprint on how an organization designs, builds and implements new information systems.

Information Systems Marketing indicates that the IS organization does a good job of selling the potential for new information systems within the organization.

Information Systems and User Relations deals with the importance of the relationship between the IS organization and users.

Company Success Factor ProfilesCompany Success Factor Profiles

Federal Express Vision Culture Executive and Information Systems Management

Partnership Information Systems Integral to Business Linkage to Customers

Company Success Factor ProfilesCompany Success Factor Profiles

British Airways Vision Culture Information Systems Integral to the

Business Executive and Information Systems

Management Partnership Information Systems Architecture

Possible Exam QuestionsPossible Exam Questions

1. Explain the three modes in which the

Success Factor Profile can be used?

2. If a friend told you about a company that had

achieved a significant competitive advantage

through the use of information systems, what

questions would you ask to determine the major

reasons for this success?

Chapter 14 IntroductionChapter 14 Introduction

Information Systems Value and

Financial Strategy

Quick OverviewQuick Overview

We will examine the issues involved in determining the business value of IS and some possible financial strategies that can be implemented to better manage the increasing amounts of money being spent on Information Systems.

High IS Costs Gets Senior High IS Costs Gets Senior Managements AttentionManagements Attention

There is a growing dependence on information There is a growing dependence on information systems to run the organization.systems to run the organization.

Information systems expenses and capital funding Information systems expenses and capital funding have frequently become quite large.have frequently become quite large.

For these reasons senior management has become For these reasons senior management has become more active in managing the role and significance more active in managing the role and significance of Information Systems.of Information Systems.

Primary Inhibitors of the Primary Inhibitors of the Growth of ISGrowth of IS

Inability to articulate the value derived from the use of Information Systems.

Implementation of new applications – takes too long and costs too much.

Major connectivity problems among installed systems provided by vendors, both within and outside the enterprise.

Lack of ease of use of installed systems – a slow learning curve.

The Heart of the MatterThe Heart of the Matter

The heart of the matter is not how to quantify the contribution of information systems, but how to satisfy management that this support resource makes economic sense based on its role within the organization.

Average Information Systems Average Information Systems Spending for an IndustrySpending for an Industry

Many executives want to know this!

Not very meaningful!

Industry averages can be misleading!

Compare With Whom?Compare With Whom?

Compare to your own company! How has IS use and spending evolved over the

years? Is the role and effectiveness of IS what it should

be? What should be done to improve or correct the

situation?

Evolution of Financial StrategyEvolution of Financial StrategyInitiationInitiation

II

ExpansionExpansion

IIII

ControlControl

IIIIII

MaturityMaturity

IVIV

ApplicationApplication

SupportSupport

Single Area Proliferation Containment Organization

Strategy

MotivationMotivation People

Displacement

Cost

Avoidance

DP

Efficiency

Competitive Advantage

FinancialFinancial

JustificationJustification

Budget Business Case Install

Audit

Charge-Out System

Management

Process

DP DP

PlanningPlanning

Little Reactive Directed Proactive

OrganizationOrganization Finance

Dept.

Multiple

Dept.

Centralized Centralized

Decentralized

Distributed

Answer to the Value Question Answer to the Value Question

Productivity drivenProductivity driven Focus on measuring Focus on measuring

efficiencyefficiency

High customer value High customer value prioritypriority

Focus on customer Focus on customer valuevalue

Look for the answer within the context of the business management and contribution to the success of the business.

ConclusionsConclusions

1. The issue of IS value is becoming increasingly more important.

2. The answer will not come from new and better techniques and methodologies, but through processes set in motion by management.

Chapter 14Chapter 14

Information Systems Value Information Systems Value

and and

Financial StrategyFinancial Strategy

Information Systems Value

• Logical to Address• Necessary to Articulate• Controversial Because “It Can’t Be Measured.”• A Management Process--Not Techniques or Methodologies.• The Reason for Significant Management Consulting.

“The Question”

What are we getting for that?

Senior Management Questions

What have I received for past information technology investments?

How can we maximize the positive impact of information technology on the business?

What is the right amount of investment for the future?

How can I track the returns on continuing investments in IT?

Needed: A process for measuring and tracking benefits realized from Information Technology.

Information Systems Value and Information Systems Value and Financial StrategyFinancial Strategy

"You have got to get me a lot more comfortable "You have got to get me a lot more comfortable

with the fact that you are spending $400 million a with the fact that you are spending $400 million a

year on information systems. Meanwhile, you year on information systems. Meanwhile, you

are not getting any more."are not getting any more."

CEO to Information Systems Vice CEO to Information Systems Vice PresidentPresident

The IT Value IssueThe IT Value Issue

1. The applications development process costs too much and takes too long.

2. Integrated systems connectivity and compatibility have major cost implications.

3. A lack of ease of use negatively impacts user productivity.

4. All of the above impact the ability to articulate IT value.

The IS Value Issue? The IS Value Issue?

A Big Deal A Big Deal - Something needs to be done.- Something needs to be done.

• A Medium Deal - Being talked about but taking a back seat to other business issues.

• No Deal - Not a current issue and there is no need to make it a priority within the I/S organization.

IT Value Can Become IT Value Can Become A Major Issue If:A Major Issue If:

1. The business is experiencing major cost reduction pressures.

2. IT expenditures are viewed as a significant cost of running the business. (now or in the future)

3. There is a growing sentiment that a better job could be done in managing IT expenditures.

IS Value and Financial StrategyIS Value and Financial Strategy

The heart of the matter is not how to quantify The heart of the matter is not how to quantify

the contribution of information systems, but the contribution of information systems, but

how to satisfy management how to satisfy management that this support that this support

resource is contributing to the success of the resource is contributing to the success of the

business.business.

Senior Management Feels Too Much is Spent on IT

0% 5% 10% 15% 20% 25% 30%

Disagree Strongly

Disagree Somewhat

Neutral

Agree Somewhat

Agree Strongly

Is the Value Issue Unique to Is the Value Issue Unique to Information Systems?Information Systems?

What about?

Advertising?

Research and Development?

Public Relations Programs?

IS Value and Financial StrategyIS Value and Financial Strategy

Less than favorable publications:

1. “The Elusive IT Payback.”

2. “The Dreaded ROI Question.”

3. “IT Spending: Is It Out of Control? Service

Sector’s Huge IT Infrastructure Weakens

Competitiveness”

4. “Office Automation: Making It Pay Off.”

5. “New Metrics for MIS.”

6. “Banks Reassess IT Spending.”

7. “ROI in Real Time.”

We can find no indication of any positiveimpact on national productivity despiteenormous investments in informationtechnology.

Lester Thurow, DeanSloan School of ManagementMIT

IS Value and Financial StrategyIS Value and Financial Strategy

The U.S. service sector has spent $862 billion The U.S. service sector has spent $862 billion

on IT over the past decade--a figure that is on IT over the past decade--a figure that is

equal to the GNP of France--without any equal to the GNP of France--without any

meaningful improvement in productivity.meaningful improvement in productivity.

IS Value and Financial Strategy

We have seen a very serious problem for the past fifteen years not because of any inherent deficiencies in the machines or the software, but because of management ineptitude in applying technology to productive endeavors.

Stephen RoachEconomistMorgan Stanley & Co.

Information Systems Value Chains

Technology

Tasks

Activities

Programs

Goals

System

Individual

Department

Organization

Enterprise

As You Progress Up the IS Value ChainAs You Progress Up the IS Value Chain

• Financial benefits would be greater but more difficult to measure.

• The time horizon to implement a new application would be longer.

• The organizational level for approval of a new project would be higher.

• The management direction and coordination would be greater.

• The amount of risk in implementing the application would be greater.

• The correlation of benefits with information systems would be less.

Dissatisfaction with IS!

Prompts a rifle-shot focus on specific

elements of Information Systems:

• Costs• Measurable return on investment• Inflexibility• Complexity• Project status and time schedules• Lack of business control and understanding• Technical orientation

Information Systems Do Not Information Systems Do Not Produce Value DirectlyProduce Value Directly

Information Systems

Value to the Business

Business Change

Who Should Answer the IT Who Should Answer the IT Value Question?Value Question?

1. Chief Financial Officer (CFO)

2. Information Systems Executive

3. User Management (Those benefiting from the

IS support)

Industry IT Spending Industry IT Spending

Everyone wants to know how Everyone wants to know how

they compare with others within they compare with others within

their industry.their industry.

Unfortunately, industry averages Unfortunately, industry averages

can be very misleading. can be very misleading.

IT Budget as Percentage of 1999 Revenue

0% 2% 4% 6% 8% 10%

Banking and Financial Services

Professional Services

Telecommunications

Health Care

Information Technology

Media and Entertainment

Consumer Goods

Insurance

Construction and Engineering

Electronics

Energy

Pharmaceutical

Transportation

Chemicals

Manufacturing

Retail and Distribution

Utilities

Hospitality & Travel

Metals and Natural Resources

Food and Beverage Processing

Overall Median

National Semiconductor National Semiconductor Annual IT Costs Annual IT Costs

1. $53 million. Corporate IS Organization Budget

2. $30 million Remote Site IS Budget

3. $30 million? Other Information Systems

IS Value and Financial StrategyIS Value and Financial Strategy

"There is no universal formula for "There is no universal formula for

determining the business value of information determining the business value of information

technology that can be applied in every technology that can be applied in every

company and value can change over time."company and value can change over time."

Consultant to Information Systems Vice Consultant to Information Systems Vice PresidentPresident

Difficulty of IT Benefit Difficulty of IT Benefit AnalysisAnalysis

• IT is an integral part of other business

initiatives.

• IT benefits accrue over long periods of time.

• Changes in a company’s business environment

make it difficult to assess benefits.

Organization

DP Planning

FinancialStrategy

Motivation

ApplicationSupport

Initiation Expansion Control Maturity

I II III IV

BudgetBusiness

CasePost Install

Audit

Charge OutSystem

ManagementProcess

Single Area Proliferation Containment Organization Strategy

PeopleDisplacement

Cost Avoidance

DP Efficiency CompetitiveAdvantage

Little Reactive Directed Proactive

Single Dept. Multiple Dept. Centralized

CentralizedDecentralizedDistributed

Figure 14-2

Evolution of IS StrategyEvolution of IS Strategy

In the Beginning There are In the Beginning There are BudgetsBudgets

Information Systems belongs to a single

department within the organization.

The financial management challenge is to do as much as possible with information systems but to do so within the limits of the budget.

IS Business CaseIS Business Case A need to prioritize new requests for

Information Systems support.

A business case provides the business justification for a new application.

A post-installation audit verifies that what was proposed actually was actually accomplished.

Business CaseBusiness Case

A financial management concern with

the business case approach is that it

does not provide an on-going focus on

the value of information systems.

Charge-Out SystemCharge-Out System

People should pay for what they

receive in terms of information

systems support.

Charge-Out System ObjectivesCharge-Out System Objectives

1. Maximize worthwhile information systems usage.

2. Minimize frivolous use.

3. Encourage information systems efficiency.

4. Spark interest and participation by users to develop innovative applications.

Charge-Out SystemCharge-Out System

A Cost Center

A Profit Center

A Service Center

What to Charge For?What to Charge For? R&D Projects Feasibility Studies User Training User Support Data Storage Telecommunications Transaction Processing Program Maintenance Program Development New Applications

Pricing MethodologyPricing Methodology

Memo As Incurred Estimates Bundled Pricing Algorithm Break-even Annual Break-even Product Life Standard Cost

Charge-Out SystemCharge-Out System

What is good about such an approach?

What is wrong with this approach?

A Management ProcessA Management Process

Application Support Prioritized by a Business Strategy.

A Major Focus on Using Information Systems to Compete.

A Proactive Role by the Information Systems Organization in the Business Planning Process.

Management ProcessManagement Process

In formulating a management process it iscritically important that careful considerationbe given to the factors that drive the success of the business. It then logically follows thatinformation systems should be aligned withthe same factors that drive the business.

Information Systems ValueInformation Systems ValueWithin many companies a great deal of effort has been made to get user management to conclude that the bill received for information systems support was fair, precise, complete and understandable.

In accomplishing this, does user management also conclude that this same IS support represents real value to them.

Costs

By User

By Application

BenefitsMacro: Business Function and Unit

Micro: Project

Justification (The initial investment decision)

Confirmation (Measuring the results of the investment)

Management Processes:

Methodologies

Major Factors to Be AddressedMajor Factors to Be Addressed

Information Systems Value?Information Systems Value?

The ultimate test is still efficient, cost

effective and responsive solutions to

business requirements.

National Institutes of HealthNational Institutes of Health

What is the source of funding for a federal agency?

How likely is it that the Information Systems organization can sell Congress on the idea that they need money for storage devices to help cure cancer?

National Institutes of HealthNational Institutes of Health

The Cancer Institute sells Congress on their need for money to cure cancer.

They pay the IS organization for computer-based support through a charge-out system.

The IS Director estimates that the $50 million a year for IT resources would probably be half that amount if this financial strategy was not used.

NIH has used a charge-out system as an integral part of an effective overall management process to effectively implement a successful financial strategy.

Productivity ChallengeProductivity ChallengeH

ead

Cou

nt

Time

Tot

al P

rodu

ctiv

ity

Headcount Increase

Risk

Productivity Programs

Management Process

Management Incentives

EliminateSimplifyAutomate

Business Case Process

I/S Development Discipline

Interlock Management

Benefit Management

MeasurementsMeasurements

• Daily user logs.

• Surveys of user perceptions, attitudes,

comments and usage.

• Interviews of users.

• Information system statistics of actual use.

Six Year ResultsSix Year Results

Revenue

Before Tax Profit

Head Count

$1.2B $3.1B

$178M

(15%)

$605M

(19.5%)

11,000 11,500

Hewlett-Packard Hewlett-Packard Test Measurement OrganizationTest Measurement Organization

(Agilent) IS Value Case Study(Agilent) IS Value Case Study

A primary objective became strategically positioning the IT organization by building better working relationships with customers (users).

A necessary step was to establish the IT organization as a “business within a business.”

The initial trigger for action was based on a company wide effort to reduce cost.

IS as a Business within a BusinessIS as a Business within a Business

1. Must communicate effectively with customers

regarding products and services.

2. Need to shift the focus of IT from operations to

strategically important business activities.

3. Must build an accepted cost base to assess the

value of IT.

A Critical FactorA Critical Factor

A necessary platform for a successful Information Systems business is a competitive cost structure for service offerings that is accepted by those that pay.

To move up the curve. . .To move up the curve. . .

Exploiting

IT

Cost effective IT operations

Securing return on

investment

Enabling change &innovation

Exploiting

the knowledge

base

Each step requires a different approach build on a sound foundation.

Guiding PrinciplesGuiding Principles

Focus Invest in major trends in cross-organizational networked solutions and services.

Cost Structure Achieve competitive cost structure for service offerings.

Organization Reduce decision-making layers and increase responsiveness to business partners.

Partnerships Forge solid partnerships with internal and external suppliers of IT services.

Value PropositionsValue PropositionsCustomer Need IT Value Proposition

Improve organizational agility andflexibility in a rapidly changing global marketplace.

Increase the ability of the businesses to create and support new geographically dispersed organization structures through worldwide information systems convergence and integration

Make TMO organizations more effective by enabling better, more timely decision-making processes.

Improve decision-making capabilities by providinga simple information environment that is accessibleto all levels of the organization.

Achieve a better return on investments indesktop computing assets.

Increase the efficiency and effectiveness of individualcontributors and work groups through better utilizationof desktop computing devices.

1

2

3

4Improve customer satisfaction and return on assets through deployment of signifi-cantly improved (reengineered) processes.

5Improve sales growth through improvedtime to market.

6 Maximize the lifetime return on processand system investments.

Increase the global competitiveness of the businessby delivering services which increase the effectivenessof business process transformation initiatives.

Increase the speed and reduce the complexity of transferring design and product information between organizations.Optimize the operations return on investment in matureprocesses through the selective application of process and technology improvements.

The New TMO IT StrategyThe New TMO IT Strategy

1. Understand customers and their needs.

2. Define the market segments.

3. Specify customers segments.

4. Define products and services including cost drivers,

pricing methodologies and customer invoicing.

5. Complete development and implementation plan.

6. Develop financial analysis of IT investments.

7. Identify potential problem areas in the new model.

8. Document recommendations and linkage issues.

9. Develop first year tactical plan.

Initial Three Year ObjectivesInitial Three Year Objectives

Increase customersatisfaction

•Increase customer focus

•Streamline operational processes•Reduce operational costs

•Customer satisfaction index ratings•Quality/response time

•Competitive rates

Increase return oninvestment

•Evolve scenario planning process•Increase new product offerings

•Market share %

•Turnaround time•Market share %

Develop an agile,skilled and motivatedteam

OBJECTIVE STRATEGY MEASURE

•Evolve a learning organization

•Motivation•Agility (skill matrix)

Total Investment in ITTotal Investment in IT

Minimize cost per unit of service

81%

StrategicInvestments

15%

IT Management and Planning

IT Services Strategy% of TMO IT

4%

Operations and Infrastructure

1997 2000

70%

Maximize Return

On Investment26%

Control costs versus budget

4%

Information Systems Information Systems OrganizationOrganization

• Good reputation as a support organization.

• Good success and benefits through the use of

an information center.

• Good PC program including support.

• Under pressure to reduce head count.

Acceptable Proposition?Acceptable Proposition?

Head Count MIPS IS $s

206

176

157

116

102

186

282

402

Flat

Flat

Flat

Flat

ConsiderationsConsiderations

Importance of dealing with the value question.

Effort and cost to do so?

More ConsiderationsMore Considerations

There are a wide range of practices for even companies in the same industry.

Telecom networks have emerged as a major component of IT costs.

It is both difficult and potentially misleading to generalize on what constitutes an appropriate level of IT expenditures for a specific company.

IS Financial Strategy IS Financial Strategy ConclusionsConclusions

Even the most supportive senior executives have “a pain threshold” regarding IS spending.

The financial management strategies for information systems are evolutionary and tend to trail the need for them.

They are additive as shown by the stages model.