Management of Computer
System Performance
Chapter 1
The Elusive nature of IT benefits
The Elusive nature of IT benefits
Objective:
 Students should be able: to identify benefits
of IT application
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Chapter 1:
The Economics of Information


The quantification of Information and its value to the
organization remains one of the most critical issues
facing any firm.
The Economics of Information is defined as a:
systematic series of concepts and theories that
explain the role which information and
information systems play in assisting
individuals or organizations in their conception,
production and delivery of goods and services
both in the public and private sectors.
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The Economics of Information

IT has been in use for business purposes for
arguably 40 years.
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IT is at last crossing into the mind of management
that it is a tool that is essential to serve
management.
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Historically, it was associated with a tool to support, or
occasionally augment manual operations.
IT solutions are mature and can effectively replace
manual operations and offer new business opportunities.
This requires Business Process Changes to optimize
efficiency.
Management is paid to optimize the return on
investment. IT is critical in this.
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Investment Considerations

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Forrester Research reports that corporations will
spend approximately 3% of their revenues on EBusiness procurements in FY2002[i].
This 3% investment may realistically equate to 4060% of that firm’s entire capital investment budget.
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Unfortunately, not every project can be funded.
There is no guarantee that those that are funded will
generate the anticipated benefits.
The projected benefits of a capital expenditure into an EBusiness solution are legitimately brought under scrutiny
by executive management.
[i] Surmacz, Jon, April 10, 2002 Nuts-and-Bolts Investment accessed May 08, 2002 from
http://www2.cio.com/metrics/2002/metric349.html
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IT Project Investment

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IT Project Investment must be done selectively and
based on good data.
Data must be acquired consistently and completely
for optimal use.

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You guess right, things work. Guess wrong and you loose
money.
Managers are paid NOT to guess on issues regarding
finance.
Failure to recognize the issues with financial analysis is
worse than guessing.
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The Economics of Information


IT Project Investment has at least one of these three major
goals:
 Replacing manual operations to reduce costs.
 Adding new sales or marketing channels to generate new or
additional revenues.
 Optimizing customer satisfaction
 The investment in the systems to address these issues is
usually expensive and may constitute a major investment in
capital resources.
The creation of these “systems” should be done methodically
and should follow certain established and proven processes
and procedures.
 Each is creation process should use a Project Management
methodology.
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Costs and Benefits


Problem: Whenever possible, define what
exactly are the costs and benefits of a project
before it is built.
What’s at risk?

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Stats on IT Projects.
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High failure rates and high costs to the enterprise.
30% of IT projects never reach fruitful conclusion
Waste–$75 billion annually in 2001
51% exceed budget by 189% and deliver only 74%
functionality
THERE IS A PROBLEM HERE!
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Costs and Benefits

Accordingly, The following must be
accomplished:

The measurement of the complete investment
to accomplish the goals of the IT project

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This include both IT and non-IT costs
The measurement of the benefits that are
expected of the investment

This includes quantifiable and intuitive benefits.
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Costs and Benefits

There is a need to accomplish these
measurements effectively.

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Executive management should insist on this.
There is a need to select only the best
projects with the highest probability to
succeed.

Management must have a way to compare one
IT investment opportunity to one another.
10
IT Benefits and Measurements
The four consistent areas by which IT benefit is
measured as as follows:

1.
2.
3.
4.
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Benefits and identifiable performance improvements.
Information System Reach
Other tangible and intangible benefits.
Benefit evolution
These categories are occasionally represented
using other terms but the concept is consistent.
They are NOT mutually exclusive but represent
approaches to benefit analysis and may be
combined.
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Benefits and Identifiable
Performance Improvements.

The first technique is the quantifiable
measurement of benefits.
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This is complimented by the identification and
quantification of measurable performance
improvements.

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Uses fixed valuations for savings and revenue
increases.
Valuation is based on efficiencies gained.
No unique or special technique are usually
required. Focuses on the benefits aspects of
valuation.
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Information System Reach

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Refers the ability of an IT system to
integrate operational components of the
firm into one single solution.
This approach attempts to identify the
many secondary benefits that occur when
an IT system is made operational.

There are many cause and effective issues
that must be analyzed.
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Tangible and Intangible
Benefits.

Tangible benefits are associated with clear
elements such as staffing changes or
reductions from the implementation of an
IT system.

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An SCM deployment allows the procurement
department to re-do its processes and reduce
the number of FTEs.
This is a clear and Tangible benefit to the
company (not the laid off FTEs)
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Tangible and Intangible
Benefits.

Intangible or soft benefits could be non-direct.
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In the SCM example, most manufacturing firms have
expeditors. An SCM could make the information
needed by the expeditors much more readily available,
thus reducing the high turnover rate within that
department due to the stress.
Certain deployments, such as a corporate Web Site in
the mid-1990s provided some value to sales and
marketing by increasing requests for brochures but the
fact that the site was there had an intangible benefit of
increasing the brand awareness of that firm to the
consuming population of their products.
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Other Tangible and
Intangible Benefits

Tangible – (capable of being appraised at an actual
or approximate value) refers to exact benefits that
be derived from an IT solution being deployed.

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Increase in production output from automating a process in
a steel mill.
Intangible benefits are derived by removing workers
from an unpleasant task.

The valuation of intangibles are even more difficult to
accomplish.
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Benefits and identifiable
performance improvements.
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CAUTION – CAUTION – CAUTION – CAUTION
Often, firms inappropriately use unique benefit models in
identifying IT worth.
Why should IT be treated differently from any other capital
intensive model?
Management needs to:
 Look at the benefit
 Look at the costs
 Look at the probability that the estimates are correct
 Judge the viability of the project by itself.
 Compare it to other capital intensive projects and
 Make a decision to authorize it or reject it and then move
forward.

That decision is only as good as the data it is based upon
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Benefits and identifiable
performance improvements.
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Unique IT models obfuscate comparative
data.
Standard benefit analysis techniques should
be used for quantifying the value of other
elements of a company.
The variables may be more difficult to
quantify within IT projects but the answer is
more valid.
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Benefits and identifiable
performance improvements.

An example, a firm deploys a Supply Chain
Management system where vendors are allowed to
received purchase orders for commodities via an
on-line system such as those offered by Office
Depot or Staples.

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This reduces labor costs and cuts the procurement cycle
by 40%.
 Purchased products to be delivered directly to the end
user instead of the warehouse eliminating handling.
 Direct delivery eliminates warehouse demurrage.
Benefits are thus known quickly through labor savings and
performance improvements are recognized by the shorter
delivery cycle.
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Benefit Evolution

IT benefits should be measured over time and the
value will change.
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An on-line portal may have little value in terms of Tangible
or Intangible benefits generated when it is first made
operational. However, over time, its value should increase.
Conversely, the use of a desktop departmental accounting
system will decline in value as a corporate wide ERP
systems is made operational.
The predicted value of the system is never met
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Benefit Evolution

Benefit Evolution is the progression of the
usefulness of the IT offering over time.

Depending on the subject IT solution or system, it may
have a benefit life cycle.
 A. As the project is implemented, few people know how
to use the system and its use starts off slow.
 B. As the users learns the system, numbers increase
and benefit increases until it peaks.
 C. As the technology gets older, benefits decrease over
time. Users find other systems. (ref: Moore’s Law)
 D. The system moves into the mode where
maintenance is costing more than any benefit. End of
life cycle.
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Benefit Evolution

Again using the SCM system as an example, the
initial deployment optimized the use of dedicated
and custom system code to allow the suppliers to
communicate with the company.
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This is costly to maintain.
This system is being replaced with a reverse
auction, web and XML enabled solution.
The original system’s benefits are declining.
It’s benefits were evolutionary. The new
system’s benefits are also evolutionary as
well.
Benefits change over time.
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Investment, Value and
Economics

IT investment is similar in concept to that
of a machine tool or any other similar
capital resource purchase.

It must be used to derive value to the
corporation.

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A $6500 firewall is useless unless it is used to
protect the corporate network.
A million dollar ERP system may save money only
if it is successfully implemented and used through
out the corporation.
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Investment, Value and
Economics

This is the dichotomy. If we don’t use it, what will
it cost us? If we do use it, what will we gain?
Compare both to the purchase price
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If the network is attacked, then the value of the firewall
is there but the amount of damage and the cost of that
damage would have been done is unknown.
The $1M ERP system may save $.5M annually but this
is not known in advance in quantifiable terms.
So the question in both cases, in real money
terms, what is the Profit and loss components of
each of those systems. What is the benefit.
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Investment, Value and
Economics


“Investment” is not only in the IT systems,
software and infrastructure (which can be
significant).
IT systems optimize processes.
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In Business Process reengineering, processes seldom,
if ever survive in tact, when an IT system is delivered to
replace or enhance them.
Therefore, investment also includes processes, users
of those processes and the time and productivity
impacts associated with those process changes.
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Investment, Value and
Economics
The Business Process and IT investment cascade
Changes to the Process and practices
IT investment to Supported improvements
Business Performance Improvements
Improved Profit and ROI
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Identifying Benefits and Value

As an extension of the previous
statements, then to conclude that IT
investment as standalone expenditures
cannot be associated with value.
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The value is derived from both the benefits of
their use as compared to the cost of their use.
Benefits = efficiencies gains + cost reductions.
Costs = System Cost + deployment costs +
operational costs.
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Identifying Benefits and Value

Benefits

efficiencies gains = better access to
information resulting in improved performance
both directly and indirectly.


Hard to Quantify
cost reductions = elimination of costs
associated with resource allocation or use.

Easy to Quantify.
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Identifying Benefits and Value

Costs

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System Costs = These are the primary (first) costs of
the IT system.
 These include the software licenses and related OEM
maintenance contracts, the hardware and related OEM
maintenance contracts and new infrastructure and
related OEM maintenance contracts. (OEM=Original
Equipment Mfg.)
Deployment Costs = The costs to bring the system online and to an operational status.
 This includes the labor that is required to set up the new
system as well as install any new infrastructure such as
additional cabling and data center build out.
 It can include operational interruptions to implement the
new system as well as the training costs for the users. 29
Identifying Benefits and Value

Costs

Operational Costs = These are the costs
associated with the operation of the system.

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These costs may be incremental costs by
assigning additional support duties to existing staff
or be new costs by requiring new staff trained on
the new system or support infrastructure.
These would include on-going Help Desk, license
renewals, incremental power costs, Data Center
Operations (7x24x365 if needed).
System maintenance workers for system updates
for patches and bug fixes.
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Identifying Return on
Investment
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The preceding list of costs and benefit elements
is not 100% inclusive nor is it intended to be.
It is meant to outline elements to the student to
allow them to begin recognizing costs and
benefits.
Return on Investment is calculated by computing
the (Benefits/Costs) for a specific time.
In that this ratio will change over time, a
subsequent time line valuation should be
undertaken as well.
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The Stakeholders of IT Project
Benefits
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IT Projects are funded by departments and
organizations.
Their goal is to increase efficiency and
thereby reduce costs.
For every successful project, there are a
series of interested participants and
observers, each will different levels of
interest in the project.
These parties are identified as follows:
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The “Interested Parties”
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The Sponsor – The individual who has requested
that the project be undertaken. They usually get
or provide the funding and face the executives.
The Stakeholders – Those who are affected by
the project and its implementation,
The Project Manager – The individual
responsible for the management of the project.
Project Team – The grunts. Individuals tasked to
perform the work identified in the project plan.
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The Stakeholders of IT Project
Benefits

Who are stakeholders?
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Financial sources and Corporate executive/Senior staff
End users
External groups, auditors, public investors, taxpayers
The Client or Project sponsor
Program manager
Project team
Team Members such as subcontractors, outsource
contractors and consultants.
Each has some form of vested interest. Each may
be impacted by the valuation of the project.
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The Stakeholders of IT Project Benefits

The impact of the valuation of the project may be
good or bad so do not assume that everyone
looks at a project the same way.
 The consumption of resources for one project
is taking away resources for another.
 As such, there may be supporters and nonsupporters within the group of stakeholders.
 This becomes apparent as soon as you put
forth your benefit analysis and the
assumptions are challenged.
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The Stakeholders of IT Project Benefits
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Influences on project assumptions
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Contingency
Risk
System resources
New technology
Design changes
Quality and reliability functions
Management considerations
Target audience
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The Stakeholders of IT Project Benefits

The identification of the stakeholders may not be
easily identified. Project Managers use several of
the following methods to identify these individuals
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Focus groups
Surveys
Interviews
Mistakes are common. Several reasons for this are:

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Incorrect assumptions
Unclear or missing information for decision making.
Inconsistent interpretation of data.
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Summary
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Business Exist for one reason, optimizing
shareholders wealth.
IT projects are critical to accomplishing this.
The selection of optimal IT projects are key to
meeting this goal and allowing management to
succeed.
Large, diverse firms may have as many as 8-900 IT
projects going on at any one time and many more
identified as needing funding.
Selection of the optimal product is critical.
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Summary

Ideally Benefits should be identified and
quantified before an IT project is
implemented and costs incurred in its
development and/or deployment.

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The primary benefits are usually quickly
identified.
The secondary and tertiary benefits make the
gross benefit more nebulous to quantify.
The same is true for the cost components of
any project.
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Summary
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The concept of IT Value is a combination of
factors.
Benefits are both tangible and intangible.
Benefits are evolutionary.
Cost benefit analysis remains a key tool for
managerial decision making.
Stakeholders must be recognized within the cost/
benefit analysis. Their information is critical.

They are the ones who will receive the benefit and will
pay the cost,
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Groups

Form into Groups
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Email me by next Session, at Discussion Board
the following information:
 Name of each group Member
 Email address of each group Member
 Phone number of each group member
Optional information
 Any general questions or concerns on the class.
 Business that you are thinking about selecting and why.
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Questions & Home Work
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
Questions?
Homework

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Read the CIO Article on Celanese.
http://www.cio.com/archive/011503/erp.html
Be prepared to:
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Discuss the Issues.
Discuss the solutions.
Discuss the Cost Valuation
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