Matakuliah
Tahun
: M0624/Information Technology Valuation
: 2008
THE NEED TO MEASURE
THE VALUE OF INFORMATION TECHNOLOGY
MODUL 1. SESSION 2 – 3
INTRODUCTION
• THE RATE OF CHANGE IN TODAY’S BUSINESS
ENVIRONMENT HAS PUSHED THE NEED FOR
TECHNOLOGIES AND ACCEPTANCE OF THEM TO A
CONTINUOUSLY ACCELERATING PACE.
• THE NEW TECHNOLOGIES ARE ENABLING
ORGANIZATIONS TO BE FLATTER, AND MORE
FLEXIBLE, REDEFINING OUR NOTIONS ABOUT
EVERYTHING FROM R&D TO DISTRIBUTION, AND IN
THE PROCESS MAKING POSSIBLE SMARTER,
MORE CUSTOMIZED PRODUCTS AND SERVICES.
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INTRODUCTION
• ORGANIZATIONS SPEND ENORMOUS SUMS OF
MONEY ON COMPUTER HARDWARE. SOFTWARE,
COMMUNICATION NETWORKED, DATABASES,
SPECIALIZED PERSONNEL, COLLECTIVELY KNOWN
AS INFORMATION TECHNOLOGY.
• LEADING EDGE COMPANIES ALL OVER THE WORLD
IN ALL INDUSTRIES HAVE INCREASED THEIR
OVERALL IT EXPENDITURES BY DOUBLE-FIGURE
PERCENTAGE ANNUALY. MANY ORGANIZATIONS
CURRENTLY OBSERVE THAT UP TO 50% OF THEIR
TOTAL CAPITAL EXPENDITURE IS FOR IT.
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INTRODUCTION
• THERE IS A GREAT DEAL OF QUESTIONING AND
SOUL-SEARCHING ABOUT THE PAYOFF OF THESE
LARGE INVESTMENTS IN IT.
THE QUESTIONS ARE:
• DOES IT YIELD TANGIBLE PRODUCTIVITY, OR
STRATEGIC BENEFITS?
• ARE THEY MEASUREABLE?
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ATTEMPS TO MEASURE THE VALUE OF
IT
BRYNJOLFSSON (1993), A LEADING RESEARCHER IN
THE FIELD OF IT ECONOMICS:
“THE RELATIONSHIP BETWEEN INFORMATION
TECHNOLOGY AND PRODUCTIVITY – THE
FUNDAMENTAL ECONOMIC MEASURE OF A
TECHNOLOGY’S CONTRIBUTIONS – IS WIDELY
DISCUSSED BUT LITTLE UNDERSTOOD”
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MANAGING THE COSTS/BENEFITS
EQUATIONS OF IT
• HISTORICALLY, IT SPENDING IN BUSINESS WAS
CONSIDERED AN ADMINISTRATIVE EXPENSE
RATHER THAN A BUSINESS INVESTMENT.
• MANY OF TODAY’S IT APPLICATION ENABLE AND
SUPPORT FAR REACHING CHANGES IN THE
INDUASTRY AND BUSINESS STRUCTURE, AND CAN
HAVE A HUGE IMPACT ON ORGANIZATIONAL
FORMS, INTERFACES WITH SUPPLIERS AND
CUSTOMERS, DISTRIBUTION CHANNELS,
PRODUCTS, SERVICES AND MARKETS.
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IT COSTS
• THERE ARE AT LEAST 3 RELATED REASONS FOR
MANAGEMENT CONCERN ABOUT COST SIDE OF
THE COST/BENEFIT EQUATION OF IT :
• IT SPENDING IS SUBSTANTIAL
• IT IS UNCLEAR HOW LARGE THE GROWTH IN IT
INVESTMENT REALLY IS
• A GROWING PORTION OF THE IT EXPENDITURES
IS INVISIBLE AND THEREFORE NOT MANAGED
(ACTIVELY) BY UPPER MANAGEMENT
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IT COSTS
• TRACING AND TRACKING THE COSTS OF IT IS
BECOMING MORE TROUBLESOME IN MOST
ORGANIZATIONS, PARTICULARLY BECAUSE A
GROWING PORTION OF THE EXPENDITURE IN IT IS
“HIDEN” BY USER DEPARTMENTS. THIS MEANS
THAT ACTUAL IT COSTS ARE NOT TRACEABLE AND
NOT INCLUDED IN CENTRAL BUDGETS, SO BOTH
THE ACTUAL EXPENDITURE LEVEL AND ITS
GROWTH RATE ARE UNKNOWN.
• THE MORE DECENTRALIZED THE ORGANIZATION IS
THE MORE HIDDEN THE IT COSTS MIGHT BE.
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IT BENEFITS
• WHILE THE COST SIDE OF THE COST/BENEFIT
EQUATION OF IT MAY BE DIFFICULT TO MANAGE
AND MEASURE, THE BENEFIT SIDE IS EVEN
TOUGHER.
• SOME OF THE COMPLICATING FACTORS IN THE
MEASUREMENT OF IT BENEFIT MENTIONED BY
KEEN, A WELL-KNOWN WRITER ON THE SUBJECT
OF IT:
• IT SPENDING DOES NOT DIRECTLY CREATE
BENEFITS
• THE SAME INVESTMENT IN THE SAME IT
TECHNOLOGY CAN HAVE DIFFERENT OUTCOME
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IT BENEFITS
• MANY OF THE VALUE ADDED BENEFITS OF IT DO
NOT SHOW UP IN THE ACCOUNTING SYSTEMS.
BRYNJOLFSONN AND KEEN, SAID THAT COMMON
CAUSES OF SHORTFALL IN MEASURING THE
BENEFITS OF IT ARE:
• IN SUFFICIENT MANAGEMENT (INCLUDING
PLANNING) OF IT AND THE VALUE OF IT;
• INAPPROPRIATE MEASURES TO DETERMINE THE
VALUE OF IT;
• LACK OF FRAMEWORKS TO MEASURES THE VALUE
OF IT.
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MEASURING THE VALUE OF IT
• LORD KELVIN, A SCIENTIST SAID: “IF YOU CAN
MEASURE IT, YOU CAN MANAGE IT. IF YOU CAN
NOT MEASURE IT, YOU CANNOT MANAGE IT”
• A DASHBOARD OF VITAL PERFORMANCE
INDICATORS PROVIDES MANAGEMENT WITH A
TOOL TO GAUGE HOW THE COMPANY IS FARING IN
TERMS OF FINANCIAL PERFORMANCE,
CONTINUOUS INNOVATION, CUSTOMER CARE,
COMPETITIVENESS, ORGANIZATIONAL CONTROL,
ETC.
• THE APPLICATION OF IT IS ONE OF THOSE
FACTORS
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MEASURING THE VALUE OF IT
• THE MEASUREMENT OF IT’S IMPACT SEEMS TO BE
DIFFICULT. EVOLVING INFORMATION TECHNOLOGY
DOES NOT STAND ON ITS OWN, BUT INTERWOVEN
WITH MANY ASPECTS OF DOING BUSINESS.
• IT DELIVERY PROCESSES ARE VARIED AND THE
TECHNOLOGY IS INCREASINGLY COMPLEX.
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MEASURING THE VALUE OF IT
• WITH REGARD TO IT, IMPORTANT LESSONS CAN BE
LEARNED FROM SYSTEMS OF MANAGEMENT
ACCOUNTING, COST MEASUREMANT, AND COST
MANAGEMENT.
• AS IN MANAGEMENT ACCOUNTING AND
MANAGEMENT CONTROL, A SYSTEMATIC APPROACH
TO MEASURING THE VALUE OF IT SHOULD BE
CAPABLE OF FULFILLING BASIC FUNCTION OF
PERIODIC ASSESSMENT AND OF SUPPLYING
FEEDBACK OF THE HEALTH OF THE APPLICATION AND
SUPPLY PROCESSES.
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IT VALUE MEASUREMENT APPROACH
TO LAUNCH EFFECTIVE, SYSTEMATIC AND
CONSISTENT MEASUREMENT OF IT,
MANAGEMENT MUST:
• CLEARLY UNDERSTAND WHAT TO MEASURE
• SELECT A SET OF KEY MEASURES FOR IT VALUE
TO ASSESS THE MANY FACETS OF THE
APPLICATION AND SUPPLY OF IT;
• IMPLEMENT AN EFFECTIVE MEASUREMENT
PROGRAM INTO ORGANIZATION
• DEVELOP NORMS FOR THE APPLICATION AND
SUPPLY OF IT.
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Figure 1.1: Effective IT Measurement
Link IT planning to IT valuation, … measure IT, and benchmark IT
Business
planning & control
Planning
objectives
IT planning &
control
IT supply planning
& control
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Measuring
result
Measurem
ent
Program
Manage
Us Them
BTRIPLEE
• IT CONTRIBUTES TO BUSINESS OBJECTIVES AND
TO BUSINESS STRATEGY, CALLED THE BUSINESS
VALUE OF IT
• IT EFFECTIVELY SUPPORT BUSINESS PROCESSES,
ACTIVITIES AND EMPLOYEES, CALLED THE
EFFECTIVENESS OF IT
• IT SUPPLY ALIGNS WITH BUSINESS REQUIREMENTS,
CALLED EFFECTIVENESS OF IT SUPPLY, AND IS
SUPPLIED AT MINIMUM COST, CALLED THE
EFFICIENCY OF IT SUPPLY
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BTRIPLEE
• BECAUSE MEASUREMENT AND MEASURES
INFLUENCE PEOPLE’S MOTIVATIONS AND
ATTITUDE, A MEASUREMENT PROGRAM MUST BE
SYSTEMATICALLY AND COHESIVELY INTRODUCED
AND MAINTAINED, TO ATTAIN THE LONG LASTING
AND EMBEDDED IMPROVEMENT SOUGHT.
• COMPANIES MAY ENGAGE IN COMPARATIVE
ANALYSIS, MEASURING THEIR VALUE OF BUSINESS
AND TECHNOLOGY PEERS, SUCH BENCHMARKING
APPROACH.
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THE END OF SESSION 2-3
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