Matakuliah
Tahun
: M0624/Information Technology Valuation
: 2008
MEASURES OF THE BUSINESS VALUE OF IT
MODUL 4. SESSION 13-16
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 WEAKNESSES, PROVIDES TO A GUIDE FOR MANAGEMENT AND FORMS THE CORE OF PLANNING AND
CONTROL.
• A DASHBOARD ALLOWS MANAGEMENT TO VALUATE THE CONTRIBUTION OF SEVERAL FACTORS
THAT IMPACT THE OVERALL PERFORMANCE OF
THE ORGANIZATION.
Bina Nusantara
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.
Bina Nusantara
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 PROFITABILITY, PRODUCTIVITY, EARNINGS, ETC
B. BUSINESS PERFORMANCE: SUCH AS COMPETITIVENESS, NEW PRODUCT SALES, PRODUCT
DEVELOPMENT LEAD TIMES, ETC
C. STRATEGIC PERFORMANCE, MEASURED BY
INDICATORS THAT MATCH SPECIFIC MANAGEMENT
OBJECTIVES (MANAGEMENT’S CRITICAL SUCCESS
FACTORS)
Bina Nusantara
Figure 4.1: Costs Dynamic of IT
Development
of new
functionality
IT
Costs
Variable
costs
Redevelop
ment of
existing
functionality
Develop
ment
$1.00
Mainte
nance
Mainte
nance
$0.20
$0.40
Operations
Operations
Bina Nusantara
Year 1
Year 2
Year 3
Year 4
Year 5
Fixed
costs
DYNAMICS OF IT COST
• TO MANAGE AND MEASURE THE VALUE OF IT,
ATTENTION SHOULD BE GIVEN TO THE COST SIDE
OF YTHE COST-VALUE EQUATION.
• THESE PATTERN SUGGEST THAT EVERY DOLLAR
SPENT ON IT DEVELOPMENT AUTOMATICALLY
GENERATES FOLLOW-ON COSTS FOR IT
MAINTENANCE AND IT OPERATIONS.
• ACCORDING TO KEEN (EARLY ‘90): EACH DOLLAR
OF NEW DEVELOPMENT GENERATES 20 CENTS OF
MAINTENANCE AND 40 CENTS OF OPERATIONS IN
EACH SUBSEQUENT YAER.
Bina Nusantara
DYNAMICS OF IT COST
• ORGANIZATIONS HAVE OPTIONS FOR DEALING
WITH THE DYNAMICS OF IT COST. THIS IS
IMPORTANT TO UNDERSTAND BOTH AT THE TIME
OF PLANNING FOR IT (EX-ANTE) TO DETERMINE
WHAT TO DO AND AT THE TIME OF VALUATING IT
AFTERWARDS (EX-POST) TO PLACE IT COSTS IN
THE CONTEXT OF PAST DECISIONS.
Bina Nusantara
Figure 4.2: Options to Deal with Costs Dynamics of IT
Year 1
Developmen
t 10.0
Year 2
Cut development
costs, overall IT
budget remains
the same
Year 3
40.0
40.0
4.0
1.6
36.0
38.4
Year 4
Year 5
40.0
40.0
1.0
0.7
39.0
39.3
64.0
Maintenance
&
operations
30.0
58.0
52.0
Keep
development
costs at the
same level
46.0
10.0
10.0
10.0
10.0
54.0
48.0
42.0
36.0
71.9
62.8
54.3
IT Costs
($)
Grow
development
costs by 10%
per year
47.0
13.3
12.1
57.5
11.0
49.5
42.2
36.0
Bina Nusantara
14.4
DYNAMICS OF IT COST
3 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
Bina Nusantara
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.
Bina Nusantara
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.
Bina Nusantara
DYNAMICS OF IT COST
3.
Bina Nusantara
E-BUSINESS IS DRAMATICALLY CHANGING THE
WAY BUSINESS OPERATE AND THE NECESSARY
INVESTMENT TO MAKE THIS HAPPEN IS NOT
SMALL.
Figure 4.3: Annual Rate of IT Budget Growth
12,0%
North America
Western Europe
Webinternet
6,0%
3,0%
Asia/Pacific
(Dev. Economies)
PC – Client/
Server
S/360
Mainframe
1,5%
0%
1960
Bina Nusantara
1970
1980
1990
2000
2010
DYNAMICS OF IT COST
GENERALLY, IT COSTS ARE CATEGORIZED INTO THE
ACTIVITIES OF:
1. DEVELOPMENT OF NEW IT CAPABILITIES
2. MAINTENANCE OF EXISTING IT CAPABILITIES
3. OPERATING IT CAPABILITIES (OPERATIONS)
4. END-USER COMPUTING SUPPORT
5. PLANNING AND ADMINISTRATION OF IT AND IT
ACTIVITIES
Bina Nusantara
Figure 4.4: IT Spending by Activity (%)
Activity
1993
1995
1997
1999
9
15
16
19
18
16
20
19
23
25
Operations
47
44
43
29
26
End user computing/
Help desk
10
11
11
18
21
Planning,
administration, other
18
10
11
11
10
100
100
100
100
100
Development/ Major
enhancements
Maintenance/ minor
enhancements
Production /
Bina Nusantara
1991
Figure 4.5: IT spending by Resource (%)
Resource
Hardware
Software
Personnel
Outside services
Datacom and other
Bina Nusantara
1991
1993
1995
1997
1999
26
26
22
18
8
8
8
13
13
40
36
37
35
37
12
19
18
16
11
11
11
11
14
20
100
100
100
100
100
29
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)
Bina Nusantara
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
Bina Nusantara
MEASURES OF FINANCIAL
PERFORMANCES
THROUGH IT
STRATEGIC
AND ECONOMIC PERFORMANCE:
1. ROI
2. ROS (RETURN ON SALES)
3. REVENUE GROWTH
4. SALES BY TOTAL ASSETS
5. SALES BY EMPLOYEE
Bina Nusantara
Figure 4.6: Relationships between IT Investment Radios and
Financial Performance Ratios
Return on Assets
Value of IT equipment
as % of revenue
Sales by Total
Assets
No. of PCs and terminals
as % of total employees
Sales by Employee
% of IT budget spent
on IT staff training
Return on Sales
Return on
Investment
Bina Nusantara
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
Bina Nusantara
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)
Bina Nusantara
Figure 4.7: The Balanced Scorecard
Financial Perspective
Goal
Goal
Measures
Measures
Goal
Customer Perspective
Innovation Perspective
Goal
Bina Nusantara
Measures
Internal Perspective
Measures
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
Bina Nusantara
B.
MEASURES OF BUSINESS
THEPERFORMANCES
SCORECARD GUARDS THROUGH
AGAINST
IT
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 .
Bina Nusantara
Figure 4.8: Relating Costs to the Balanced Scoreboard of an Airline
Performance indicator
Relating IT costs to
the:
Year 1
Year 2
Year 3
Year 4
Trend
(%)
IT Costs ($m)
15
17
18
20
33
Revenues ($m)
300
350
400
450
50
Operating costs ($m)
280
315
350
390
39
Number of passengers ($m)
600
640
690
735
23
Number of freq. flyers ($m)
60
100
150
200
233
Financial
Perspective
IT costs as % revenue
5.00
4.85
4.60
4.45
-11
Internal
Perspective
IT costs as % operating costs
5.35
5.40
5.30
5.15
-3.5
Customer
Perspective
IT costs per passenger
25.00
26.50
27.00
27.20
9
Innovation
Perspective
IT costs per frequent flyer
250.00
170.00
120.00
100.00
-60
Revenue per passenger
500
547
580
612
22
Operating costs per
passenger
466
493
507
531
14
Bina Nusantara
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
Bina Nusantara
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
Bina Nusantara
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 DETERMINED. 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.
Bina Nusantara
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.
Bina Nusantara
Figure 4.9: IT Costs by Critical Success Factor
Classes of IT
IT
Costs
Going Concern IT
Maintenance &
Operation
Mandatory
Development
Rejuvenate Product
portfolio
Develop Eastern
European Market
Payroll
General Ledger
Critical to business Success
No critical to business Success
Bina Nusantara
IT
Infrastructure
& Research
New IT Development
Business
Improvement
Business
Redesign
MEASURES OF FINANCIAL
PERFORMANCES
3 CLASSES
OF IT COSTS: THROUGH IT
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.
Bina Nusantara
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.
Bina Nusantara
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.
Bina Nusantara
CONCLUSION
B. 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.
Bina Nusantara
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.
Bina Nusantara
• THE END OF SESSION 13 - 16
Bina Nusantara