PPTTEST 3/14/2016 19:13
IT
Business Innovation Through Information
Technology
ROI
Ron Williams
1
PPTTEST 3/14/2016 19:13
IT
Quantitative Analysis
• Cost Focus
– Total Cost of Ownership – Depreciation + operations + maintenance
+…
• Returns without time value of money
–
–
–
–
Cash Flow – Benefits/Costs
ROI – Net benefits/Costs
ROA – Net benefits/Assets
Payback Periods – Initial investment/Annual net benefits
• Returns based on time value of money or cost of capital
– Net present value – Net benefits/(1 + cost of capital)n
– Internal Rate of Return – Present value of future cash flows – Initial
investment = 0
– Discounted Cash Flow - Cash flow based on time value of money
– Profitability Index – Present value of future cash flows/ Initial investment
Ron Williams
2
PPTTEST 3/14/2016 19:13
IT
IT Investment Analysis
• Capital budgeting process
– Companies pick the method of analysis
– Cut off points and methods (sometimes) vary with
economic conditions
• Many issues
– Who is picking the numbers?
– How do you figure in intangibles like ability to
compete or customer service?
– Who is owns the business case?
Ron Williams
3
PPTTEST 3/14/2016 19:13
IT
IT Investment Bottom Line
• The analysis of most projects is not simple
• Business case must be based on value (TVO) –
benefits and costs
• Intangibles and risks have to be factored in
• Should be owned by business executive & a
component of business plan – Unless IT only project
• Business processes in place to manage and measure
• Manage outcomes not just inputs
Ron Williams
4
PPTTEST 3/14/2016 19:13
IT
Providian Trust – Investment Case
Ron Williams
5
PPTTEST 3/14/2016 19:13
IT
The Balanced Scorecard…. Translating
Vision and Strategy: Four Perspectives
Business Process
Financial
To succeed financially,
how should we appear
to our shareholders?
• Objectives
• Measures
• Targets
• Initiatives
To satisfy our
customers what
business processes
must we excel at?
• Objectives
• Measures
• Targets
• Initiatives
Vision and
Strategy
Learning &
Growth
Customer
To achieve our vision,
how should we appear
to our customers?
• Objectives
• Measures
• Targets
• Initiatives
How will we sustain our
ability to change and
improve?
• Objectives
• Measures
• Targets
• Initiatives
Ron Williams
6
PPTTEST 3/14/2016 19:13
IT
Typical Benefits of IT Related
Investments
Business Process
Financial
• Increased Revenue
• Innovation
• Increased Profit
• Decreased Working Capital
•Days of Inventory
•Days of A/R
•Reduced SG&A
•Increased Gross Margins
•Increased ROC
•Market /Product Identification
•Time-to-Market
•Development Cost
• Operations ( All Processes)
• Cycle Time
• Quality
• Cost
•Post Sales
•Response Time & Downtime
•Warranty/Returns (Cycle Time & Cost)
•Collections/Payments ( Cycle Time)
Customer
• Customer Satisfaction
• Market Share
• Customer Acquisition
• Customer Retention
• Customer Profitability
Ron Williams
Learning & Growth
• Employee Capabilities
• Information Capabilities
•Information Sharing
•Communications
•Availability/Reliability
•Flexibility
•Responsiveness
•Security
7
PPTTEST 3/14/2016 19:13
IT
IT Investment Related Costs
• Purchase (hardware, software, services)
• Development, implementation & integration
• Transition to new system/technology (training & process)
• Complexity of new technology (skills and processes)
• Technical risk ( implementation difficulty & staying power )
• Future business flexibility
Ron Williams
8
PPTTEST 3/14/2016 19:13
IT
Risk vs. Value
High
No Brainer:
Just do it
Low
Be Careful: These
can eat up all the
resources with
little return
Requires further
analysis
Value
No Brainer: Why
would you?
Low
Ron Williams
High
Risk
9
PPTTEST 3/14/2016 19:13
What Happens as Solutions Move from
Operational to Strategic?
IT
Strategic
Operational
High
No Brainer:
Just do it
Requires further
analysis
Value
Low
Be Careful: These
can eat up all the
resources with
little return
Low
No Brainer: Why
would you?
High
Ron Williams
10