The 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?
Diversification or Worsification!?
The truth about Intel lies ahead.
INTEL Industry
PC Component
Microprocessors
Motherboard
Chipset
AMD
Motorola
VIA
Transmeta
VIA
AMD
ALi
nVidia
SiS
Network Devices
Flash Memory
ASUS
ABIT
Micron
Samsung
3Com
Nortel
Cisco
Business Strategy Model - Motorcycle Manufacturing Industry
Product Strategy
Type/Purpose/Size
Heavyweight Off-Road Dual Purpose Road Racing Café Racer
Price Strategy
Entry Level
Law Enforcement
Moderate
Market Strategy
Premium
Military Recreational Professional Young Adult
North American
Europe
Japan/Asia
Manufacturing Strategy
Vertically Integrated
Vendor Emphasis
Latin America
Outsource
Sales/Distribution Strategy
Distributors
Independent Dealers
Franchised Dealers
Company Structure
Independent
Alliances
Joint Ventures/Subsidiaries
Information Systems
Engineering
Product Design
Manufacturing
Sales/Distribution
Business
Business Strategy Model for the Newspaper Industry
Product Strategy
Special Interest
General
Interest Financial Sports Entertainment
Local
News
National
News
International
News
Advertiser Target Audience
Retail Industry
Classified
General
Business
Specialized
Advertisers
Market Focus
Local
Regional
Multi-Regional
National
International
Information Sources
Regional or
Foreign
Local Editorial
National
Staff
Correspondents Correspondents
Wire
Service
Newspaper
Alliances
Publishing Strategy
Internal Publishing System
Sub-contract
Outsource the printing process
Delivery Strategy
Home and Business
Delivery
Retail Sales
Mail Delivery
Internet
Online
Company Structure Strategy
Independent
Alliances
Joint Ventures and/or
Subsidiaries
Information Systems Strategy
Self Develop
Self Sufficient
Application Package
Consultants &
Self Sufficient
Systems Integrators
Editorial System
Publishing System
Outsource
Business Systems
US Advertising Spending
Newspapers
1960
Internet
1970
Others
1980
Direct Mail
1990
Cable TV
2000
Broadcast TV
2001
Radio
0%
10%
20%
30%
40%
50%
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 Summary
Using Information Systems to Compete:
A Success Factor Profile
Use 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 Profile
The 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 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 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 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



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 Profiles
Federal Express
 Vision
 Culture
 Executive and Information Systems Management
Partnership
 Information Systems Integral to Business
 Linkage to Customers
Company Success Factor Profiles
British Airways
 Vision
 Culture
 Information Systems Integral to the
Business
 Executive and Information Systems
Management Partnership
 Information Systems Architecture
Possible 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 Introduction
Information Systems
Value
and
Financial Strategy
Quick 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
Managements Attention



There is a growing dependence on information
systems to run the organization.
Information systems expenses and capital funding
have frequently become quite large.
For these reasons senior management has become
more active in managing the role and significance
of Information Systems.
Primary Inhibitors of the
Growth 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 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
Spending for an Industry
Many executives want to know this!
Not very meaningful!
Industry averages can be misleading!
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 Strategy
Initiation
I
Expansion
II
Control
III
Maturity
IV
Application
Support
Single Area
Proliferation
Containment
Organization
Strategy
Motivation
People
Displacement
Cost
Avoidance
DP
Efficiency
Competitive
Advantage
Financial
Justification
Budget
Business
Case Install
Audit
Charge-Out
System
Management
Process
DP
Planning
Little
Reactive
Directed
Proactive
Organization
Finance
Dept.
Multiple
Dept.
Centralized
Centralized
Decentralized
Distributed
Answer to the Value Question
Look for the answer within the context of the
business management and contribution to the
success of the business.


Productivity driven
Focus on measuring
efficiency


High customer value
priority
Focus on customer
value
Conclusions
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 14
Information Systems Value
and
Financial 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
Financial Strategy
"You have got to get me a lot more comfortable
with the fact that you are spending $400 million a
year on information systems. Meanwhile, you
are not getting any more."
CEO to Information Systems Vice President
The 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?

A Big Deal - 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
Major Issue If:
A
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 Strategy
The heart of the matter is not how to quantify
the contribution of information systems, but
how to satisfy management that this support
resource is contributing to the success of the
business.
Senior Management Feels Too Much is Spent on IT
Agree Strongly
Agree Somewhat
Neutral
Disagree Somewhat
Disagree Strongly
0%
5%
10%
15%
20%
25%
30%
Is the Value Issue Unique to
Information Systems?
What about?
Advertising?
Research and Development?
Public Relations Programs?
IS 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 positive
impact on national productivity despite
enormous investments in information
technology.
Lester Thurow, Dean
Sloan School of Management
MIT
IS Value and Financial Strategy
The U.S. service sector has spent $862 billion
on IT over the past decade--a figure that is
equal to the GNP of France--without any
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 Roach
Economist
Morgan Stanley & Co.
Information Systems
Value Chains
Technology
Tasks
Activities
Programs
Goals
System
Individual
Department
Organization
Enterprise
As 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
Produce Value Directly
Information
Systems
Value to the
Business
Business
Change
Who Should Answer the IT
Value Question?
1. Chief Financial Officer (CFO)
2. Information Systems Executive
3. User Management (Those benefiting from the
IS support)
Industry IT Spending
Everyone wants to know how
they compare with others within
their industry.
Unfortunately, industry averages
can be very misleading.
IT Budget as Percentage
of 1999 Revenue
Overall Median
Food and Beverage Processing
Metals and Natural Resources
Hospitality & Travel
Utilities
Retail and Distribution
Manufacturing
Chemicals
Transportation
Pharmaceutical
Energy
Electronics
Construction and Engineering
Insurance
Consumer Goods
Media and Entertainment
Information Technology
Health Care
Telecommunications
Professional Services
Banking and Financial Services
0%
2%
4%
6%
8%
10%
National Semiconductor
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 Strategy
"There is no universal formula for
determining the business value of information
technology that can be applied in every
company and value can change over time."
Consultant to Information Systems Vice President
Difficulty of IT Benefit Analysis
• 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.
Evolution of IS Strategy
Application
Support
Motivation
Financial
Strategy
DP Planning
Organization
Initiation
Expansion
Control
Maturity
I
II
III
IV
Single Area
Proliferation
People
Displacement
Cost
Avoidance
Budget
Business
Case
Post Install
Audit
Little
Single Dept.
Reactive
Multiple Dept.
Containment
DP Efficiency
Organization
Strategy
Competitive
Advantage
Charge Out Management
System
Process
Directed
Proactive
Centralized
Centralized
Decentralized
Distributed
Figure 14-2
In the Beginning There are
Budgets

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 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 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 System
People should pay for what they
receive in terms of information
systems support.
Charge-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 System
 A Cost
Center
 A Profit
Center
 A Service
Center
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 Methodology
Memo
 As Incurred
 Estimates
 Bundled Pricing
 Algorithm
 Break-even Annual
 Break-even Product Life
 Standard Cost

Charge-Out System
 What
is good about such an approach?
 What
is wrong with this approach?
A 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 Process
In formulating a management process it is
critically important that careful consideration
be given to the factors that drive the success
of the business. It then logically follows that
information systems should be aligned with
the same factors that drive the business.
Information Systems Value
Within 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.
Major Factors to Be Addressed
Methodologies
Costs
By User
By Application
Benefits
Macro: Business
Function and Unit
Micro: Project
Management Processes:
Justification (The initial investment decision)
Confirmation (Measuring the results of the
investment)
Information Systems Value?
The ultimate test is still efficient, cost
effective and responsive solutions to
business requirements.
National 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 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
Programs
Risk
Headcount
Increase
Time
Total Productivity
Head Count
Productivity Challenge
Management Process
Management Incentives
Eliminate
Simplify
Automate
Business Case Process
I/S Development Discipline
Interlock Management
Benefit Management
Measurements
• Daily user logs.
• Surveys of user perceptions, attitudes,
comments and usage.
• Interviews of users.
• Information system statistics of actual use.
Six Year Results
Revenue
$1.2B
$3.1B
Before Tax Profit
$178M
(15%)
$605M
(19.5%)
Head Count
11,000
11,500
Hewlett-Packard
Test Measurement Organization
(Agilent) IS Value Case Study
The initial trigger for action was based on a company wide
effort to reduce cost.
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.”
IS 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 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. . .
Exploiting
Each step requires a
different approach build
on a sound foundation.
the knowledge
base
Securing
return on
investment
Exploiting
IT
Cost effective
IT operations
Enabling
change &
innovation
Guiding Principles
Focus
Invest in major trends in crossorganizational 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 Propositions
Customer Need
IT Value Proposition
1
Improve organizational agility and
flexibility 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
2
Make TMO organizations more effective
by enabling better, more timely decisionmaking processes.
Improve decision-making capabilities by providing
a simple information environment that is accessible
to all levels of the organization.
3
Achieve a better return on investments in
desktop computing assets.
Increase the efficiency and effectiveness of individual
contributors and work groups through better utilization
of desktop computing devices.
4
Improve customer satisfaction and return
on assets through deployment of significantly improved (reengineered) processes.
Increase the global competitiveness of the business
by delivering services which increase the effectiveness
of business process transformation initiatives.
5
Improve sales growth through improved
time to market.
6
Maximize the lifetime return on process
and system investments.
Increase the speed and reduce the complexity of
transferring design and product information between
organizations.
Optimize the operations return on investment in mature
processes through the selective application of process
and technology improvements.
The 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 Objectives
OBJECTIVE
Increase customer
satisfaction
STRATEGY
•Increase customer focus
MEASURE
•Customer satisfaction
index ratings
•Quality/response time
•Streamline operational
processes
•Reduce operational costs •Competitive rates
Increase return on
investment
•Evolve scenario planning •Market share %
process
•Increase new product
•Turnaround time
offerings
•Market share %
Develop an agile,
•Evolve a learning
skilled and motivated organization
team
•Motivation
•Agility (skill matrix)
Total Investment in IT
% of TMO IT
1997
2000
IT Services
Strategy
Operations and
Infrastructure
Minimize cost per
unit of service
81%
70%
Strategic
Investments
Maximize Return
On Investment
15%
26%
IT Management
and Planning
Control costs
versus budget
4%
4%
Information Systems
Organization
• 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?
Head Count
MIPS
IS $s
206
102
Flat
176
186
Flat
157
282
Flat
116
402
Flat
Considerations
Importance of dealing with the value question.
Effort and cost to do so?
More 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
Conclusions

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.