Business value of systems

Costs and benefits of IS applications Business value analysis Risk analysis Management issues

What is a successful project?

It delivers everything specified To the quality agreed Within the time and costs laid out at the start

of 1027 projects surveyed only 130 were successful!

British Computer Society Review 2001

IS business value

The facts

Considering only budget & time:

29% of the projects are delivered in time & budget

53% 18% overrun cost & time cancelled
The Standish Group, 2004

The causes of failure?

Lack of user & management
commitment Underestimation of the costs Overestimation of the benefits Wrong project selection Poor project management

IS business value
Opportunity study

Framing the problem to be solved

What is the business problem? Who are the users? What are their expectations? What are the constraints? What if status quo?

IS business value
Opportunity study

4 types of feasibility studies:

Do we master the technical

solution? What are the benefits? What is the contribution to the strategy of the business? Is the organization prepared to use the new IS?

IS business value
Business value analysis

Tangible benefits

Increased productivity Reduced workforce Lower operational costs Lower computer expenses Lower outside vendor costs Lower clerical and professional costs

IS business value
Business value analysis

Intangible benefits

Improved decision making Faster time to market Higher client satisfaction Increased organizational flexibility Increased organizational learning legal requirements attained Enhanced employee goodwill Increased job satisfaction

Hidden costs in data processing

Well recognized costs
Materials Software Telecommunications Maintenance Training (end users)

Badly recognized costs

Change monitoring Failures corrections

Hidden costs
Activities disruptions End users assistance Suppliers meetings Products assessment Bad quality of supports

Hidden costs in data processing

Materials Softwares Telecommunications maintenance Training of DP HR
Hot line

Well recognized costs

Endusers training

BPR Change monitoring Failures corrections Activities disruptions Products assessment Endusers assistance Suppliers meetings Bad quality of supports

Badly recognized
costs

Hidden costs

HAVE AS POSSIBLE, A GLOBAL VIEW OF THE COSTS

IS business value
Business value analysis

Costs:
Capital expenses (hardware, software licenses), and developments, either internal or external, Operating expenses or overheads (training, consulting, maintenance, ..) Total cost ownership of PCs

IS business value
Business value analysis

Total cost ownership (TCO):

TCO consists of both direct & indirect costs: Depreciation of direct purchase Software licenses Maintenance costs Training Direct telecommunication costs Hot line

IS business value
Business value analysis Good practice

Dont forget to estimate time for:

Business justification To agree on specifications with customers Quality reviews To select and install hardware, software, security features, help texts, recovery procedures

Contingency allowances according to

the level of detail you have at hand

UNDERSTANDING BUSINESS VALUE OF INFO SYSTEMS

CAPITAL BUDGETING MODELS PORTFOLIO ANALYSIS REAL OPTIONS PRICING MODELS

Capital Budgeting Models

The payback method The accounting rate of return on investment (ROI) The net present value The cost-benefit ratio The profitability index The internal rate of return (IRR)

The Payback method

Payback method: Measures the time required to pay back the initial investment of a project
Original Investment Annual net cash inflow

= Number of years to pay

back

IS business value
Business value analysis
Cash flow

benefits

costs

time Payback period Net present value Internal rate of return

Accounting Rate of Return on Investment (ROI)

Calculates rate of return by adjusting the cash inflows produced by the investment for depreciation Step 1: Calculate Benefit
(Total benefits - Total cost - Depreciation) Useful life

= Net benefit

Accounting Rate of Return on Investment (ROI)

Step 2: Calculate ROI by dividing net benefit by the total initial investment

Net benefit
Total initial investment

= ROI

Net Present Value

Present value: The value in current dollars of a payment or stream of payments to be received in the future
1 - (1+interest)-n Interest

Payment x

= Present value

Cost-Benefit Ratio
Total benefits Total costs

= Cost-benefit ratio

Profitability Index

Present value of cash inflows Investment

= Profitability index

Internal Rate of Return

Rate of return or profit that an investment is expected to earn, taking into account the time value of money The discount (interest) rate that will equate the present value of the projects future cash flows to the initial cost of the project

CAPITAL BUDGET:
PAYBACK METHOD: How long will it take to pay back the investment? RETURN ON INVESTMENT: Does return during useful life of an item exceed the cost to borrow money? COST-BENEFIT RATIO: Does the ratio of benefit versus cost exceed 1?

CAPITAL BUDGET
PROFITABILITY INDEX: What is the ratio of present value of cash inflow to initial investment? NET PRESENT VALUE: Accounting for cost, earnings & time value of money what is the investment worth? INTERNAL RATE OF RETURN: Accounting for the time value of money, what is the return rate of an investment?

CAPITAL BUDGETING MODELS

LIMITATIONS: Assume all relevant alternatives have been examined; cost & benefits can be expressed as money Ignore intangible benefits

Special context of IT financial models

Many problems emerge when financial analysis is applied to IS Financial models do not express the risks and uncertainly of their own costs and benefit estimates Costs and benefits do not occur in the same time frame costs tend to be upfront and tangible, whereas benefits tend to be back loaded and intangible IT can change during the course of the project, causing estimates to vary greatly Intangible benefits are difficult to quantify

Special context of IT financial models

These difficulties give financial models an application bias:
Transaction and clerical systems that displace labor and save space always produce more measurable, tangible benefits than MIS, DSS or groupware systems. FINANCIAL RESULTS MUST BE CONSIDERED IN A BROADER CONTEXT OF BUSINESS ANALYSIS

An IS budgeting method
Look for a level of decomposition that is appropriate to the information that you have to hand and the time available to you Dont forget to estimate time for:
business justification
to agree on specifications with customers quality revues to select and install hardware, software, security features, recovery procedures.

IS business value
Business value analysis

Sensivity analysis

Use the financial model to compute

the IRR in the best case and in the worst case: Best case: optimistic return on investment Worst case: benefits delayed, cost and delay overruns This analysis helps to find the factor which has the heaviest impact on IRR.

IS business value
risk analysis

3 types of risk factors:

Concerning project management, Concerning the users:
Expectations? Cooperation?

Concerning IT

IS business value
risk analysis
Consequences of a poorly managed project:

Costs overruns, time slippage Technical shortfalls imparing

performance Failure to obtain promised benefits

IS business value
risk analysis
How to evaluate the level of cooperation and commitment to a project?

List the different actors in a project:

User department 1, User department 2 IT team Management

define their importance in the success,

their interests and their position:
Negative / Cooperative

IS business value
risk analysis
Maturity of an IT product
Users strategy and suppliers strategy are in opposition: users focus continuity suppliers focus IT replacement

It rarely pays to be a pioneer!

IS business value
risk analysis
Visibility

IT maturity curve
Java as language Datamarts Chip cards XML Vocal recognition IP Voice

Summit of Technology overestimated First fruits hopes

Abyss of disillusions

Sunshine side

Profitable plateaus

IS business value
risk analysis
Risk levels factors
Project leader User cooperation Complexity of the demand Change intensity Management commitment Quality of the tools
X X 1 2 3 4 5

low
Full time X X X

high
no

IS business value
risk analysis Risk increases with the size of the project
30

Risk level score

avoid
C

A
B 0 100

Project size

PORTFOLIO ANALYSIS:
ANALYSIS OF POTENTIAL APPLICATIONS TO DETERMINE RISKS & BENEFITS

Determine desirable features, acceptable risks of required system Generate portfolio of characteristics, risks for each alternative Scoring model

Portfolio Analysis
An overall understanding of where the firm is making information technology investments

Based on inventory of all information systems projects and assets, including infrastructure, outsourcing contracts, and licenses
Assigns risk and benefit profiles to IS investments

Portfolio Analysis

SCORING MODEL
Identify desirable features Provide weights for each (add to 1.00) Look at each alternative: Which features are present? To what extent (as an amount)? Score the alternative Rank-order the alternatives Select highest ranked option

Scoring Models

REAL OPTIONS PRICING MODELS

Useful under uncertain conditions Include estimates for management learning, value of delaying decision, volatility of costs & revenues Uses the financial industry concept of options valuation An option is the right, but not obligation, to act at a future date.

Knowledge Value-Added Approach

Any program that uses information technology to change business processes requires knowledge input The value of the knowledge used to produce improved outputs of the new process can be used as a measure of the value added

Knowledge inputs can be measured in terms of learning time to master a new process, and a return on knowledge can be estimated

Some conclusions
Financial and non-financial models to assess business value of IS Shortcomings of financial models Potential of non-financial models for value assessment

ACTIONS & INDICATORS FOR SUCCESSFUL SYSTEM IMPLEMENTATION

Internalization of training program Continual updating of the system Promotion of key personnel Survival of system after turnover Attainment of widespread use

FACTORS IN IMPLEMENTATION OUTCOME

CAUSES OF SUCCESS OR FAILURE

User involvement & influence Management support Level of complexity / risk Management of implementation process

USER-DESIGNER COMMUNICATIONS GAP Differences in backgrounds, interests, priorities Impede communication and problem solving Among end users and information systems specialists

USER CONCERNS
Will system deliver information I need? How quickly can I access data? How easily can I receive data? How much clerical support will I need for data entry? How will system operation fit into my daily business schedule?

DESIGNER CONCERNS
How much disk space will master file consume? How many lines of program code will this function take? How can we reduce CPU time? What is the most efficient way of storing this data? What database management system should we use?

IS business value
Good practices

Management issues

The owner of an IS should never

delegate decision He should require a precise & easy to read reporting on short term targets Large projects should be split in a program of subprojects

IS business value

Management issues

Good practices

Interactions & synergies between

projects must be clearly defined Invest in IS R&D to be able to take initiatives Invest in organizational learning & training to capture a maximum value of the IS investment