Justifying & Managing IS/IT Investments

MSSI 2022S
Structure Demand-side Supply-side

Corporate & Aligning Organizing

business IS/IT with Managing the Strategic
strategy and business the app. Managmnt
IS/IT strategy portfolio of IS/IT
implications

A strategic Business Determine

perspective innovation the IS
of IS/IT with IS/IT strategy

Establish Search for Justifying & The Strat.

IS/IT strategy competitive managing Managmnt
process opportunit. IS/IT of IT service
to shape investment &
strategy infrstructure

Establishing IS/IT Portfolio & Organizing,

strategic strategy: investment sourcing, and
management tools & management infrastructure
framework techniques management
2
Session Objectives
• To understand how to justify & evaluate IS/IT
(business apps & infrastructure) investments
– To understand how to identify & manage IS/IT’s
investment benefits
• To understand how to assess & manage IS/IT’s
investment risks

3
Survey Findings of Current Practices in IS/IT
Investment Management
Average
• Relatively low levels of
Management Average satisfaction
Satisfaction –
more
Management
Satisfaction –
• Post-implementation
successful less successful investment evaluation and
Practice group group review is the factor that
Portfolio 49% 33% differentiates the two
management
groups most
Business case 44% 19%
development • Overall levels of satisfaction
with both business case
Identifying and 44% 20% development and benefit
quantifying benefits
identification are about
Identifying and 69% 46% 30% (~similar to the
quantifying costs
percentage of IS/IT projects
Evaluation and 36% 7% deemed successful)
review

5
Investment and Priority-setting Policies
• IS/IT investments have traditionally been evaluated like capital projects such as
plant and equipment assuming a fixed cost offset against net revenue over the
life of the application. However, many IS/IT investments are now more like ‘new
business ventures’ or business initiatives where the financial aspects of the
outcome can only be guessed and the technology is only one component of a
major change program …
• … in most cases not all demand can be satisfied and priorities must be set. If no
consistent justification approach is followed, the more beneficial applications
may well be deferred, allowing those that make a lesser contribution to proceed.
• … the same principles and practice should govern the ‘go–no go’ decisions for
individual applications ... The only additional factor, assuming that systems are
not sequentially dependent, is the amount of resource consumed. The limiting
factor is normally people, in quantity or quality (particular skills or knowledge),
… priority setting should enable maximum return from the use of that resource.

6
Justifying and Evaluating IS/IT Investments:
Problems in IS/IT Investments
• Research findings: >90% of large organizations required some form of business case to
justify the funding of IS/IT investments
– only 59% subjected to a formal investment appraisal
– 60% felt that they were valuable in gaining funding approval
– <40% were satisfied that the case identified the appropriate benefits, secured commitment to deliver the
stated benefits
• Grindley summed up the mistrust of conventional justification methods:
– 83% of IT directors admit that the cost–benefit analyses supporting IT investment proposals are a fiction;
– CEO: “It’s like there is a spontaneous conspiracy to exaggerate the benefits.”
• Most technology investments are justified on the back of applications:
– Infrastructure’s investment are generally carried out in advance and the return can only be counted based
on subsequent application’s benefit
– However, it is difficult to associate infrastructure’s investment with application’s benefit due to accounting
practices (~IT lifetime, etc.)
– The full costs of the investments are not included (costs incurred by business departments in specifying,
testing, and implementing the system; costs of making the business changes)

7
Justifying and Evaluating IS/IT Investments:
Financial Appraisal of IS/IT Investments
• Payback
• Accounting ROI
• Discounted Payback
• Discounted Cash Flow – IRR
• Discounted Cash Flow – NPV
• Discounted Cash Flow – Profitability Index

8
Classifying IS/IT Investments –
business case effectiveness

In addition to obtaining funding, More Less

preparation of a business case often successful successful
or always … group group Total
Identifies all available benefits 50% 27% 37%
Gains commitment from the business 64% 44% 53%
to realizing the benefits
Attains an ROI above a required 56% 33% 43%
hurdle rate
Establish appropriate measures for 36% 17% 25%
the benefits
Adequately quantifies the benefits 47% 21% 32%
Overstates the benefits to get 25% 46% 37%
approval
As a result, what % of business cases 78% 44% 58%
are approved?

9
Classifying IS/IT Investments:
Types of Applications

• substitutive—technology replacing people with economics being

the main driving force, to improve efficiency ~ support & some
key operational apps
• complementary—improving organizational performance,
productivity and employee effectiveness by enabling work to be
performed in new ways ~ key operational & some strategic apps
• innovative—achieving a competitive edge by changing trading
practices and business relationships, creating new markets, etc. ~
strategic apps
10
Classifying IS/IT Investments:
Techniques of Evaluation

• Traditional cost–benefit analysis, which allows for efficiency improvements in

organizational processes resulting from automation
e.g. automating invoices and sending them electronically to customers via e-commerce
• Value linking, which estimates the improvement in business performance, not just
savings made, from improving the linkages between processes or activities
e.g. automatic reconciliation of orders, invoices and payments to enable accounts staff to spend more time
resolving customer queries and issues
• Value acceleration, which considers time dependence of benefits and costs in other
departments of system improvements
e.g. giving sales data to buyers on a daily basis, improving their ability to respond to changes in demand and
negotiate more effectively with suppliers
• Value restructuring, which considers the productivity resulting from process and
organizational change and change of job roles
e.g. information-intensive tasks such as forecasting and planning can often only be improved by a combination of
better systems and a change in organizational responsibilities
• Innovation evaluation attempts to estimate the value to the business of new business or
new business practices levered from IS/IT
e.g. the launch of an online banking service may change the company image and attract new types of customers 11
Evaluating Benefits:
Relationship with App. Portfolio

12
Benefits Management
• Benefits Management: the process of organizing and managing such that
potential benefits arising from the use of IT are actually realized.
• Why ‘benefits management’?
– One of the factors that differentiates successful from less successful
companies in their deployment of IS/IT is the management resolve to
evaluate IS/IT investments before and after they occurred.
– Post-implementation review must be carried out on a high percentage
of projects to identify whether (i) they were carried out as well as
possible and (ii) whether the benefits claimed (or possibly different
benefits) were achieved or not.
13
The Context of Benefits Management
The Context Inputs to Benefits
Management Process
• Why is the investment being made—
what is causing the organization to
change and how critical to its future is
the successful management of the
changes? (the benefit drivers)
• What types of benefit is the
organization expecting from the
investment overall—to reduce costs,
improve operational performance,
gain new customers, create a new
capability, etc.?
• How will other activities, strategic
initiatives, business developments or
organizational issues affect the
particular investment either to
facilitate or inhibit its progress and
outcome? (the organizational context)
14
Benefits Management Process
1.Identifying the target benefits & who should
be responsible for its delivery
2.Determine the changes required for delivery
of each benefit and how the IS/IT
development will enable the changes and
benefits to occur
3.Carry it out and adjust it as necessary
4.Review what was/not achieved to maximize
benefit & learn for future investments
5.Further benefits often become apparent only
when the system has been running for some
time and the associated business changes
have been made
15
Justifying Business Apps Investments
Justification ‘rules’ should allow for differences in
the rationale for implementing apps in each
segment!
• Support
– Any allocation of the resources should be argued
primarily on economic, ROI
– Some discretion can be left to local management
via free-market strategy
• Key Operational
– The business unit should be the final arbiter
• Strategic
– The ‘go/no go’ decision is based on how directly it
relates to the business objectives
• High Potential

16
Justifying Infrastructure Investments
• The main aims of infrastructure’s investments
are:
– to enable the business apps to perform
successfully
– to create appropriate capabilities for the general-
purpose use of IT tools in the short/medium term
– to anticipate longer-term (uncertain) organization
& business needs

• The business benefits are often difficult to

identify and use to justify the costs 
Building the Infrastructure Business Case:
– To reduce business and IT operating costs
– To enable or even create growth in the volume of
business
– New or planned apps
– New working practices
– New business capability

17
Assessing & Managing Investment Risks:
Check List
Technical risk factors
Complexity of the system
functionality
Technical novelty – to the
organization & the supplier
The number of system interfaces
and systems being replaced
Certainly & stability of the
business requirements
Technical skills of the project
team
The extent of changes needed to
the IT infrastructure
The degree to which the system
can be prototyped/piloted
Financial risk factors
Size of the investment
Project duration
Degree of confidence in all the
elements of project costs
Confidence in the evidence for
the investment benefits
Appropriateness of project
cost control mechanisms
Rate of change of the external
environment
The business criticality of the
areas affected by the system
Business Change & Organizational
risk factors
Senior mangement commitment to the
project
User commitment of resources and
knowledge
Stability of the organization and key
staff
The extent of changes to business
processes and practices
The number of departments, functions
and business staff involved and
affected
The degree to which organizational &
role changes are needed to realize the
benefits
Existing change management capability
& experience
18
Variations in Risk Patterns for Different Types of
Apps Investments
STRATEGIC HIGH POTENTIAL

Risks are likely to be of all Risks are likely to be of all

kinds kinds

TECHNICAL, FINANCIAL, & TECHNICAL, FINANCIAL, &

ORGANIZATIONAL ORGANIZATIONAL

Minimized by limited
scale/scope

Major risks are likely to be Major risks are likely to be

ORGANIZATIONAL ORGANIZATIONAL
due to vested interests

Financial & technical risks are Low financial risks & technical
addressed by strict application risks minimized by use of
of methodologies proven technologies

KEY OPERATIONAL SUPPORT

19
End of Presentation
TUGAS: BAHAN DISKUSI MINGGU DEPAN

24
This week’s material
• …

25
Next week’s material
• …

26