SESSION 13 UNDERSTANDING THE BUSINESS VALUE OF SYSTEMS AND MANAGING CHANGE

Traditional Capital Budgeting Models Process of analyzing and selecting various proposals for capital expenditures The payback method ROI Cost benefit ratio NPV Profitability Index IRR

Traditional Capital Budgeting Models Limitations of Financial Models Do not express the risks and uncertainty of own cost and benefits estimates Costs and benefits do not occur in the same time frame for IS Technology changes causing estimates to vary Intangible benefits are difficult to quantify IS life expectancy is shorter than manufacturing systems

Understanding the Business Value of Information Systems Case Example: Capital Budgeting for a New Supply Chain Management System Heartland Stores General merchandise retail chain upgrading supply chain management system Reduce inventory costs: Items stocked in inventory Reduce labor costs: Inventory and tracking personnel Reduce telecommunication costs: Less time on phone tracking inventory and shipments Reduce transportation costs: Consolidating shipments, more efficient shipping schedules

Understanding the Business Value of Information Systems Costs and benefits of the new supply chain management system Figure 14-1

Understanding the Business Value of Information Systems Financial models Figure 14-2

Understanding the Business Value of Information Systems Case Example: Capital Budgeting for a New Supply Chain Management System Payback Method Time required to pay back initial investment of project Original investment = Number of years to pay back Annual net cash inflow

Understanding the Business Value of Information Systems Case Example: Capital Budgeting for a New Supply Chain Management System Accounting Rate of Return on Investment (ROI) Desired rate of return must equal or exceed cost of capital (Total benefits – Total cost – Depreciation) = Net benefit Useful life Net benefit = ROI Total initial investment

Understanding the Business Value of Information Systems Case Example: Capital Budgeting for a New Supply Chain Management System Net Present Value Compare investment with future savings and earnings Present value of expected cash flows - Initial investment cost = Net present value

Understanding the Business Value of Information Systems Case Example: Capital Budgeting for a New Supply Chain Management System Cost-Benefit Ratio Ratio of benefits to cost Total benefits = Cost-benefit ratio Total costs

Understanding the Business Value of Information Systems Case Example: Capital Budgeting for a New Supply Chain Management System Profitability Index Allows ranking of different possible investments Present value of cash inflows = Profitability index Investment

Understanding the Business Value of Information Systems Case Example: Capital Budgeting for a New Supply Chain Management System Internal Rate of Return (IRR) Rate of return, or profit, that an investment is expected to earn Discount (interest) rate that will equate the present value of the projects future cash flows to the initial investment cost

Strategic Considerations Portfolio Analysis Analysis of portfolio of potential applications within a firm Determines risks and benefits Selects among alternatives for information systems

Strategic Considerations A System Portfolio Figure 14-3

Strategic Considerations Scoring Models Method for deciding among alternative systems based on a system of ratings Real Options Pricing Models Models for evaluating information technology investments with uncertain returns

Strategic Considerations Knowledge Value–Added Approach Focuses on knowledge input into a business process Determines costs and benefits of changes in business processes from new information systems

Information Technology Investments and Productivity Productivity :Measure of firm’s efficiency in converting inputs to outputs Productivity paradox

IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE Information System Problem Areas System failure Information system does not perform as expected, is not operational at a specified time Poor design, inaccurate data, excessive expenditure, breakdown in operations

Information System Problem Areas IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE Information System Problem Areas Figure 14-4

IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE Change Management and the Concept of Implementation Implementation Organizational activities working towards adoption, management, and routinization of innovation

Role of users in implementation process IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE Causes of Implementation Success and Failure Role of users in implementation process Degree of management support for implementation effort Level of complexity and risk of implementation project Quality of management of implementation process

Factors in Information System Success or Failure IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE Factors in Information System Success or Failure Figure 14-5

User–designer communications gap IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE User Involvement and Influence User–designer communications gap Different backgrounds, interests, and priorities Impedes communication and problem solving among end users and information systems specialists

IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE Management Support and Commitment Project requires backing and commitment of management at various levels Perceived positively by both users and technical information services staff

Project size: Larger project has greater risk IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE Level of Complexity and Risk Project size: Larger project has greater risk Project structure: Clear and straightforward requirements help define outputs and processes Experience with technology: Project risk rises if project team and information system staff lack required technical expertise

Improper management leads to: IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE Management of the Implementation Process Improper management leads to: Cost overruns Unexpected time slippage Technical shortfalls Failure to obtain anticipated benefits

Consequences of Poor Project Management IMPORTANCE OF CHANGE MANAGEMENT IN INFORMATION SYSTEM SUCCESS AND FAILURE Consequences of Poor Project Management Figure 14-6

Controlling Risk Factors Managing Technical Complexity: Usage of internal integration tools to ensure operation of implementation team Formal Planning and Control Tools: Structures and sequences tasks, monitors progress towards fulfillment of goals

Controlling Risk Factors Increasing User Involvement and Overcoming User Resistance: Linking work of implementation team to that of users at all organizational levels