Developing the Business Case for IT Investment Bradley C. Wheeler Kelley School of Business Indiana University

Bounded Rationality  Conceptualized by Herbert Simon in early 1960’s He won the Nobel prize so he must know something  People try to behave rationally within the limits of their information processing capabilities and within the context of their attitudes and emotions they engage in restricted searches for information; have limited information processing capabilities rely on familiar sources of information »biases and heuristics construct simplified models of reality;...and then they make decisions using those models!

Simon’s definition... The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behavior in the real world -- or even for a reasonable approximation of such objective rationality.

Cognitive Limitations  Human decision makers can retain only a few bits of information in short-term memory 7 plus or minus 2  Those who think in concrete rather than abstract terms tend to be somewhat limited in their ability to process information inside versus outside the box  Propensity for risk may limit the amount of information needed to arrive at a decision risk takers may require less information than risk avoiders

Bounded Rationality Problem Space Simon refers to this as “satisficing”

Bounded Rationality  We all suffer from it  There is no cure  So how do we deal with it?  We rely on structured problem solving methods to help us minimize or overcome the effects of bounded rationality.  Business cases are one of those methods.

Business Case Examples  Consumer Products International Strengths? Concerns? Should this business case be funded?  Biogenetica Strengths? Weaknesses Should this business case be funded?

Why Write Business Cases?  Disciplined Exercise Make tacit assumptions explicit Provides basis for allocating capital  Communication Tool Essential investment in building the relationship asset Defines what the project is (and is not)

Project Completion... Delivery Phase... Execution Phase...Approval Phase... Project Close BUSINESS CASE Post - Impl’n Review POST IMP REVIEW DELIVERY PLAN Project Delivery SUPPORT PLAN COMM’N PLAN Project Execution PROJECT INITIATION DOC. PROJECT PLAN QUALITY PLAN STATEMENT SUPPORT REQUIRE’S Project Initiation Project Approval BUSINESS CASE Project Set-Up PROJECT OUTLINE Project Definition Project Lifecycle and Documents

Size Matters Project Size &/ Scope Required Documents and Checkpoints

Three Bases of Argument

Arguments of Fact  “The system will eliminate the need for hiring two positions for an annual savings of $100K.”  Justify using hard data, quantitative, structured feasibility assessment  Target Audience: “ S ensing”

Arguments of Faith  “IS is infrastructure. We need it to support our growth and stability.”  Justify by vision. Investment X will lead to benefit Y.  Target Audience: “i N tuitives”

Arguments of Fear  “If we don’t do this we may be eaten alive by our competition.”  Justify by perception of events.  Target Audience: “i N tuitives”

Collaborative Exercise Color code arguments of Facts Faith Fear

Types of IT (-enabled) Projects New System or Modification?  Enabling Infrastructure Networks, Servers, backup systems, etc.  Support Activities Accounting, HR, etc.  Business Applications Sales Tools, Inventory Mgmt, etc. Increased Funding Difficulty

Conveying New IT Insights Communicating e-Business Initiatives Taking Value Propositions to Market Time Matching with Economic Opportunities (EO) Choosing Enabling/Emerging Technologies (ET) Executing Business Innovation for Growth (BI) Low Hi ET Business Cases are a Matching EO Routine Internal Organization External Market Low Hi Value Realization Value Potential Organizational Learning Assessing External Customer & Internal Client Value (CV) ©Bradley C. Wheeler, Indiana University

Review  Business Cases... Are essential part of project selecting & scoping Require making assumptions explicit Use arguments of Facts, Faith, & Fear Set the direction & support for projects Establish business ownership Set boundaries Strongly influence the Relationship Asset

Developing the Business Case for IT Investment Developing the Business Case for IT Investment Bradley C. Wheeler Kelley School of Business Indiana University