IS 356 IT for Financial Services Calculating the Return on IT Investment October 22,

October 22, 2015© Paul Tallon2/21 BusinessWeek 6/14/99

October 22, 2015 Productivity Paradox © Paul Tallon3/21 Roach, HBR, 1991 … which implies that ROIT is falling

October 22, 2015 G. Loveman in “Information technology and the Corporation of the 1990s” T. Allen and M.S..Morton (eds.) Paradox continued… © Paul Tallon4/21

October 22, 2015© Paul Tallon5/21 Executives Cry Foul…... Executives Cry Foul…... Only 25% of CEOs are satisfied with their IT investments. Spending on IT is wasteful London School of Economics (1999)

October 22, 2015© Paul Tallon6/21 Numerical Analysis Return on Investment (ROI) The net revenue gain or operational cost reductions that exceed the investment Payback analysisThe length of time to recover the cost of a project (regardless of time value of money) Net Present Value (NPV)Current value of the expected cash flows minus cost of the project Economic Value Add (EVA) Operating profit, minus the capital and debt used to generate profit Internal Rate of Return (IRR) The potential profits resulting from the completion of the project

October 22, 2015© Paul Tallon7/21 Value Chain Processes

October 22, 2015© Paul Tallon8/21 Three Research Studies  Thermometer of IT Business Value – Benchmarking studies by industry  IBM and Economist Intelligence Unit – 304 firms; global survey; select case studies  Multi-respondent survey – Triangulate responses

October 22, 2015© Paul Tallon9/21 Thermometer of IT Business Value Benchmarking example for Fortune 200 firm

October 22, 2015© Paul Tallon10/21 Size and Industry Effects Production and OperationsCustomer Relations

October 22, 2015© Paul Tallon11/21 Corporate Productivity and IT $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $0$5,000$10,000$15,000$20,000$25,000$30,000 I/S budget per employee Intel Corp. Revenue per employee Apple Computer ATL Products Data General Diebold Gateway Hewlett-Packard IBM Intergraph Pitney Bowes Seagate Technology Silicon Graphics Storage Technology Sun Microsystems Western Digital Computer & Office Equipment Companies High productivity Low investment Low productivity Low investment High productivity High investment Low productivity High investment Source: InformationWeek (1998)

October 22, 2015© Paul Tallon12/21 Benchmarking: What’s in an Industry? ADP Comdisco Computer Associates CSC EDS Entex Info. Services Lexis-Nexis Microsoft Novell Oracle Unisys Wang Global Computer Services Companies High productivity Low investment Low productivity Low investment High productivity High investment Low productivity High investment I/S budget per employee Revenue per employee $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $0$10,000$20,000$30,000$40,000 Intel Corp. Source: InformationWeek (1998)

October 22, 2015© Paul Tallon13/21 IBM/EIU ~ Sample Particulars

October 22, 2015© Paul Tallon14/21 IT Business Value and the Value Chain IT Business Value and the Value Chain The Level and Locus of Value...

October 22, 2015© Paul Tallon15/21 Satisfaction with Return on IT Satisfaction with Return on IT Bottom Line Top Line

October 22, 2015© Paul Tallon16/21 “So we invest in the computers and in training personnel – millions of dollars, thousands of hours – but we never go back and check on whether we saved ourselves even one person, let along the twenty-two that were promised.” “I’ve signed so many projects that by now I should have nobody left. Yet I don’t know that our decisions – or our cars – get any better.” Lee Iacocca, “Talking Straight” Post-Implementation Evaluation

October 22, 2015© Paul Tallon17/21 Evaluation of IT Projects Evaluation of IT Projects Pre-ImplementationPost-Implementation

October 22, 2015© Paul Tallon18/21 Linked Survey Design Linked Survey Design

October 22, 2015© Paul Tallon19/21 Matched Surveys 86 Bus. Execs 63 IT Execs 67 Planners

October 22, 2015© Paul Tallon20/21 Strategic Alignment and IT Business Value Strategic Alignment and IT Business Value

October 22, 2015© Paul Tallon21/21 For Next Class…  Reminder: − We will discuss XBRL next class − The stock market game ends on Friday, April 25. The report is due by 6pm on Monday, April 28 (hard copy please). Please drop it off in my office (SH325).