EVALUATING AND SELECTING IT INVESTMENT Pertemuan 5-6 Matakuliah: A0824/IT Investment Portfolio Tahun: 2009 The problems of today will not be solved by the same thinking that produced the problems in the first place. ~ Albert Einstein ~

Corporate Governance and the ITPM Approach Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

IT Investment Management Process

Investment Review Board Board members Staff executives, such as the Chief Operating Officer, Chief Financial Officer and Chief Information Officer. Customer Supplier representatives Technical executives others

Investment Review Board Review objectives –Assess the value and risk of alternative solutions to organizational performance problems and develop business cases for the recommended solutions. Cross functional Investment Review Board helps create understanding and buy-in among the different parts of the organization that its members represent. –It keeps stakeholders informed about IT plans and why certain proposals were approved while others were not. –A cross functional view is valuable for accurately assessing a proposal’s benefits, costs, and risks from the standpoint of each line of business. –Makes decisions on all capital investment

Organization Wide Use of Same Investment Criteria The board considers how well the proposal responds to the criteria and its likely net contribution to the IT portfolio. The objective is to use the criteria and portfolio information to select only the best IT investments, regardless of the positions of the proposal sponsors.

Link to Organizational Performance Measures Provide a way to measure the contributions of individual IT investments to organizational performance. Provide information for determining the net contribution of the IT portfolio and for making decisions on improving the portfolio.

Assessing the Worth of IT Approaches to assessing IT Investments –Return on Investment (ROI) –Quantification Method –Multiple Attribute Decision Model –Return on Management –Stakeholder Perceptions –Value Analysis –Real Options –Critical Success Factors –Delphi Technique –Balance Scorecard –Cost Benefit Analysis –Economic Value Added (EVA) TR –Information Economics –Portfolio Management

Use of Comprehensive Investment Criteria Refers to a practical number. Practicality is achieved by having one high level criterion represent a category of related criteria or sub-criteria. All of the sub-criteria are used in assessing proposed or in-place investment.

Use of Comprehensive Investment Criteria High Level Criteria as Categories of Criteria In the research on Information Economics, the high-level criteria were determined by grouping large numbers of related criteria into six value and four risk categories. The names of these categories became the names of the ten high level investment criteria, each with many “sub-criteria.” additional high level criteria have since been added respond to new needs.

Value and Risk Assessment Criteria Value Criteria –Return on Investment –Strategic Match –Competitive Advantage –Management Information –Quality of work life –Competitive response –Enterprise architecture

Value and Risk Assessment Criteria Risk Criteria –Organizational Risk –Definitional Uncertainty –Technical Uncertainty –Information Security Risk –Infrastructure Risk –External Risk See: supporting material IT Investment Assessment Worksheet

Variations Among Organizations in Criteria Selection Many organizations use criteria with names similar to those used by other organizations Although organizations may use the same name for a criterion, the definition of the criterion will likely differ in each organization

High Level Criteria vs Problem Specific Criteria Problem-Specific Criteria High Level Proposal Selection Criteria Another View of the Two Classes of Criteria

Screen-Out Criteria Decision Making Level Project Length Credibitility of Benefits Risk Threshold Technical Aspects Sponsorship and Buy-In Cost Complexity Standards

Alignment of IT Investment Boards