Campbellsville University Week 8 Business of IT Paper

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Managing and Using Information Systems: A Strategic Approach – Sixth Edition Keri Pearlson, Carol Saunders, and Dennis Galletta © Copyright 2016 John Wiley & Sons, Inc. Chapter 8 The Business of IT The Horner/Alcoa Story • High-performing tech worker—almost dismissed as CIO • What were the issues? • What did they expect from him? • What did he deliver at first? • What change did he make to become more valuable to Alcoa? © 2016 John Wi ley & Sons, Inc. 3 The Alcoa lesson: Business Demands • IT offerings need to be aligned with business demands • IT complexities should be translated to business needs © 2016 John Wi ley & Sons, Inc. 4 Merlyn’s Business-IT Maturity Model © 2016 John Wi ley & Sons, Inc. 5 What a Manager Can Expect From the IT Organization A manager typically can expect some level of support in 14 core activities (Figure 8.2) – levels in parentheses 1. Developing and maintaining IS (1) 2. Managing supplier relationships (1) 3. Managing data, information, and knowledge (1, 2) 4. Managing Internet and network services (1, 2) 5. Managing human resources (1) 6. Operating the data center (1) 7. Providing general support (1) © 2016 John Wi ley & Sons, Inc. 6 What a Manager Can Expect From the IT Organization (Cont.) 8. Planning for business discontinuities (1) 9. Innovating current processes (2) 10.Establishing architecture platforms and standards. (2) 11.Promoting enterprise security (2) 12.Anticipating new technologies (3) 13.Participating in setting and implementing strategic goals (3) 14.Integrating social IT (3) © 2016 John Wi ley & Sons, Inc. 7 What The IT Organization Does Not Do • Does not perform core business functions such as: • Selling • Manufacturing • Accounting. • Does not set business strategy. • General managers must not delegate critical technology decisions. © 2016 John Wi ley & Sons, Inc. 8 Chief Information Officer (CIO) The Senior-Most IT Executive • Responsible for technology vision • Leads design, development, implementation, and management of IT initiatives • Is a business technology strategist or strategic business leader • Uses technology as the core tool in • creating competitive advantage • aligning business and IT strategies © 2016 John Wi ley & Sons, Inc. 9 CIO’s Focus • CIO’s focus has shifted: • From efficiency to effectiveness in a constantly changing/competitive marketplace • Formerly: reported to the CFO. Now: reports to the CEO. • Shift over time towards helping executive team formulate business strategy © 2016 John Wi ley & Sons, Inc. 10 CTO, CPO, and Other Roles • CIO Can’t have all skills—can’t know everything! • Other roles are important: • • • • • • • • • • • CTO: Chief Technology Officer (tracks technologies) CKO: Chief Knowledge Officer CDO: Chief Data Officer CAO: Chief Analytics Officer CTO: Chief Telecommunications Officer CNO: Chief Network Officer CRO: Chief Resource Officer CISO: Chief Information Security Officer CPO: Chief Privacy Officer CMO: Chief Mobility Officer CSMO: Chief Social Media Officer © 2016 John Wi ley & Sons, Inc. 11 So Who Should Make the Decisions? • Ross & Weill say • The CEO should not make those decisions alone • C-level executives should not even make those decisions • Input is needed from both IT and the business units alike • Steering (or Executive) Committee solution © 2016 John Wi ley & Sons, Inc. 12 Building a Business Case Components • • • • • • • • • • Executive Summary Overview and Introduction Assumptions and Rationale Project Summary Financial Discussion and Analysis Benefits and Business Impacts Schedule and Milestones Risk and Contingency Analysis Conclusion and Recommendation Appendices © 2016 John Wi ley & Sons, Inc. 13 © 2016 John Wi ley & Sons, Inc. 14 Sample of benefits in a business case for adding chat function linked from Facebook page Sales improved by $250k; costs decreased by $50k after change Converted 150 calls per day to chats; reaching 200 more customers per day Facebook page likes; number of chats; Customer satisfaction scores moved from 3.3 to 4.1 (out of 5) Busy chat operators; busy Facebook page; Customers seem happier © 2016 John Wi ley & Sons, Inc. 15 IT Portfolio Management • IT investments should be managed as any other investment. • Evaluate and approve IT investments as they relate to other potential investments of all kinds • Goals: • Pick the right mix of investments • Invest in the most valuable IT initiatives © 2016 John Wi ley & Sons, Inc. 16 Asset Classes • Weill and Aral say that there are four asset classes of IT investments: • Transactional systems – systems that streamline or cut costs on business operations. • Informational systems – any system that provides information used to control, manage, communicate, analyze or collaborate. • Strategic systems – any system used to gain competitive advantage in the marketplace. • Infrastructure systems – the base foundation or shared IT services used for multiple applications. © 2016 John Wi ley & Sons, Inc. 17 Average company’s IT portfolio profile (See Discussion Question 4) Informational 20% 18% Strategic 13% 11% Transactional 25% 13% Infrastructure 46% 54% © 2016 John Wi ley & Sons, Inc. 18 Comparative IT portfolios for different business strategies (See discussion question 4) Valuing IT Investments • Soft benefits, such as the ability to make future decisions, make it difficult to measure the payback of IT investment • IT is expensive, thus under close scrutiny. • IT is complex; calculating the costs is an art, not a science. • Payback period for infrastructure is much longer than other types of capital investments. • With necessary systems (due to laws, etc.), the payback period cannot be calculated • Many valuation methods are available… © 2016 John Wi ley & Sons, Inc. 20 Financial Valuation Methods Valuation Method Description Return on Investment (ROI) ROI= Net Present Value (NPV) Discount the costs and benefits for each year of the system’s lifetime using present value factor 1 1 + 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 𝑦𝑒𝑎𝑟𝑠 Economic Value Added (EVA) EVA = net operating profit after taxes (capital x cost of capital) Payback Analysis Time that will lapse before accrued benefits overtake accrued and continuing costs Internal Rate of Return (IRR) Return of the IT investment compared to the corporate policy on rate of return Weighted Scoring Methods Costs and revenues/savings are weighted based on their strategic importance, accuracy/confidence, other opportunities 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 −𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 © 2016 John Wi ley & Sons, Inc. 21 IT Investment Monitoring • Old saying: “If you can’t measure it, you can’t manage it” • Management needs to achieve organizational benefits from IT investments • Must agree upon a set of metrics for monitoring IT investments. • Often financial in nature (ROI, NPV, etc.). © 2016 John Wi ley & Sons, Inc. 22 The Balanced Scorecard • Focuses attention on the organization’s value drivers (which include financial performance). • Assesses the full impact of corporate strategies on customers and workforce, as well as financial performance. • Allows managers to look at a business from four related perspectives: © 2016 John Wi ley & Sons, Inc. 23 The Four Balanced Scorecard perspectives How do we look to shareholders? How do our customers see us? At what must we excel? Can we continue to improve and create value? © 2016 John Wi ley & Sons, Inc. 24 The IT Balanced Scorecard • Using it within the MIS department helps senior IS managers • Understand their organization’s performance • Measure it in a way that supports its business strategy • Linked to the corporate scorecard • By ensuring that the measures used by IT are those that support the corporate goals. © 2016 John Wi ley & Sons, Inc. 25 IT Dashboards • Snapshot of metrics at a given point in time (often “right now”) • Offer “at a glance” idea of how things are going • Often colors depict conditions: • Areas with problems (red) • Areas in good shape (green) • In-between or average (yellow) © 2016 John Wi ley & Sons, Inc. 26 Sample Black & White Dashboard © 2016 John Wi ley & Sons, Inc. 27 ITDashboard.gov © 2016 John Wi ley & Sons, Inc. 28 Architecture for Dashboards © 2016 John Wi ley & Sons, Inc. 29 Funding the IT department • How are costs of design, development, delivery and maintenance of IT systems recovered (or simply covered)? • Chargeback • Allocation • Corporate budget • The first two are done for management reasons • The latter covers costs using corporate coffers © 2016 John Wi ley & Sons, Inc. 30 Comparison of IT funding methods Funding Method Description Why do it? Why not do it? Chargeback Charges are calculated based on actual usage Fairest method for recovering costs since it is based on actual usage Must collect details on usage; often expensive and difficult Allocation Expenditures are divided by nonusage basis (revenues, headcount, etc.) Less bookkeeping for IT Users can question rates & basis of allocation Free riders Corporate Budget Corporate allocates funds to IT in annual budget - to general P&L No billing to the businesses. No rates to compute. Encourages use of new technologies. Have to compete with all other budgeted items for funds. Potential for overspending. © 2016 John Wi ley & Sons, Inc. 31 How to Determine Cost • Basic method: add up costs of hardware, software, network, and people involved in IS. • Real cost is not always easy to determine • Remains a mystery for many firms © 2016 John Wi ley & Sons, Inc. 32 Total Cost of Ownership (TCO) • Has become the industry standard. • Looks beyond initial capital investments to include costs often forgotten. For example: • technical support • administration • training • Estimates total annual costs per user for each potential infrastructure choice. • Provide the best foundation for comparing to other IT and non-IT investments. © 2016 John Wi ley & Sons, Inc. 33 TCO Component Breakdown • Shared components (servers and printers): • TCO divided among all users who access each • When only certain groups of users possess certain components, segment the hardware analysis by platform. • Soft costs, such as technical support, administration, and training are important to include © 2016 John Wi ley & Sons, Inc. 34 Figure 8.13 Soft cost considerations Soft Cost Areas Example Components of Cost Source Technical support Hardware phone support In-person hardware troubleshooting Call center IT operations Hardware hot swaps Physical hardware repair Total cost of technical support Hardware setup IT operations IT operations Administration Hardware upgrades/modifications Training New hardware evaluation Total cost of administration New employee training Ongoing administrator training System administrator System administrator IT operations IT operations Hardware vendor Total cost of training Total soft costs for hardware © 2016 John Wi ley & Sons, Inc. 35 Managing and Using Information Systems: A Strategic Approach – Sixth Edition Keri Pearlson, Carol Saunders, and Dennis Galletta © Copyright 2016 John Wiley & Sons, Inc.
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Running head: CHAPTER 8: THE BUSINESS OF IT

Chapter 8: The Business of IT
Your name
Institution

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CHAPTER 8: THE BUSINESS OF IT

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Chapter 8: The Business of IT
However much an IT offering appears to be captivating and ideal for a business, it may turn out
to be useless if it fails to meet the demands of the business. Technology shall always turn out to
be your best friend if the business demands need to be met. Therefore, the right system can be so
helpful in streamlining bus...


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