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?
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The Alcoa lesson: Business Demands
• IT offerings need to be aligned with business
demands
• IT complexities should be translated to business
needs
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Merlyn’s Business-IT Maturity Model
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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)
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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)
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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Average company’s IT portfolio profile
(See Discussion Question 4)
Informational
20%
18%
Strategic
13%
11%
Transactional
25%
13%
Infrastructure
46%
54%
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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…
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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
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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.).
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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:
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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?
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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.
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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)
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Sample Black & White Dashboard
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ITDashboard.gov
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Architecture for Dashboards
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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
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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.
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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
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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.
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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.
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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.
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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.
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