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Porter and Millar (1991) have also been useful in establishing the need for value chain analysis. This looks at where value is generated inside the organization, but also in its external relationships, for example with suppliers and customers. Thus the primary activities of a typical manufacturing company may be: inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities will be: firm infrastructure, human resource management, technology development and procurement. The question here is what can be done to add value within and across these activities? As every value activity has both a physical and an information-processing component, it is clear that the opportunities for value-added IT investment may well be considerable. Value chain analysis helps to focus attention on where these will be.
IT investment mapping
Another method of relating IT investment to organizational/business needs has been developed by Peters (1993). The basic dimensions of the map were arrived at after reviewing the main investment concerns arising in over 50 IT projects. The benefits to the organization appeared as one of the most frequent attributes of the IT investment (see Figure 9.2).
Infrastructure Business Process Market Influence
B E N E F I T
Figure 9.2 Investment mapping
Evaluating the Outcomes of Information Systems Plans 245
Thus one dimension of the map is benefits ranging from the more tangible arising from productivity enhancing applications to the less tangible from business expansion applications. Peters also found that the orientation of the investment toward the business was also frequently used in evaluation. He classifies these as infrastructure, e.g., telecommunications, software/hardware environment; business operations, e.g., finance and accounts, purchasing, processing orders; and market influencing, e.g., increasing repeat sales, improving distribution channels. Figure 9.3 shows the map being used in a hypothetical example to compare current and planned business strategy in terms of investment orientation and benefits required, against current and planned IT investment strategy.
Infrastructure Business Process Market Influence
B E N E F I T
Planned Business Strategy – Focus on Opportunity
Current and Planned IT Investments – Focus on Cost
Figure 9.3 Investment map comparing business and IT plans
Mapping can reveal gaps and overlaps in these two areas and help senior management to get them more closely aligned. As a further example:
a company with a clearly defined, product-differentiated strategy of innovation would do well to reconsider IT investments which appeared to show undue bias towards a price-differentiated strategy of cost reduction and enhancing productivity.
Finally, Earl (1989) wisely opts for a multiple methodology approach to IS strategy formulation. This again helps us in the aim of relating IT investment
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more closely with the strategic aims and direction of the organization and its key needs. One element here is a top-down approach. Thus a critical success factors analysis might be used to establish key business objectives, decompose these into critical success factors, then establish the IS needs that will drive these CSFs. A bottom-up evaluation would start with an evaluation of current systems. This may reveal gaps in the coverage by systems, for example in the marketing function or in terms of degree of integration of systems across functions. Evaluation may also find gaps in the technical quality of systems and in their business value. This permits decisions on renewing, removing, maintaining or enhancing current sysems. The final leg of Earl’s multiple methodology is ‘inside-out innovation’. The purpose here is to ‘identify opportunities afforded by IT which may yield competitive advantage or create new strategic options’. The purpose of the whole threefold methodology is, through an internal and external analysis of needs and opportunities, to relate the development of IS applications to business/organizational need and strategy.
Evaluating feasibility: findings
The right ‘strategic climate’ is a vital prerequisite for evaluating IT projects at their feasibility stage. Here, we find out how organizations go about IT feasibility evaluation and what pointers for improved practice can be gained from the accumulated evidence. The picture is not an encouraging one. Organizations have found it increasingly difficult to justify the costs surrounding the purchase, development and use of IT. The value of IT/IS investments are more often justified by faith alone, or perhaps what adds up to the same thing, by understating costs and using mainly notional figures for benefit realization (see Farbey et al., 1992; PA Consulting, 1990; Price Waterhouse, 1989; Strassman, 1990; Willcocks and Lester, 1993).
Willcocks and Lester (1993) looked at 50 organizations drawn from a cross-section of private and public sector manufacturing and services. Subsequently this research was extended into a follow-up interview programme. Some of the consolidated results are recorded in what follows. We found all organizations completing evaluation at the feasibility stage, though there was a fall off in the extent to which evaluation was carried out at later stages. This means that considerable weight falls on getting the feasibility evaluation right. High levels of satisfaction with evaluation methods were recorded. However, these perceptions need to be qualified by the fact that only 8% of organizations measured the impact of the evaluation, that is, could tell us whether the IT investment subsequently achieved a higher or lower return than other non-IT investments. Additionally there emerged a range of inadequacies in evaluation practice at the feasibility stage of projects. The most common are shown in Figure 9.4.
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Figure 9.4 IT evaluation: feasibility findings
Senior managers increasingly talk of, and are urged toward, the strategic use of IT. This means doing new things, gaining a competitive edge, and becoming more effective, rather than using IT merely to automate routine operations, do existing things better, and perhaps reduce the headcount. However only 16% of organizations used over four criteria on which to base their evaluation. Cost/benefit was used by 62% as their predominant criterion in the evaluation process. The survey evidence here suggests that organiza-tions may be missing IS opportunities, but also taking on large risks, through utilizing narrow evaluation approaches that do not clarify and assess less tangible inputs and benefits. There was also little evidence of a concern for assessing risk in any formal manner. However the need to see and evaluate risks and ‘soft’ hidden costs would seem to be essential, given the history of IT investment as a ‘high risk, hidden cost’ process.
A sizable minority of organizations (44%) did not include the user department in the evaluation process at the feasibility stage. This cuts off a vital source of information and critique on the degree to which an IT proposal is organizationally feasible and will deliver on user requirements. Only a small minority of organizations accepted IT proposals from a wide variety of groups and individuals. In this respect most ignored the third element in Earl’s multiple methodology (see above). Despite the large amount of literature
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emphasizing consultation with the workforce as a source of ideas, know-how and as part of the process of reducing resistance to change, only 36% of organizations consulted users about evaluation at the feasibility stage, while only 18% consulted unions. While the majority of organizations (80%) evaluated IT investments against organizational objectives, only 22% acted strategically in considering objectives from the bottom to the top, that is, evaluated the value of IT projects against all of organization, departmental, individual management, and end-user objectives. This again could have consequences for the effectiveness and usability of the resulting systems, and the levels of resistance experienced.
Finally, most organizations endorsed the need to assess the competitive edge implied by an IT project. However, somewhat inconsistently, only 4% considered customer objectives in the evaluation process at the feasibility stage. This finding is interesting in relationship to our analysis that the majority of IT investment in the respondent organizations were directed at achieving internal efficiencies. It may well be that not only the nature of the evaluation techniques, but also the evaluation process adopted, had influential roles to play in this outcome.
Linking strategy and feasibility techniques
Much work has been done to break free from the limitations of the more traditional, finance-based forms of capital investment appraisal. The major concerns seem to be to relate evaluation techniques to the type of IT project, and to develop techniques that relate the IT investment to business/ organization value. A further development is in more sophisticated ways of including risk assessment in the evaluation procedures for IT investment. A method of evaluation needs to be reliable, consistent in its measurement over time, able to discriminate between good and indifferent investments, able to measure what it purports to measure, and be administratively/organization-ally feasible in its application.
Return on management
Strassman (1990) has done much iconoclastic work in the attempt to modernize IT investment evaluation. He concludes that:
Many methods for giving advice about computers have one thing in common. They serve as a vehicle to facilitate proposals for additional funding . . . the current techniques ultimately reflect their origins in a technology push from the experts, vendors, consultants, instead of a ‘strategy’ pull from the profit centre managers.
He has produced the very interesting concept of Return on Management (ROM). ROM is a measure of performance based on the added value to an
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