1

IS 6800Management of Information

Systems

Dr. Mary C. Lacity

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• Magnitude of dollars spent on IT • If general managers are involved in IT, IT enables:

Gaining a competitive advantageStreamlining business processesExpanding markets

• If General Managers are not involved in IT, problems emerge:Dollars wasted on ITIn the extreme, businesses can fail

Why General Managers Need to Understand IT

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Magnitude of Dollars Spent on IT

US I.T. Spend: ~ $1 trillion

Global I.T. spend: ~ $2.1 Trillion Dollars Currently 6.6% of world’s gross domestic product IDC found major spenders: IT Spend Population IT spend/personUnited States: $762 billion 272,639,608 $2,795Japan: $362 billion 126,549,976 $2,861Germany: $139 billion 82,797,408 $1,679

Others in top 10:Britain France Italy CanadaChina Brazil Australia

IT spend Study conducted by IDC, reported by Reuters on 11/21/2000 on digitalmass.boston.comPopulation demographics: US Census; World Fact Book

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Magnitude of Dollars Spent on IT

• On average, a company’s annual IT operating budget represents5% of annual revenues:

$1 billion company, on average, spends $50 million per year on IT

• On average, capital IT assets are worth about twice the IT operating budget:

$1 billion company typically carries $100 million in IT assets (this is diminishing rapidly due to outsourcing)

Capital investments in IT are 20% of most large company’scapital investments. (Davenport reports closer to half of all capital budgets)

Marchand, Davenport, Dickson, Mastering Information Management, Financial Times/Prentice Hall, 2000; Minoli, D., Analyzing Outsourcing, McGraw Hill, 1994

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% of Revenue Spent on IT by Industry

INDUSTRY % REVENUE SPENT ON I.T. Aerospace 4.76 Airlines 11.53 Automotive 3.6 Banks 4.18 Beverages 1.01 Broadcasting 4.54 Chemicals 4.18 Financial Services 3.60 Hotels 4.61 Food Processing 1.80 Government Agencies 9.01 Manufacturing 4.90 Medical Institutions 1.00 Natural Resources 1.87 Nonprofit Organizations 8.00 Paper Forest Products 1.80 Pharmaceuticals 4.40

Minoli, D., Analyzing Outsourcing, McGraw Hill, 1994

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% of Revenue Spent on IT by Industry

INDUSTRY % REVENUE SPENT ON I.T.Publishing 4.54Railroads 9.15Retail (non food) 8.00Steel Producers 3.39Transportation/Trucking 9.01Universities 7.93Utilities 3.53

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Average Size IT Budget bySize of Company

8.70%

6.40%

5.00%4.20% 4.00%

<$100M $100M-$499M

$500M-$999M

$1B-$4.9B

$5B-$10B

IT Budget

Source: Spending: How Bad is the Bite in Your Budget by Allan E. Alter, January 14, 2003.;Source: Spending: How Bad is the Bite in Your Budget by Allan E. Alter, January 14, 2003.;Copied from Group 1 slides on Copied from Group 1 slides on www.umsl.edu/~lacity/oraleven.htm Winter 2004.

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Size of Different IT MarketsIT Market: Approximate Size:

B2B & B2C

B2B > B2C Spend

~$7 trillion

IT Outsourcing $250 billion

Business Process Outsourcing $200 billion

Offshore Outsourcing ~$30 billion

Knowledge Management ~$6 billion

ERP ~$10 billion

CRM ~$ 8 billion

ASP $1 billion

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Value for Money?

In 1985 to 1995, net average return on IT was 1% according to Gartner Group.

Reasons for low return: Project changes Cannot measure intangible benefits Failing to reinvest in applications

“Without proactive management of existing IT cost base, enterprises will continue to spend too much on the wrong kinds of IT.”

Gartner Group Strategic Planning Assumption, Enterprise Performance Through IT, 1996

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Value for Money?

Nobel prize winner Robert Solow in 1987 found IT productivity paradox:

“Computers are seen everywhere except in the productivity statistics”

Reasons why Macro level data still shows a paradox:• Mismeasuement—micro measures find productivity• Diffusion Delay– took decades to see productivity benefits of electric motor• Capital Stock Theory – although IT is 20% to 50% of capital spend, it is still a small percentage of capital stock. Can’t stock computer assets because they become obsolete• Mismanagement

Willcocks, L., and Lester, S. Beyond the IT Productivity Paradox, Wiley, 1999

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Standish Group CHAOS Report:IT Projects classification

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Morris StudyFactors Affecting Project SuccessENVIRONMENTAL

FACTORSPolitics, Community,

Environment, Weather

FINANCING &ECONOMICS

poor c/b analysisbudget cuts

IMPLEMENTATIONbest practices such as top management support, user involvement,

adequate resources, effective teams, quality assurance

PROJECT DEFINITION

Requirements knownTechnology Proven

EXPECTATIONS/ATTITUDES

PROJECTOUTCOME

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Examples of IT failure causing business failure

• Branson Airlines• Banca di Roma• Fox Meyer Drugs• Multifoods International• Platform Re-Engineering Technologies

Information Technology is too important to leave to the technologists!!!

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Ensuring Value for IT Spend

General managers must manage IT to ensure value for money:

• Understand the nature of IT

• Help set IT strategy to support business strategy: CRM, ERP, B2C, B2B

• Empower CIO & ensure core IT capabilities

Business runs on information, information runs on IT

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Ensuring Value for IT Spend

General managers must manage IT to ensure value for money:

• Understand the nature of IT

• Help set IT strategy to support business strategy: CRM, ERP, B2C, B2B

• Empower CIO & ensure core IT capabilities

Business runs on information, information runs on IT

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Insourcing:Nature of IT Within Organizations

Top 3 things general managers must understand about IT:

The IT function provides a portfolio of IT products and services.

For almost every IT product & service, there is acorresponding cost/service trade-off.

Stakeholders possess different expectations and perceptions of IT performance.

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Best Practices for Managing IT

1. Stakeholders must determine cost/service trade-off basedon the IT product/service business contribution

2. Develop chargeback (billing) systems to motivate behaviortowards cost minimization or service excellence

3. Develop service level agreements to articulate servicerequirements to stakeholders

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Ensuring Value for IT Spend

General managers must manage IT to ensure value for money:

• Understand the nature of IT

• Help set IT strategy to support business strategy: CRM, ERP, KM, B2C, B2B

• Empower CIO & ensure core IT capabilities

Business runs on information, information runs on IT

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Business Strategies Supported by IT:

““CRMCRM,, or Customer Relationship or Customer Relationship Management, is a company-wide business Management, is a company-wide business strategy designed to reduce costs and strategy designed to reduce costs and increase profitability by solidifying increase profitability by solidifying customer loyalty. True CRM brings customer loyalty. True CRM brings together information from all data sources together information from all data sources within an organization (and where within an organization (and where appropriate, from outside the appropriate, from outside the organization) to give one, holistic view of organization) to give one, holistic view of each customer in real time.”each customer in real time.”

““What is CRM?” from What is CRM?” from www.destinationcrm.com/articles/default.asp?ArticleID=1747 , viewed 3/11/04 Group 7 slides from

www.umsl.edu/~lacity/oraleven.htm Winter 2004

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Business Strategies Supported by IT:

Knowledge ManagementKnowledge Management is a is a business strategy supported by business strategy supported by structured activities to improves an structured activities to improves an organization’s capacity to acquire, organization’s capacity to acquire, share, and utilize knowledge in ways share, and utilize knowledge in ways that improves its survival and success.”that improves its survival and success.”

Modified from: Steven L. Mcshane & Mary Ann Von Glinow. “Organizational Behavior: Emerging Realities for the Modified from: Steven L. Mcshane & Mary Ann Von Glinow. “Organizational Behavior: Emerging Realities for the workplace revolution.” workplace revolution.” Knowledge management,Knowledge management, second edition, page 19. second edition, page 19.

Knowledge Knowledge Communities in Communities in JapanJapan

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Business Strategies Supported by IT:

Enterprise Resource Planning is an integrated system of operation applications combining Logistics, Production, Distribution, Contract and Order Management, Sales and Forecasting, Financial and HR Management.

““What is CRM?” from What is CRM?” from www.destinationcrm.com/articles/default.asp?ArticleID=1747 , viewed 3/11/04

Type III project

Type I project

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Business Strategies Supported by IT:

B2B exchanges offer digital transaction services that heighten eBusiness performance making it safer and more secure. The B2B market is composed of websites were buyers and sellers come together vertically and horizontally to communicate, bid, advertise, transact, and procure.

Source:, www.techechange.com/thelibrary /b2bterminology.html, Viewed February 24, 2004.

Source: “An outlook on B2B Commerce”, www.weforum.org, Viewed March 11, 2004From Group 3 slides on www.umsl.edu/~lacity/oraleven.htm Winter 2004

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Business Strategies Supported by IT:

From Group 5 slides on www.umsl.edu/~lacity/oraleven.htm Winter 2004

E-Commerce enables organizations to market and sell directlyto consumers. The E-commerce landscape is constantly changingTechnically, legally, and socially, which continuously challengesManagers.

Internet AdvertisingInternet Advertising

Online DVD Rental IndustryOnline DVD Rental Industry

B2C Legal IssuesB2C Legal Issues

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Don’t forget the past...Stable Practices for ManagingIT-enabled business strategies

Sound management of new technology does not change with new technology:

• Business solutions drive technology selection

• Technology in-and-of itself is neutral; how you implement it is political

• Secure top management support

• Involve knowledgeable users

• Don't judge success solely based on time to budget

• Buy-in expertise to transfer learning

• Implement incrementally

• Manage Scope Creep, perhaps using 80/20 rule

• Beware of Mythical Man Month

• Ensure change management (training, buy-in, roll out)

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Ensuring Value for IT Spend

General managers must manage IT to ensure value for money:

• Understand the nature of IT

• Help set IT strategy to support business strategy: CRM, ERP, B2C, B2B

• Empower CIO & ensure core IT capabilities

Business runs on information, information runs on IT

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What Is A CIO’s Role?

• As IT leaders, CIOs– Set IT goals to achieve business value– Maximize return for every dollar spent in IT– Convert data and information into knowledge– Empower the organization to meet customers’

demand– Facilitate internal teamwork and external

partnerships

Source: CIO Insight Magazine, The Role of the CIO, February 14, 2003Source: CIO Insight Magazine, The Role of the CIO, February 14, 2003

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CIOs Role Vary by Size ofOrganization:

• Anheuser-Busch:Mr. Robert Byrne

• City of St. Charles, Mrs. Edsell Barrios

• Enterprise Rent-A-Car: Mr. Craig Kennedy

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Business and IT Vision

Delivery of IS Service

Design of IT Architecture

Business SystemsThinking

ContractFacilitation

TechnicalArchitecture

ContractMonitoring

VendorDevelopment

TechnicalDoer

RelationshipBuilder IS

Leadership;InformedBuying

Feeny & Willcocks: IT Capabilities

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Do three models yield different answers?

TCT RBV Core IT

High Asset

Specificity

Valuable IT governance

High Uncertainty Rare Business Requirements & Relationships

High Frequency Non-Imitable Technical Architecture & Doing

Non-substitutable External Supplier Management

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Sourcing the IS Function

After keeping core capabilities in house, companies canSave money, access skills, increase speed of implementation,Create variable cost IT, and maximize flexibility with soundRelationships with third party suppliers…

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The Netsourcing Service Stack

Business Process Delivery

Customized Applications

Standard Applications

Application Operating Infrastructure

Hosting Infrastructure

Network Services

Network Connectivity

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BPO Survey: Size of Marketn = 120

Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentationAt World Outsourcing Summit, Orlando Florida, 2002.

1012.4

33.4

21.624.8

13.4

20.623.1

67.6

43.145.8

26.1

0

10

20

30

40

50

60

70

80

Administration Finance & Accounting Human Resources Payment Services Supply Chain Sales, Marketing,Customer Care

US

$ B

illio

ns

2000 2005

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Xchanging Insurance Services (XIS)

Xchanging Claims Services (XCS)

Xchanging Human Resource Services (XHRS)

Xchanging Procurement Services (XPS)

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Year Decision Was Made

YES, most

expectation met

NO, most expectation

not met

MIXED results

Total

1984-1991 14(48.3%)

12(41.4%)

3(10.3%)

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1992 to 1998 41(73.2%)

8(14.3%)

7(12.5%)

56

TOTAL # OF DECISIONS

55(64.7%)

20(23.5%)

10(11.8%)

85

CONTRACT DATE(n=85 outsourcing decisions with discernible outcomes)

Success Rates Over Time:Fee-For-Service Outsourcing

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Selective Sourcing:Fee for Service

Decision: Yes No Mixed Total #

DecisionsTotal

Outsourcing11

(38%)

10

(35%)

8

(27%)

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Total Insourcing

13

(76%)

4

(24%)

0

(0%)

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Selective Outsourcing

43

(77%)

11

(20%)

2

(4%)

56

Total # Decisions

67 25 10 102

N = 102 decisions with discernible outcomes

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Informed Buying

Proven practices include:

• Joint senior executive/IT manager development of IT sourcing strategy

• Creating RFP and inviting internal & external bids

• Short term contracts

• Detailed contracts

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Canada

Mexico India

Brazil

EURussia

Israel China Japan

Philippines

Singapore

Australia

In 2003: 95% of US Offshore IT sourcing activity istaking place in these nations:

Carmel, E., and Agarwal, R., “The Maturation of Offshore Sourcing of Information Technology,” MIS Quarterly Executive, Vol. 1, 2, pp. 65-77.

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Promised Benefits of Offshore Outsourcing

• Lower inflation• Increased productivity• Lower interest rates• By 2008, GDP expected to be $124.2 billion

higher• 90,000 net new jobs as of 2003, 317,00 net new

jobs by 2008.

Source: Global Insight, Inc. 2004

And Group 8 slides from www.umsl.edu/~lacity/oraleven.htm Winter 2004

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IT can Create CompetitiveAdvantage

• IT can differentiate a product or service (Federal Express vs.. USPS)

• IT can streamline business processes:

Dell computer hooks 90% of suppliers to factory floors via web to reduce inventory to 5 days. Compaq has 3 weeks of inventory. • IT can spawn new businesses (Frequent Flyer; SABRE; Netflix)

• IT can change entire industry structuresDisintermediate: Napster;Dell-direct marketing to consumersFrom Products to Services: Software products to ASP

Porter, Michael, Competitive Strategy, Free Press, 1998; “25 Leaders From a Dangerous Time, Business Week, May 14, 2001, pp. 24-59

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Attributes to Create Competitive Advantage

Valuable: if it allows the firm to exploit opportunities in the market or thwart competitive threats (idea of strategic fit of firm resources, firm strategy, competitive context); allow a firm to conceive of or implement strategies that improve efficiency and effectiveness;

Rareness: number of firms in competitive arena possessing a resource is less than the number of firms needed to generate perfect competition.

Appropriability: Appropriability addresses how easily the resource can be appropriated by a competitor. It assesses the value that the resource creates and whether or not a given firm has the right to accrue these profits

Barney, 1991; Michalisin et al, 1997; Group 2 slides from

www.umsl.edu/~lacity/oraleven.htm Winter 2004

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Attributes to Sustain Competitive Advantage

Imperfectly Imitable: depends on unique historical conditions, causal ambiguity (neither firm or competitors know how resources yield a CA), social complexity (beyond a managers ability to systematically manage & influence, like culture); also a function of observability;

Non-substitutable: no strategic equivalents; the rent-generating capacity of resource A is only lessened to the extent that resource B can provide strategic benefits similar to those afforded by resource A;

Mobility: Imperfect Mobility; Captures the extent to which the underlying resources can be acquired through factor markets

Ex: A charismatic leader may be a substitute for a superior planning process if both resources yield a clear view of the future to the entire organization.Barney, 1991; Michalisin et al, 1997 & MIS Quarterly vol28 No. 1/March 2004

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Companies Using IT toCreate a Sustainable

Advantage

• RehabCare Group Inc.• Progressive• Walmart• Mitek• Federal Express• American Airlines

Source: Group 2 presentation slides from www.umsl.edu/~lacity/oraleven.htm viewed on April 25, 2004

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IS 6800 at a glance:

• Nature of Information Technology• Core IT Capabilities• Role of CIO• IT For Competitive Advantage• Business-to-Business Relationships• Business-to-Consumer Relationships • Knowledge Management• Enterprise Resource Planning• Domestic & Offshore Outsourcing• Application Service Provision• Business Process Outsourcing•Customer Relationship Management

Tools toensure valuefor IT spend