is 356 it for financial services calculating the return on it investment october 22, 2015...
TRANSCRIPT
IS 356IS 356IT for Financial ServicesIT for Financial Services
Calculating the Return on IT Investment
April 20, 2023
http://www..evergreen.loyola.edu/~pptallon/is356.htm
April 20, 2023© Paul Tallon 2/21BusinessWeek 6/14/99
April 20, 2023
Productivity ParadoxProductivity Paradox
© Paul Tallon 3/21
Roach, HBR, 1991
… which implies that ROIT is falling
April 20, 2023
G. Loveman in “Information technology and the Corporation of the 1990s” T. Allen and M.S..Morton (eds.)
Paradox continued…Paradox continued…
© Paul Tallon 4/21
April 20, 2023© Paul Tallon 5/21
Executives Cry Foul…...Executives Cry Foul…...
Only 25% of CEOs are Only 25% of CEOs are satisfiedsatisfied with their IT investments. with their IT investments.
Spending on IT Spending on IT is wastefulis wasteful
London School of Economics (1999)
April 20, 2023© Paul Tallon 6/21
Numerical AnalysisNumerical Analysis
Return on Investment (ROI)
The net revenue gain or operational cost reductions that exceed the investment
Payback analysis The length of time to recover the cost of a project (regardless of time value of money)
Net Present Value (NPV) Current value of the expected cash flows minus cost of the project
Economic Value Add (EVA)
Operating profit, minus the capital and debt used to generate profit
Internal Rate of Return (IRR)
The potential profits resulting from the completion of the project
April 20, 2023© Paul Tallon 7/21
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
SERVICEINBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALES
SUPPORTACTIVITIES
MA
RG
IN
MA
RG
IN
PRIMARY ACTIVITIES
Source: Competitive Advantage: Creating and Sustaining SuperiorPerformance by Michael E. Porter, 1985, The Free Press
Value Chain ProcessesValue Chain Processes
April 20, 2023© Paul Tallon 8/21
Three Research StudiesThree Research Studies
Thermometer of IT Business Value– Benchmarking studies by industry
IBM and Economist Intelligence Unit– 304 firms; global survey; select case studies
Multi-respondent survey– Triangulate responses
April 20, 2023© Paul Tallon 9/21
Thermometer of IT Business ValueThermometer of IT Business ValuePost-implementation Comparison of IT Impacts
Paper Inc. All Manufacturing Paper & Forestry Products Desired Benchmark Criteria Large, OE Small, OE Large, OE Small * Large, OE
N=8 N=16 N=8 N=13
IT Business Value Assessment
Process Planning & Support 6.16 5.91 6.79 6.48 6.92 Supplier Relations 4.77 4.71 5.37 4.25 5.10 Production & Operations 5.77 5.28 6.47 6.34 6.23 Product & Service Enhancement 4.41 5.21 5.92 4.32 5.67 Sales & Marketing Support 4.78 4.79 4.87 4.41 5.09 Customer Relations 5.47 5.40 6.43 5.88 6.28 Competitive Dynamics 4.00 3.47 5.11 4.37 5.30
* Our sample of 24 paper and forestry product firms was divided into 8 small firms (OE: 1, CI: 7) and 16 large firms (OE: 13, CI: 2, PL: 1). Using only one small, OE firm as a benchmark could yield an unfair or inaccurate comparison. Therefore, we grouped all small paper and forestry products firms together to form an overall benchmark for small firms in this industry.
Benchmarking example for Fortune 200 firm
April 20, 2023© Paul Tallon 10/21
Size and Industry EffectsSize and Industry EffectsIT Business Value and Two-way Interaction Effects
Industry x Value Discipline Size x Value Discipline Business Processes OE CI PL OE CI PL
Mfg. 6.51 5.73 6.19 Large 6.19 5.87 6.25 Process Planning
Services 5.85 6.48 6.06 Small 5.71 6.54 5.82
Mfg. 5.16 4.44 4.62 Large 4.85 4.90 5.74 Supplier Relations
Services 4.26 4.94 5.44 Small 3.93 4.77 4.12
Mfg. 6.09 5.15 5.12 Large 5.96 5.26 5.81 Production & Ops.
Services 5.58 6.04 5.42 Small 5.34 6.14 4.41
Mfg. 5.69 3.95 4.70 Large 5.32 4.47 5.48 Prod. & Serv. Enhance.
Services 4.77 5.13 5.18 Small 4.49 5.05 4.17
Mfg. 4.84 3.97 3.77 Large 4.44 4.38 5.17 Sales & Marketing
Services 4.02 4.85 4.52 Small 3.87 4.78 2.59
Mfg. 6.10 5.41 5.27 Large 5.96 5.85 5.88 Customer Relations
Services 5.37 5.96 5.58 Small 4.98 5.81 4.73
Mfg. 4.59 3.91 3.62 Large 5.02 5.33 5.63 Competitive Dynamics
Services 4.86 5.50 5.56 Small 4.55 4.98 3.66
Production and Operations Customer Relations
April 20, 2023© Paul Tallon 11/21
Corporate Productivity and ITCorporate Productivity and IT•
••
•
•
••
• •
•
••
•
•
•
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000I/S budget per employee
Intel Corp.
Rev
enue
per
em
ploy
ee
Apple Computer
ATL Products
Data General
Diebold
Gateway
Hewlett-Packard
IBM
Intergraph
Pitney Bowes
Seagate Technology
Silicon Graphics
Storage Technology
Sun Microsystems
Western Digital
Computer & Office Equipment Companies
High productivityLow investment
Low productivityLow investment
High productivityHigh investment
Low productivityHigh investment
Source: InformationWeek (1998)
April 20, 2023© Paul Tallon 12/21
Benchmarking: What’s in an Industry?Benchmarking: What’s in an Industry?
ADP
Comdisco
Computer Associates
CSC
EDS
Entex Info. Services
Lexis-Nexis
Microsoft
Novell
Oracle
Unisys
Wang Global
Computer Services Companies
High productivityLow investment
Low productivityLow investment
High productivityHigh investment
Low productivityHigh investment
I/S budget per employee
Rev
enue
per
em
ploy
ee
•
•
•
• ••
•
•
•••
••
•
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$0 $10,000 $20,000 $30,000 $40,000
Intel Corp.
Source: InformationWeek (1998)
April 20, 2023© Paul Tallon 13/21
IBM/EIU ~ Sample ParticularsIBM/EIU ~ Sample ParticularsVariable Frequency Percent
Revenues (1997)Less than $500m 112 36.8
$500m $1b 41 13.5
$1b $5b 67 22.1
$5b $10b 39 12.8
More than $10b 45 14.8
Industry GroupManufacturing 128 42.1Wholesale / Retail Trade 39 12.8Telecommunications / Utilities 19 6.3Finance, Insurance & Real Estate 52 17.1Business & Professional Services 66 21.7
RespondentsCEO 38 12.5CFO 37 12.2Vice President 86 28.3Director 85 28.0Senior Manager 43 14.1Other 15 4.9
April 20, 2023© Paul Tallon 14/21
IT Business Value and the Value ChainIT Business Value and the Value Chain
3.0
3.5
4.0
4.5
5.0
5.5
ProcessPlanning
SupplierRelations
Production &Operations
Prod/ServiceEnhancement
Sales &Marketing
CustomerRelations
CompetitiveDynamics
Process-level Performance Measures
Rea
lized
Val
ue (
1-7)
Unfocused Operations Focus Market Focus Dual Focus
The Level and Locus of Value...The Level and Locus of Value...
April 20, 2023© Paul Tallon 15/21
Satisfaction with Return on ITSatisfaction with Return on IT
2.0
2.8
3.6
4.4
5.2
6.0
IncreasingProductivity
Enabling NewProfit Levels
Reducing COGS EnhancingRevenue Growth
Increasing MarketShare
EnhancingCustomer
SatisfactionFirm Level Performance Measures
Sat
isfa
ctio
n R
atin
g (1
- 7
)
Unfocused Operations Focus Market Focus Dual Focus
Bottom LineBottom Line Top LineTop Line
April 20, 2023© Paul Tallon 16/21
“ So we invest in the computers and in training personnel – millions of dollars, thousands of hours – but we never go back and check on whether we saved ourselves even one person, let along the twenty-two that were promised.”
“ I’ve signed so many projects that by now I should have nobody left. Yet I don’t know that our decisions – or
our cars – get any better.”
Lee Iacocca, “Talking Straight”
Post-Implementation EvaluationPost-Implementation Evaluation
April 20, 2023© Paul Tallon 17/21
Evaluation of IT ProjectsEvaluation of IT Projects
3
4
5
6
7
Executive ManagementReviews of Large
Spending Proposals
Justification beforePurchase
Formal Reviews afterImplementation
Regular Reviews byBusiness Units
Ad-hoc Evaluations ofProjects
Criteria for Evaluting IT Projects
Ext
ent
of U
se (
1 -
7)
Unfocused Operations Focus Market Focus Dual Focus
Pre-ImplementationPre-Implementation Post-ImplementationPost-Implementation
April 20, 2023© Paul Tallon 18/21
Linked Survey Design Linked Survey Design
University of California, Irvine www.crito.uci.edu
STRATEGY EXECUTIVE
Business Strategy & Information Technology
SECTION I. ELEMENTS OF ORGANIZATION STRATEGY 1. To what extent have the following items been implemented as part of your company’s strategy? Organizational Planning and Support Not at all To a great
extent
1 2 3 4 5 6 7 Improve internal communication/ coordination.
1 2 3 4 5 6 7 Improve global communication/ coordination.
1 2 3 4 5 6 7 Strengthen strategic planning. 1 2 3 4 5 6 7 Enable your organization to adopt
new organizational structures. 1 2 3 4 5 6 7 Improve management decision-
making. 1 2 3 4 5 6 7 Streamline business processes.
Supplier Relations (In-bound Logistics) Not at all To a great
extent
1 2 3 4 5 6 7 Help your corporation gain leverage over its suppliers.
1 2 3 4 5 6 7 Help reduce variance in supplier lead times.
1 2 3 4 5 6 7 Help develop close relationships with suppliers.
1 2 3 4 5 6 7 Improve monitoring of the quality of products/services from suppliers.
1 2 3 4 5 6 7 Enable electronic transactions with suppliers.
Production and Operations Not at all To a great
extent
1 2 3 4 5 6 7 Improve production throughput or service volumes.
1 2 3 4 5 6 7 Improve operating flexibility. 1 2 3 4 5 6 7 Improve the productivity of labor. 1 2 3 4 5 6 7 Enhance utilization of equipment. 1 2 3 4 5 6 7 Reduce cost of tailoring products
or services. Product and Service Enhancement Not at all To a great
extent
1 2 3 4 5 6 7 Enhance the value of products/ services by embedding IT in them.
1 2 3 4 5 6 7 Decrease the cost of designing new products/services.
1 2 3 4 5 6 7 Reduce the time to market for new products/services.
1 2 3 4 5 6 7 Enhance product/service quality. 1 2 3 4 5 6 7 Support product/service
innovation. Marketing and Sales Not at all To a great
extent
1 2 3 4 5 6 7 Enable the identification of market trends.
1 2 3 4 5 6 7 Increase your ability to anticipate customer needs.
1 2 3 4 5 6 7 Enable sales people to increase sales per customer.
1 2 3 4 5 6 7 Improve the accuracy of sales forecasts.
1 2 3 4 5 6 7 Help track market response to pricing strategies.
University of California, Irvine www.crito.uci.edu
I/S EXECUTIVE
Business Use of Information Technology
SECTION I. BUSINESS USE OF IT 1. To what extent is your company using information technology (IT) for each of the following? Organizational Planning and Support Not at all used Used to a
great extent
1 2 3 4 5 6 7 Improve internal communication/ coordination.
1 2 3 4 5 6 7 Improve global communication/ coordination.
1 2 3 4 5 6 7 Strengthen strategic planning. 1 2 3 4 5 6 7 Enable your organization to adopt
new organizational structures. 1 2 3 4 5 6 7 Improve management decision-
making. 1 2 3 4 5 6 7 Streamline business processes.
Supplier Relations (In-bound Logistics) Not at all used Used to a
great extent
1 2 3 4 5 6 7 Help your corporation gain leverage over its suppliers.
1 2 3 4 5 6 7 Help reduce variance in supplier lead times.
1 2 3 4 5 6 7 Help develop close relationships with suppliers.
1 2 3 4 5 6 7 Improve monitoring of the quality of products/services from suppliers.
1 2 3 4 5 6 7 Enable electronic transactions with suppliers.
Production and Operations Not at all used Used to a
great extent
1 2 3 4 5 6 7 Improve production throughput or service volumes.
1 2 3 4 5 6 7 Improve operating flexibility. 1 2 3 4 5 6 7 Improve the productivity of labor. 1 2 3 4 5 6 7 Enhance utilization of equipment. 1 2 3 4 5 6 7 Reduce cost of tailoring products
or services.
Product and Service Enhancement Not at all used Used to a
great extent
1 2 3 4 5 6 7 Enhance the value of products/ services by embedding IT in them.
1 2 3 4 5 6 7 Decrease the cost of designing new products/services.
1 2 3 4 5 6 7 Reduce the time to market for new products/services.
1 2 3 4 5 6 7 Enhance product/service quality. 1 2 3 4 5 6 7 Support product/service
innovation. Marketing and Sales Not at all used Used to a
great extent
1 2 3 4 5 6 7 Enable the identification of market trends.
1 2 3 4 5 6 7 Increase your ability to anticipate customer needs.
1 2 3 4 5 6 7 Enable sales people to increase sales per customer.
1 2 3 4 5 6 7 Improve the accuracy of sales forecasts.
1 2 3 4 5 6 7 Help track market response to pricing strategies.
Customer Relations (Out-bound Logistics) Not at all used Used to a
great extent
1 2 3 4 5 6 7 Enhance your ability to provide after-sales service and support.
1 2 3 4 5 6 7 Enhance flexibility and responsiveness to customer needs.
1 2 3 4 5 6 7 Improve the distribution of goods and services.
1 2 3 4 5 6 7 Enhance your ability to attract and retain customers.
1 2 3 4 5 6 7 Enable you to support customers
University of California, Irvine www.crito.uci.edu
BUSINESS EXECUTIVES
Business Value of Information Technology
SECTION III. RATING OF BUSINESS VALUE OF INFORMATION TECHNOLOGY
11. How does IT boost firm performance in the following areas? Please restrict your appraisal to value already realized rather than value expected in the future. Organizational Planning and Support Not at all To a great
extent
1 2 3 4 5 6 7 Improve internal communication/ coordination.
1 2 3 4 5 6 7 Improve global communication/ coordination.
1 2 3 4 5 6 7 Strengthen strategic planning. 1 2 3 4 5 6 7 Enable your organization to adopt
new organizational structures. 1 2 3 4 5 6 7 Improve management decision-
making. 1 2 3 4 5 6 7 Streamline business processes.
Supplier Relations (In-bound Logistics) Not at all To a great
extent
1 2 3 4 5 6 7 Help your corporation gain leverage over its suppliers.
1 2 3 4 5 6 7 Help reduce variance in supplier lead times.
1 2 3 4 5 6 7 Help develop close relationships with suppliers.
1 2 3 4 5 6 7 Improve monitoring of the quality of products/services from suppliers.
1 2 3 4 5 6 7 Enable electronic transactions with suppliers.
Production and Operations Not at all To a great
extent
1 2 3 4 5 6 7 Improve production throughput or service volumes.
1 2 3 4 5 6 7 Improve operating flexibility. 1 2 3 4 5 6 7 Improve the productivity of labor. 1 2 3 4 5 6 7 Enhance utilization of equipment. 1 2 3 4 5 6 7 Reduce cost of tailoring products or
services. Product and Service Enhancement Not at all To a great
extent
1 2 3 4 5 6 7 Enhance the value of products/ services by embedding IT in them.
1 2 3 4 5 6 7 Decrease the cost of designing new products/services.
1 2 3 4 5 6 7 Reduce the time to market for new products/services.
1 2 3 4 5 6 7 Enhance product/service quality. 1 2 3 4 5 6 7 Support product/service innovation.
Marketing and Sales Not at all To a great
extent
1 2 3 4 5 6 7 Enable the identification of market trends.
1 2 3 4 5 6 7 Increase your ability to anticipate customer needs.
1 2 3 4 5 6 7 Enable sales people to increase sales per customer.
1 2 3 4 5 6 7 Improve the accuracy of sales forecasts.
1 2 3 4 5 6 7 Help track market response to pricing strategies.
April 20, 2023© Paul Tallon 19/21
Matched SurveysMatched SurveysU.S. Ireland Holland Total
Population
Corporations 477 64 541
Respondents
Business Executives 123 31 2 156
Strategic Planners 80 24 1 105
IT Executives 91 20 1 112
Total respondents 294 75 4 373
Survey Matching
Match 3 (complete) 46 16 1 63
Match 2 (missing 1) 33 5 38
Match 1 (missing 2) 62 12 74
Firms responding 141 33 1 175
Response Rate 29.6% 51.6% 32.3%
86 Bus. Execs
63 IT Execs
67 Planners
April 20, 2023© Paul Tallon 20/21
Strategic Alignment and IT Business ValueStrategic Alignment and IT Business Value
3.70
3.80
3.90
4.00
4.10
4.20
4.30
4.40
4.50
4.60
4.70
4.80
4.90
Sales &MarketingSupport
Product &Service
Enhancement
SupplierRelations
ProcessPlanning &
Support
CustomerRelations
Production &Operations
Business Processes
IT B
usi
ne
ss V
alu
e (
1 -
7)
0.33
0.38
0.43
0.48
0.53
0.58
0.63
Strate
gic A
lign
me
nt (0 - 1)
Business Value Strategic Alignment
April 20, 2023© Paul Tallon 21/21
For Next Class…For Next Class… Reminder:
− We will discuss XBRL next class− The stock market game ends on Friday, April 25. The report is
due by 6pm on Monday, April 28 (hard copy please). Please drop it off in my office (SH325).