Business Value of Systems and Managing Change

Introduction

In the previous chapter we discussed building information systems. In this chapter looks at what is involved in managing an entire information system project to make sure a company realises the intended benefits from its investment. Management need to ensure that the system solves problems for the organisation rather than create new ones.

The objectives of this chapter are to:

  • Explain the management of information system projects
  • Describe how information system projects are selected for development
  • Explain how the business value of Information Systems is established
  • Explain the importance of change management when implementing systems
  • Identify the problem areas in system development and implementation

 

 IMPORTANCE OF PROJECT MANAGEMENT

Whether the project entails building a new information system or enhancing an existing system, it is important to be able to measure the business benefits of these investments and make sure that these systems will work successfully in your organisation. The success of any project will depend on how well it is managed.

Poor Project Management

Only about a third of all technology investment projects are completed on time, on budget, and with all features and functions originally specified, with another third of all software projects far exceeding schedules and budgets.

A systems development project without proper management will most likely suffer the following consequences:

  • Costs that significantly exceed budgets
  • Unexpected time slippage
  • Technical performance that is less than expected
  • Failure to obtain anticipated benefits Other types of project failings include:
  • Systems not being used as intended
  • Failure to deliver business requirements
  • Poor user interface
  • Poor data quality

Without proper management, a systems development project takes longer to complete and will likely exceed the allocated budget.

Project Management Objectives

A project is a planned series of related activities for achieving specific business objectives. Project management refers to the application of knowledge, skills, tools and techniques to achieve specific targets within specified budget and time constraints.

Project management activities include:

  • Planning the work
  • Assessing risk
  • Estimating resources required to accomplish the work
  • Organising the work
  • Acquiring human and material resources
  • Assigning tasks
  • Directing activities
  • Controlling project execution
  • Reporting progress
  • Analysing the results.

Good project management is essential for ensuring that systems are delivered on time, on budget and provide real business benefits.

Project management for information systems must deals with five major variables:

  • Scope: This defines what work is and is not included in a project
  • Time: The amount of time required to complete the project
  • Cost: This depends on the time to complete a project and the cost of human and other resources required
  • Quality: This relates to how well the end result of a project satisfy the objectives specified
  • Risk: This refers to potential problems that may threaten the success of a project

Factors that impact Project Risk

The level of risk inherent in an information systems development project risk is influenced by three main factors:

  • Project size: The larger or more complex the project, the greater the risk and the greater the failure rate. Large projects will require large budgets; a large project team will be involved; an extended timeframe will be required and will likely impact on a number of organisational units. All these factors will contribute to the level of project risk. A further complication is that there are few reliable techniques for estimating the time and cost to develop large-scale information systems, meaning that large projects run a very high risk of going over budget and over allocated time.
  • Project structure: Highly structured projects carry lower risks than those with relatively undefined and constantly changing requirements and scope. In some situations the requirements are difficult to tie down because the users continually change what they want or sometimes different users cannot agree on what they want.
  • Experience with technology: The less experience the project team has with the hardware and/or software, the higher the risk of project failure.

Project Management Software Tools

Project management software tools provide support for many aspects of project management. Project management software typically features capabilities for defining and ordering tasks, assigning resources to tasks, establishing starting and ending dates to tasks, tracking progress, and facilitating modifications to tasks and resources and creating Gantt and PERT charts. Microsoft Project has become the most widely used project management software today.

PERT ANALYSIS

A PERT analysis of the tasks involved in completing a project gives an estimate of the time needed to complete each task and calculates the minimum time required to complete the whole project. The minimum time needed to complete the total project is calculated on the basis of the critical path, which is the series of tasks that take the longest time to complete.

GANTT CHARTS

Gantt charts are graphical means of representing the tasks involved in a project and their interdependencies. The Gantt chart shows at what stage in the project each task can begin and how long it will take. Gantt charts provide a means of comparing planned performance against actual performance.

   SELECTING PROJECTS

Because there are far more ideas for systems projects than there are resources, it is important to select projects that promise the greatest benefit to the business and supports the firm’s business strategy.

Management Structure for Information System Projects

In a large corporation, the management structure for information systems projects helps ensure that the most important projects are given priority. Each level of management in the hierarchy is responsible for specific aspects of systems projects.

At the top of the structure is the corporate strategic planning group which is responsible for developing the organisation’s strategic plan, which may need new information systems or changes to existing systems.

The information systems steering committee is the senior management group responsible for systems development and operation. It is made up of managers of departments from both end-user and information systems areas. The steering committee reviews and approves plans for all systems.

The project management group is made up of information systems managers and end user managers and is responsible for overseeing specific information systems projects and supervising the project team.

The project teams are responsible for the individual systems project. A team is made up of systems analysts, specialists from the relevant end user business areas, programmers and database experts.

System Projects must be linked to Business Plans

To identify the information systems projects that will deliver the most business value, organisations need to develop an information systems plan that supports the overall business plan and demonstrates which strategic systems are part of high level strategic planning. The information systems plan is a road map indicating the direction of systems development, the logic underlying the plan, the current systems, new developments being considered, the management strategy and the budget. Other important components of an information systems plan include target dates and milestones. These will help evaluate the plan’s future progress and drive management decisions regarding hardware and organisational change.

Establishing Organisational Information System Requirements

Enterprise Analysis

Two approaches called enterprise analysis and critical success factors (CSF) can be used to establish organisation-wide information systems requirements. Both approaches attempt to gain a clear understanding of the organisations long and short-term information requirements.  Both use interviews of managers to gain an understanding of the requirements.

Enterprise analysis looks at the entire organisation in terms of organisational units, functions, processes, and the information they use.  This approach involves taking a large sample of managers and asking them the following questions:

  • How do they use information?
  • Where do they get the information from?
  • What are their environments like?
  • What are their objectives?
  • How do they make decisions?
  • What are their critical information needs?

The data collected is combined to enable conclusions to be drawn about the organisationwide information systems requirements.

The strength of enterprise analysis is in its complete picture of the way the organisation conducts its business. The weakness of the enterprise analysis is that it produces so much data that it is expensive to conduct and difficult to organise and analyse. A further weakness is that the enterprise analysis tends to look at the way existing information is used and not at the fact that new approaches may be needed in the future.

Critical Success Factors (CSFs)

Critical Success Factors (CSFs) are simply the goals managers feel will make the organisation a success. The CSF approach involves interviewing a smaller number of top managers who are asked to identify their goals and the objectives essential to those goals.  These critical success factors (CSFs) are combined to develop a picture of the overall organisations CSFs.  Systems that are needed to deliver these critical success factors are then built.

The advantage of this method centres on the fact that the smaller sampling of data involved makes it easier to develop an information plan. It tends to be faster than enterprise analysis and therefore less expensive. The plan will revolve around a few CSFs instead of a large number of information requirements.

Using the CSF method also takes into account how the external business environment affects information needs. Usually top management are the organisational level most involved in this type of analysis as they have a better idea of the environmental effects than lower levels of management.

The main weakness of this method is in the process for analysing and combining the data as it can be difficult to merge individual CSFs into a clear company blueprint. A second problem is that there is often confusion between individual and organizational CSFs, as what can be critical for a particular manager may not be important to the entire organisation. Finally, the CSF approach is biased toward top managers because they are usually the only ones interviewed.

Portfolio Analysis

This approach can be used to select and evaluate information systems investments using strategic and other non-financial considerations. Portfolio analysis compares a portfolio of potential projects based upon the projects expected risks and benefits. Projects are categorised as high or low-risk and high or low-benefits.  Thus, four ratings are available: high-risk/high-benefits, high-risk/low-benefits, low-risk/high-benefits, and low-risk/lowbenefits.  High-benefit/low-risk projects are generally preferred, whereas low-benefit/highrisk projects are to be avoided. These four rating are summarise in Figure 13.1.

 

Figure 13.1: Portfolio analysis

Scoring Models

The scoring model is a quick method for deciding among alternative systems based on a system of ratings for selected objectives. Criteria are listed and weighted and then alternative projects are rated using these criteria by those involved in judging the projects. Scoring models are meant to be relatively objective techniques, but involve many qualitative judgments. They are used most commonly to confirm and support decisions rather than to make decisions. The challenge with this method is on getting agreement on criteria to be used to judge the system.

 ESTABLISHING THE BUSINESS VALUE OF INFORMATION SYSTEMS

It is not sufficient for a project to support strategic goals and meet user’s information requirements; it also needs to be a good investment for the organisation. The value of systems from a financial perspective is mainly concerned with the return on capital invested in the system.

The Costs and Benefits of Information Systems 

The benefits that can be gained from investing in information systems include both tangible and intangible benefits. The tangible benefits of information systems can be quantified and allocated a financial value. Intangible benefits, such as superior customer service or improved decision making, cannot be immediately quantified but may lead to quantifiable gains in the long run.

Total cost of ownership (TCO) is an approach designed to identify and measure all the different pieces of information technology expenditures including those that come after the initial costs of acquiring the hardware and software.

Capital Budgeting Models

Capital budgeting models are techniques used in assessing long-term capital investments. The process of analysing and selecting proposals for capital expenditure is called capital budgeting. Information systems are considered long-term capital investment projects. This section describes six capital budgeting models. These models include:

  • Payback method,
  • Accounting rate of return on investment,
  • Cost-benefit ratio,
  • Net present value,
  • Profitability index,
  • Internal rate of return.

 

Payback Method

The payback method measures the time required to pay back the initial investment in the project. This method is good for high-risk projects where useful life is difficult to know.  However, it ignores the time value of money, the cash flow after the payback period, the disposal value and the profitability of the investment. The payback period is calculated as follows:

Original Investment

Annual net cash inflow = Number of years to pay back

Accounting Rate Of Return On Investment (ROI)

The accounting rate of return on investment (ROI) calculates the return from an investment by adjusting the project inflows produced by the investment for depreciation. The rate of return must equal or exceed the cost of capital in the marketplace. This model approximates the accounting income that would be earned by the project. To calculate the ROI the average net benefit is first calculated as follows:

(Total benefits – Total cost – Depreciation)

 = Net benefit

Useful life                                                               

The net benefit is then divided be the total initial investment to get the ROI as follows:

Net benefit

Total initial investment      = ROI

Cost-Benefit Ratio

The cost-benefit ratio is a method for calculating the returns from a capital expenditure by dividing total benefits by total costs.  Any value above 1.0 is a positive ratio. The method can be used to rank several projects for comparison. The ratio can be calculated using present values to account for the time value of money. The cost-benefit ratio is calculated as follows:

Total benefits

Total costs = Cost-benefit ratio          

Net Present Value

Net present value is the amount of money an investment is worth, taking into account its cost, earnings and the time value of money.  By subtracting the cost of the project from the net present value of its benefits, one can determine one measure of profitability. The present value is first calculated using the following formula: Payment  x 1 – (1+interest)-n = Present value

Interest                                                

The net present value is then calculated as follows:

Present value of expected cash flows – Initial investment cost = Net present value

 

Profitability Index

The profitability index is calculated by dividing the present value of the total cash inflow by the initial cost of the investment.  The result is a profitability measure that, unlike the net present value, can be used to compare with alternative investments. The profitability index is calculated as follows:

Present value of cash inflows

Investment                        = Profitability index              

Internal Rate Of Return

The internal rate of return is defined as the rate of return or profit an investment is expected to earn taking into account the time value of money.

Real Options Pricing Models (ROPM) 

Some information system projects are highly uncertain, especially investments in IT infrastructure. While the costs of the investment can be calculated not all the benefits can be calculated in advance because the future benefits are often unclear.

Methods such as real options pricing models (ROPM) can be applied to evaluate the information system when the benefits cannot be easily established in advance. Real options pricing models apply techniques used in valuing financial options to systems investments. This approach can help managers think about the potential future benefits and value that IT investments can generate.

An option gives the entitlement, but it does not compel one to take action at a future date. For example a share option gives a person the right to purchase particular shares at a fixed price on or before a specified date, but they are not obliged to purchase the shares if they don’t want.

ROPM values information systems projects similar to stock options, where an initial investment in information technology creates the right, (not the obligation) to gain benefits in the future when further system developments are carried out. Management has the option in the future not to go ahead with additional developments.

ROPM allows managers to systematically take account for the uncertainty in the value of information technology projects over time.

The disadvantages of this model relate to the difficulties in estimating all the key elements, such as the expected future cash flows from the investment, and changes that are likely in the cost of implementing the technology and systems.

Limitations of financial models for establishing the value of information systems

Financial models assume all relevant alternatives have been examined, that all costs and benefits are known and that these costs and benefits can be expressed in terms of money. These assumptions are seldom met in reality. Only tangible benefits can be quantified and assigned a monetary value. Intangible benefits cannot be easily quantified, but may lead to monetary gains in the future. It should also be noted that financial models can be selectively used to support decisions made for reasons that have nothing to do with the cost and benefits of a system.

Financial models do not always express the risks and uncertainty of their own cost and benefit estimates. They also fail to consider the fact that costs are usually incurred up-front, while benefits tend to be realised in the future.

In addition, firms can invest in capital projects for many non-economic reasons that are not captured by financial models. They may be undertaken to support strategic considerations or to comply with government regulations.

Information Technology Investments and Productivity

Productivity is a measure of the firm’s efficiency in converting inputs to outputs. Many of the studies into the relationship between IT investment and improved productivity have been inconclusive. The term “productivity paradox” was created to describe such findings.  However, some studies have found evidence that when IT investment is complemented with organisational and process change then productivity has indeed increased.

 CHANGE MANAGEMENT

Change Management and Implementation

To effectively manage the organisational change surrounding the introduction of a new information system, you must look at the implementation process. In the implementation process, the systems analyst should act as a change agent. As well as developing technical solutions the analyst also needs to consider the organisational structure, the relationships between the various impacts by the new system and the business process that the new system will support. It is highly likely that all these will need to be changed as part of the implementation. The analyst is effectively the driver of the entire change process and is responsible for ensuring that all parties involved accept the changes created by a new system. The change agent communicates with users, negotiates between competing interest groups, and ensures that the organisational changes required are achieved.

End Users Involvement

System implementation generally depends on user involvement and management support. A high level of user involvement ensures that the system better reflects user needs, as well as creating a positive reaction to the system by users. An important consideration is the difference between the technical focus of the system designers and the business focus of endusers. This can often result in a communication gap. Systems development projects run a very high risk of failure when there is an obvious gap between users and technical specialists and when these two groups pursue different goals.

Management Support

Commitment of management on every level in the organisation to an information system will ensure it is viewed in a positive way by both the users and the technical specialist staff. If a particular manager in seen to support an information systems project then their staff will also treat it as a priority. Also management support will ensure that the information project receives sufficient funding and resources to be successful.

Change Management Challenges

Implementing applications that span the enterprise (enterprise applications) usually requires extensive organisational and business process changes and are therefore very demanding.  They often replace old technologies and legacy systems.  Many are damaged by poor implementation and change managements. These types of projects must address employee concerns about the change, their fears and worries and the resistance that is generated.

  INFORMATION SYSTEMS PROBLEM AREAS

An information system failure rarely means a catastrophic system failure; it usually means that the system does not perform as expected, is not operational at a specified time or cannot be used in the way it was intended. Therefore it is often under-utilised or not used as intended.  Users may have to develop parallel manual procedures to make the system work properly.  The major problem areas are:

  • Design – the system may fail to capture essential business requirements or improve organisational performance. Information may not be provided quickly enough to be helpful; it may be in a poor format or it may represent a wrong piece of data. The system may be designed with poor user interface. If the system is not compatible with the structure, culture and goals of the organisation as a whole, it is unlikely to be a success.
  • Data – the data may be inaccurate or inconsistent. The information in certain fields may be erroneous or ambiguous. The data may not be organised properly. Information required for a specific business function may be inaccessible because the data are incomplete.
  • Cost – some systems operate well but their implementation cost may have gone way over budget. Other system projects may be too costly to complete. In either case, the excessive expenditures cannot be justified by the business value of the information they provide.
  • Operations – the system does not run well. Information is not available in a timely and efficient manner. Jobs fail too often, leading to excessive reruns and late or missed schedules for delivery of information. The response time may be too long.

Causes of Implementation of Success and Failure

System failure can be due to external or internal factors. An organisation may be faced with external, environmental pressures that cannot be met. However in many instances, system failure and poor implementations are caused by factors within the organisations control.

According to Laudon and Laudon (2010) implementation success or failure can be determined by the following factors:

  • The role of users in the implementation process
    • End user need to be involved so the requirements are understood
    • Need to address users concerns about change and also deal with resistance
  • Level of management support and commitment
    • Strong management support will facilitate the organisational change required
  • The level of complexity and risk involved in the implementation project – The principal risk factors include:
    1. Project size;
    2. Project structure;
    3. Experience with the technology
  • The quality of management of the implementation process
    • Good project management is required to ensure systems are delivered:
    • On time, on budget, of good quality and provided business benefits

Implementation Process Issues

In relation to information systems implementations the entire process of introducing, building, and installing the system can be considered a complex organisational change initiative. One of the most important determinants in a system success and failure is how the implementation process is carried out and managed. Some of the key facets in the implementation process are:

  • Conflicts between the technical focus of information systems specialists and the organisational or business focus of users.
  • The impact of information systems on organisational structures, work groups, processes and behaviour.
  • The planning and management of systems development activities.
  • The degree of user participation in the design and development process

Increasing End User Involvement Overcoming End User Resistance

Projects with little structure and many undefined requirements require heavy user involvement at all stages and implementation activities. For example users can become active members of the project team, take on leadership roles and take charge of installation and training. It is important to promote cohesion and unity within the implementation team. This is particularly important when projects involve a high level of technical complexity. Involvement of end users in the implementation activities may not be enough to overcome resistance to organisational change. End-user resistance to information system projects can be reduced using following strategies:

  • Promote user participation in the project to obtain commitment as well as to improve design
  • Provide user education and training
  • Management pronouncement and policies, including management sponsorship of the project
  • Provide incentives for those who cooperate
  • Improve user interfaces design
  • Solve organisational problems prior to implementation
  • Engage in process change initiative before implementation

 

   MANAGEMENT CHALLENGES

Building successful systems is a very complex and demanding activity.  It is becoming increasingly difficult to determine the costs and benefits of systems, especially those in which benefits are primarily intangible or those that are interrelated with other systems and projects in the firm.  Implementing large-scale systems and obtaining benefits from such investments are especially challenging. Management solutions include developing ways of measuring return on investments and processes to make sure information systems investments provide business value. There is also a need for a more dynamic and rigorous approach to project management and a greater use of project management tools.

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