Strategic Planning

for Information
Systems
Third Edition

CHAPTER 9
Managing
Investments in
John Ward and Joe Peppard

Information Systems
and Technology

1
 Outlines
• Evaluating IS/IT investments
• Setting priorities for applications
• Benefits management
• The benefits management process
• Assessing and managing investment risks

2
 Evaluating IS/IT Investments
• Cooke and Parrish discovered that 70% of
organizations had no formal justification and
post-implementation review process for IS/IT
investments
• Farbey found that only 50% of IS/IT project were
subject to formal preinvestment appraisal
• In less than half the cases was a recognized
financial analysis technique used, and in barely
30% was the outcome of the investment
evaluated

3
 3 Types of Applications
• Substitutive – technology replacing with
economics being the main driving force, to
improve efficiency
• Complementary – improving organizational
productivity and employee effectiveness by
enabling work to be performed in new ways
• Innovative – achieving a competitive edge by
changing trading practice, creating new market,
etc.

4
 5 Basic Techniques for
Evaluating Benefits
• Traditional cost-benefit analysis, which allows for
efficiency improvements in organizational processes
resulting from automation
• Value linking, which estimates the improvement in
business performance, not just saving made, from
improving the linkages b/w processes or activities; or
interactive component design with suppliers via a shared
CAD system, to reduce the number of iterations needed
• Value acceleration, which considers time dependence of
benefits and costs in other departments of system
improvements. This implies that benefits can occur in
other parts of the business, not just where the system is
actually implemented.
5
 Cont…
• Value restructuring, which considers the
productivity resulting from process and
organizational change and change of job
roles
• Innovation evaluation attempts to estimate
the value to the business of new business
or new business practices levered from
IS/IT

6
 Relationship b/w Benefit types
and the Application Portfolio
Substitutive Complementary Innovative
(efficiency) (effectiveness) (competitive)
Cost/Benefit   
Value linking   
Value acceleration   
Value  
restructuring
Innovation 
evaluation
Support High potential
Key operational
Strategic
7
 Application Portfolio Approach
• It is simply not feasible to express all the
benefits of systems in financial terms
• It is no useful purpose to develop spurious
calculations to quantify the unquantifiable
• The portfolio approach can offer help in
making judgements

8
 Portfolio Approach Suggestions
• Quantified, financial justification of applications
is easier in the key operational and support
quadrants, where most aspects of the
application will be better known or can be
determined, risks are lower and the rate of
change is slower.
• A singular approach to investment justification
will tend to produce one type of application to
the exclusion of others
– This argument is strong where a scare resource
approach has been adopted and pure financial return
on investment decides investment priorities - support
applications will always be easier to justify financially
9
 Cont…
• The way in which applications are planned
and managed by the organization will also
affect the way in which they are justified –
whether they are customer-related
applications integral to achieving business
objectives or systems intended to save
major costs in one part of the organization

10
Investment Justification
STRATEGIC HIGH POTENTIAL

Enable the R&D project to

achievement of explore potential
business objectives value and cost-fund
via explicit critical from R&D budget
success factors
Risk money

Disadvantage/Risk
if it is not done Net cost
(critical failure reduction through
factors) quantified
and/or quantified savings
performance
improvement

KEY OPERATIONAL SUPPORT11

 Support Applications
• Support application must show a good
economic return for the allocation of a
scare resource.
• If the project can be carried out within the
user department’s control, then it is
reasonable that the ‘go-no go’ decision is
made by local user management

12
 Key Operational Applications
• Financial benefits are not the only driving force.
• Some benefits will be able to be related to CSFs, which
provide a clear link of the investment to the achievement
of business objectives.
• ‘What will happen to the business if we do not invest in
improving this key operational system?’
• ‘Can we afford the risk of not doing it?
• Monopoly works best for key operational applications =>
central control
• This enables a standard checklist of questions to be
considered in the evaluation of any new project

13
 Strategic Applications
• Not estimates suitable for a discounted cash-
flow calculation
• Expressed as the business opportunity that is
being created or the CSFs that the application
specifically addresses.
• Application will get the ‘go-no go’ decision based
on how directly it relates to the business
objectives and particular strategies.
• The benefits will drive from achieving those
objectives by enabling the required business
changes, not from the system alone.

14
 High Potential Applications
• It should be justified on the same basis an any
other type of R&D, and preferably from a general
R&D budget rather than IS/IT funds.
• High potential ideas tend to arise informally,
based on individuals’ creative thinking, rather
than from formal planning.
• Many of ideas simply will not work and some
control is essential to avoid significant waste of
resources.

15
 Cont…
• Product champion is responsible for such
projects, given a budget against agreed general
terms of reference to deliver results
• When initial allocations are used up, further
sums have to be justified based on the evidence
of the possible benefits, not allocated in the
vague hope of eventual success.
• IS/IT investments should be considered just as
objectively and just as subjectively as other
business investments

16
Setting Priorities for Applications
• The mechanisms used to decide whether or not
applications go ahead should also be used to set
priorities across applications
• Some priorities are logical, but many are largely
independent of one another
• Priorities need to be set in the short term to
enable the best use of resources within the
acquisition lead time for further resources

17
3 Factors for the Assessment of
Priorities
• What is most important to do, based on
the benefit identified.
• What is capable of being done, based on
the resources available.
• What is likely to succeed, based on the
risks of failure of each investment

18
 Setting Priorities in the Support
Segment
• Setting priorities in the support segment
should not be too difficult.
• Those with the greatest economic benefit
that use the least resources should get the
highest priority.

19
Setting Priorities in the Strategic
Segment
• Give priority to those applications that will
contribute most to achieving business
objectives, and use the least resources in
the process.

20
Strategic Weighting via CSFs
APPLICATION CONTRIBUTION
HIGH (3) MEDIUM (2) LOW (1)
OBJECTIVE A:
CSF 1
CSF 2
CSF 3, etc.

OBJECTIVE B:
CSF 1
CSF 2, etc.

OBJECTIVE C:
CSF 1
CSF 2, etc.

OBJECTIVE D:
etc.

TOTALS

OVERALL
TOTAL
21
 Setting Priorities in the Key
Operational Segment
• Arguments
– Financial
– CSFs
– Risk to current business
– Infrastructure improvement
• Each of these benefits areas must be given
some form of relative weighting based on the
current business situation, to decide the
preferred mix of benefit before looking at
resource constraints
• The costs and/or resources used by the project
should be compared against its relative
importance in each of the 4 categories to
22
establish overall priorities
 Setting Priorities in the High
Potential Segment
• If the idea potentially impacts many CSFs,
it clearly stands out from others and
should be elevated above the general
scramble for R&D type resources

23
 Setting Priorities Across the
Segments of the Portfolio
• The approach recommended for key
operational applications can be extended
to cover the whole portfolio.
• Strategic applications will score heavily on
CSFs, whereas support applications
should deliver a good financial return.
• Management must decide the weighting
they wish to attribute to each type of
benefit and then rank the systems.
24
 Effect on Weighting of Various
Factors: Examples
Factors Objec Business Infra Econo
tives/CSF Risks structure mics
All types of investment have
to be cost- justified to meet L L L H
strict ROI hurdles
Business is in weak position
or in decline – short-term L M L H
profitability
Business is in a high-growth
market and satisfying the H H M L
market demand is paramount
Environment is very
competitive and business
H H L M
performance must be 25
improved
 Cont…
Factors Objec Business Infra Econo
tives/CSF Risks structure mics
Need for redevelopment of
old systems. Systems and/or
technology are out of date L H H M
compared with competitors
or peer organizations
New systems are required to
support major
M H M L
business/organization change
or rationalization
Technology cost
performance enables lower
L L H H
costs for existing systems if 26
redeveloped
 Benefits Management
• A number of factors that differentiated success
from failure were identified.
• While some were already well known, the
successful investments were characterized by a
deliberate, comprehensive approach to
managing the benefit delivery.
• In highly-successful projects, management
treated the IT investment as a component of
organizational change and were able to use
existing change management processes to
ensure the business maximized the value of the
investment through associated changes to
business practices
27
 Factors Increasing the Degrees
of Success in SIS
High Life-cycle role of
- initiation of the SIS in the context
success of the need for business change senior executive
Benefits exceeded
expectation
- Allocation of responsibility for
benefit delivery
Existence of an
organizational Success
change method and a Benefits met - Involvement in
willingness to invest expectation implementation as well
in strategic benefits – as planning/evaluation
different evaluation
emphasis Moderate
Comprehensive success
approach to benefit Some benefits
management initiated
in the planning phase
achieved
that has a stronger
business Unsuccess
involvement and Planning approach,
No Benefits
emphasis method and output,
and implementation delivered
roles of IS/IT and
business managers 28
 The Context of Benefits
Management
• Benefit Management: the process of
organizing and managing such that
potential benefits arising from the use of IT
are actually realized.
• The ability to achieve benefits from a
particular investment will depend largely
on the organization’s experience and
knowledge of what types of benefit IS/IT
investments can or cannot deliver and how
they can be obtained.
29
 Cont…
• Based on the different objectives and
rationale for the applications in each
segment of the application portfolio, it can
be seen that the mix of activities and their
criticality to success will vary

30
Generic Sources of Benefits for
Different Applications
STRATEGIC HIGH POTENTIAL

Business innovation
and change
(R&D projects)

Business process
restructuring

Business Business efficiency

effectiveness

Business Process elimination

rationalization and and cost reduction
integration

KEY OPERATIONAL SUPPORT31

 The Context of Benefits
Management
• Inputs to the benefits management process
– Why is the investment being made – what is causing
the organization to change and how critical to its
future is the successful management of the changes?
(the benefit drivers)
– What types of benefit is the organization expecting
from the investment overall – to reduce costs,
improve operational performance, gain new customer,
etc..
– How will other activities, strategic initiatives, business
developments or organizational issues affect the
particular investment either to facilitate or inhibit its
progress and outcome? (the organizational context)
32
Benefits Management Context

Types of Organizational
Benefit drivers
benefits context

Benefits
IT process and Organizational
management
products changes
process

Benefits
33
 The Benefits Management
Process
• Identification and structuring of benefits
• Planning benefits realization
• Executing the benefits plan
• Reviewing and evaluating results
• Potential for further benefits

34
A Process Model of Benefits
Management
Identify and
structure
benefits

Potential for Plan benefits

further realization
benefits

Review and
Execute
evaluate
benefits plan
results
35
 Identification and Structuring of
Benefits
• The overall business rationale for a new or
improved system will have been identified
– The nature of the types of target benefit and
– Extent of change involved to obtain them will depend
on their impact and criticality for the business strategy
which in turn determines whether the system is
strategic, key operational or support
– If the nature of the benefits and/or how to obtain them
is unclear, then the system should be put through the
R&D stage implied by the high potential segment until
they are better known
– The whole benefit management process does not
really apply to the high potential segment

36
 Cont…
• Identifying the target benefits implies an iterative
process of establishing the investment
objectives and the potential business
performance improvements that the system and
associated changes should or could deliver.
• The achievement of each objective could well
deliver a variety of different benefits across the
organization and also to trading partners and
customers.
• The process is iterative since objectives may be
modified and new benefits identified as ideas
and options are considered in the creative stage
of discussion, or perhaps rejected after more
careful scrutiny.
37
 Cont…
• The benefits should be tested against the
‘benefit drivers’ in the organization (the business
strategy), to ensure they are relevant and that
investment to achieve them will be endorsed by
senior management.
• Every target benefit should be expressed in
terms that can be measured, even if the
measure will be subjective.
• The final part is the determination of where in
the business each benefit should occur and who
in the organization should be responsible for its
delivery.
38
Planning Benefits Realization
• Determine the changes required for
delivery of each benefit and how the IS/IT
development will enable the changes and
benefits to occur => benefit dependency
network.
• The network relates the IS/IT functionality
via the business and organizational
changes to the benefit identified.

39
 Benefits Dependency Network
How new ways of working can deliver the The benefits and why we want them
benefits, and how to make that happen.

IS/IT Enabling Business Business Investment

enablers changes changes benefits 40 objectives
 2 Types of Changes
• Business changes are those changes to working
practices, processes and/or relationships that
will cause the benefits to be delivered.
– They cannot normally be made until the new system
is available for use and the necessary enabling
changes have been made.
• Enabling changes are those changes that are
prerequisites for making the business changes
and/or are essential to bring the new system into
effective operation.
– These often evolve defining and agreeing new
working practices, redesigning processes, changes to
job roles and responsibilities, new incentive or
performance management schemes, training in new
business skills, etc.
– They can often made before the new system is
introduced. 41
 Stakeholder Analysis
• Stakeholder analysis is required to check
the feasibility of achieving all the changes
on the network.
• The purpose of the analysis is to
understand those organizational factors
that will affect the organization’s ability to
achieve the required improvements.

42
 Stakeholder Analysis
Commitment (Current and Required)
Perceived
Stakeholder Changes Perceived
benefits Allow it to Help it Make it
group needed resistance Anti None
(disbenefits) happen happen happen
Customers Configuration None None
tailored exactly to
needs – no testing/
reject

Sales and Improved customer New incentives Reluctance to Action

C R
marketing service and to get sales reps change reps required?
managers product quality to use system reward
image with customers systems

(Extra work in Action

Sales To use system No time C R
required?
representatives preparing and improve available to
requirements and quality/accuracy use/learn
quotes) of quotes system. Loss
of autonomy
Action
Manufactoring/ Remove need for Stop current Do not trust C R
required?
logistics configuration checks to put sales reps’
checking. Less onus on reps to accuracy in
returns/queries get it right requirements/
quote

IT developers New advanced Skills in expert None

system- remove system
old difficult to development
maintain system 43
 Stakeholder Analysis
• Each stakeholder group is considered in
terms of the extent to which they perceive
the project produces benefits for them,
relative to the amount of change they will
have to undergo or endure before they see
the benefits.

44
 Benefits Dependency Network
Introduce Measure
Campaign
project mgt. outcome of
planning &
for all A&P campaigns Identify most
mgt. system
campaigns reobjectives appropriate Reduced cost by
communication avoiding waste on
medium for target irrelevant customers
Reduce customers
Use database to To improve the
Customer marketing staff improve targeting effectiveness of
prospect time on admin in segments advertising &
database activities promotion (A&P)
Coordinate sales & Increased response spend
marketing activity rare from A&P
Realign sales in follow-up campaigns
Redefine activity with new
customer customer
Contact mgt. segments segments
system

Allocate sales time

Increased rate of
to potential high-
Introduce follow-up of leads
New sales value leads
Enquiry new account staff
quotation & mgt. To increase sales
incentives value and volume
response processes
tracking from new
system customers
Increase sales Increased
Release sales Use system to conversion rate of
time from post target sales time with
customers leads to orders
sales activity activity/contact
Portable PCs to pre sales time
for sales
staff

IS/IT Enabling Business Business Investment

45
enablers changes changes benefits objectives
 Dimensions of Benefit
Why do we want
improvement?
Management
What improvement do
we want/could we get?

Where will it occur? Can it be Can it be Can a financial

measured? quantified? value be put on it?

Who is responsible for

its delivery?

What changes are

needed?

Who will be affected?

How and when can

BENEFIT DELIVERY PLAN
changes be made?

Benefits achieved? More benefits possible? Further actions?

46
 Presenting the Business Case
1. Drivers for change giving rise to
2. Investment objective which result in
3. Benefits by
and incur 4. Costs:
(a) Development
(b) One-off
(c) Infrastructure
(d) Business change
(e) Ongoing
Degree of Degree of Doing things Stop doing
explicitness explicitness better things etc.
How much
Financial 5. Risks associated with
the investment that may
prevent full benefit
Quantifiable
realization, etc.

Measurable

Objective Observable
measures
47
Subjective assessments
Stage 3: Executing the Benefits Plan
• To carry it out and adjust it as necessary, as
issues arise affecting its achievement.
• Monitoring progress against the activities and
deliverables of the benefits plan is just as
important as for the IS/IT development plan.
• It may be necessary to establish interim targets
and measures to evaluate progress toward key
milestones or the final implementation.
• During this stage, further benefits may also be
identified, and again the business project
manager should decide on appropriate action to
plan for the benefit or defer it until stage 5.
48
 Stage 4: Reviewing and
Evaluating Results
• 2 purposes of evaluation
– To maximize the benefits of the particular investment
– To learn how to improve benefits delivery from further
investment.
• The results
– Provide explanations for the non-delivery of intended
benefits
– Provide knowledge to improve the management of
future projects or system design.
– Identify any unexpected benefits that have arisen and
understand how they came about.
49
 Cont…
• Post implementation reviews tend to be
held behind the closed doors of the IS
function and are reviews of the
implementation process rather than the
investment outcome

50
 Stage 5: Potential for Further
Benefits
• Further benefits often become apparent
only when the system has been running
for some time and the associated business
changes have been made.
• IS/IT planning should be driven by the
delivery of a benefit stream that improves
business performance at the optimum
manageable rate.

51
Assessing and Managing Investment
Risks: 5 Failure Domains
• Technical failure – this is clearly the domain of
IT, who are responsible for the technical quality
of the system and the technology it uses.
Technical failure is increasingly less common
and is often the cheapest to overcome.
• Data failure – this is a shared responsibility b/w
IS/IT professionals and the users who input the
data.
• Use failure – while some blame for the users
misunderstanding the system may accrue to the
IS/IT professionals, the primary responsibility for
ensuring users are trained to use the system
appropriately
52
 Cont…
• Organizational failure – systems may
satisfactory in meeting particular functional
needs, but may fail because they do not satisfy
the organizational overall, due to inadequate
understanding of how the system relates to the
other processed and activities.
• Failure in the business environment – the
systems are or become inappropriate to external
or internal business requirements due to
changing business practices instigated by
others, or by not supporting the business
strategy adequately, or simply by not coping with
the volume and speed of business process
needs effectively or economically.
53
 Assessing and Managing
Investment Risks
• Major investment failure is due to lack of
understanding of the contextual factors that
produce project risks, or the inability to identify
or address emergent issues that introduce risks
of not achieving the required outcome.
• The more strategic IS/IT investments become,
the greater the consequence of failure and the
more difficult it is to foresee and deal with the
range of risks involved.

54
 Cont…
• The risks of each development need to be
assessed in order to improve the chances
of success, but management need to
understand the relative risks of all the
developments in the portfolio in order to
set sensible priorities.

55
 Cont…
STRATEGIC HIGH POTENTIAL
Very risky
Very risky Business innovation
and change
(R&D projects)

Business process
restructuring

Business Business efficiency

effectiveness

Business Process elimination

rationalization and and cost reduction
integration

KEY OPERATIONAL SUPPORT

Low risk 56
 Assessing and Managing
Investment Risks
• The assessment address the risk factors that are
due to the nature and degree of change
involved, as well as the organization’s ability to
achieve those changes.
• 4 categories potential factors
– What kind of change will be involved?
– How ready is the organization to accommodate the
change?
– How will the organization react to the change?
– How dynamic is the context within which the change
is to be effected?

57
 Potential Risk Factors

• Kind of change (A) • Likely reaction (C )

– Business impact – Stakeholder
– Degree of change commitment to
– benefits
Pace of change
– – Stakeholder
Technology innovation
willingness to change
– Novelty of business
– Stakeholder
solution
willingness to
– Clarity of vision of
contribute resources
intended outcome
– Process and system
interfaces
58
 Potential Risk Factors
•State of readiness (B)
– Level of dissatisfaction – History of success or
with the status quo failure- track record
– Strength of drivers & – Change management
constraints – balance capability
– Business sense of – Technology
ownership competency and
– Agreement on project experience
objectives by key – Project management
stakeholders competency and
– Senior management experience
stance
59
 Potential Risk Factors
• Contextual change (D)
– Dependence of objectives on current
commercial environment
– Susceptibility to regulatory and legislative
changes during project
– Dependence on current management
structure
– Dependence on other projects
– Dependence on key personnel
– Appropriateness of internal control
mechanisms 60
 Potential Risk Factors
• Any individual factor scoring 4 or 5 should cause
relevant aspects of the project to be reviewed in
order to:
– Identify the possibility of changing its scope or the
development approach to reduce the risk; or
– Agree actions that can address the underlying
cause(s) if the weakness; or
– Establish appropriate contingencies to accommodate
problems; or
– Perhaps all three, in the case of a 5!
• If the average for any category is 4 or 5 or 50%
or more of the category factors are 4 or 5, there
is cause for considering whether the investment
as intended will succeed. 61
 Potential Risk Factors:
Strategic Investment
• Score is highly in categories A and D
• Action can be identified per high-risk factor
• Actions should focus on reducing risk factors in
B and C by reviewing the change components of
the benefits dependence network to reduce the
scale, severity or speed of change to make it
more manageable
• Some benefits may have to be forgone or
postponed by accepting that not all the changes
are achievable at present.

62
 Potential Risk Factors:
Strategic Investment
• If the project scores highly in category C,
but low in category B, careful attention
should be paid to particular stakeholders’
issues to reduce the potential resistence

63
 Potential Risk Factors:
Key Operational Investment
• Similar to the strategic projects, except
that a high score in A is more serious.
• Unless all other categories are low, the
nature and scope of the proposed solution
should be considered carefully, with the
objective of finding a lower-risk, alternative
way of delivering the set of benefits.

64
 Potential Risk Factors:
Support Investment
• A high score in category A, C, or D
suggests that the project is not support!
and its expected contribution should be
reconsidered.
• The main risk category is C and if this
scores highly, it implies that essential
changes will be resisted.

65