IS 483 IS Management Session 10 Commentary 

Agenda

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Course Summary

• The Nature of IS Management

• The Role that Technology Plays

• The Role that History Plays

• Leading People and IS-HR

• IS -- structural patterns

• Distributed Architecture

• Operations

• Training / Help Desk

• Outsourcing

• Risk Management

• Procurement
  

Break

Reconsider:

Financial Analysis

• Costs and Benefits Review including the Statement of Work (see Contract Negotiation)

• Cost Benefit Analysis
  1. Break-even analysis
  2. Payback analysis
  3. Cash-flow analysis
  4. Net Present Value (NPV) analysis

• Capital Budgeting  -- depreciable assets and their return over long periods of time.

                                        Remember: 
probability of an event occurring + probability of an event not occurring = 1 
so     if  probability of rain        is .8 
then    probability of no rain     is .2       or  1- .8   

Course Summary  (A META view)

• What is "data".
  • facts
• What is "information"
  • facts that are useful.
• What is "knowledge"
  • useful facts in a context.
• What is "management"? 
  •  "the art and science of getting things done through other people" 
    [Wilbur Cross, Dictionary of Business Terms, 1999, Prentice Hall]
• What is "Information Systems"?
  • "An "information system" is a collection of computer programs, hardware, people, procedures, documentation, forms, inputs, and outputs used in or generated by handling business data.  It consists of these components and their interrelationships.
  • "Information Systems (IS) Organization" is an organizational unit responsible for managing information technology" [E. Wainright Martin et al., Managing Information Technology: What Managers Need to Know 3/E, 1999, Prentice Hall]

• The Nature of IS Management
  • concern -- 
    the interaction of computers and people in achieving organizational goals
    must have an understanding of:
    • how people are currently using computers
    • how people could use technology
    • the economics of using technology
    • the economics of the organization and its environment 
             (competition, customers, suppliers, governmental influences)
    • the goals of the organization 
    • how IT can meet these goals
    • how people/tasks can be organized to meet these goals
    • how to lead effectively in meeting organizational goals
    •   MORE??
               Examples
      
• The Role that Technology Plays 
  • expands/limits choices for an organization:
    • process  -- from functions >> processes >> process chains  
    • coordination mechanisms
          Examples?
      
• The Role that History Plays
  • limits the options considered 
  • innovations become established  often in reaction to problems encountered
    
• Leading People and IS-HR
  • Achieving organizational goals -- 
    •  analyze what is needed
    •  analyze who will do it
    •  analyze nature of those doing it
    •  choose appropriate leadership style
    •  determine the leadership tasks to perform
    •  perform the tasks
  • The 6 IT-HRM Components
    • Hiring
    • Turnover and Retention 
    • Career Development
    • Training
    • Compensation
    • Performance Behavior
  • IT-HRM Components Compared to Flamholtz Framework's Leadership Tasks
    • Hiring  -- not covered
    • Turnover and Retention -- Personnel Development / Interaction Facilitation
    • Career Development  -- Personnel Development
    • Training -- Personnel Development, Work Facilitation 
    • Compensation -- from Supportive Behavior, Goal Emphasis
    • Performance Behavior -- Supportive Behavior

    
    

• IS Organization-- the 3 basic structural patterns found :

    Typical 'Matrix' IT Organization

    Some Functions/Tasks Handled in IT Organization

• Distributed Architecture -- Technical Organization
  • Some Important Definitions:  based on location of processing units (CPUs) and ability to 'talk with one another'
    • Centralized
    • Decentralized
    • Distributed
  • Concern is setting up and running operations and processes at remote sites that are:
    • secure
    • reliable
    • efficient
    • effective
        Examples
      
• Operations
  • Concern with maintaining quality and efficiency -- Controlling costs
          Examples
    
• Training / Help Desk
  • How to get people to use computers
    • efficiently
    • productively
            Examples
      
• Outsourcing
  • Products
  • Processes
  • Resources
  • Services
           Examples
    
• Risk Management
  • What can go wrong --will go wrong and will we survive
    Examples
    
• Procurement
  • How to make sure that IT investments are ?????
    

Break

Financial Analysis

• Costs and Benefits Review
  • Costs:
  • -- One-Time vs. Recurring
  • -- Fixed vs. Variable
  • -- Tangible vs. Intangible
  • --- accurately projected vs. difficult to estimate or hidden
• Benefits:
  • -- Tangible vs. Intangible
  • --- Tangible
  •         Advantages measurable in $ that accrue to the organization through the use of IS/IT
  •         Cost Reduction; Shorter Cycle time
  • --- Intangible
  •         Important but difficult to measure, or translate into dollars

Analysis Methods  are based on the-
'Statement of Work' -- an agreement between firm and vendor 
--includes:

Software Performance

• Description of software

• Detailed explanation of required customization

• 3rd party products

• Standard and Ad Hoc Reporting

Implementation

• Project team structure

• Staffing assumptions

• Implementation methodology

Technical Architecture

• Infrastructure

• Data Conversion

Training Strategy

• plans

• resources

Maintenance and Support

• on-site, online support

• interface with legacy systems

• future upgrades

Cost Schedule

• detailed cost schedule by category and software; other costs

• five (?)year schedule

Financial Analysis

1. Break-even Analysis
---- justification from costs (reduction usually on unit costs but can also reduce fixed costs)
          not looking at the benefits improvement (usually in IS benefits equate to improving capabilities), 
          that is,  benefits will/do not substantially improve with the proposed system
---- compares total costs against growth in volume

The break even point is when the total cost of the current system and proposed system intersect, 
      at this point the project becomes "profitable"

Pro  -- useful when business is growing, volume is a key variable in cost
Con -- because benefits are not considered and therefore assumed to remain the same under any  new alternative
           a new alternative that has a combination of benefits improvement with a less robust costs structure
           improvement must not get approved because the more robust cost structure improvement alternative looks
           better

                                                                Example:
  Current payroll system costs $1.25 /ee to process an employee for a payperiod with 2000 employees.   
  New system will process up to 4000 transactions per period at the cost of $.35 /ee and costs $20,000 up front 
   (fixed cost).   
  Payroll is processed weekly.

TC_old = Total Cost of running old system
Q = number of employees processed / period = 4000 

TC_new = .35Q + 20,000
TC_old= $1.25Q or 1.25*2000= $2500 for each pay period
Breakeven is when old costs = new costs therefore: TC_old = TC_new

  .35Q +20000 = 1.25Q  
             20000  = 1.25Q - .35Q 
             20000  = .9Q
             22222   = Q
     or Q = 22,222 employees or at the point where 22,222 employees have been processed, the costs of the new
                            system are same as for the old system 
         22,222/2000_{rounded up} = the number of the pay period in which breakeven occurs 
                                             or in the 12th pay period the break-even point is reached.  

2. Payback Method -- justification from improved tangible benefits
---- assess the worthiness of alternative investments in terms of time
---- length of time it takes for the benefit of the system to payback the cost of developing it.
---- determine the period of time in which the system must operate so its benefits payback the cost of investment.
---- Payback Period = Investment required / net annual cash inflow (that is, the benefits)

Pro  -- gives the minimal period of time the system needs to be in operation to have system make "sense."
Con -- short term approach on investment & replacement
       -- does not consider how repayments are timed
       -- does not consider total return beyond the payback period
       -- does not consider cost structure improvements 

                                                                Example
 A new b2b system handles 1000 sales per day averaging $50 net per sale 
            (after taking out the increased costs for running new system on existing equipment) and
            which could not occur without this new system
 or $50,000 per day after paying the variable costs.  
 New system costs $300,000 to develop.  
 The payback period is 300,000 / 50,000 = 6 days for payback.

3. Cash Flow Analysis -- 
project is expensive relative to firm's size, 
or when firm can be significantly affected by large drain of funds

---- assess the direction, size and pattern of cash flow (both inflow and outflow).  
       If no revenue, then only measure the cash outlays with inflows remaining zero
---- when will project begin to make profit or out of the red?
---- examines the direction, size and pattern of cash flow associated with the proposed systems

Pro  -- gives the firm an idea of when it must add funds to get system developed and when system will generate funds 
        -- considers both cash inflows the new system generates and the cash outflows the new system needs for its
            development and operation
Con --  does not consider the time value of money where today's money is worth more that tomorrows

expanation: -- cash flow shows the results of that period (Q1-Q5) or cash flow_current = revenues_current - costs_current
                    -- cumulative cash flow (CUM CF) shows the collective cash spent and received and its direction  
                        cum cf _current = cum cf_{current-1 period} + cashflow_current

                                                                                        Example
The new system requires starts generating new revenues in the first quarter of its development but there are large outflows from the beginning.  By tracking both, the new system will start generating a profit, that is the cumulative cash flows become positive in the 4th quarter with 3.79k.

4. Net Present Value -- payback period is long or cost of borrowing money is high.  

---- considers both the time value of the investments and cash flows.
---- assess all of the costs (outlays) and revenues (inflows) over a project's economic life and 
       to compare cost today with future costs; and today's benefits with future benefits 
       so different project can be compared regardless of timing
---- concept of Present Value: 
  $1 received today is more valuable than $1 a year from now 
     which is more valuable than $1 two years from now
   WHY??
    The present $1 can be invested and earn 7% return or 
                         $1.07 in 1 year   (1.00*1.07)           and 
                         $1.14 in 2 years  (1.00*1.07*1.07) and 
                         $1.23 in 3 years  (1.00*1.07*1.07*1.07) or (1.00*1.07³⁾ 
                                 (this is the foundation for analyzing 'opportunity costs')
  
The future involves uncertainty-- the longer the time frame, the more uncertainty on what that $1 will earn

Money has a time value: managers must have a means of expressing future receipts in present dollar terms so the future receipt can be compared on an equal basis.
    F₁   = the amount to be received in 1 year = The future value at 1 year
    F_n   = the future amount to be received in n periods = The future value at n^th year
    p    = the present outlay to be made or 100
    r    =  the rate of interest or 7%
    n   =  the number of periods

                     Future Value
    F₁= p(1+r) = 100(1+.07) = 107
    F_n= p(1+r)ⁿ = 100(1+.07)⁴ = 100(1.3107) = 131.07 when n=4, r = 7% and p = 100
                    Present Value
    p = F_n/ (1+r)ⁿ


                    Discounting or the value of future expected cash receipts and expenditures at a common date, which is calculated using Net Present Value or Internal Rate of Return (IRR).  It is a factor use in the analyses of capital investments.
the process of finding the present value of a future cash flow
discounting $110.25 to its present value of $100 ; 5% is the discount rate. 


Internal Rate of Return (IRR) --aka time-adjusted rate of return -- aka yield) is the rate promised by an investment project over its useful life  -- finding the rate that equates the PV of the cash outflows with the PV of the cash inflows -- or when NPV = 0

NPV -- advantages over IRR
1. Easier to calculate -- IRR is trial and error
2. Cannot adjust rate to reflect greater risk in the far future versus near future
3. Easier to explain 

Capital Budgeting --  
an investment concept involving depreciable assets (definition: no value at end of useful life & provides a return during its life)  when their returns extend over long periods of time.  
The focus here is on flows of cash.

objective:  
Determine if a depreciable asset will provide a return that will meet of exceed the original investment in the asset's acquisition.
also:
a.  Distinguish between 
                        capital budgeting screening and preference decisions, and 
                        identify the key characteristics of business investments.
   Screening decisions -- relating to whether one proposed project meets some present standard of acceptance.  
    E.g., using IRR when the rate has to meet/exceed a preset "hurdle rate;" 
            using NPV method to make sure the NPV is positive.  
   
  Preference decisions -- relating to selecting from among several competing courses of action.  Here you might use a variation of the NPV called Total Cost Approach where all inflows and outflows for the alternatives are considered.

When are intangible benefits used?   
When the tangible costs exceed the tangible benefits --> then look at the deficit and decide if the intangibles are worth that amount.  Always a  judgment call.
   

Total Cost Approach