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Valuing IT

Valuing IT

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Valuing IT through Virtual Process Measurement

ICIS '94 Paper by:
Information and Operations Management University of Southern California, School of Business Administration Los Angeles, CA 90089-1421 E-mail: nissen@usc.edu; Tel 213-740-0196

Mark E. Nissen

Revised for ATRIUM 19 August 1994 The so called "productivity paradox" associated with information technology remains the focus of active research in information systems. One explanation involves the dearth of useful measures to assess the value of IT investments. A review of the predominant approaches to such measurement reveals a number of serious weaknesses and fundamental limitations. The research described in this paper addresses these limitations through a complementary methodology termed virtual process measurement (VPM). Through VPM, assessments of IT value are determined through the measurement of computer-based process representations (i.e., virtually), as opposed to measuring their real counterparts in ongoing organizations; this approach a ords a number of advantages that are unattainable through extant techniques. In this paper, the VPM methodology is discussed in considerable detail, and examples from industry practice are used to demonstrate the use and utility of this approach. The paper closes with a set of conclusions and some possible directions for continued research. Keywords Business process reengineering, Information systems, Knowledge-based systems, Process measurement, Qualitative reasoning, Valuation of information technology.
c 1994 Mark E. Nissen

Abstract

1 Productivity Paradox
A trillion dollars have been invested in information technology (IT) through the decade of the eighties, yet marked improvement in business productivity remains illusive 38]. This so called "productivity paradox" has been cited in the information systems (IS) literature as a lingering dilemma 4, 22], and represents the focus of current research in academics (e.g., 1, 14, 26, 46]). According to one IS journal editor, a key aspect to this dilemma pertains to the manner in which productivity is measured, exacerbated by the lack of good measures for the value of IT 27]. Given the deep and rapid proliferation of IT through the business environment, this need for useful IT-valuation measures will certainly grow through time; moreover, to the extent that measures for IT valuation fail to capture the "true" economic bene t of IT investments, business managers risk serious misallocation of capital to IT-based investments. The search for IT valuation measures is not new to IS research. Traditional nancial techniques (e.g., ROI, IRR) have been employed for decades, and measures have been developed to estimate IS functionality and cost (e.g., function point analysis, COCOMO). The key limitation of these approaches is that they fail to capture intangible costs and bene ts, many of which are inherently qualitative, very di cult to quantify, and nearly impossible to reduce to measures expressed in terms of dollars, complexity, and lines of code 16]. Other approaches take a strategic view of IT, discarding valuation measures for the promise of attaining competitive advantage; however, the sustainability of IT-based competitive advantages is arguable, so valuation remains key to analysis and decision making. Further, IS textbooks (e.g., 10]) now include guidance on subjective valuation, but this approach is asystematic, and su ers from inconsistency and bias. Many researchers now argue for methodological pluralism (e.g., 16, 24]), through which multiple simultaneous approaches are employed in an attempt to "triangulate" on the underlying IT value. In this paper, we too adopt this multiple-methodology approach, for the measures and approaches developed to date have considerable utility and merit; however, we strive to overcome the residual limitations of this ensemble of approaches through a methodology termed virtual process measurement (VPM). Virtual process measurement derives from a more-comprehensive methodology employed for business process reengineering. In this methodology, which is currently being actively and e ectively employed in a number of organizations, processes from the eld are represented in our knowledge-based modeling environment. This environment also supports symbolic simulation, in which dynamic process measures are taken from the represented process. A validation step ensures that the behavior of this representation is consistent with the real-world process in the eld, so that value-based measure- ments can be made regarding virtual processes; these include the obvious measures of process performance (e.g., cost and cycle time), in addition to a battery of measures with heuristic value that is useful for identifying process weaknesses and generating redesign alternatives. These measures are also useful for IT valuation, and can be used, for example, to compare the performance of an organizational process with the proposed IT investment, against that 1

Table 1 provides a summary of the key strengths and weaknesses of each to provide a backdrop for discussion of virtual process measurement. 3) strategic. Financial measures can be e ectively employed to quantify tangible costs and bene ts associated with IT investments. and their strong theoretical basis supports unambiguous decision rules regarding investment. responsive process Focus upon managing risk Focus upon value added Weaknesses Poor at qualitative concepts Poor at addressing intangibles Limited to \dollarized variables" Do not address bene ts Limited to software engineering costs Competitive advantage not sustainable Do not address fundamental economics How to measure? How to relate to IT investments? Table 1: Key Strengths and Weaknesses of its counterpart without the IT implementation. 2) functional. accurate measurements Theoretical decision rules Assess costs early in SDLC Facilitate software engineering Focus upon competitive advantage Align IS with business strategy Focus upon lean. and then describe virtual process measurement in considerable detail.and) dollardenominated.1 Financial Measures . and payback period. Moreover.. with particular emphasis on how IT implementations a ect the manner in which work is performed. dynamic process representation supports detailed measurement at the level of the organizational microprocess 32]. the rich. we discuss the predominant approaches toward IT valuation. generally in terms of cost and revenue streams over time. and 4) subjective. Section four includes two examples of this methodology applied to an important process captured from the eld. 45]). The fundamental limitation of nancial measures derives from their (time. Examples include net present value (NPV). Use of nancial measures requires dollar-denominated measurement of costs and bene ts.delity. high.g. this unit of analysis provides a context-speci c view into the workings of alternative process designs. and the paper closes with a set of conclusions and some possible directions for continued research. These approaches can be found in standard nance textbooks (e. internal rate of return (IRR). In the next section. 2 IT Valuation The predominant approaches to the valuation of IT can be classi ed in four major categories: 1) nancial. quantitative nature: many important costs and bene ts associated with IT 2 2. and also include the time-based measures employed in the practice of industrial engineering 3].Method Financial \ \ Functional \ Strategic \ Subjective \ \ Strengths Quantify tangible costs and bene ts Precise. These approaches have the advantage of precision supported by quantitative measures.

Such measures directly address IS costs associated with software engineering (SE). cases like the computerized airline reservation systems 21] suggest that IT-enabled competitive advantages may not be sustainable. training. intangible. For example. A number of publications have addressed IS strategy and strategic information systems 19.imposed as key determinants of IT value. in which powerful symbolic representational techniques are employed to obviate this problem. 35. 18]. 49]. certainly when the IS a ords a company the opportunity to dominate a competitive arena.g. p. Examples include using the competitive forces model 35] to change the nature of competition for a rm (e. Examples include function point analysis 2. in which the objective was to estimate the complexity of an IS early in the systems development life cycle (SDLC). by raising IT-enabled barriers to entry).S. through product di erentiation. strategic IS are described in terms of a unique class of importance 49.. or the theory of strategic thrusts 49] to outline IT-based means for achieving competitive advantage (e. and usage are left unaddressed. these functional measures focus only upon software engineering. and the fundamental economics of cost vs. the McCabe Measure of IS complexity. which represents a systematic approach to estimating source lines of code (SLOC).2 Functional Measures Functional measures were developed in the context of information systems analysis and design. many of which have been proposed in the trade literature. they do not address the important dimension of bene ts. hence. 8]. the chief information o cer (CIO) of a major U. 3 2. Once a competitive advantage has been mitigated. and COCOMO 4]. they ignore costs for hardware. 23. A number of consultants begin with the assumption that an IS is indispensable (and. innovation. bene t and risk vs.3 Strategic Measures 2. the latter of which entail IS used to shape or enable a rm's business strategy. return are re. or competitive alliance).investments are qualitative. hence. However.g. strategic IS lose some of their special status and importance. or is required for a rm's survival. must be developed). which entails the use of a multivariate statistical model to estimate SE costs. The key argument is that the precise costs and bene ts of strategic IS are relatively unimportant. and the potentially huge costs associated with implementation.. 2. 28. and di cult or impossible to measure quantitatively. this represents a fundamental limitation of methods in this class. 48.4 Subjective Measures . Although these measures address SE costs. hence. This Subjective Measures category represents something of a "catchall" for techniques not addressed in the categories above. Moreover. corporation adduced 12. Such limitation is very well recognized in the eld of arti cial intelligence (AI) 36].

35] "When IT is seen as part of the process of making organizations leaner and more responsive to the marketplace.1 Virtual ." "responsiveness. workgroup).. without actually introducing the IT into the processes of an ongoing organizational concern (e. From the weaknesses identi ed in Table 1.." "value added. improved quality. corporation. the concept of virtual IT valuation represents computer-supported representations. and 3) measurement. However. 4) IT-related bene ts as well as costs. 20]. and visualizations of the e ects produced by IT in the organizational context (e. 2) process. and has been developed to help overcome the limitations inherent in the approaches summarized above. coordination. 5) organizational costs above software engineering. decreased cost. 3) intangibles. shorter cycle time).g. and commitment/transaction processing su cient to enable buyers and sellers to conduct commerce. The term virtual is commonly used to describe phenomena or e ects that exist or occur in or through the computer. the concept of the virtual organization 18. the issue of placing a dollar value on systems starts to become irrelevant. and processing su cient to enable an "organization" of workers to function. and 7) a measurement procedure. store. although the economic transactions may be indistinguishable from those of other market modes. Our discussion of VPM follows each of the three elements in the term: 1) virtual. simulations. an IT consultant suggests that "managing risk" represents the key to e ective IT investment. 2) qualitative concepts. without meeting personally or requiring a physical marketplace (e.g.. department. stock exchange). 6) fundamental economics. in a manner that captures the contribution from investment in IT? Virtual process measurement provides an approach to measuring some of these concepts. although its output could be indistinguishable from that of its corporeal counterpart. we propose that VPM should minimally address seven measurement issues: 1) non-"dollarized" variables." "risk. Hence the objective is to augment the portfolio of capabilities supported at present with a methodology that addresses the weaknesses inherent therein. We shall see that VPM addresses a number of issues beyond this minimal set." In a related example. Additionally. rm. thus the "marketplace" exists virtually. market. a critical question remains without answer: How does one measure aspects such as "leanness. 41] represents computer-supported communication." and other qualitative concepts. communication. For example.g. p. 3 Virtual Process Measurement It is important to note that virtual process measurement has been developed as a complement to the ensemble of measurement approaches currently available.g. with its emphasis on value added 11. 67. thus the "organization" exists virtually. without the necessity of collocation or even belonging to a common organizational entity (e. the concept of the virtual marketplace 30] represents computer-supported information. In our present context.p. Similarly. much has been written regarding the necessity of valuation within the rubric of Total Quality Management (TQM).. 4 3.

the representation can be validated against its real-world counterpart by ensuring that the number of organizational agents. measurement error). Moreover. The key to virtual IT valuation is consistency between the behavior of a computer-based process representation and its ongoing organizational counterpart in the eld. task assignments. because of the time compression enabled by simulation 40]. thus the "IT valuation" is assessed virtually. 5 3. simulation can be employed to validate the dynamic behavior of the represented process{for example. Additionally. the value of IT is assessed by measuring the impact of a proposed investment in IT on the a ected organizational processes. much shorter than the cycle time required for the process in the eld). process operations can be replicated again and again via computer.2 Process . Representational validation is central to AI. the operations of an ongoing organization do not need to be interrupted while the IT-valuation e ort is being conducted. the number and types of agents required to perform these tasks. For example. the experimenter can selectively modify one variable at a time. as a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer. their roles. The process represents a key element of VPM. Together these advantages enable IT valuation imbued with high internal validity (through experimental controls) while simultaneously preserving the external validity of the represented process. With this approach. tools. visualization can be employed to provide process experts with the means to witness the mechanics of represented processes. and with su cient delity to make detailed comparisons with observable process mechanics in the eld... Finally. work environment.government agency." Viewing a process systems-theoretically 44]. Additionally.e. and like attributes are consistent between the real process and its virtual counterpart. without the requirement to physically implement or pilot the process changes in the eld organization. time sequence. a very large number of alternative process designs can be observed and evaluated in a relatively short period of time (i. related to replication. whereas each "live" process instance is unique in some regard (e. military unit). Further. A number of advantages accrue from virtual IT valuation. experimental controls can be imposed upon the study of a virtual process: through computer support. exogenous factors. through which a number of e ective techniques have been developed. Further. a wide diversity of (good and bad) processes can be examined virtually. as well as variables in any combination. p. to ensure that the time required for agents to perform tasks. . The term process has been de ned 18.g. 35] ". although the measurements used for assessment could be indistinguishable from those obtained from ongoing organizations in the eld. No existing valuation approach o ers such important advantages. coordinative structures. it can also be described in terms of inputs. to observe and measure the e ects on performance of the represented organization. Finally. given the set of organizational constraints corresponding to the process in the eld. and like attributes match. For example logic can be employed to verify that the represented process is internally consistent and possible. the throughput and quality of products/services through the process. .

. and Value Chain fraction. Additionally. graph theory provides a powerful set of mathematics to support systematic analysis and reliable measurement of organizational processes. because very detailed process models can be represented through attributed directed graphs (A. but it also represents a step toward reengineering the process of reengineering itself. IT-processing/communication density.based processes/communications. and improvement..delity computer representation 13]. Further. in addition to a number of derived metrics such as parallelism. for. embedding the A-digraph process representation within a knowledge-based system (KBS) enables measurements and analyses to be performed automatically. p. many important qualitative and intangible concepts associated with modeled processes can be represented symbolically. p. Using the A-digraph for process representation a ords several key advantages. de ned with rigor 33]. not only does this support the VPM methodology. and compared with other (even cross. a boundary. and mission or goal. organization. This facilitates a number of representational economies. dynamic.g. and tools come together to add value. but it can also be used to capture the rich organizational details associated with the process task environment. breadth. to support the use of ratio scales in our measurement methodology. and analyzed through qualitative simulation 47]. Static attributes include direct measures such as length. organizational hando s.g. the A-digraph constitutes the fundamental data structure employed in support of VPM.g. tasks.. and measurements to be obtained with su cient precision. These measures have the advantage of being domain independent.digraphs). and others. in that any process can be described in terms of such metrics. and "families" of reusable process models can be organized through object-oriented meta-models 31]. organizational activities/tasks). 37]. Additionally. the systems-process scheme supports high. Processes are necessarily cross-functional 17] and dynamic 5. the process represents the central unit of analysis for business process reengineering (BPR) 15]. The direct or fundamental measures have been developed through the procedure of extension 37]. Additionally.3 Measurement . so they provide a rich representation of organizational operations. this enables measures to be de ned with su cient rigor. for which IT represents a key enabling technology 5. 6]. among many others. Process measures can be conveniently classi ed according to three categories: static. Ratio scales are very desirable in terms of their information content and inferential power. that is.industry) processes. transfer function. bushiness. First.outputs. not only can it be used to link process inputs and outputs through value creation. Similarly. and when the various agents. for nearly every organizational process can be represented via this systems scheme. with which kinds of tools and communication modes) this work is accomplished. not only do they describe who (e. but are generally quite di cult to obtain in the social sciences 29]. IT. but also how (e.al agent/role) does what (e. dynamic attributes can be de ned and measured directly through computer 6 3.

additionally. which represents a key element of order ful llment for many companies. and other dynamic constructs can be simulated and measured at any level of detail in a represented process. improvement attributes such as process adaptability. risk mitigation). quality. throughput. training. For example. Table 2 provides a summary of the weaknesses identi ed above for current valuation methods. deemed to be important in today's competitive environment 42]. Di erences are attributed to the IT investments. One use of improvement attributes would be to represent the time-based derivatives of their dynamic counterparts (e. the cost. which serves to highlight the close coupling of IT valuation and 7 . in terms of static.simulation. 36-39] in a reengineering context.. which can include.delity model of a real process in the eld is measured with respect to any number of modi ed processes that re ect implementation of various IT investments under consideration.. This methodology approaches the task of IT valuation through comparison: the performance of a validated. and IT value is assessed on the basis of organizational process performance.delity model of the organization and its processes. Provided that the structure and behavior of an organizational process model is consistent with that of the represented process in the eld (consistency which is ensured through model validation). for example.g. the speci c incorporation of an IT investment under consideration. 100 50] can be used to capture an important dimension of organizational learning 9]. simulation. and repairability provide the opportunity to represent an organization's potential for improvement. corporation.g. cycle time. cycle time improvement. exibility. which can be used for reengineering.S. Quantum improvement measures have been employed to gage the degree to which a reengineering proposal is "radical" 18] (e. high.valuation methods. and improvement attributes that are domain-independent. 3. To summarize. a similar case is discussed in 18. As such. Such measurements support performance comparisons between alternative process designs. and play a key role in the VPM methodology developed and employed to date. and which can be measured with rigor and precision. This approach not only extends our capabilities for valuing IT. cost reduction. and visualization of organizational processes. process documentation. but the static and dynamic measures are relatively well-established.4 Summary 4 Measurement Example This example is taken from the order ful llment process of a major U. and a number of other purposes. pp. dynamic. Work on improvement measures is just beginning. the approach of virtual process measurement includes a methodology for the representation. VPM can be employed to e ectively address the de ciencies identi ed above for current IT. but it provides a rich. A number of improvement attributes are being developed for incorporation into VPM. VPM can be used to complement other available IT-valuation methods. and the manner in which VPM addresses their limitations. and focuses upon the speci c sub-process of credit approval. high.

notice the isolated presence and usage of IT in each department. not just software Costs and bene ts can be measured Elements of risk and return can be assessed VPM output can support analysis by other valuation methods VPM obtains measurements from process models Process models are validated against processes in the eld Process measurements are calibrated against eld processes Table 2: Issues Addressed through VPM reengineering. work within each department must be approved by the department manager before being sent to the subsequent department for processing.Issue Non-"dollarized" variables Qualitative concepts \ Intangibles \ \ IT-related bene ts \ Costs above software \ Fundamental economics \ \ Measurement procedure \ \ VPM Approach Model variables not limited to dollars Symbolic modeling supports qualitative concepts Qualitative simulation projects behavior of qualitative characteristics Qualitative variables can represent intangible costs and bene ts AI techniques enable inference regarding intangibles Detailed process models can be visualized for intangible aspects Multidimensional performance bene ts are projected through simulation Bene ts like process simplicity and improvement can be assessed Process models address agents. payment calculation.cess is comprised of ve tasks.precedence edges. Attached to this digraph (but not shown) are a number 8 4. who then carries the information to the Credit Department. From the rich pictures representation. agents from each department perform the credit check. Practices. In this baseline case. not to discuss an exemplar of "radical" reengineering. tools and communications related to process performance. terms development. notice also that a third party is contracted for delivery.1 The Credit Approval Process 4. and Quote. the relevant customer and sale information is written-down by a contact person in the credit organization. tasks. this model captures the "command and control" behavior exhibited in many organizations. organizations. the purpose of this example is to explicate VPM. Four primary departments participate in the credit approval process: Credit. which are represented as process-activity nodes connected by task. The rst step required for virtual process measurement is to represent a process via A-digraph.2 Representation . However. and note that all communication is accomplished via telephone and paper. Pricing. A eld sales representative with a new-customer lead contacts the credit approval organization by telephone to request a credit proposal for the potential customer. Figure 1 presents a rich pictures 6] view of the baseline credit approval process. This schema indicates that the baseline level-1 pro. and proposal preparation activities serially. A level-1 schema is presented in Figure 2.

Pricing Dept. Practices Dept. Figure 1: Rich Pictures Representation .Baseline 9 .Field Sales Credit Dept. Contact Delivery Quote Dept.

role (agent specialty or job description). In Figure 3.ciated with this process. and also provide the basis for a set of derived measures. and quality checks are performed dynamically during simulation. Elements of quality are determined during the modeling process.3. First.00 indicates that the process is entirely sequential. some of which are listed in Table 4. including the organization (credit approval in this case). and Value Chain. the parallelism measurement of 1. The derived measurements provide additional static information. processing mode (tools used for accomplishing work). this task chain must be repeated until quality meets the modeled threshold.1 Measurements 4. we present the sequence of level-2 activities for the quote task from above. Notice the feedback loop which captures an aspect of output quality: unless the quoteletter re ects acceptable quality. 10 4. These direct measurements provide some summary information regarding the baseline process. communication mode (method of communication). Table 3 presents descriptions of some static measures that can be applied to the baseline credit approval process. and are useful to generate process redesign heuristics.3 Measurements and Redesign .Figure 2: Articulator Representation . along with the direct measurements that were obtained from the level-2 process schemata. a selection of process measurements and heuristics generated for the baseline process is presented in Table 5 and discussed below.Baseline Level-1 of relevant attributes asso.

29 0.13 36 Table 4: Static Process Measures (Derived) 11 .Baseline Level-2 Measure Steps Length Leaves Levels Breadth Hando s IT Activities (IT-A) IT Communications (IT-C) Value Chains (VCs) Calculation Base Total number of nodes 24 Nodes in longest path 24 Number of atomic activities 18 Levels of decomposition 2 Distinct paths 1 Organizational traverses 6 Processing steps supported by IT 7 Communications supported by IT 0 Value Chain traverses 3 Table 3: Static Process Measures (Direct) Measure Parallelism Bushiness Hando Fraction IT-A Fraction IT-C Fraction VC Fraction Footprint Calculation Steps divided by length Breadth divided by length Hando s normalized by steps IT-A normalized by steps IT-C normalized by steps VCs normalized by steps Levels multiplied by leaves Base 1.25 0.Figure 3: Articulator Representation .04 0.00 0.00 0.

Practices.25 Case manager/team or empowerment IT-A Fraction 0. Electronic communication also enables forward integration of the delivery task.surement of 0. Third. p. some empowerment is introduced so that work can ow between departments without managerial approval. and enable work to ow electronically through the four departments. as electronic communication obviates the need for a third party. the values for IT-A fraction and IT-C fraction indicate that the IT density of the process is relatively low.00 IT tools to support communication VC Fraction 0. We refer to this alternative as "Redesign-1. we hypothesized that three of the level. so the tasks assigned to specialists in Credit. this suggests the possibility of employing a case manager 18. Further. For our rst process redesign alternative.25 indicates that the process is highly-departmentalized.1 activities could be performed in parallel. Second. this suggests that the one or more process activities and communications may be better accomplished with IT support. as three separate Value Chains are involved in this relatively small process. as opposed to serially.3. by making an additional investment in IT-supported pro. and Pricing are conducted concurrently. Figure 4 illustrates the rich pictures representation of Redesign-2 for comparison with the baseline. p. this suggests the possibility of recon guring the work ow so that one or more of these steps are processed in parallel. 4. heuristically. the hando fraction mea. or empowerment can also be instituted to decentralize and accelerate decision making 43]. this suggests that forward or backward integration may be used to eliminate one or more Value Chain interfaces." we extended the process design from above. 36] or case team 5. provided that it meets quality requirements. This enables the eld sales representative to contact the credit organization electronically. heuristically.00 Parallel processing of tasks Hando Fraction 0.29 IT tools to support tasks IT-C Fraction 0. an IT investment is made to couple the separate IT systems through an integrated database.Measure Value Redesign Heuristic Parallelism 1. this re ects a process redesign that does not require changes to the organization chart. 97] approach." For our second process redesign alternative. Finally.2 Redesign 12 . heuristically.cessing and communication in the eld. and Figure 5 serves to delineate the redesigned (level-1) work ow con guration. notice that the process design is now visibly shorter.13 Forward or backward integration Table 5: Measurement-Based Redesign Heuristics heuristically. which we refer to as "Redesign-2. as well as view the status of proposal requests as they move through the process. Additionally. the measured Value Chain fraction indicates considerable complexity in the Value Stream.

Pricing Dept.Field Sales Credit Dept. Practices Dept.Baseline 13 . Figure 4: Rich Pictures Representation . Integrated Database Quote Dept.

they provide for useful comparisons and interesting results. Redesign-2 also re ects the forward integration of a Value Chain. However.. forward integration. token resource units were projected through the modeled process to measure various performance categories.e. Table 6 provides a comparison of some key static measurements obtained from the three process designs.4 IT Valuation . Notice that both redesigned processes re ect greater parallelism. parallelism. Qualitative simulation is powerful.Figure 5: Articulator Representation . other. Table 7 provides a comparison of some key dynamic measurements obtained from the three process designs. 14 4. process size. and involve fewer steps (i. Results such as these (e. IT den. although ordinal relations are not as powerful as their ratio counterparts 37].g. The reader can see that both redesigned processes are smaller.tions.Redesign-2 Level-1 To determine the value of these IT investments. and it can be conducted at a very early stage of process understanding and redesign. throughput. cycle time. including cost.sity) re ect some of the intangible bene ts deriving from the IT investments.. and have much higher IT densities in terms of both activities and communica. more tangible bene ts like dynamic performance improvements were projected and measured through simulation. simpler). unlike the ratio scales supported by the static measures above. In the qualitative simulations. simplicity. shorter. because it supports dynamic process measurement with minimal information. qualitative simulations used to obtain these dynamic measurements support only ordinal relations between process design alternatives. we need to compare the process before IT implementation with its post-redesign counterparts. and risk.

this tradeo represents the known economic phenomenon of labor-capital substitution 7]. cycle time. but the IT investments assessed in this section should su ce to convey the use and utility of VPM. even though they contributed toward substantial improvements in cost.Measure Baseline Redesign-1 Redesign-2 Steps 24 18 17 Length 24 14 13 Footprint 36 24 22 Breadth 1 3 3 Value Chains 3 3 2 Parallelism 1. than those conducted through electronic media.delity process models supporting VPM.00 0.59 Table 6: Comparative Static Measures Measure Baseline Redesign-1 Redesign-2 Agent Cost 18 12 11 IT Cost 9 21 25 Overhead Cost 27 6 5 Supplier Cost 1 1 0 Cycle Time 27 17 15 Communications Risk 19 17 5 Throughput 9 15 17 Table 7: Comparative Dynamic Measures One interesting result can be seen regarding the tradeo between the costs of agents ("Agent Cost") and those associated with investments in IT ("IT Cost").00 1. Table 8 summarizes a few quantum improvement measurements obtained from these examples. along with its potential to complement extant IT-valuation methods.29 1.ect the shorter cycle times and higher throughput rates of the redesigned processes. Notice that the hybrid of electronic communications and telephone/paper-based systems in Redesign-1 barely a ected communications risk.31 IT-A Fraction 0. and paperbased disseminations are harder to keep current. shorter process cycle times decrease period costs per cycle. this result is consistent with measurements obtained through most accounting systems in practice. results. the "Redesign 2M" column re ects marginal improvements over Redesign-1.44 0. and higher throughput rates increase the volume of output used for allocation. and output. Also.29 0. simulation of this riskreturn relationship indicates another aspect of the IT-valuation problem that is di cult to explore through existing valuation methods. di erences in (allocated) overhead cost re. 15 .88 IT-C Fraction 0. and comparisons would be required to use VPM for IT valuation in practice. Another interesting result pertains to communications risk. This measure captures the management heuristics that telephone communications are more error-prone. Many additional measures.72 0. and its simulation signi es the kind of high.

6 Acknowledgements I wish to thank Dr. KBS. Basic research into issues such as the representation. to extend static and dynamic measures to capture domain-speci c factors. This satis es the primary objective of the present research e ort. Second. For example. or other support tools precludes the modeling and simulation of competitive arenas. the measures and examples from above have an apparent internal focus. we were able to see how IT valuation and VPM are closely coupled with reengineering.al ontology. multidimensional value of IT across the various designs. ICIS '94 Program Co-chair and the reviewers for their helpful comments on an earlier draft of this paper. nothing associated with the VPM methodology. First. using VPM. This measurement-based approach to redesign has the potential to introduce a considerable amount of engineering into the process of "re. units of analysis. as they are oriented primarily toward e ciency as opposed to e ectiveness. our static measurements were employed to conceive of the IT investments and redesign alternatives examined above. which could be employed to measure and assess the e ects of alternative IT investments and strategies. we were able to analyze and compare a number of alternative process designs. We were able to assess the relative. say in terms of a process-transformation model. for example. in a manner that overcame the limitations of current valuation methods. and epistemology associated with such use of VPM is only now being contemplated. and to validate that virtual process measures are consistent with measures obtained directly from ongoing processes in the eld.based engineering methodology in practice will be indispensable. a number of conclusions can be drawn." Additional research can be conducted to develop a theoretical framework for process redesign. but the use and evaluation of this knowledge. continued research will be required to determine the relative e cacy of various measurement constructs. Research oriented toward the automation of the redesign process is already underway in the laboratory. Finally. each re ecting a di erent level of investment in IT. and the examples above.Measure Baseline Redesign-1 Redesign-2 Total Cost 27 % 25 % -3% Cycle Time 37 % 44 % 12 % Communications Risk 11 % 74 % 88% Table 8: Quantum Improvement Measures 5 Conclusions Through our discussion of virtual process measurement. to de ne and test improvement metrics. Malcolm Munro.engineering. and to acknowledge the guidance and 16 . and several opportunities for future research emerge. These questions suggest a number of opportunities for continued research along the lines discussed in this paper. However. however. and to test such a model in both laboratory and eld environments.

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