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AFM 241 SE Notes Chapter 1: Business Value of IT

IT spending overview
$3.8billion worldwide spending
Will continue to grow
Higher sales, lower costs
IT investments should have high NPV
Risks of IT spending
However, it is easy to quantify IT costs, not IT benefits
Managers do not also nullify potential IT risks that could destroy benefits
1.1 Introduction
IT is everywhere basically
Information Technology: Development, maintenance, use of computer systems, software
and networks for processing and distribution of data
Information Systems: Technical component and human activities within an organization.
Describes process of managing life cycle of organizational practices with IT
Businesses use IT to capture and manipulate data to support firm business process and
IT will help mitigate risk for business decisions
1.2 IT Spending - Trends & Patterns
Distinction between Operational IT spending and capital expenditures (investments in new
Operational spending: expenses to maintain current IT
Capex: New IT projects that have potential to transform way of business functions and
Increasing spending over time
No requirement to report regulatory data
Interesting IT Patterns
Average IT spending across industries has been 3%
Highest spending
Banking and Financial Services
Media and entertainment
Consulting and business services

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Lowest industries
Metals and natural resources
Construction and Engineering
IT spending in IT industry relatively high, not as high as others though
Dot com boom and other years spending was very high

1.3 Emerging Technologies

North American firms spend $50-$90mill a year on IT
Hot spending topics over the last few years
Business analytics
Big Data
internet of Things (IoT)
Cloud Computing
Web 2.0
GPS enabled web appcs
Business/Data Analytics: Use of large sets of data and statistical analysis to identify most
profitable customers, select price price, design best supply change or identify best person to
Need data for this to work lol
Internally Point of Sales (POS) transactions, accounting department data
Web 2.0: Social networking applications, wikis and blogs
Enable company to integrate various aspects of business
GPS Enabled Location Aware Web Apps: Leverage GPS technology to locate users and
suggest discounts or special offers
Radio frequency identification: Allows you to cross toll booths without having to stop
Internet of Things: Integrating data that everyday objects generate with data from other
Greatly increases logistics
Energy savings
Physical security, safety, privacy
Surveillance of homes and buildings

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Big Data: Data generated by users in social media (Web 2.0) and smart objects in IoT
Creates problem regarding cost of storing data
Cloud computing can create this solution

Cloud Computing: Delivery of IT computing as service rather than product

Subscription based pay per user
Three forms
Infrastructure as Service
Provide IT infrastructure as service
Client has control over operating system applications and networks not the
infrastructure part though
Some companies have so much data they need this kind of service
Platform as a service
Vendors provide clients with platform (IT infrastructure and operating system or
Unlike first one, clients do not manage or control underlying networks
Clients have control over the deployed application
Software as Service
Provide clients with applications running on cloud infrastructure
Clients can change certain configurations in the application but nothing else
1.4 Technological Adoption
1.4.1 innovation Adoption Life Cycle
Bell shaped distribution
Gains of early adopters force non-adopters to follow in order to eliminate their competitive

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Innovators: First people to adopt emerging technology

High risk, uncertainty not yet sure if benefits are clear
Left of X - 2 standard deviations
Early Adopters: Adopters when technology s not in experimental stage anymore
Pivotal role for triggering mass adoption
Failure of early adopters = end of new technology
Between X - 2(SD) and X - 1(SD)
Early Majority: Adopters who join when most of the tech risks have been mitigated and benefits
of adoption are still relatively high
Between X - 1(SD) and X
Late Majority: Adopters who adopt technology because of strong peer pressure
Business realizes that they have a competitive disadvantage and are peer pressured into
Investment in new tech is necessity
Between X and X + 1(SD)
Laggards: People who dont even adopt
May be hostile or conservative to new tech
Right of X + 1(SD)
1.4.2 Technology Life Cycle ( The Gartner Hype Cycle)

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Gartner Hype Cycle: Graphic representation of the maturity, adoption and business application
of specific technologies
Illustrates over enthusiasm or hype
of new product and subsequent
disappointment that happens with
new tech
Only when new tech moves beyond
the hype will it offer practical benefits
and be accepted
5 Stages
1. Innovation Trigger: Technological
breakthrough or proof of concept
2. Peak of Inflated Expectations:
Unrealistic expectations where

some companies invest in new tech

3. Trough of Disillusionment: First generation adopters fail to extract value since not
calibrated yet, most exit, > 5% remain (these are innovators)
4. Slope of Enlightenment: More benefits and ways of technology use emerge, new
generation of adopters (early adopters)

5. Plateau of Productivity: Mainstream adoption takes off because of early adopter success
(early majority adopters start here)
Not actually based on hard evidence or scientific fact, just Gartners own analysis

1.4.3 A Methodology to Predict Adoption Time

We can estimate adoption time by using
Google trends
Hype cycle framework
Following Propositions below

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Proposition 1a: Time from introduction of new tech until end of peak of inflated expectations
reflects approximately one standard deviation
Proposition 1b: Period from introduction of new technology to late stages of slope of
enlightenment reflects period of approximately two standard deviations
Innovators and early adopters likely to adopt new technology up to the late stages of slope of

Proposition 2: Two rather than 1 standard deviations in the adoption cycle

Adoption rate is likely to change due to several technological and economic factors
Speed and thus slope of adoption curve is influenced by variety of things
Higher perceived advantages = higher adoption
Level of complexity
Google trends search interests is equivocal to the expected value of emerging trends
Why is this useful? Stratopoulos argues that
Generating adoption time predictions could be useful to financial mangers trying to
estimate NPV
Could gauge market reaction to firm decision to adopt new tech
1.4.4 IT Adoption Ethical Issues
Spying on privacy is bad
Walmart got wrecked for using their Radio frequency identification trackers
1.5 Justifying IT Spending
1.5.1 IT Business Value Proposition
Simplest way is to look at its expected effect on firm profitability
Task automation
Payroll task automation
Revenue optimization
Below is the beautiful hypothesis
Inventory management system to always have items in stock

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1.5.2 IT Business Value Manifestations

Measure pay off of IT with the three general
Capital Budgeting: IT spending means that firms makes an IT investment because it
expects either to raise revenues or reduce costs
Project should generate positive NPV
Financial Performance: IT spending that decreases costs or increases sales means
higher profitability
Market Valuation: Great financial performance and NPV investments make firm stock
higher priced
More attractive to investors

1.6 Payoffs from IT Spending Part 1

IT Productivity Paradox: Seemingly obvious relation between investment in IT and productivity
Straussman wrecks IT spending
In his study, he finds no correlation between IT sending and profitability
The relationship between corporate profitability and computer spending has not changed
in more than 20 years. It is unlikely that any direct relationship between computerization
and profitability will appear in the future

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AFM 241 IT Chapter 2
Gauge firm performance (absolute vs relative performance)
Business modes
Industry structure view
Resource based view
Value chain
Porters 5 forces
Financial performance measures related to market structure and business strategy
Sustained vs temporary competitive advantage
Sustained = a competitive advantage that resists a competitors attempts to copy it
Temporary = can be copied by competitors

Business Strategies: Specific actions that firms take to neutralize threats or exploit
advantages by leveraging their resources in order to gain a competitive advantage within a
specific market or industry
Corporate strategies: Trying to gain an advantage across several markets or industries
Focus this chapter is business strategies
Relative firm performance: Firms performance in regards to its competitors
Zero economic profits
Positive economic profits
Most people use accounting profits instead
Doesnt account for risk
Only measures past performance
Divided into three groups
Asset, inventory turnover
COGS, Opex ratios
RoA, RoE
Business Models
Management decides via the business model

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Mechanisms and manner in which value is captured

Which technologies and features to be embedded in its products and services
Way in which technologies are to be assembled and integrated
Identity of market segments to be targeted
How revenue and cost structure of a business is to be designed if necessary redesigned
to meet customer needs

Porters Five Forces

Used to perform industry analysis and business strategy development
These five forces determine the attractiveness and competitiveness of a market
Threat of new entry
i.e. economies of scale, demand side benefits of scale (a business needs masses in a
certain market to be profitable thus reducing likelihood of new entry), customer
switching costs, capital costs, patented technologies, access to distribution channels,
government policies and laws
Rivalry among existing competitors
Intensity of rivals, no growth in market (firms will be forced to take shares from other
firms), No option of exit therefore its a do or die mentality, commitment of existing
firms to their line of business
Bargaining power of buyers
# of buyers, nature of product, backward integration (if firm can credibly argue that
theyll make their own supplies then they have more power), importance of product to
Bargaining power of suppliers
# of supplies, nature of suppliers product, ability to forward integrate (if supplier
decides to make the whole product the buyer is trying to make), percentage of
supplier sales coming from one industry
Substitute products
Attractiveness refers to profitability

How can firms neutralize competitors?

Via product imitation
Obtaining new customers or market segments
Porters five forces is too external markets focused

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No internal focus as what happens internally in a firm such as crazy new R&D has a
profound impact on the market as well
Resources and Capabilities
Value Chain: Chain of technology and economically distinct activities that a firm performs in
order to do business in a specific industry
Primary Activities: activities involved in the physical creation of product, its marketing,
delivery to buyers, support and servicing after the sale
Support Activities: Activities that provide the inputs and infrastructure in order for the primary
activity to take place
Human resources, firm infrastructure, IT, R&D, procurement, accounting, etc
Firms that are able to coordinate across all organizational lines and value chains

Resource Based View: Firms possess different resources and capabilities

Rarity of resource of capability in firms determines its level of advantage

Barriers of imitation
Casual Ambiguity: Reflects to the extent in which relationships between inputs and outputs
is understood
If source of firms competitive advantage is not easily understood then it is hard to
Path dependence
Early choices one takes in order to do things
Historical advantages
Firms that take a certain resource while it is still historically advantageous for them to
do so
Expensive to replicate
Porters Generic Business Strategies
Cost Leadership
Gain a competitive advantage by reducing its cost below that of competitors
i.e. Wal mart, Southwest airlines, Hyundai
Does this by
Specialized equipment only feasible via economies of scale
Building larger more efficient facilities and factories
Using specialized employees

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Spread overhead cost in a higher number of units and products sold
Can ward off competitors via
Lower priced products to deter threat of new entrants
Afford to enter price war to defend against rivals
Price products competitively to eliminate threat of subsets
They can absorb high cost of inputs
Product Differentiation
Will try to increase the perceived value of its product or service relative to competitors
Will leverage leading cutting edge R&D and superior customer service
Can charge a premium for its price, generates brand loyalty
i.e. Apple, Rolls Royce, Louis Vuitton, etc
Ways to differentiate include
Changing properties or features of product or service
Linkages between functions within the firm that provide a unique advantage to a firm
Introducing the product at the right time
Physical location of firms (i.e. vacation spots)
Mix of products and services

Product differentiators will generally enjoy higher gross or operating or profit margins
Cost leadership firms will focus on operating efficiency and asset turnover etc

Appendix 2A

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AFM 241 SE Notes Chapter 3

Ralph Lauren is really good at using IT to solve innovative problems
3.1 Introduction
IT investments constitute most firms largest capital spending item
Management sometimes thinks its beneficial and sometimes not
Typical pessimist argument is that IT investments are easily replicated therefore not a
source of competitive advantage
Factors that drive senior managements inclination to IT include
Prior experience with IT
Personal preference
Chapter 3 will review some factors driving IT strategy and views regarding IT
McFarlans strategic grid as well
3.2 Factors Driving IT Strategy
IT strategy = shared vision among firms top management team (TMT)
Hobbies and past experiences shape how an executive views and deals with business related
Other factors include
Can IT change competition?
Can IT build barriers to entry?
Can IT change balance of power in supplier relationships?
Can IT generate new products?

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3.2.1 IT and Basis of Competition
As mentioned, two types of firms, cost leaders, product differentiators and focused firms
IT can help both differentiate products and stay a cost leader
IT can help shift a company away from cost leadership to product differentiation as well and
vice versa
Google Apps vs Microsoft Office 365

3.2.2 IT and Barriers of Entry

IT can influence barriers to entry in these ways
1. Economies of Scale
Large retailers incurred high fixed costs and increased their economies of scale making it
harder for small retailers to enter businesses
2. Network Effects
Buyers willingness to buy a firms product increase with number of buyers who buy firms
IT can generate network related effects such as BBM , Facebook, Skype, Nike+ apps
3. Customer Switching Costs
Fixed costs that buyers face if they decide to switch to another product r service
Buying new Apple gadgets
Human Capital
Learning new software
Human traits
Risk avoidance of new things
Customized IT programs

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4. Capital Requirements
Large IT requirements can increase barriers to entry for small companies
However, cloud computing decreases this barrier
5. Incumbent advantage
Cost or quality advantage due to proprietary or hereditary tech
I.e. encyclopedia Britannica
Got wrecked by wikipedia and crowdsourcing though
6. Access to Distribution Channels
Acts as barrier to entry for new comers since they have to secure new distribution channel
Introduction of e-commerce has made physical market obsolete
7. Government Policy
Bureaucratic contraints, controls and regulations
i.e. Government privacy restrictions for health records or Facebook
3.2.3 IT and Balance of Power
Can use IT to alter balance of power between buyer and supplier
Can use IT to work collaboratively with other businesses to
Reduce safety inventory
Increase forecasting accuracy
Increase sales revenue
i.e. Wal mart partnering with Listerine to make sure enough stock is always stocked
i.e. John Deere tractors have built in wireless support and alert mods in case anything goes
This will increase customer loyalty and decrease wasted resources on fixing parts via
preventative measures
3.2.4 IT and New Products
Lots of new products due to IT
Most notable of products include mass customization
3.2.5 IT and Hyper Competition
IT makes information more transparent and harder for firms to sustain their competitive

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Hyper Competition: Market that is marked by very rapid changes in competition where firms
cannot sustain an advantage
Four causes
IT tech
Customers changing and fragmenting of customer preferences
Falling geographic and industry boundaries
Deep pockets among competitors due to gigantic global alliances
3.3 General Views Regarding Role of IT
Will share most common views senior executives have regarding role of IT in firm
Two types of roles
Functional role of IT
Positional role of IT
3.3.1 Functional Roles of IT
Automation: Replacing human labour by automating business processes
Executives tend to replace expensive and unreliable human labour with IT
Primarily cost reduction and quality improvement view
Execs who adopt this view view IT as an overhead cost that must be managed
Informate Up: IT provides information to higher levels of organization making it easier and more
efficient for senior executives to exercise organizational control and facilitate activities
Executives see IT as means of facilitating access to information regarding firms operations
Provides them with timely information to make more appropriate decisions
Informate Down: IT is used to direct information from top to bottom
Senior executives can focus on systems to provide critical and timely information to front line
managers and employees
These executives see IT as an agent of empowerment and autonomy and more likely to treat
IT as agent of organizational transformation

Transform Senior executive view that IT is a vehicle that fundamentally alters structure and
competitive forces of the industry
Means of changing firms relationships with suppliers & customers, altering products, markets,
organizational structures, boundaries, etc
3.3.2 Firms Disposition Towards IT

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Following classifications for IT adopters
Leader of Follower
Innovative or Conservative
Offensive or defensive
Innovative versus Conservative Players
Key difference is in firm objectives and approach to IT investment
Want to be IT leaders in industry
First in industry to try and capitalize new IT initiatives
More cautious approach with IT investments
Invest in IT only after it has proven to be successful in the industry
Offensive versus Defensive Approach to IT
Relates to firm related IT priorities
Firms that rely on delivering efficient, secure and un interrupted services prefer defensive
Tend to invest in IT to continue firms operations rather than to leverage IT to improve
competitive position
Wants reliable IT but also IT initiatives that can improve firms competitive position
IT initiatives from offensive firms tend to be more ambitious in terms of expected returns
and thus naturally risky due to substantial organizational change
Will adopt offensive stance if they want to attack to gain advantage or position of industry

3.4 McFarlans Strategic Grid

Successful business model aligns organization with environment
McFarlans Strategic Grid; Framework used to guide senior executives who aim to align IT
and business strategy
Two dimensions for evaluation
Impact of IT on business operations
Impact of IT on business strategy

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Support mode/Support Quadrant

IT simply supports employees activities
Very basic types of IT needed such as in a hand craft store
Factory Mode/Factory Quadrant
Plays very important role in firms operations (short term effects) but has relatively low
contribution to firms strategic position
Firms in factory mode need systems that are reliable and efficient
Typically dont have access to the latest software and will use a more reliable older version
i.e. banks, airlines, e-retailers
Aim to reduce costs and improve qualities
Even short disruption of factory IT services will wreck havoc on firm revenue

Turnaround Mode/Quadrant

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Hard to envision
Somewhat like a firm is implementing a new information system but relies on old system to
support firms day to day core operations
System will not be used until carefully tested and fully implemented
Once new system is operational firm will go into factory or strategic mode
Turnaround is characterized by
Substantial investment that can account to more than 50% of firms annual expenditures
Very high expected returns
Implementation risk is very high as these IT investments require substantial change of the
firms business processes
Planning and execution is allocated to senior level executives
Strategic Mode/Quadrant
Firms here allocate a significant portion of CapEx to new IT projects
Very important relationship between CEO and CIO
3.4.5 McFarlans Strategic Grid: Benefits
Numerous benefits which include
1. Provides simple framework that can be used to assess the alignment of individual IT projects
with business operations and strategy
2. Can be used to assess firms overall IT portfolio of all IT initiatives to assess where the firm
is overall
3. Can be used to benchmark firms IT performance with other firms in industry
4. Can be used to develop IT governance (deals with such issues as who should be
responsible for making IT related decisions and how to implement the firms iT strategy)
McFarlands grid stresses two things
We need to understand role that IT plays within firm
IT strategy must align with the companys strategic priorities

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3.5 Alignment of Business and IT Strategy

Operational Effectiveness: Ability to perform same or similar activities with your competitors
but better than them
Invest in new tech to make less defects, etc
Can translate to variations in cost position and level of differentiation
This is short term profit but not long term profitability
Firm can gain competitive advantage but not sustainable since competitors can emulate their
operating effectiveness
Strategic Positioning: Perform different activities from your competitors or perform similar
activities in different ways
Variety Positioning: Firm that can produce particular products/services using distinctive set
of activities
i.e. FedEx has overnight shipping whereas UPS does not
Needs-based Positioning: Firm will target and serve the needs of a specific group of
Firm needs unique set of activities that can meet those needs
Access based positioning: Assumes firm has unique set of activities that can service the
feds of a geographically distinct group of
Using both dimensions, we can create this Porter 1996 grid

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Sustainable Competitive Advantage Quadrants: Dual Focus

Temporary Competitive Advantage Quadrants: Operational Focus
Building/Enjoying Competitive Advantage: Strategic Positioning Focus
Competitive Disadvantage Quadrants: No focus

Operational Focus
Goal of IT here is to increase operational effectiveness
Reduce operating costs, enhance overall effectiveness of operations
Time to Market
Executives view this focus as the ability to gain greater control over internal processes through
IT and thus better respond to environmental uncertainty and emergence of new competitors
Strategic Positioning Focus
Will use IT to create or enhance value proposition to customers
i.e. Try to leverage information systems to better differentiate among different customer

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Can better understand customer needs
Dual Focus Quadrant
Senior business and IT executives will choose goals that align both revenue growth and cost
No Focus Quadrant (For IT operations at least)
For firms that still ave other operational or strategic focuses, firm has made choices that it
does not want to compete in IT and IT is not critical to its operations
Simply chooses to be a follower in terms of IT
However, a firm that has no real focus in operational effectiveness or strategic positioning is a
firm that has no strategy
Will probably not remain viable of long
Business strategy that aligns with IT strategy will achieve superior financial performance and
improve competitive positioning
3.6 Payoffs from IT Spending Part 2
Mere acquisition of asset does not grant competitive advantage
Capability: Firms ability to leverage assets and resources in order to achieve particular
3.6.1 IT Capabilities
Effective Implementation Capability
Significant percentage of IT projects will fail during implementation or meet objectives
Successful project is completed on time and on budget with original features and
functions intact
Challenged project is completed and operational but went over budget or time estimate
and offers fewer features and functions than originally planned (runaway projects as
dubbed by KPMG)
Failed or impaired project is project that at some point cancelled

Projects will succeed based on

User involvement
Executive management support
Clear statement of requirements

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IT project implementation tend to go over budget, take more time to complete and tend to
deliver less than the original planned functionality
IT Infrastructure Capability: Firms portfolio of IT based resources
Tangible resources (physical IT infrastructure)
Human IT resources (technicians and managers)
Intangible IT-enabled resources (knowledge of assets, customer orientation, synergy)
Human IT Capability: Technicians ability to program and managers ability to envision how IT
can contribute to firm value
Organizational IT Capability: (page 166)
IT Capable Firm: Firm that can mobilize and deploy IT based resources (Also possesses IT
Using IT capabilities to measure relative pay offs
No standard to measure IT pay offs
Instead of measuring IT spending and firm performance, measure companies that are
successful users of IT vs companies that have no such recognition
3.6.2 Revisiting Effect of IT Spending Relative Performance
Firms that spend money on IT should be reflected in market valuation
This includes both good and bad valuations
SEC required firms to report IT spending briefly during Y2K
Companies used this opportunity to increase IT spending into full blown enterprise
resource planning systems
These ERPSes could integrate entire organization through a common database as
opposed to the older legacy systems that could not
Shareholder value associated with Y2K spending was in fact many times greater than
spending itself
Based on this logic companies actually underspent during Y2K for IT
Read pg 168 for more details
Small IT budget = limited resources to meet service requests and leverage installed
Too big budget = too much slack and inefficient use of firm assets

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IT budget levels are positively associated with subsequent firm performance and
shareholder returns
3.6.3 Market Reaction to IT Investment Announcements
Firms that invest in operational efficiency IT initiatives have temporary business advantage
Must do this for necessity or competitors will win
IT that exploits functional role of communication (informate up or down) also has temporary
competitive advantage
Firms that leverage transformational IT investments have sustainable competitive advantage
i.e. new tech bypasses certain value chain participants or creates new value space
Very risky however
AFM 241 SE Notes Chapter 4
4.1 Introduction
As mentioned in chapter 3, hyper competition is very real
Success in hyper competition will come in prediction and what customers want in advance via
i.e. more investment in point of sales systems, customer relationship management (CRM)
systems, supply chain management (SCM) systems and social media and media
Big data refers to data that comes in high volume, high velocity, high speed and needs to be
dealt with in timely manner
This + Moneybag movie created interest in business analytics
Growing demand of business Analytics has created these two results
Democratization of BA tools
New BA tech such as scalable data warehouses, faster, deer query has become more
More and more small companies can use BA tools and putting it in front of front-line
decision makers
Increased incidents of firms that face competition fro unanticipated competitors
i.e. competitor uses auto-decision IT to re-stock hot products at lightning speed
Chapter is built into two parts
1. Business analytics from decision maker standpoint and two most popular approach to
business analytics

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2. Best and most celebrated example of firm that has pioneered and integrated business
analytics in its strategy (Harrahs Entertainment)
4.2 Business Analytics
4.2.1 Relationship between Business Analytics and Decision Makers
BA can help on three levels for decision makers
Operational Level
These are front line decision makers
Page 199
Tactical Level
These are managers or departments
Require semistructured and summary reports generated from operational level
Tactial decisions generally related to allocation of firm resources and aim to achieve maximum

Strategic Level
Firms senior executives
Tend to deal with unstructured information
i.e. firm decision to enter new market is based on internal summary reports regarding firm
health and R&D, operational and marketing capabilities
4.2.2 Categories of Business Analytics Pg 200
Classification Proposed by INFORMS (Institute for Operations Research and
Management Science)
Three categories for BA
1. Descriptive
2. Predictive
3. Prescriptive analytics
Descriptive Analytics: Preparation and analysis of historical data to identify patterns and report

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Predictive Analytics: Prediction of future probabilities and trends

Prescriptive Analytics: Using analytics to determine what to do with predictive and descriptive
Evaluating and determining prescriptions for new ways to operate and compete
Also known as decision or normative analytics
Classification Proposed by SAS Institute - Page 203
Two broad classifications
Past activity and support reactive decision making
Standard reports
Ad hoc reports
Online analytical processing
Future prediction that supports
Statistical analysis
Predictive modeling

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4.3 Harrahs Anatomy of a Success Story

4.3.1 Harrahs Introduction
Harrahs was gaming industry company that differentiated by combining innovative IT strategy
4.3.2 Harrahs Story
Read Pg 207-212
4.3.3 Harrahs Payoffs Pg 212
20% improvement in profits per room when using home grown predictive modelling tool
Predicted lifetime yield based on demographics, betting pattern, casino game preference,
and other card holder data
4.3.4 Harrahs Analyzing Practices
Two CIOs John Boushy and Tim Stanley
No IT initiatives are approved until management from both business units involved and IT
organization agree that benefits outweigh costs and that metrics are measurable
To find certain headers
IT Management Pg 213
Practices on IT Projects Pg 214
Focus on Efficiency and Effectiveness Pg 215
Focus on Outsourcing Pg 216
Focus on Investments Pg 216
Focus on Innovation Pg 217

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4.4 Caveat Emptor

Should be careful not to attribute all of Harrahs success to data analytics
One of their most important decisions was field because they relied on data analytics too

AFM 241 SE Notes Chapter 5 Introduction to Database Theory

Overview of Topics
Business Processes
Order to Cash and Purchase to Pay
Data vs Information
Database and database management systems
Relational database
Production versus Decision Support System database and data warehouse
Entity, attribute, occurrence and associations
Associations Among attributes & associations among entities
Primary and Foreign Keys
Normalization and Normal Forms
Data Redundancy
5.1 Introduction
Order to Cash Process: Generating sales and collecting cash from customers
1. Generate and record sales orders
2. Ship content of orders to customers
3. Send invoice for products to customers and record amount to be
4. Receive and record Payments
Purchase to Pay Process: Acquiring products from various vendors and making payments
1. Prepare and record purchase order
2. Received goods and record the receipt of inventory
3. Record invoice from vendor and amount to be paid

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4. Submit and record payment
Capturing data for each stage is key
Minimum data to be collected should include
1. All individuals or organizations involved in each activity i.e.
salespersons, customer name, supplier name
2. All assets that are exchanged as a result of this activity
3. All locations where activity took place
4. Time periods related to compeltino of activity
^ examples on Pg 238
Database Management System: program for capturing, accessing and managing data
Data = facts about people, places, transactions, etc in their rawest form
Information: Data that is refined into something useful i.e. tables, bar graphs, pie charts

5.2 Relational Databases

Different kinds of databases
- Production Database: Used to track data about frequent and
complex transactions
- Decision Support System (DSS) Database: More complicated,
information generating and processing database with management
capabilities as well
o DSS more focused on information generating than data
o Data warehouses: DSS Primary storage facilities dedicated to
processing existing data taken from production databases into
useful information
Updated less frequently than others
Metadata: Data about the data stored in the database
Data dictionary: Place that stores metadata, compilation of data, their names, their
characteristics and facts about nature of relations between different sets of data
Database Management System (DBMS): Program that manages and intertwines all of the
above data and metadata
- Manages metadata in a data dictionary
- Produces complex data storage functions, including enforcing data
input requirements and restrictions
- Creates and enforces a secure environment for the storage of data
- Manages the complex needs of a multi user environment
- Enforces data integrity at all levels of database

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Four different types of database models

1. Hierarchical
2. Network
3. Relational
4. Object-orientated
Relational most prevalent, implemented via a relational database management system
- Data is represented in two dimensional tables (files, relations)
consisting of rows (individual records and transactions) and columns
(attributes and fields)
- Microsoft access, Oracle, Microsoft SQL MySQL

5.3 Database Theory & Terminology

Entity: Something users want to track
i.e. person, concept, event
Attribute: Characteristics or properties of entities
Entity Occurrence (aka record or row): One instance of an entity
Simple or Atomic Attribute: Attribute that can be stated in a single compeonent
i.e. Postal code, area code
Composite Attribute: Attribute that can be divided into more meaningful components
i.e. Employee name divided into first and last name, generally better to use atomic attributes
Single value vs multivalued attributes
- Single valued can only have one value i.e. student number, SIN, date
of birth
- Multi value can have multiple i.e. emails, # of houses owned, etc
5.3.2 Attribute Associations
One association form a set A to set B: If only one item in B can be associated with A
I.e. child (B) can only have one biological mother (A)
Many association from A to B: More than one item from B can be associated with A
I.e. Students (B) can have multiple professors (A)

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Functional Dependency: When there is only one association from A to B therefore A

functionally determines what B is
If B -> C is also functional dependent, A -> C is functionally dependent as well
5.3.3 Identifiers Primary Key
Primary Key: An attribute that can be used to uniquely identify an entity occurrence
Attribute is unique I there are no two records that have or can have the same value for hat
particular attribute
i.e. CID, EID are primary keys in tCustomer and tEmployee respectfully
Combined/Concatenated Primary Key: Primary key that consists of two or more attributes
that combined uniquely identifies
Candidate Keys: Attributes that could be chosen as primary keys but are not
- Each table can only have on primary key
Secondary Key: Records that may not be unique but can still easily identify the needed data
such as employee name

5.3.4 Associations Between Entities (Pg 246)

Relations: Associations between occurrences of different entities
Three types
- One to one (1:1)
- One to many (1:M)
- Many to Many (M:N)
Foreign Key: When tables are linked in a (1:M) relationship, the primary key on the one side is
repeated on the many data side
- It is this repetition of primary keys that links tables, allows us to
retrieve data from multiple tables
One to many
- You can functionally determine from the many to one way but not from
the one to many way
One to One relation
- You can start from either A or B and functionally determine the other
- Sub-class: New table that is linked by a one on one relationship
- We can actually consolidate all the entities in a one on one relationship
into a single table

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o This wil create some null values though
Many to Many relations
- Does not allow us to extend chain of inference from one table to the
- Many to many relationships must be removed from database design or
else it will not work
- Intersection Table: Table that provides a bridge with records that
relate to a pair of occurrences from the original tables
Cardinality: Refers to the maximum and minimum number of occurrences that must be
included in a relation
- Direction of association matters
- Salesperson to Customer cardinality and Customer to Salesperson
cardinality is different
Relations can be classified as (pg 249)
- Optional: When entity on one side of relation can be represented with
corresponding occurrence but not needed to
o i.e. products can be in the order table but dont have to since
some products might never be sold
- Mandatory: Occurrences between both sides of a relation must exist
o An invoice must have a product ID to exist

Weak: An entity whose existence depends on another entity and its

primary key is at least partially derived from the related entitys
primary key
Strong: An entity that is not weak

Recursive Relation: When an entity is related to itself

- Employee ID table where employee is linked to a supervisor who has
another employee ID in the same table
5.3.5 Entity Relationship Diagram (Pg 251)
First step in designing database is to create conceptual blueprint
Entity Relationship Diagram (ERD)/Entity Relationship (E-R) Model: Most commonly
used data model design to provide description of database in visual form
Most common features include
- Rectangle = Entities, always nouns
- Elliptical Shapes = attributes
- Diamonds = relations between entities, always passive or active verbs
o Relations always red from the 1 side to the M side in a 1:M
- Circle = Optional entity relationship

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ERDs are good tool for designing production databases

- Not enough for DSS databases though, we need to use something
called multi dimensional modeling
5.4 Normalization Pg 256
Modification Anomaly: If when we have to modify records, we have to modify multiple
versions of the same record
Ie. If we have multiple records for each degree an employee has, wed have to edit each of these
records every time we want to change anything for him
Insertion Anomaly: Have to insert multiple versions of the same record in to account for a
minor difference
Ie. Adding this super smart employee in who has 4 degrees
Deletion anomaly: Deleting multiple versions of this super smart employee
^ To avoid these, tables need to be normalized
Normalization: Organizing data and tables in a relational database to minimize redundancy and
Partial Dependency: Records that are based on only part of one of those amalgamated primary
Transitive Dependency: Dependency that is not part of the primary key
Data redundancy: Data redundancy exists if the following criteria is met
1. Multiple values of an attribute exist within the tables
2. Multiple values are not necessary in establishing relations between
tables. Therefore, multiple foreign key values do not imply a
redundancy because they are reiuqred to establish relations between
Generally created when the above anomalies are there
5.4.1 Normal Forms (Pg 258)
Normal Form: Rendering a super pro table where data redundancies and anomalies can be
First Normal Form (1NF)
- Lowest implementable, simplest (least desirable though) normal form
- Tables have properly specified primary keys
- Tables are flat, no repeating columns/fields or groups
- Repeating fields must be moved to separate but related table
- Each row and column intersection (cell) must contain only one value
- Each tables attribute is dependent on the primary key

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Second Normal Form (2NF)
- Meets all conditions of 1NF
- No partial dependencies
o Ensure that non-candidate key fields are fully dependent on
value of primary key
Third Normal Form (3NF)
- Meets all conditions of 1NF
- Does not have any transitive dependencies
5.5 Business Value: Accounting/Finance Angle
How do databases help accounting and finance?
- Industry under increasing pressure to report fraud
- Can use data analysis techniques to mine transactional data to
uncover fraud
- Computer-assisted audit techniques (CAATs)
o These CAATS analyze 100% of all transactions instead of
reasonable assurance via sample tests
- Can identify outliers relatively quickly
- These data analytic techniques can be used in a proactive
manner to deter fraud
o Notifying employees when they are doing sketchy shit regularly
will help deter them from doing it again

AFM 241 SE Notes Chapter 6 Enterprise Systems

Enterprise Systems (ES): Company-wide software applications that are designed to support
various business processes, capture the flow of information and facilitate the creation of reports
for monitoring key processes within the firm
- Links all primary and support activities in a firm
- Largest and most expensive IS implementation firm can undertake
o Generally 2-3% of revenues and consulting fees can be 10 that
MindTree is in this chapter (Pg 271)
6.1 Introduction Pg 273
Although firms have many different units, their success depends on how they can integrate
everything together via an ES

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Expected ES benefit generally include

- Reduction in working capital
- Access to more accurate information about suppliers, customers and
- Can leverage this information to reap significant benefits from their
Half of ERPs (Enterprise resource planning system) dont meet half of their projected benefits
Going to look at
- ES Implementation
- Famous ES failures
- Key ES implementation success factors
6.2 ES Implementation Pg 274
6.2.1 Famous ES Implementation Failures
Overstock.coms four year ERP nightmare
- Basically another amazon
- New Oracle ERP system failed to link some of the old accounting
system practices
- This caused overstatement of revenue by $12mill and an increase in
cumulative net loss of $10mill
- Implemented ERP system too fast, (wanted to get it before the holiday
shopping system) customer service and other business functions
couldnt keep up
- This hurt their customer relationships, etc

Hersheys ERP Experience

- New SAP system failures stopped them from delivering $100million
worth of Kisses for Halloween
- Stock dipped 8%
Just Do It Supply Chain ERP System
- Goal to integrate ERP, supply chain and CRM into one super star
- The $400mill project caused $100mill in lost sales, 20% stock dip, lots
of law suits
HPs ERP System Perfect Storm Problems

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HP projected everything that could possibly go wrong with their ERP

They just didnt plan for all of them happening at the same time lol
$160mill in order backlogs and lost revenue, more than 5 times project

Differences between major ES providers: SAP & Oracle

o German software company
o Leader in software and software related services
o One of largest software companies in the world
- Oracle
o American multinational computer technology company
o Both computer hardware systems and enterprise software
o Third largest software maker by revenue after Microsoft and IBM
o Also does ERP, CRM (Customer relationship management
software) and SCM (supply chain management software)
6.2.2 ES Implementation Rationale and Scope
Basic reasons include
- Integrated IT platform
- Increased data visibility
- Improved business processes
- Reduced operating costs
- Increased Responsiveness to customers
Physical scope: Whether an ES implementation system will cover one or multiple sites within
one geographic region vs multiple sites scattered around the world
- Positive relationship between complexity cost, implementation time, #
of users
Business Process Re-engineering Scope: The process of changing workflow to obliterate forms
of work that do not add value
- Vanilla Implementation: Firm uses BPR to map out a new business
process instead of keeping its business process and customizing the ES
to fit it
o One ERP project can have various parts of the software using
vanilla implementation or ES software customization
Technical Scope: How much, how customized and how complex an ES must be
- ES customization tends to lead to exponential increase in complexity,
cost and length of implementation
Functional Scope: Which business process modules a firm will want to implement in its ES
- Ie. Sales, inventory management, asset management, etc

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Types of Implementation Strategies
1. Phased Rollout/Cascaded Roll out
a. Change occurs over extended period of time
2. Big Bang
a. All at once
b. Much cheaper but much more risky
3. Parallel Adoption
a. Both legacy system and new system running at same time
b. Problems can be identified without it causing much disruption
c. Much more costly
Resource Allocation Scope: How much resources and how firm will fund ES project
- Depends on all other scope related choices
6.2.3 Critical ES Success Factors
ES implementation is very risky and costly
- Many factors influence successful implementation below
o Top Management Support
o Change Management
o Managing Cultural Change
o Communication Plan
o Team Morale and Motivation Employee Retention
o Choosing right consultant + correct plan of knowledge transfer
o Job Training and Redesign
o Data Conversion and Integrity
Top Management Support: Top management team (TMT) will set tone at the top and this
tone will trickle down to the rest of the company
- If TMT sends message that ES adoption is high priority more users will
try harder to succeed
- Important from a psychological standpoint
- Steering Committee: Committee composed of top management from
different corporate functions to involve themselves more and convince
company that ES aligns with business strategy
o Project champion needed as well
o Team responsible should provide appropriate vision and
o Probability of success increases if following conditions are met
Team has developed specific and measurable objectives
There is a main plan and contingency plans
Incorporated some degree of risk
Clear articulation of tasks to be completed at each stage
Implementation progress benchmarked against internal
and external best practices

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o This team should have best and brightest employees from
variety of backgrounds
Change Management: Consider implications of ES adoption for management and users
- Top priority for change management is to build user acceptance and
build positive employee attitude towards it
o Educate users on benefits of ES
o Educate users on need for ES
Managing Cultural Change: Implementation team must be aware of different cultures for a
high physical scope project
- Ie. Culture in North America is not the same as in South East Asia
Communication Plan: Plan to ensure proper line of communication with business, IT
personnel and customers and suppliers
Team Morale and Motivation Employee Retention: Because ES implementation stress can
be high, need to nurture a high level of employee morale as low morale = low staff retention
Choosing Right Consultant + Knowledge transfer: Have a strong consultant and well
defined plan to transfer knowledge from the consultant to the company to decrease dependency
on the vendor/consultant
Training and Job Re-design: Hands on training with IT skills, take into account how staff
may be moved, etc
Data Conversion and Integrity: Ensure that data being transferred during the conversion
process is accurate
6.3 Expected ES Benefits Pg 286
6.3.1 Benefits: Management Standpoint
Operational Level
- Automation can help
o Cost reduction
o Cycle time reduction
o Productivity improvement
o Quality improvement
o Improved customer service
Managerial/Tactical Level
- Managers must allocate resources properly relying on summary and
exception reports
- ES will help them dissect information from the operational level and
provide better information to super high level management
o Better resource management
o Improved decision making and planning

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o Improved performance in different operating divisions of the
Strategic Level
- Shifts focus to firms competitors
- Senior management focused on how firm can enjoy an IT competitive
advantage (offensive) or maintain its current IT advantage (defensive)
- Can deliver better links to trading customers, better response time,
better firm response time, etc listed below
o Business growth
o Alliances
o Innovation
Cost reduction
o Differentiation
o External Linkages
6.3.2 Benefits: Accounting Standpoint
Accounting Information Systems (AIS) offer managers transaction processing, report and
information support
- Provides more automation, effectiveness, efficiency and real time data
- Historically accounting modules one of the first ES modules firms
- Benefits include
o Increased flexibility in information generation
o Increased integration of applications
o Improved quality of reports
o Reduction of time for issuing of reports
o Improved decisions based on timely and reliable accounting
6.3.3 Benefits: IT Infrastructure
IT Infrastructure: All sharable and reusable IT resources
- Ie. Telecommunications networks and servers, etc
- ES isnt really tangible infrastructure but its sort of intangible since its
such a large investment anyways
- Provides benefits in the way that
o More business flexibility for future changes
o Reduced IT costs and marginal cost of business IT
o Increased capability for prompt and economic implementation of
new applications related to ES
6.3.4 Benefits: For Competing with Business Analytics
ES can help in decision support systems (DSS) and business intelligence (BI) systems
- Helps lay the foundations for a firm to compete in the grounds of
business analytics

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Firms can leverage the thousands of tons of data ES stores and use
them in their DSS and BI systems to make better decisions

6.4 Business Value: Accounting & Finance Angle Pg 290

Announcement of business adopting a new ES system means
- More integration between firms separate business functions
- Gives firm option to compete in future e-commerce and supply chain
management activities
- Referring back to Porters value chain of primary & support activities
o Firm who can integrate these two parts better is a better firm
o Firm announcing it is investing in ES system will be better able to
integrate everything compared to a firm only investing in a
material resource planning (MRP) or human resource
management (HRM) system so it is better for the former firm
Thus, investors may want to know number of modules and
areas of the firms ES system will be implemented in
The higher the functional scope, the greater
the expected increase in firm value
o Similar argument can be made for higher
physical scope = higher firm value
Functional and physical scope have positive impact
on market valuation

AFM 241 SE Notes Chapter 7 Evaluation of IT Investments

7.1 Introduction Pg 302

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We must find some way of evaluating IT investments

- ES investments are more elaborate investments, harder to evaluate
Evaluating IT investment benefits and costs helps with
- Helps managers think carefully and quantify costs and benefits
- Makes managers aware that there are limited resources, resources
should be allocated to projects with highest payoffs
- Introduces element of accountability for benchmarking actual
performance of IT investments
Typical tools include
- Payback (ROI and Payback favored for short term investments since no
time value of money)
7.2 Capital Budgeting Analysis Pg 304
7.2.1 Blue Bikes ES Implementation
Blue bikes updating its ES system with expected benefits
- 10% increase of profit margins to 60%
- 9% availability increase to 99%
- Days sales inventory reduced by 10
- 70% of increase in availability to sales
- 60% of increase in first year, remaining 40% in second year
7.2.2 Cash Flow
Typical cash outflows include
- Upfront software payment
- Consulting and implementation costs
- Training costs
- Maintenance fees
Typical cash inflows include
- Increased revenues
- Reduced costs
- Release in working capital
7.2.3 Blue Bikes Cash Inflows
Additional Units = (Pre-ES Units Sold) x (Increase in Availability) x (Conversion Rate)
x(Achieved Improvement in First Year

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Profit Margin Per Unit = (Price per unit COGS per unit)Price per unit
Ending Inventory = (Cost of Goods Sold x DSI)/365
Inventory reduction levels are incremental and affect only one year not multiple
(Read in book rest, Pg 309)
7.3 Limitations of Capital Budgeting Analysis Pg 311
7.3.1 Measuring Expected Benefits and Costs
Benefits can be both
- Tangible: lower costs, higher revenues
- Intangible: Increased customer satisfactions, more timely information
Hard to say if we want to quantify these intangible benefits
Managers typically fail to account for all possible costs
- Must consider both direct and indirect costs
o Direct costs include: hardware, software, consulting, training
Excluding benefits or costs will alter NPV
7.3.2 Assessing Riskiness
Typical evaluation of capital investment is discounted via firms cost of capital that is taken
from the markets view of firm risk
Other reasons to adjust discount rate include
- Technical Risk: Staff will not be able to generate very accurate
estimates with new technology
- Project Risk: The larger the project, the more likely it is to failed. The
more the experienced the firm, the more likely it is to succeed
- User Related Risk: Developers may not have captured the needs of
the users properly in their IT system or users refuse to take part in it as
they fear they will be replaced by IT
- Systemic Risk: Transformative, strategic changes from large IT
investments may precipitate unanticipated response from competitors,
customers or regulators
Not a lot of firms actually adjust their discount rate due to the above factors though
- Recommended that managers do sensitivity analysis to see how NPV
would change
7.3.3 Interpretation
First Message

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Lots of elaboration when it comes to evaluating the NPV of these

- Most of the time its just IT professionals trying to convince senior
management to take on these projects
Second Message
- Doing a sensitivity analysis is key
- This will provide you the full scope of if things go well or go poorly

Real Options Pg 315

7.4.1 Flexibility as an Option

Agility/Flexibility: Ability to respond to changes in competitive environment
- One of the most mentioned benefits with IT investments
o Ie. Firm can work with supplier to integrate collaborative planning
forecasting replenishing (CPFR)
- Under resource based view (RBC), these investments such as CPFR and
BA due to ES are path dependent therefore a source of sustainable
competitive advantage
Traditional NPV analysis does not account for this flexibility
7.4.2 Financial Options

Use black scholes option formula for calculating financial

Same financial options formula can be used to calculate
flexibility formulas for IT

7.4.4 How to Value a Real Option

Valuing Real (IT) options is difficult because
- Assets are not traded so difficult to generate value and variance of
value asset
- Real option doesnt really have a predefined expiration date and
exercise price
o Option to exercise will depend on market conditions and actions
of competitors, suppliers, customers, etc
We can still generate an approximate value with the Scholes formula
7.4.5 Real Options Concluding Remarks
Real Options
- Address some limitations of NPV analysis
- Allow managers to take into consideration in the volatility in the value
of IT projects over time, optimal timing of investment and fact that
technology prices decline over time

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Place value on management learning

Are more valuable when future is uncertain (when you invest in new
and untested technology) but also more risky
- Have the main disadvantage of trying to estimate all 5 variables
especially expected cash flows of underlying asset and changes to cost
of implementation
AFM 241 SE Notes Chapter 8 Monitoring IT
8.1 Introduction Pg 335
RoA and Dupont analysis have a layered system of investigation similar to 211
- ROA > Profit Margin & Asset turn over > NI & sales > sales, COGS >
drivers > source of problem
All decisions should aim at source of problem not effect
Several non-financial factors may affect RoA as well but cannot use analysis since they are not
Need to look beyond financial accounting measures in order to capture a more holistic view of
firm performance led to introduction of balanced scorecard
8.2 Balanced Scorecard Pg 336
Balanced Scorecard: System for measuring and managing all dimensions of a firms
- Tool that aligns performance management initiatives with strategy
o Does this by translating firms strategy into clear objectives,
measures, targets and initiatives
Revolves around 4 Perspectives
1. Financial perspective: How is success measured by our stakeholders?
How do we look at our shareholders?
2. Customer perspective: How an we create value for our customers? How
do customers see us?
3. Internal processes perspective: What must we excel at to create value
for our customers?
4. Learning and growth perspective: Can we continue to improve and
create value?
8.2.1 Strategy Map
Strategy map is on Pg 337
Shareholder value
- Fall into either short term value or long term sustainability

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Financial measures include cash flow, sales growth, operating income,

market share and ROA and ROE

Customer Perspective
- Measures objectives for firms customers and firms value prop to them
- Quality, performance/service, translate these goals into specific
o Ie. # of repeat customer sales per year
Internal Perspective
- Critical internal operations that add value to customers and achieve
desired financial objectives
- Need to determine what processes and competencies they must excel
and specify measures for each
- How does firm increase firm exceed customer expectations? >> make
a higher quality process via internal operations
Learning and Growth Perspective
- Companys ability to innovate, improve and learn ties directly to the
companys value chain
8.2.2 Bluebikes: Causality Example
Typical Balanced scorecard process works like below
- Look at financial perspective first
o Look for drivers in financial profitability, tie certain aspects to
customer perspective
Ie. repeat sales from customer loyalty
- Then look at customer perspective
o Look for area that ties into internal processes
Ie. Customers care about effectiveness and efficiency in
product delivery
- Then look at internal processes, identify areas the company has to
excel in order to achieve the effectiveness and efficiency in deliveries
o Look for ways to help improve its effectiveness and efficiency via
learning and growth
Ie. In order to improve quality and process cycle time, firm
must have skilled employees
- Now look at learning and growth side
8.2.3 Alignment between Strategy & Operations
One of the main benefits of balanced scorecard is that of aligning firms strategy to operations
- Gets all employees to understand companys strategy and how they
play a role in it

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8.2.4 Building the Balanced Scorecard

Building a balanced scorecard needs a connection between a firms strategy map to firms
specific objectives
- Specific objectives include flight boarding time of 30minutes or less,
90% of flights on time, etc
Managers then need to develop initiatives to help firm achieve its target
- Ie. Training programs that help onboard people faster
8.3 IT Balanced Scorecard Pg 342
Firms use IT scorecards because they want to achieve
1. Align firms business strategy with IT strategy and operations
a. Main action of balanced scorecard is that every action should be
linked to firms strategic goals
2. Evaluate and communicate the performance of the IT organization to
business managers
a. Since IT benefits are usually indirect, firms use balanced
scorecard to make these paths more visible
3. Relate IT organization performance to employee performance and
8.3.1 Balanced Scorecard for the IT Organization
One problem with IT scorecards is that mindset of most IT employees is reactive (put out the
fire after it started) rather than strategic
- Therefore, first step of IT balanced scorecard should be attempt to
develop set of strategic goals for IT organization
o Reactive mindset is appropriate for firms in support mode but
not in any other modes of McFarlans strategic grid
Key difference for IT balanced scorecards is that customer perspective is not from customers
outside organization but IT users in the company
- This also means that we consider financial perspective by focusing on
firms top management rather than shareholders
Therefore perspectives are as follows
1. Corporate perspective
2. User perspective
3. Internal process perspective
4. Learning and growth perspective

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Corporate Perspective
- Top management is financial perspective
- Main concern for TMT is whether IT accomplishes firm goals and
contribute to value of firm
- IT initiatives can be broken into
o Short term
o Long term
- IT budget as a percentage of sales is a useful metric to contain IT
User Perspective
- If users are involved in implementation of IT then more likely to
- Ability to extract value will increase as well
- Therefore it is logical that the customers perspective will be driver
behind corporate contribution metrics
o Metrics for gauging user perspective effectivenss on pg 345
Internal Process Perspective
- Two principle points include effectiveness and efficiency
- Metrics for internal process perspective on Pg 346
Learning and growth perspective
- Metric for learning and growth perspectives on Pg 346 & 347
Success of IT balanced scorecard depends on many factors
1. Firms management and employees will have to buy in
2. Metrics will have to be well selected and relatively small in number
3. Targets must be realistic and gradually increasing
4. Employees should be able to see how their actions could affect their
metrics and help them achieve their target (causality must be clear)
8.3.2 An ERP Balanced Scorecard
Since ES implementation is so complicated, it makes sense to break down the scorecard into
two components
1. ES implementation balanced scorecard
a. Achieve implementation on time, on budget and desired
2. Balanced scorecard monitoring ES use
a. This should focus on users ability to extract value from system
Typical multi-business unit organization can experience this disaster
1. Every business unit is fighting over scarce IT resources

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2. Units are dissatisfied with current IT system performance due to
scarce resources resulting in delays
3. Everyone blames ITO for lackluster business unit performance and
justifying deliberate or unauthorized decentralization of IT functions
and purchasing of segmented IT hardware and software
4. Higher technology costs for firm overall due to uncoordinated efforts

AFM 241 SE Notes AFM 241 Chapter 9 IT Budgets & ITPM

Opening Story Pg356
Talks about relationship between CFO and CIo
9.1 Introduction Pg 358
Based on 2011 survey from McKinsey, executives expect more from IT than ever before
- This means higher budgets for IT
- More range of options for IT project proposals
- Must look at expected benefits and costs as well as risks of project
This chapter will focus on two things
1. IT budgets
2. IT portfolio management
9.2 Corporate and IT Budget
Budget: How organizations allocate financial resources to different units
- Typically starts in fall or several months before end of firscal year
Things to provide
- Forecast level of sales, level of services for next year
- Various expenditures
Pros for budgeting
- Can help senior execs coordinate many activities in organization
- Maintain control of multiple divisions and business units
- Can compare budgeted to actual results
Cons for budgeting
- Too rigid or stiff structure will hinder innovation

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Limit agility in competitive environment

CFOs and CIOs dont get along all the time

- Synergistic relationship is really great
- But most of time CFOs and CIOs dont get along because of way they
think of budgets
o CFOs think of budgets as fiscal budgets
o CIOs think of budgets as functional budgets
We will explain these differences in the next sections
9.3 IT Budgets Pg 361
IT Budget: Definitions
IT Budget: Best estimate of total spending at end of 12-month budget period for IT to support
- What constitutes IT spending?
o Capex and opex for infrastructure such as telecom, networking,
o Internet based costs
o Salaries and recruitment
o IT services/outsourcing and training
IT Budget: Elements
Gartner proposes IT should include following
1. Hardware
a. Current equipment and planned equipment costs
b. Maintenance fees
c. Computers, laptops, servers, routers, etc
2. Software
a. Current and planned software costs
b. Support and maintenance fees
c. Software for servers, computers, antivirus and back up software
3. IT personnel
a. Development, production/operations, IT management people
b. IT independent/dependent contractors
4. Outsourcing
a. External IT services, consulting, data transmission, etc
5. Disaster Recovery
a. Costs with back up, disaster recovery and business continuity
b. Software colocation, outsourced back up and licenses
6. Occupancy Costs
a. Cost of facilities being used by IT organization

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b. Office space, furniture, maintenance, property taxes, supplies
c. Does not include cost for space dedicated to IT functions ie. Data
IT Budget: Operational and Strategic
Classify IT budget between operational and strategic
- Operational: IT spending that is needed to keep organization running
o Critical and key software upgrades, etc

Strategic: IT spending to grow transform, advance the ball for IT

o Or basically capital budgets and projects related to IT
o Improve firms competitive position, more likely to be taken when
firm is doing well rather than when cash flow is tight
o Can divide strategic into grow & advance the ball vs transform or
change the rules
Grow = make current operations more efficient
Transform = Identify right technologies for new
organizational capabilities
9.4 Accounting View of IT Budget Pg 366

Issues between accounting and IT professionals

- IT professionals want more of their budget capitalized since it will be a
lower expense on their end
- Accountants need to think about GAAP and tax and earnings
- There are few GAAPs for IT spending and we will analyze this below
9.4.1 IT Spending in Accounting Standards
IFRS is more principle based, requires more disclosure, US GAAP is more rules based
US GAAP more detail in some respects and distinguishes IT investments from general
Ambiguity of IFRS make it hard to separate investments in technology in ordinary business and
IT specific investments
Both require IT investment useful life to be evaluated on annual basis due to rapid change of
- Therefore companies will favour investments that deliver high short
period returns

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IFRS says costs should be expensed in initial research phase and capitalized in development
phase once design and specifications of project have been more clearly defined
Require projects that are delayed to be registered for impairment (AFM 291)
9.5 Drivers of IT Budget Levels
IT budget to be influenced by multiple factors
9.5.1 External Industry Factors and IT Budget Levels
- Less firms = less competition = more profit
- Firms less likely to invest in IT if they know it is not going to increase firms economic profits
or competitive position
- More uncertainty in industry = more complexity of IT investments & budgets
Industries have been classified for IT spending as
1. Automate
a. Technology used is mature, main objective is to lower costs via IT
b. Initiatives that aim to build and incrementally enhance robust
2. Informate
a. Industries that have dynamic product markets but technology
used is relatively stable
b. These investments require large complementary investments in
human capital and structural capital
3. Transform
a. Technology used to transform the competitive environment
IT innovation also raises potential of IT spending substantially
9.5.2 Internal Factors and IT Budget Levels
Internal factors that affect IT spending include
1. Diversification
2. Affordability
3. Growth Opportunities
Number of nature of markets firm chooses to enter (diversification) will affect IT spending
Depends on if firm goes into related markets (related diversification) or unrelated markets
(unrelated diversification)
If related diversification, there is need to maintain tightly integrated IT system across units

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Unrelated diversification, units can operate independently and therefore more complex IT
systems not needed
IT Spending higher for related rather than unrelated diversification
IT spending less when firms are doing poorly
Also affected by level of debt, prior investments,
- Higher levels of debt and leverage reduce cash available for IT
- Higher the debt levels, lower the IT budget
If large projects were taken on before, these projects will require budget maintenance reducing
budget for current/future cash flow for new projects
Sales Growth
Firm with more growth options have multiple other projects with high NPV
- High growth potential in other areas is a resource constraint for
discretionary spending such as IT
9.6 Funding and Cost Allocation Pg 378
Three most common methods of funding IT spending
1. Corporate budget
2. Chargeback
3. Allocation
Corporate Budget
- Treats all IT costs as overhead direcrtly into the firms corporate budget
- Compares operational and strategic benefits of new IT initiatives with
corresponding benefits of other types of investments
- If IT investments are complementary to other investments, it is more
likely to be approved
- Cost of IT is charged back to departments or business units based on
- Similar to how you pay for utilities every month
- Considered one of the fairest methods, this is a pro
- Cons include
o IT department must collect significant data regarding usage by
each department, this is a lot of work
o Likely to discourage business units to invest in new innovative IT
projects as they have to pay for it later

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- IT cost Is divided among departments based on some metric other
than usage
o # of employees, users, desktops, etc
- Much simpler and departments know amount they will be charged, can
put it in their budgets
- Major drawback are freeriders: organization that uses a lot of IT will be
subsidized by ones who dont really use a lot
9.7 IT Portfolio Management PG 380
IT projects should consider portfolio on part of interrelated portfolio of all firm initiatives
Basic idea is that IT initiatives should be balanced like a financial portfolio
- Risky investments should be balanced with safer investments such as
government bonds
9.7.1 Steps in IT Portfolio Management
1. Establish a portfolio of IT investments
Want to know both current year and future year portfolio
Firm can classify IT initiatives into 4 types
1. Transactional Investments (Transactional Assets)
a. Motivated by desire to cut costs or increase output for same cost,
2. Informational Investments (Information Assets)
a. Provide information strengthen reporting, accounting,
communication, etc
b. Aim to strengthen informate down or informate up
3. Strategic Investments (Strategic Assets)
a. Aim to provide firm with competitive advantage
b. Transform competitive environment
4. Infrastructure Investments (Infrastructure assets)
a. Foundation of shared IT services
Record all new IT investments such as
- Project name, description, champion, organizational or business unit,
estimated duration, cost, etc
2. Establish a process for evaluation of IT projects
Each proposal should be evaluated via strategic objectives (ch3), NPV or IRR (ch7) and risk
- Types of risk on Pg 383
o New technology tends to be riskier
o Size of company and IT investment makes larger proportion
investments more risky

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o Need for re-training, # of people being re-educated, those kinds
of risk
Once assessment has been complete, IT committee must prioritize projects
3. Review actively manage your portfolio
- Like financial investment portfolios, IT steering committee will have to
actively monitor and manage IT initiative portfolio
9.7.2 Why ITPM (IT portfolio management)?
Some benefits include
- Avoid misaligned projects
- Approval process/prioritization
- Accountability
What can you do with ITPM?
- Maximize value while minimizing risk
- Improve communications with business leaders
- Encourage business unit leaders to think as a team and take
responsibility for projects
AFM 241 SE Notes Chapter 10: IT Governance
Epilogue Pg 394
Growing importance of IT due to
- Cyberattacks
- Industrial espionage
- Passing of Sarbanes-Oxley
IT Governance: The processes that ensure effective and efficient use of IT in enabling an
organization to achieve its goals
- Controls in place to regulate IT implementation and strategy
It is important to get TMT to be more sensitive and actively involved with IT
- Companies with strong IT governance and exercised it generated 20%
more profits
- Board members should be able to measure the payoffs from IT
Boards approach to ITG (information technology governance) depends on specific context
- Company history
- External environment (industry structure)
- Current competitive and financial position

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Quality of IT and non-IT management

o Use McFarlans strategic grid

ITG in TMT perspective: framework of decision rights and accountabilities to encourage

desirable behaviour in use of IT
Need difference between IT governance and IT management
- IT management: Decisions regarding everyday IT decisions and
Effective IT governance requires the following
1. Clear business strategy and vision for IT
a. Have vision that ties in with IT synergy
2. Document costs and benefits
3. Implement alignment of IT with business strategy
4. Accountability for organizational changes
a. IT initiatives may require organizational changes and this
accountability is assigned to people
5. Knowledge Management
a. Documenting prior IT history s important and key to future

Effective IT governance leads to the following four objectives

1. Cost effective use of IT
2. Effective use of IT for growth
3. Effective use of IT for assets utilization
4. Effective use of IT for business flexibility
More and more senior executive teams have bee called upon to get involved with technology
Stakes from getting technology right is quite large
- Half of M&A synergies depend on IT, making it a core driver of deal
- Major corporate changes such as supply-chain transformation have
major IT components that can imperil delivery if anything goes wrong
ITG in IT Governance Institute (ITGI) perspective: IT governance is the responsibility of the
board of directors and executive management. IT is integral part of enterprise governance and
consists of the leadership and organisational structures and processes that ensure that the
organisations IT sustains and extends the organisations strategies and objectives

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Concerned with two things
1. IT ability to deliver value
a. Alignment of IT to business strategy
2. Mitigation of IT risk
a. Embedding accountability into enterprise will help
Main Areas of Delivery include
1. Strategic Alignment
2. Risk Management
3. Resource Management
4. Value Delivery
5. Performance Measurement
10.1 Concluding Remarks Pg 399
Nave to think spending more on IT = more value
- IT initiatives are risky and only firms that mange this risk will obtain
expected results
Not all firms need to be IT innovative
- All firms need to align their IT initiatives with their corporate priorities