2

Chapter
Valuing Information Systems
Investments

“The most important discoveries of the next 50

years are likely to be ones of which we cannot
now even conceive.”
Sir John Maddox, 1999
3-1
Learning Objectives

1. Discuss the roles and importance of MIS in an organization.

2. Issues concerning with MIS investment decision making.

3. MIS investment decision making

3-2
Learning Objectives

1. Discuss the roles and importance of MIS in an organization.

2. Issues concerning with MIS investment decision making.

3. MIS investment decision making

3-3
Information is critical
• The information we have is not what we
want.
• The information we want is not what we
need
• The information we need is not available.

3-4
Information is a resource
• It is scare
• It has a cost
• It has alternative uses
• There is an opportunity cost factor
involved if one does not process
information.

3-5
Why need information?
• Information ensures
effective and efficient
decision making
leading to prosperity
of the organization

3-6
Valuing Information Systems

• Information systems can be used in three

ways to add value to an organization:

1. Automating
2. Informating
3. Strategizing

3-7
IS for Automating: Doing Things Faster

• With automation,
tasks can be
completed:
o Faster
o Cheaper
o More accurately
o With greater
consistency

3-8
Automating: Example

• Loan processing comparison for 3 methods

(from the moment the customer takes the
application until the applicant is notified of
decision)
o Manual loan process – 25 to 40 days
o Technology-supported process – 5 to 20 days
o Fully automated process – 1 hour to 15 days

3-9
IS for Organizational Learning: Doing
Things Better

• Information
systems can also
be used to:
o Learn about
processes
o Improve
processes
o Support
organizational
learning

3-10
Informating: Example
• Computer-
based loan
system
identifies peak
times during
the year when
specific loans
are processed
3-11
IS for Supporting Strategy: Doing Things
Smarter

• IS used to gain
or sustain
competitive
advantage
o Turning benefits
of automating
and informating
into strategic
advantage

3-12
Strategizing: Five Types of Organizational
Strategies

• Organizational
strategies
define the way
in which a
company
plans to
gain/sustain
competitive
advantage

3-13
What is MIS for managers?
• MIS refers broadly to a computer based
system that provides managers with tools
for organizing, evaluating and efficiently
running their departments.

3-14
What is MIS for managers?
MIS provides:
o Right information
o To the right person
o At the right place
o At the right time
o In the right form
o At the right cost

3-15
MIS roles in an organization
MIS is:
•The core internal communications (among
functions/structural levels)
•The core external communications
(Stakeholders, suppliers, customers)
 MIS improves customers service
 MIS creates competitive advantage
 MIS seizes business opportunities over the
competitors.

3-16
Characteristics of MIS

3-17
Value Chain Analysis
• Tool used by managers to identify
opportunities for gaining competitive advantage

3-18
IS and Value Chain Analysis
• Information systems use in adding value:
o Use of Internet
o Use of Extranet/Intranet

3-19
Sources of Competitive Advantage
MIS can
1. Best-made product on the market offer these
2. Superior customer service
3. Achieving lower costs than rivals MIS can
offer this
4. Having proprietary manufacturing technology
5. Having shorter lead times in research and
development projects
6. Having a well-known brand name and
reputation
7. Giving customers more value for their money
3-20
Learning Objectives

1. Discuss the roles and importance of MIS in an organization.

2. Issues concerning with MIS investment

3. MIS investment decision making

Information Systems Today: Managing in the Digital World 3-21

Factors in MIS Investment Decisions

3-22
MIS hierarchical planning stages

3-23
Detailed MIS hierachical planning

3-24
MIS hierarchical planning stages
• Strategic level:
o Developing corporation strategy
o Developing a specific system to implement
corporation wide strategy
Outcomes: Goals, objectives, priority for
longer term time table
 MIS function strategy to support corporation
strategy

3-25
MIS hierarchical planning stages
• Tactical level:
o Middle managers implement the goals,
objectives (how to implement?)
o Allocating resources to achieve the goals,
objectives.
o Focusing on all employees of each function.
o Shorter term time table to implement.
o MIS investment decisions are made at this
stage.

3-26
MIS hierarchical planning stages
• Operational level:
o More detailed, day to day works scheduled.
o Focusing on each individual with required
skills, knowledge to perform the works.

3-27
Detailed MIS hierachical planning
Step 1:
• External environment analysis:
o Technological factors (speed of changes)
o Political factors (competitors’ advantages)
o Economic factors (competitors’ spending on MIS)
o Physical factors (Space/capability to invest on MIS)
o Social factors (competitors’ skilled employees)
o Customer expectation
o Suppliers’ investment on MIS
Opportunities/threats to our organization
3-28
Detailed MIS hierachical planning
Step 2:
• Internal environment analysis:
o Culture to support high level service for
stakeholders
o Organizational structure to support flexibility and
innovation
o Financial resources
o Human resource
o Technical resources
o Physical resources

3-29
Detailed MIS hierachical planning
Step 3:
• Corporation wide policy consistent with
organizational goals, objectives.
Step 4:
• Individualize organizational
goals/objectives into more narrow
aspects concerning with MIS function

3-30
Detailed MIS hierachical planning
Step 5:
• Development and determination of inputs,
outputs, processes of the firm’s system.
• Determination of changes and their
complexities brought by MIS changes.

Step 6:
• Analysis of alternative configurations of MIS

3-31
Detailed MIS hierachical planning
Step 7:
• Choosing the right MIS configuration to support the
organizations’ activities

Step 8:
• Acquisition and procurement
• Operational planning
• Implementation and installation
• Integration

Step 9:
• Analysis of the whole system to assure it meets goals,
strategy requirements of the organization 3-32
Organizational systems and MIS

3-33
MIS Structural concept

3-34
Files dedicated to application programs

3-35
Interacting with a database

3-36
Data sharing in a database environment

3-37
MIS investment
MIS investment includes expenses for
acquiring:
•Computers and communications
•Softwares
•Networks
•Personnel to manage/operate the system

3-38
Problems facing managers in MIS investment
decision making
• Intra-firm adaptability: MIS must be integrated in the
whole system of the organization.
• Inter-firm adaptability: MIS must work well with the
systems of suppliers, customers via internets or
mainframes.
• Platform neutrality:
• Inter-operabilities
• Scalability
• Security
• System reliabilities.
• Ease of use
• Customer support
• Perceived VALUE to the firm
3-39
Time Lags

• Benefits do not
always occur at the
same time MIS is
implemented
o Some MIS
implementation
requires people to
gain experience
o System must be
integrated with
existing systems

3-40
Mismanagement

• Bad business
model can not be
overcome by
good MIS
o MIS
implementation as
temporary fix
o Creation of
unanticipated
bottlenecks

3-41
Risks in MIS investment decision
• Physical risks:
o Vulnerability of hardware, software
o Data to theft, sabotage
o Software vulnerability to piracy and deletion
o Data securities laps
• Managerial risks:
o Failure to achieve anticipated benefits or cost reduction.
o Implementation failure to achieve the desired time frame
o End user resistance
o Inability of the system to support organization or its growth
over time
o Incompatibility issues that later develop.

3-42
MIS failures
Poorly investment in MIS can cause:
• The investment becomes a competitive
disadvantage.
• Needlessly increasing capital costs, interest
costs
• Delaying customer orders
• Disrupting the communications within the
organization and with other stakeholders
• Decreasing employee morale

3-43
Learning Objectives

1. Discuss the roles and importance of MIS in an organization.

2. Issues concerning with MIS investment decision making.

3. MIS investment decision making

3-44
Decision making principle
• Balancing Benefits vs. Cost
• More values
(tangible/intangible) received.

3-45
Base for decision making
• Consequence is seen as an event that arises from
the introduction of the MIS starting with the
decision to go ahead with the investment
• The consequences (values) of MIS investment can
be measured in terms of
o Financial measures
o Non financial measures

Benefits of MIS = Positive consequences – negative consequences

3-46
Financial measures
• Pay back period:
o The period between the moment that MIS
invesment is made and the moment that the total
sum of investment is recovered through the
incoming cash flow
• Internal rate of return (IRR):
o The threshold at which after discounting the
incoming and outgoing cash flows, the net present
value equals zero.
• Net present value (NPV):
3-47
Non financial measures
• Customer satisfaction
• Good supplier coordination
• Improved employee motivation.
• Competitive advantage

3-48
Multi criteria approach

3-49
Multi criteria approach
• Enhanced ROI (Information economics):
o Value linking: Additional cash flows that accrue to
other departments.
o Value acceleration: Additional cash flows due to
reduced time scale for operations
o Value restructuring: Additional cash flows through
restructuring work and improved job productivity.
o Innovation valuation: Additional cash flows arising
from the innovating aspects of the investment (e.g.
competitive advantage)

3-50
Strategic investment evaluation model - SIESTA

3-51
Return on management (ROM)

3-52
End of Chapter contents

3-53
Michael Dell, Founder and Chairman,
Dell, Inc.
• High school teacher said
Dell would “probably never
go anywhere in life”
• In 1990s – Dell was the
youngest CEO to head a
Fortune 500 company
• Twelfth richest man in
2006

Information Systems Today: Managing in the Digital World 3-54