IT Business Value Organizations use IT to capture, store, manipulate, and present data in order to support the firm's business processes and value adding activities (ex, think of point of sale system in a retail store) IT is ubiquitous (found everywhere) A sign of a well-functioning system is one you take for granted but how much does this cost? o IT is a very large expenditure which can range from a million to billions of dollars IT spending depends on: o State of Industry o State of Economy o New IT projects o Size of Company (ex. Small company, fortune 500 company) o Nature of Product
IT Spending as a Percentage of Revenue
Limitations of this table: Size of companies varies in each industry Changes in revenues and IT spending from year to year only surveyed companies that are fairly large Industry determines how much a company will spend on IT more information content – more spending on IT IT spending as a percentage → ratio depending on the direction of revenue vs. IT spending (% can be based on increase/decrease of revenue, not IT spending) The Beautiful Hypothesis IT spending can be used to either reduce costs (expenses) or add value to a product in order to increase sales (Revenue)…either way this makes a profit This hypothesis, summarized in the above Figure, indicates that when IT spending is `processed' (goes through the black box) within the firm, it leads to higher profits either through higher revenue or lower cost.
The Productivity Paradox There is no identifiable association between expenditures on IT and profitability Beautiful hypothesis is not true
Interpretation: Spending lots of money on IT does not necessarily mean that the return on equity will also increase This provides support to the Productivity Paradox which states that IT spending and Profitability have no correlation Causality – The relationship between cause and affect Return on Investment (ROI) = (Gains) – (Investments) / (Investments) The Input-Process-Output Model
Black box: companies’ ability to use strategies, planning and policies in order to manage risk and achieve performance outcomes Maximizing the payoffs from IT investments is not an easy process. It requires “deliberate strategies, planning, and policies in order to manage risk and achieve performance outcomes, compliance, and accountable delivery of value”
Payoffs: Effective Implementation The Standish Group Study categorizes projects into three resolution types: o Successful: Project is completed on time and on budget, has all features and functions originally specified. o Challenged: The project is completed and operational, but over-budget, over the time estimate, and with fewer features and functions than initially specified.
o Failed: The project is cancelled before completion or never implemented Used factors such as: budget, time took to complete the project, and time the project is supposed to be launched, features and functions of the project
What is user involvement and why is it important? User involvement is Input from the user of the product (Customers) Allows the firm to know the needs, wants and expectations of the customer who they are selling their product/service to What is and Why Executive Management Support matters? A team can only spend as much as executive management will allow the team to spend on IT Amount of resources and money all depends on executive management Likelihood that the project will success will also change with more involvement from executive management If executive do not show support, what message is it sending? Financial support, align with strategy of firm, sends message to user because the stakes are much higher (work harder to make the project a success) What are the implication of the findings of the Standish Group for the association between IT spending and payoffs? little or no relation between investment in IT and financial performance Obviously,...
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