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Evaluating It Investments
 

Evaluating It Investments

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    Evaluating It Investments Evaluating It Investments Presentation Transcript

    • “ Evaluating IT Investments and measuring efficiency / improvements”
            • Over all frame work on assessing IT
            • implementation projects
            • Often neglected strategic considerations
            • and causes of non-performance of IT
            • installation
      Road Map for this presentation
            • Investment Evaluation models - An insight
            • Auditors’ check list - A practical approach
      Road Map for this presentation...
    • Main objective of assessing IT Implementation Projects is to improve IT’s contribution to the overall business and not just measure the contribution Overall Frame Work
      • The contribution IT makes to business is
      • a complex mix of
      • IT efficiency and Business efficiency
      Overall Frame Work...
    • IT Provides “Business support” Acts as a “Performance driver” (along with other main management functions - Marketing, HR, Product Development, Knowledge Management etc.,) Overall Frame Work…
    • Thus, IT can provide an edge over competitors and improve the efficiency and effectiveness of business processes in line with best practices Therefore, the interaction of business processes with IT is of Paramount importance Overall Frame Work…
    • Conduct Business Conduct IT Improvements studies Performance studies Select Key Processes & Functions (Functional analysis of business to compare business processes / services with industry standards) (How effective the IT systems are)
    • Select Key Processes & Functions... Co-relate these two studies IT Performance should be associated to Business Key Performance indicators Value of IT in the Business Environment
      • Analyse main business areas
      • in terms of
      • functions that support these business areas
      • and then activities that support these functions
      Business Improvements Studies
      • Eg:
      • Sub sect : Supply Chain Management
      • Functions :
              • Materials Management
              • Production Operations
              • Logistics Management
              • Spares logistics materials management
              • IT etc.
      Business Improvements Studies...
      • Pre-defined
      • Activities : Materials Management
              • Master Production Scheduling
              • Materials Planning
              • Purchasing contract negotiations
              • Vendor Management
              • Purchasing
              • Inventory Planning & Control etc.
      Business Improvements Studies...
      • Strategic Business Objectives
      • set of Critical Success Factors (CSFs)
      • Key Performance Indicators (KPIs)
      IT Value Chain
    • Eg: Increased Profitability CSFs - World Class Cost Management & Market Share For CSF ‘Cost Management’ IT Value Chain...
      • Associated KPIs could be,
            • Materials Management Cost as a
      • percentage of the total supply chain
      • Cost and inventory carrying cost
      IT Value Chain...
    • At the last level, Identify the success of the interactions between Business & IT Measure short comings by comparing performance metrics with other companies IT Value Chain...
      • Application of established
      • Business Techniques
      • to
      • IT disciplines,
      • Balanced quantitative analysis
      • &
      • Systematic assessment of
      IT Value Chain...
            • Strategic objectives,
            • Critical success factors and
            • Practices employed by world class companies
      • will help companies
      • (a) in making informed IT investment
      • decisions
      • (b) provide knowledge needed to optimise
      • existing IT Systems
      IT Value Chain...
          • Senior Business Executives lacking
          • necessary knowledge and experience to
          • make IT decisions confidently
          • Delegation of decision making to IT /
          • financial staff
      Often neglected strategic considerations in making technology investments
          • Decisions primarily based on cost alone
            • Net present value
            • Internal Rate of return
            • Profitability index
            • Discounted pay back period
            • (Standard tool kit)
      Often neglected strategic considerations in making technology investments...
          • These are insufficient for evaluating all
          • applicable considerations - particularly
          • ‘ intangible values’
          • Benefits of reduced operating costs
          • considered - opportunity cost of the lost
          • business not considered.
      Often neglected strategic considerations in making technology investments...
          • Other strategic considerations often missed out
            • Will the investment add to / enhance
            • firm’s core competencies?
            • Will it provide capabilities to penetrate
            • new markets with your product or
            • services?
      Often neglected strategic considerations in making technology investments...
            • Does the market (in the particular
            • industry) perceives technological
            • leadership as important?
          • Accelerating pace of technological change
          • or technology obsolescence complicate
          • good IT decision making
      Often neglected strategic considerations in making technology investments...
          • Cost focussed approaches do not always
          • lead to sensible investment decisions -
          • They miss out on important business
          • opportunities
      Often neglected strategic considerations in making technology investments...
          • High initial costs
          • Prolonged implementation time
          • Hidden Costs
          • High consultancy fees
          • Lack of support
      Causes of non-performance of IT installation
          • Top management having realistic
          • expectations about their IT investments?
          • If the IT investments yield low returns is it
          • the sole responsibility of IT?
          • Is profit contribution the only reliable way of
          • justifying an IT investment?
      Related issues
          • Situation
          • Non-existent IT functionality
            • IT systems operating with or alongside or
            • as part of manual systems
            • automated system not performing as
            • expected due to vendor misleading the
            • buyer about system’s capabilities
      Poor performance of IT installations
          • Under utilising system functionality
            • System installed with the objective of
            • improving productivity / cutting costs
            • (Focus - Reduce staff - operators viewing
            • this as a threat)
      Poor performance of IT installations...
            • Efforts to bring down cost of IT
            • Investment
            • (resulting in insufficient training
            • programs, operators do not know
            • how to optimally use the system)
      Poor performance of IT installations...
          • Functionality specified - but in appropriate
            • Many companies do not possess
            • necessary tools needed to check if their
            • systems & system development functions
            • satisfy their business needs or not
            • (package options specified are a compromise
            • and do not offer full solution)
      Poor performance of IT installations...
          • Inefficient & ineffective IT infrastructure
            • IT infrastructure technology itself may
          • perform well.
            • But the practices and procedures may
          • hamper the over all implementation.
      Poor performance of IT installations...
            • IT system run by people who do not show
          • much interest in the actual requirements
          • of end users.
      Poor performance of IT installations...
          • Other causes
            • Faults in software
            • Improper installation by Vendor or
            • implementor
      Poor performance of IT installations...
            • System purchaser responsible - do not
            • get adequately described system
            • requirements at the purchase stage
            • Lack of compatibility with other systems
            • Reliance on existing older systems and
            • lack of proper consultations with
            • system’s potential users.
      Poor performance of IT installations...
          • Is it Hardware - oriented view of costs
          • Total cost of ownership - “TCO”
          • (or)
          • Application specific view
          • Total cost of Application ownership - “TCA”
      Evaluation Models
          • Analysis on Cost of owning and maintaining
          • computer Hardware.
          • Hardware centric approach - irrelevant in the
          • age of internet, web based computing and
          • e-commerce.
      Total Cost of ownership (TCO)
          • Critical incorporation of users - contemporary
          • cost analysis - True cost of providing
          • applications.
          • How applications are deployed, the
          • locations of users, variety of connectivity
          • options, varied types of client devices etc.
      Total Cost of Application ownership (TCA)
          • Critical Factors:
          • Physical location of the application
          • Where application is stored? (server / Client)
          • Related issues
            • IT Personnel Cost
      Total Cost of Application ownership (TCA)...
              • Time required to distribute, install &
              • configure application
              • Cost of managing updates
              • (on tens of thousands of computing
              • devices)
      Total Cost of Application ownership (TCA)...
          • Execution location
            • Where the application actually runs
            • (server, on the client or on some
            • distributed combination)
          • (to determine hardware, net work &
          • connectivity required to access the
          • application)
      Total Cost of Application ownership (TCA)...
          • Physical location of data
            • Location of stored data also determines
            • the speed at which information is
            • available and the cost associated with
            • protecting / backing up valuable data.
      Total Cost of Application ownership (TCA)...
          • Location of user & means of connectivity
            • User’s location & network connectivity
            • have a dramatic impact on cost.
            • Support personnel, network infrastructure,
            • amount of band width required.
      Total Cost of Application ownership (TCA)...
          • Complexity
            • Cost connected with deploying a
            • business critical application to hundreds
            • of thousands of users in dozens of
            • branches around the world !
            • (Therefore type of ‘computing’ models
            • plays an important role.)
      Total Cost of Application ownership (TCA)...
          • Decisions based on total value added
            • Will improved information and
            • communications create new organisational
            • knowledge?
            • Will Collaboration improve?
            • Will Efficiency and productivity improve?
      A New holistic approach - Total Value Added as basis (“TVA”)
          • Major ingredients
            • Cost benefit methodology
            • Robust management process
            • Maturity of business judgement
      A New holistic approach...
          • Cost Category
            • The incremental value created by IT
            • investments
            • The one off IT & business costs
            • The incremental business revenue
            • generated resulting from the investment
      Cost Benefit
          • Impact Category
          • Hard impacts
            • Cost of new hardware
            • Personnel Costs
            • (Controllable & quantifiable after a
            • process has been automated)
      Cost Benefit...
          • Soft Impacts
            • Market share
            • Productivity gains
            • (Uncontrollable but quantifiable)
      Cost Benefit...
          • Unquantifiable
            • Improved competitive position
            • Increased customer satisfaction
            • (Uncertain and difficult to quantify)
      Cost Benefit...
          • Evaluation category
            • How out come of an investment is
            • measured
      Cost Benefit...
          • Basic factors to be considered
            • Time frame over which the investment
            • will be judged.
            • Business & system areas within which its
            • effect will be measured
      Cost Benefit...
            • Financial method that will be used to
            • evaluate results
            • Base case against which results will be
            • compared
      Cost Benefit...
          • Other relevant factors
            • Transition Cost
            • Costs incurred by moving to new system
            • (Business interruption, stop gap IT
            • solutions, Cost of retraining people)
      Cost Benefit...
          • Complexity Costs
            • Costs associated with increase in
            • operating costs when multiple
            • technologies are supported
            • (Maintenance, upgrades cost etc.)
      Cost Benefit...
          • Technical Risks
            • What impact the delay in project would
            • have or if a key functionality not
            • delivered?
            • (Define a few discrete scenarios and
            • estimate financial impact)
      Cost Benefit...
          • Future flexibility Value
          • Eg:
            • Investment in new corporate network
            • with standard protocols / spare band
            • width – limited savings in short term but
            • immensely useful in the long term
      Cost Benefit...
          • Other Commercial factors
            • Consistency, quality, standard
            • sustainability of the vendor – life and
            • acceptability of the technology being
            • adopted in the market
      Cost Benefit...
          • Set of Management Processes that
          • integrates IT into the normal business
          • planning.
          • “ Inter link IT decision making with its
          • business context and get the right people
          • involved at the right time”
      Management Process
          • A Strategic Plan at the Corporate level
          • Linking
          • Business & IT Strategies
          • Basis for
          • Developing strategic / operating plans
      Management Process…
          • Core processes
          • Source of competitive
          • advantages
      Management Process…
          • How IT will support them
          • The five process steps:
          • 1. Corporate strategic Plan
            • Link Business & IT strategy
          • 2. Business Unit strategic plans
            • Formulate IT strategic plans & goals
            • Ensure alignment with business unit plans
      Management Process…
          • 3. Business Unit operating Plans
            • Determine IT Budget
            • Identify Project ideas
            • Develop business cases
            • Prioritise projects
            • Reconcile proposed funding levels with business unit budget target
      Management Process…
          • 4. Corporate Operating Plan
            • Identify Corporate or across Business Unit projects
            • Prioritise & finalise list of projects
      Management Process…
          • 5. Performance evaluation
            • Assess business impact
            • Check goals have been met
            • Decide compensation
      Management Process…
          • No amount of analysis can substitute
          • business judgement.
          • Analysis is meant to reduce uncertainity
          • but unquantifiable factors do exist
          • in every project
          • Maturity of judgement comes along
          • with time and experience
      Maturity of judgement
          • But the following steps help:
          • Key people involvement
            • Senior Business Managers should understand and own IT Investments
            • Helps in other Executives spending the necessary time during IT decisions
      Maturity of judgement...
          • Leverage the Management Process
            • Whole process should not be done mechanically.
            • Each decision needs to be understood well by all and followed up.
      Maturity of judgement...
          • Applications as enablers
          • Generate revenue
          • Offer new / better services
          • Increase levels of user knowledge
          • Enhance productivity
          • Crucial for achieving & sustaining
          • competitive advantage
      Focus for Auditors
          • People involved
            • Employees
            • Suppliers
            • Vendors
            • Customers
      In an ERP Model
            • Modules
            • Materials Management
            • Production Planning
            • Plant Maintenance
            • Selling & Distribution
            • Financial Accounting
      In an ERP Model...
            • Modules
            • Controlling (Management Accounting)
            • Asset Management
            • Human Resources
            • Quality Assurance
      In an ERP Model...
            • Measures (or) Success Factors
            • All controls in place?
            • Process cycle time reduced?
            • Decision taken based on data?
            • Manpower reduced?
            • Cost of operation reduced?
            • Working capital reduced?
      In an ERP Model...
            • Measures (or) Success Factors...
            • Speed / accuracy achieved?
            • Pipeline cash reduced?
            • Inventory levels reduced?
            • People are empowered?
            • (Empower man at the work spot - convert information to knowledge)
      In an ERP Model...
            • Measures (or) Success Factors...
            • Customer reach / satisfaction achieved?
            • Effective communication ensured?
            • Increase in sales (Market share)
            • Brand strengthening (Customer loyalty)
      In an ERP Model...
            • Measures (or) Success Factors…
            • Managing with substantial lean
            • organisation
            • Flexibility (ability to absorb shocks &
            • exploit opportunities)
      In an ERP Model...
          • Live examples of inadequacies in an
          • Integrated System Model
          • Can you measure the impacts?
          • How soon the organisation is able to come
          • out of these?
      Measuring Improvements in efficiency & effectiveness
          • System preventing / delaying despatch of
          • lorry loads
          • Adhoc credit limits uploaded in the system (or) credit limits enhanced to facilitate Invoicing
          • “ Marketing Representatives” selling at ‘street corners’ --> Regularising sales at nearest Branch on batch mode
      Measuring Improvements in efficiency & effectiveness...
          • Continuation of legacy systems - Interface problems with integrated system
          • Smaller locations with no connectivity getting into the system on ‘batch mode’
              • related delays
              • possibility of control deficiencies
              • continuation of manual records
      Measuring Improvements in efficiency & effectiveness...
          • Often left out ‘HR’ Modules !
              • Isolated systems
              • Stand alone ‘front end’ system - not connected with the main system. Eg:
              • Employee Medical System
              • Travel Expense System etc.
      Measuring Improvements in efficiency & effectiveness...
              • Time Management effective?
              • Work flows streamlined?
      Measuring Improvements in efficiency & effectiveness...
          • No supporting features available for business specific activities
              • ‘ Cane Management’ system in a Sugar Industry
              • Refurbished spares accounting - (Eg:motors)
      Measuring Improvements in efficiency & effectiveness...
          • Start up problems : How effectively tackled? First year of implementation
              • Analysis of ‘Non / Slow moving
              • ‘ Stores & Spares’
              • Dealer Credit Limit uploads /
              • monitoring
      Measuring Improvements in efficiency & effectiveness...
              • Batch codes for date expiry / Best before use stocks
              • Manual intervention for small activities
              • (Eg: ‘Gypsum / Battery Acid sale in
              • Fertiliser Manufacturing Units)
      Measuring Improvements in efficiency & effectiveness...
    • “ Main objective of assessing IT Implementation Projects is to improve IT’s contribution to the overall business and not just measure the contribution Back to the Objective…
      • The contribution IT makes to business is
      • a complex mix of
      • IT efficiency and Business efficiency”
      Back to the Objective…
          • Average cost over run - 178%
          • Average schedule over run - 230%
          • Average decline in functional
          • improvements - 59%
      Study by Gartner : Indian ERP Implementation
              • 55% of ERP implementation
              • over run on every sphere
              • 35% were cancelled out right
      Study by Gartner : Indian ERP Implementation...
          • Let’s not worry about this pessimism regarding the success rate
          • ‘ ERP’ has come to stay -
          • Auditors need to sharpen
          • their Audit Tools !
      Study by Gartner : Indian ERP Implementation...
          • India’s growth - 70% over the last 5 - 6 years
          • Rs. crores
          • 1995 - 96 - 12
          • 1996 - 97 - 27
          • 1997 - 98 - 62
          • 1998 - 99 - 134
      Changing Market Scenario - ERP Market
          • .
          • Rs. crores
          • 1999 - 00 - 250
          • 2000 - 01 - 460
          • 2001 - 02 - 650 (estimated)
          • e-business is a major driver of ERP Market
          • (Source : IDC Estimates)
      Changing Market Scenario - ERP Market...
          • Some Information:
          • BPCL
          • - ROI on SAP R/3 implementation totalling to
          • Rs.40 crore on annual savings
      Changing Market Scenario - ERP Market...
          • Fosters India
          • - Closing of accounts would take more than
          • 20 days - now it is less than a week
          • Konkan Railways
          • - (in house ERP) Substantial savings
      Changing Market Scenario - ERP Market...
          • Test for success :
          • Is there a radical departure from past
          • practices?
          • Has every existing process as well as sub-
          • process in the supply chain been put under
          • microscope?
      Changing Market Scenario - ERP Market...
          • Test for success...
          • Whether every process has been put as close to the theoritical optimum methods as possible?
          • (Which eliminates all unnecessary
          • duplications & reverse work flows)
          • After this is achieved, correct ERP product should be put in place with some customisation
      Changing Market Scenario - ERP Market...
          • Test for success...
          • Argument here is,
          • It is not the ideal ERP package or multiple man years spent in customisation & training that will drive the success of an ERP Project.
      Changing Market Scenario - ERP Market...
          • Test for success...
          • If processes are elegant & streamlined and enough effort is put in to make sure that all possible rationalisation and reengineering is done, half the battle is already over.
      Changing Market Scenario - ERP Market...
    • “ THANK YOU “