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Information economics

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IT Economics is a means of selecting IT projects with highest possibility of generating added value for the company.

Published in: Economy & Finance
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Information economics

  1. 1. Information Economics The classical approach Jeroen Hoevenberg 2control4IT Jeroen.Hoevenberg@2control4IT.nl
  2. 2. Classic Information EconomicsInformation Economics regards the ex-anteassessment of IT investments. It is regardingboth the individual project and the projectportfolio and is meant as a frame work in orderto assign the scarce IT budgets in such a waythat the highest Added value is generated.Information economics is a multi criteria analysisinstrument taking into account both tangibleindicators as intangible indicators.The subject of Information Economics was developed by Parker and Benson (see Benson, 1991).
  3. 3. Main used Benefit Indicators (1)1. Return on Investment (ROI) A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. The return on investment formula: It is also possible to use similar indicators as net present value, etc2. Strategic Match (SM) Strategic match assesses the degree to which the proposed project responds to established corporate and business strategies and goals. This dimension emphasizes the close relationship between IT planning and corporate planning, and it assesses the degree to which a potential project contributes to corporate strategy.
  4. 4. Main used Benefit Indicators (2)3. Competitive Advantage (CA) Competitive advantage evaluates the degree to which the proposed project provides an advantage in the marketplace, for example, inter-organizational collaboration through electronic data interchange.4. Management Information (MI) Management information is an assessment of a projects contribution to managements need for information on core activities, e.g., activities directly involved in the realization of the firms mission, as distinguished from support and accounting activities.5. Competitive Response (CR) Competitive response evaluates the degree of business risk associated with not undertaking the project.
  5. 5. Main used Benefit Indicators (3)6. Service and Value (SV) Measurements of customer satisfaction (service and value) must be made from the customers viewpoint. This measurement takes into consideration such things as ease of access, credibility, competence, reliability, courtesy, security and responsiveness. It also attempts to measure the degree to which customers "like" to do business with the company.7. Strategic IT Architecture (SA) Strategic IT architecture assesses the degree to which the proposed project fits into the overall information systems direction. It assumes the existence of a long-term IT plan, i.e., an architecture or blueprint that provides the top-down structure into which future data and systems must fit.
  6. 6. Main used Risk Indicators (1)1. Strategic Uncertainty (SU) Strategic uncertainty is an assessment of the degree to which the business strategy is likely to succeed. That is, information technology projects associated with a risky business strategy are also at risk, a fact to consider in assessing a projects viability.2. Organizational Risk (OR) Organizational risk is an assessment of the degree to which an information systems project depends on new or untested IT or Business skills, management capabilities, or experience.3. IT Infrastructure Risk (IR) The assessment of IS infrastructure risk is essentially an environmental assessment, involving such factors as data administration, communications, distributed systems, etc. It assesses the degree to which the entire IT organization is both required to support the project and the degree to which it is prepared to do so.
  7. 7. Main used Risk Indicators (2)4. Definitional Uncertainty (DU) Generally, definitional uncertainty assesses the specificity of the users or business objectives that are communicated to the IT project personnel. When the user cannot properly describe a problem, the technology department is hard-pressed to supply an answer (quality of requirement engineering).5. Technology Uncertainty (TU) Technology uncertainty assesses a projects dependence on new or untried technologies, which may involve a single technology or a combination of new technical skills sets, hardware, or software tools.
  8. 8. Framework for Assessment of Projects Every participant is scoring the project at the assessment items. The individual scores are added and a mean result is calculated in order to prevent manipulation of outcomes. Large differences between individual scores should be discussed.Assessment of an individual project AssesmentName Function ROI SM CA MI CR SV SA SU OR IR DU TUABCDAverage W ei ght ROI = Return on Investment Score tabel SM = Strategi c M atch 0= Of no Importance CA = Competi ti ve Advantage 1= Of somewhat i mportance MI = M anagement Informati on 2= Of l i ttl e i mportance CR = Competi ti ve Respons 3= Of i mportance SV = Servi ce and Val ue 4= Of great i mportance SA = Strategi c IT Archtecture 5= Of very hi gh i mportance SU = Strategi c Uncertai nty OR = Orgi ni zati onal Ri sk IR = IT Infrastrcuture Ri sk DU = Defi ni ti onal Uncertai nty TU = Technol ogy Uncertai nty
  9. 9. Framework for Assessment of Projects• The framework can also be used in communication with the business or from the business.• Scoring can be done by a fixed group and/or by project related stakeholders (However one should take into account that stakeholders tend to over/under-estimate scoring).• A variance based on the statistical deviation can be used to analyse the effect of mavericks.
  10. 10. Framework for Portfolio AssessmentThe whole portfolio is assessed on al criteria. All criteria have received thereown weight. Based on added value and risk a score of importance can becalculated.Assesment of Project Portfolio Added Value RisksCri teri a ROI SM CA MI CR SV SA SU OR IR DU TURel ati ve i mportance Score T Score + Score -W ei ght +/- + + + + + + - - - - -Project ScoringA 0 0 0B 0 0 0C 0 0 0D 0 0 0 Score tabel 0= Of no Importance 1= Of somewhat i mportance 2= Of l i ttl e i mportance 3= Of i mportance 4= Of great i mportance 5= Of very hi gh i mportance
  11. 11. Assessment MatrixThe results of a portfolio assessment can also be plotted in a matrix table. Thematrix provides more information on Added Value vs Risks. Execute Reduce Risk Added Value Score Redefine Kill Project Risk Score
  12. 12. ExampleA ssessm en t of Pr oject A A ssesm en tN am e Fu n ct i on RO I SM CA MI CR SV SA SU OR IR DU TUA 3 4 3 2 5 3 0 2 3 2 4 1B 4 5 3 4 5 2 1 2 3 3 5 1C 4 5 3 4 5 1 1 2 3 1 5 1D 4 4 3 2 5 0 0 2 4 3 5 1A v er age W ei gh t Pr oj ect A 3,8 4,5 3,0 3,0 5,0 1,5 0,5 2,0 3,3 2,3 4,8 1,0Assesment of Project A within Portfolio Added Value RisksCriteria ROI SM CA MI CR SV SA SU OR IR DU TURelative importance 4 5 4 3 2 4 3 2 4 3 3 2 Score T Score + Score -W eight +/- + + + + + + - - - - -Project ScoringA 3 4 5 3 3 5 2 1 2 3 2 5 74 37 37B 4 4 4 4 4 4 4 3 2 2 5 3 80 32 48C 3 3 1 5 2 5 1 1 1 1 1 1 60 11 49D 4 3 3 3 3 3 3 3 3 3 3 3 60 33 27In this example project A has a positive score, but is only third in line within theportfolio.
  13. 13. Assessment Matrix exampleThe assessment matrix shows that none of the projects is good enough tobe executed.The model can be extended with a weight for Project costs in order to makechoices from a scarcity point of view.
  14. 14. Assesment Matrix with size Added value 120 110 Execute Reduce 100 Risk 90 80 B 30 100 A 70 60 C 50 40 30 25 D 20 Redefine 10 Project Kill 0 Risk 0 5 10 15 20 25 30 35 40 45 50 55 60It is not only possible to have analysis per project, but also it ispossible to cluster projects to themes.
  15. 15. Prioritizing In PPM Deci si on process• Continuity (Maintain) Budget – Budget needed to keep to keep business momentum Pri ori ty < K€ 250 >= K€ 250 Mai ntai n No Yes – Budget needed for mandatory changes Improve No Yes Leadershi p Yes Yes• Efficiency (Improve) – Budget needed based on ROI for => K€ 250,-• Business Innovation (Leadership) – Budget reserved for high risk business innovation• IT Innovation (Leadership) – Budget reserved for high risk IT innovation• Budget limits (<K€ 250,- change)
  16. 16. LiteratureR.J. Benson (1991), Determining the value of information Technology, in: “Handboek bestuurlijke informatiekunde”.J.A. Oosterhaven (2007), ICT-strategie en – organisatie in theorie en praktijk, Sdu Uitgevers BV, Den Haag.
  17. 17. 2control4IT2control4IT is a consultancy company specialized on IT cost management, activitybased costing, IT charge back systems and added value analysis. 2control4IT createsinsight and transparency. These two elements are basic requirements for bothreducing IT costs and increasing IT added value. Transparency also works as a lever forthe quality delivered and is the basis for trust based management.Services:• Create transparency in IT costs – Total cost of ownership – Indirect costing analysis – Cost modeling – Benchmark support – KPI Frameworks• Create transparency in IT volumes – CMDB cleaning – Uniformity in incident and problem registration• Create relations between costs and volumes – Activity based costing – Activity based management – Activity based budgeting (including internal transfer prices) – Scenario planning for strategic decisions 17
  18. 18. 2control4IT• Create strong business control – Coaching – IT business control training – Interim IT business control – Performance dialogues – Change programs Contact 2control4IT Jeroen Hoevenberg +31(0)6-5894 6176 Jeroen.hoevenberg@2control4IT.nl 18

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