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Investing in enterprise systems

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A short introduction to enterprise systems investments.

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Investing in enterprise systems

  1. 1. www.handels.gu.se Johan Magnusson Centre for Business Solutions School of Business, Economics and Law University of Gothenburg Investing in Enterprise Systems 2013-08-29Centre for Business Solutions
  2. 2. www.handels.gu.se Agenda After the lecture, you will be able to: 1. Describe the context of IT-related investments and how this is currently changing 2. Explain different methods for evaluating IT-related investments ex- ante and ex-post 3. Describe the ES Procurement process and evaluate how this can be managed 2013-08-29Centre for Business Solutions
  3. 3. www.handels.gu.se Prioritization and the investment process 2013-08-29Centrum för Affärssystem
  4. 4. www.handels.gu.se Hypothesis: Changing patterns of spending 2013-08-29Centre for Business Solutions Degree of Corporate Cost Control (IT Budget/Total IT Cost) Time 100% 0% 1980’s 1990’s 2000’s 2010’s Decentralized investments Strive for integration synergy CIO: “We don’t know” Decisions: Semi-grand decisions Scope of control: Network Centralized investments Costs move to corporate IT CIO: “We know” Decisions: Grand decisions Scope of control: Everything Centralized investments Formalization CIO: “We know better” Decentralized investments Decentralized cost “cost of operations” Consumerization Shrinking grasp of Corp IT CIO “We don’t know all” Decisions: Micro Principles, Integration, Backbone
  5. 5. www.handels.gu.se From Efficiency to Productivity: Changing patterns of IS • Supporting functions are cost-centers • Cost should be minimized • Efficiency as KPI • Supporting functions are profit-centers • Relationship between cost/revenue • Profit as KPI • Supporting functions are investment-centers • Effectiveness in use of resources • Productivity as KPI 2013-08-29Centre for Business Solutions
  6. 6. www.handels.gu.se Questions raised by a governance perspective • Should IS be involved in the prioritization process? • Should the CIO be responsible for IT-related investments? • Should IT be regarded as a cost? • How should costs related to IT be allocated? • Should the CIO report to the CEO or the CFO? • Which costs should be controlled by IS? • How should micro-investments be treated? • Should the CIO be involved in the strategic dialogue? • Who should be responsible for the benefits realization? • Who should prepare the business case? 2013-08-29Centre for Business Solutions
  7. 7. www.handels.gu.se Food for thought: The case of SaaS at Skandiabanken • Software as a Service involves a pay- as-you-go principle • Each key-stroke generates a cost… • Question: Should we treat SaaS as a cost or an investment? • Pro Cost: Cost of doing business, each activity is associated with direct costs • Pro Investment: Long-term commitment before break-even 2013-08-29Centre for Business Solutions
  8. 8. www.handels.gu.se The investment evaluation ex-ante/ex-post • Ex-ante – Guess-works on cost and benefits – ROI, TCO, EVA, PP, PENG et cetera – How do we find the cost of something that is dependent upon our own input across the entire enterprise? – How do we identify the benefits across the entire enterprise? • Ex-post – 20% of IT-projects employ ex-post financial assessments – The reasons why not… – Issues of causality and instrumentality 2013-08-29Centre for Business Solutions
  9. 9. www.handels.gu.se Food for thought: What does the vendor want you to use? • The battle between ROI and TCO • ROI: Return on Investment • TCO: Total Cost of Ownership • Assumptions: – The per item size of the investment is decreasing – The switching cost is decreasing • Question: Which method should you use in your business case? 2013-08-29Centre for Business Solutions
  10. 10. www.handels.gu.se Example of evaluation • Small team working together with consultant year 1, doubling costs year 2, ready year 3 – BPR analysis and formation of training team • Software costs 3 M € • Hardware costs 500.000 € • Operating costs from year 4 (2 M €) annual increase 10% • Needs for futher development year 4/5 • Cost of Capital 20% • Benefit year 4 is approximately 4 M € with an annual increase 10-30% • IRR: 25/5%
  11. 11. www.handels.gu.se Net Present Value Year Investment Operations Benefit(30%) NPV30 Benefit(10%) NPV10 1 1,200,000 -1,000,000 -1,000,000 2 7,500,000 -5,208,333 -5,208,333 3 5,000,000 -2,893,333 -2,893,333 4 3,000,000 4,000,000 482,253 4,000,000 482,253 5 2,500,000 5,200,000 1,085,069 4,400,000 763,567 6 2,420,000 6,760,000 1,453,457 4,840,000 810,453 7 2,662,000 8,788,000 1,709,654 5,324,000 742,915 8 2,928,200 11,424,400 1,975,945 5,856,400 681,006 9 3,221,000 14,851,720 2,254,108 6,442,040 6240225 10 3,543,122 19,307,236 2,545,992 7,086,244 572,234 NPV 2,404,627 -4,425,168
  12. 12. www.handels.gu.se Payback Year Investment Operations Benefit(30% Netto (30% Netto (10% Ack.30% Ack. 10% 1 1,200,000 -1,200,000 -1,200,000 -1,200,000 -1,200,000 2 7,500,000 -7,500,000 -7,500,000 -8,700,000 -8,700,000 3 5,000,000 -5,000,000 -5,000,000 -13,700,000 -13,700,000 4 3,000,000 4,000,000 1,000,000 1,000,000 -12,700,000 -12,700,000 5 2,500,000 5,200,000 2,700,000 1,900,000 -10,000,000 -10,800,000 6 2,420,000 6,760,000 4,340,000 2,420,000 -5,660,000 -8,380,000 7 2,662,000 8,788,000 6,126,000 2,662,000 466,000 -5,718,000 8 2,928,200 11,424,400 8,496,200 2,928,200 -2,789,800 9 3,221,000 14,851,720 11,630,700 3,221,020 431,220 10 3,543,122 19,307,236 15,764,114 3,543,122
  13. 13. www.handels.gu.se Examples: ROI and Business Case • Gartner Toolkit CPM Investment 2008 • Gartner Business Case ERP 2013-08-29Centrum för Affärssystem
  14. 14. www.handels.gu.se Investing in ES • Identification of demand and requirements • Identification of potential solutions • Building your business case • Managing the vendors • Planning the project • Negotiations 2013-08-29Centre for Business Solutions
  15. 15. www.handels.gu.se Identification of demand and requirements • What do we really want to achieve? – Improved efficiency through rationalization – Improved control and agility • What are the motives for our (re- )investment? – Political, esthetic, control, disgruntled • What is the time-line for the project? • What can we hope to free in terms of resources? • What should the scope of our ambitions be? • Should end in a process-based requirement analysis but rarely does… 2013-08-29Centre for Business Solutions
  16. 16. www.handels.gu.se Identification of potential solutions • Objective: Find the right solutions • Determined by the scope of the requirements • Talking to competitors, friends etc • Potential use of external consultant • Results in a “long-list” of potential solutions 2013-08-29Centre for Business Solutions
  17. 17. www.handels.gu.se Building your Business case • Objective: Win support and priority! • Specify and market your investment idea • Find the costs (not only direct) • Trace the expected benefits and quantify • See what you are up against… 2013-08-29Centre for Business Solutions
  18. 18. www.handels.gu.se Example of a Business Case 1. Front (summary) 2. Executive summary 3. Introduction and background 4. Recommended solutions and alternatives 5. Cost and benefit and risk analysis 6. Project plan 7. Appendixes – Cash flow analysis – Details of alternatives – List of identified risks and planned mitigation actions, auditing etc – Detailed project schedule and resource plan – List of sponsors, participants and organization – Plan for post-implementation review 2013-08-29Centrum för Affärssystem Source: Gartner Bizcase template 2007
  19. 19. www.handels.gu.se Managing the vendors • Objective: Gain friends and influence people • What do we want from the vendors? • What do we want to pay? • When do we want it? • What do the vendors know about us? • How much do we want them to know? • How should we act to make sure we get what we want? • Ends in a short-list of equally good solutions 2013-08-29Centre for Business Solutions
  20. 20. www.handels.gu.se Negotiations • Objective: Secure the correct pre- requisites for a successful implementation • What should we pay? • How should we pay? • Who do we get? • What do we get? • How should we control the project outcome? • How should we plan for failure? 2013-08-29Centre for Business Solutions
  21. 21. www.handels.gu.se Planning the project • Objective: Find the time, scope and budget of the project and secure the internal resources (staffing) • When do we want to Go Live? • How do we wish to Roll out? • What are the key factors we need to relate to? • Will be dependent upon the choice in solution and vendor 2013-08-29Centre for Business Solutions
  22. 22. www.handels.gu.se Recapitulation 1. Describe the context of IT-related investments and how this is changing 2. Explain different methods for evaluating IT- related investments ex-ante and ex-post 3. Describe the ES Procurement process and evaluate how this can be managed 2013-08-29Centre for Business Solutions
  • mamazura

    Apr. 3, 2015

A short introduction to enterprise systems investments.

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