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Kohli & Devaraj l Business Value of IT Investments R EALIZING THE B USINESS V ALUE OF I NFORMATION T ECHNOLOGY I NVESTMENTS : A N 1 O RGANIZATIONAL P ROCESS Rajiv Kohli Executive Summary University of Notre Dame A primary reason businesses fail to realize intended payoffs from their information technology (IT) investments is their lack of an effective process for planning, imple- Sarv Devaraj menting, evaluating, and institutionalizing the payoffs. We present a framework to University of Notre Dame conceive and implement an IT investment’s payoffs, ensure creation of the appropri- ate assets needed to achieve the payoffs, and measure the actual outcomes. The four phases in the AIAC framework are A lignment, Involvement, Analysis, and Commu- nication. In examining the business value of IT through this framework, we present three cen- tral themes in this paper: 1. IT payoffs are the responsibility of the entire organization, not just the IT department. 2. Management of IT payoffs begins prior to the investment and continues through post-implementation. 3. IT payoffs are contingent upon creating and exploiting complementary as- sets. We illustrate an organizational process for managing IT investments and measuring the business value of those investments by drawing on the experiences of Holy Cross Health System, a multi-entity healthcare organization that invested in a corporate- wide cost information system (CIS) and established a mechanism to extract business value from that investment. 11% over the previous year, even though other spend- WHY MEASURE THE BUSINESS ing had slowed. VALUE OF IT? These estimates of investment indicate that IT contin- ues to be regarded as a critical resource that leads to Worldwide spending on information technology (ITorganizational value. However, this assumption has in 2003-04 is estimated to grow in every major snot always been shared by functional business manag- 2 ment of the economy.he US financial services secers. CIO’s often complain that IT is not given the op- tor, which accounts for a large part of US IT spportunity to shape business strategy. For their part, is pr3jected to increase spending by about 15% bbusiness managers – CEO, COO and CFO – charge 2005. Similarly, the US government budget for 20that IT managers do not always understand the nature anticipated $50 billion in IT spending, an increof the business and, instead, focus more on the tech- nology. The reality is that payoffs from IT invest- ments are not just the responsibility of the IT function. 1Mike Vitale was the accepting Senior Editor for this article. 2“Gartner Dataquest Says 14 Vertical Markets to Increase IT Spending uses IT or is involved in the in 2003” http://www4.gartn/5_about/press_releases/pr21 3an2003a.jsp. The Financial Services Fact Book http://www.fin4ncialservicesfacts. in banking, insurance, and securities services.rnews.com, 2002, http://news.com.com/2100-1001-830196.html. © 2004 University of Minnesota MIS Quarterly Executive Vol. 3 No. 1 /53arch 2004 Kohli & Devaraj l Business Value of IT Investments Figure 1: Phases and steps in the AIAC framework for measuring IT Payoff (Adapted from Devaraj and Kohli, 2002) Phases Alignment Involvement Analysis Communication •AlignBusiness- • Involve •tsb • Make Actionable IT Strategy Customers Analytics Steps • Communicate • Invest in • Create Tangible • Validate Results Results Steps Complementary and Intangible Assets • Choose IT • Make the rtIn • Institutionalize Business Case Results Payoff Analysis Investment Type value generation shares respon sibility for aligning IT Lack of clear responsibility, inaccurate measurement, with business functions. and misplaced investment, when combined with skep- ticism over the value of IT, can lead to frustration and Nevertheless, measuring the business value of IT re- finger pointing when the expected payoffs are not re- mains a resource-intensive, yet desirable, goal. In a alized. recent survey, 86% of the information systems profes- sionals felt that measuring IT value was an important The Benefits Of A Measurement or an extremely important priority. Yet only 10% felt Process that the value measures were very reliable or highly reliable. Furthermore, the survey indicated that less A well-organized IT payoff measurement system serves as a mechanism for monitoring and insuring than 15% of the companies conducted post- 5 implementation measurement of IT business value. “the conversi6n effectiveness” of IT assets into busi- Measurement of IT entails a broad time frame, begin- ness results. A measurement system assists managers in capitalizing on organizational resources, creating an ning at pre-investment strategy formulation and con- tinuing well after the investment is made. IT measurement process, and taking corrective action when an IT investment does not yield the expected payoffs. Realizing value also requires additional investments or process changes, such as training, process redesign, and skilled people, to complement the IT investment. 6Weill, P. The Relationship between Investment in Information Tech- 5Gliedman, C. “Measure Business Va lue Created by IT Spending to nology and Firm Performance: A Study of the Valve Manufacturing Fight Perceptions of Little Benfit,” 2000, http://www.microsoft. Sector, Information Systems Research , 3, 4 (1992), 307-333, defines com/business/articles/value/valgiga.asp. conversion effectiveness. 54 MIS Quarterly Executive Vol. 3 No. 1 / March 2004 © 2004 University of Minnesota Kohli & Devaraj l Business Value of IT Investments Figure 2: Key Personnel, Resources Required, and Expected Outcomes in the Four Phases of the AIAC Framework Alignment InvolvementAnalysis Communication Who • Board of directors • Chief • IT department • Top management should be Technology Officer • C-Level • Hybrid managers • IT department involved? executives • Business process owners • External • Business unit • External consultants managers consultants • External and internal customers • Financial analysts • Office of Project Management Resources • Market • Coordination • Statistical and • Web development required intelligence expertise analytical expertise • Project management • Business forecast • Business domain • Representative experts business scenarios • Writing and • Current strategic communication plan • Technology • Data mining of expertise experts historical data • Attendance at user- • Forum to get group meetings business and IT experts together Outputs • Aligned IT- • Needs assessment • A business case • Press releases business strategy document and technical expected • Town hall meetings document to • Buy-in and support report outlining the serve as a findings of the • White paper on IT roadmap for from process analyses in impact on department milestones, owners practical terms as well as timelines, • IT assets created • IT use that leads to organizational constituencies tangible and processes involved intangible payoffs • IT payoff as a • Decision to invest managerial dashboard in strategic • IT impacts on the indicator technologies such organization • Organizational as corporate-wide • Assumptions, ERP or mobile limitations, and learning for future IT commerce generalizability of projects the analyses An organized measurement process to demonstrate the ment roles and processes. 7 IT investments can be business value of IT addresses the demands for greater viewed as seeds and complementary investments accountability as the size of IT investments increases viewed as the nourishment necessary for the invest- and as other business functions compete for a piece of ments to yield the expected payoffs. A recent study the total investment pie. suggests that each $1 invested in IT may require as much as $5 in complementary investments to yield Being able to extract business value from IT invest- ments also demonstrates to stakeholders an important knowledge asset. Prerequisites include complementary 7Sambamurthy, V., and Zmud, R.W. “Arrangements for information investments and changes, such as effective manage- technology governance: A theoof multiple contingenciMIS” Quarterly (23:2), June 1999, pp 261-290. © 2004 University of Minnesota MIS Quarterly Executive Vol. 3 No. 1 / March 2554 Kohli & Devaraj l Business Value of IT Investments Holy Cross Health System (HCHS) Invests in a Cost Information System Holy Cross Health System (HCHS) is a national network of hospitals across the United States. The member hospitals have combined beds of over 4000, employ about 20,000 people, and have total operating revenues of approximately $1.5 billion. Many HCHS hospitals have been providing healthcare for over 100 years. The hos- pitals provide a range of services, including acute care, extended care, residential facilities for the disabled and elderly, and occupational medicine. The Business Challenge Was to Calculate Costs In the 1990s, many hospitals suffered financial losses from increased costs and decreased reimbursement for services. HCHS hospitals faced such conditions and th eir profitability depended upon how well they could align their costs with expected reimbursements, either by reducing costs or by negotiating financially favorable insurance contracts, or both. Hospital administrators know what they charge for patient services, but they usually do not know how to de- termine the actual cost of a service or procedure. Traditionally, hospitals have calculated costs based on the cost-to-charges ratio, where total costs are divided by total charges (revenue) and the resulting ratio is applied to each service. As a result, a large portion of costs are fixed costs and remain outside the managers’ control. Furthermore, when the cost of a procedure is uncertain , hospitals have difficulty assessing whether or not an insurance contract will result in a profit or a loss. The Solution Was a Cost Information System HCHS determined that to exercise better control over its operations, such as cost reduction and process redes- ign, it had to develop a reliable cost information system (CIS). The CIS would be integrated with, among oth- ers, the general ledger for expenses, the order entry systems for resources consumed, and the human resources systems for labor costs. In addition, the business managers would set productivity benchmarks to calculate la- bor costs. Depending upon the resources consumed, cost s would be allocated to each procedure. These costs would be applied to each patient’s medical record and used by the decision support system (DSS) in various analyses. Similar challenges of cost containment and control over operations are being experienced by automobile com- panies, electronics manufacturers, and financial services companies because competitive pressures have neces- sitated cost cutting and process redesign. 8 9 successful payoff. Organizations that fail to make Communication—as shown in Figure 1. The feed- these complementary investments can put their IT back loop at the end of each phase provides learning payoffs in jeopardy. and refinement of the IT implementation and payoff process. THE AIAC FRAMEWORK FOR 1. In the alignment phase, all technology investments MEASURING IT PAYOFFS undergo a critical review of the fit between the Despite targeted investments in IT and performance business strategy and the IT investment in support- measurement systems, IT investments often fail to ing that strategy. demonstrate benefits because the measurement proc- 2. In the involvement phase, the customers or users of ess is weak. A robust measurement process addresses the shortfalls noted above. the IT investment are engaged in the payoff proc- ess and in selecting the appropriate metrics to The AIAC framework is a ro bust process with four gauge payoff. phases—Alignment, Involvement, Analysis and 8 9 Brynjolfsson, E., and Hitt, L.M., “Beyond computation: InformDevaraj, S. and R. Kohli, The IT Payoff: Measuring Business Value of technology, organizational transfor mation and business perfoInformation Technology Investment , Financial Times Prentice Hall, Journal of Economic Perspectives (14:4) 2000, pp 23-48. Upper Saddle River: NJ, 2002. 56 MIS Quarterly Executive Vol. 3 No. 1 / March 2004 © 2004 University of Minnesota Kohli & Devaraj l Business Value of IT Investments 3. In the analysis phase, the actual payoff is assessed. To discuss the strategies for accomplishing the goals Unfortunately, many IT payoff projects conclude of each AIAC phase, we use the journey of Holy at this point and do not learn from the experience. Cross Health System in investing in a cost information system and establishing mechanisms to ensure contin- 4. In the communication phase, the findings of the analysis are disseminated in a meaningful and use- ued payoffs from that investment. able form to promote learning and improvements in achieving paybacks. IMPLEMENTING A PROCESS TO ASSESS CIS PAYOFFS AT HOLY Figure 2 answers the following questions about each phase of the framework: CROSS HEALTH SYSTEM The details of the four phases of the AIAC framework 1. Who should be involved in this phase? can be demonstrated by first presenting their use in general and then their use at HCHS. The steps in each 2. What resources are required to successfully im- plement this phase? phase are shown in Figure 3. Note also that the proc- ess perspective in the framework shows that the proc- 3. What outputs can be expected from this phase? ess begins with investments to create IT assets, which This snapshot of responsi bilities, resources, and ex- are then converted into impacts, both at the process pected outcomes can help managers plan and foresee and the organizational level. the results of each phase, and it can be used as a Phase I: Alignment communication tool to gain buy-in from those who will be involved or will provide resources or benefit The alignment phase proposes that an organization from the investment. can expect IT to pay off only after the IT investment is Figure 3: An Expanded AIAC Framework With Tools And Techniques Used In Each Step Alignment Involvement Analysis Communication Establish Analytics Align Business-IT Involve Customers Make Actionable Strategy • Joint Application • Cost Benefit Steps Development • Regression analysis • ‘Back at my desk’ • Porter’s model • Procurement • Production function • Integrate with • Resource Based • Real Options View existing processes • Industry benchmark Invest in Create Tangible and Communicate InvestmentsIntangible Assets Validate Results Impacts Results Complementary • Balanced Score • Commonsense Assets Card – Financial, check • PR support • Infrastructure • Reality check • Town hall meetings • Training Quality, Customer • User review • Intranet website • Marketing service, • Reverse validation • User groups • Process redesign satisfaction • Actual usage Interpret Results Choose IT Make the Business • Plain English Institutionalize Case Payoff Analysis Investment Type • Critical Success interpretation • Project • New investment Factors • Extent of the effect management • Maintenance • Failure analysis • List caveats • Change • Upgrade • Acknowledge management • Prospective unknowns • Reward mechanism Feedback © 2004 University of Minnesota MIS Quarterly Executive Vol. 3 No. 1 / March 2004 57 Kohli & Devaraj l Business Value of IT Investments aligned with the business strategy. Alignment also tem that does not do its job. 10 In spite of the frequent implies that the organization summons all its relevant calls for business executives to improve this align- resources to fully exploit the use of the new technol- ment, there are indications th at they often believe the ogy. IT function is solely responsible for IT-business alignment. 11 When this view is held in an enterprise, The alignment phase responds to the common pitfall IT must take primary responsibility for IT-strategy of IT investing that occurs when the investment is alignment. made without a clear and agreed-upon objective, the resources may not focus on achieving the organiza- IT-business strategy alignment should consider inter- tion’s strategy. IT investments can be deployed to nal and external opportunities as well as resource re- achieve any number of objectives, including improv- quirements. Michael Porter, of the Harvard Business ing customer satisfaction, increasing the customer School, states that corporations need to incorporate IT base, or improving operational efficiency. Each could into their business strategy formulation rather than 12 entail a different investment. Some IT investments focus on IT’s operational role. Technology strategy aim to cut costs, others to deliver convenience to the and business strategy need to be orchestrated prior to customers, and still others to create new business op- deploying IT. portunities. Although all investments aim to improve business profitability, different IT investments mani- Furthermore, IT managers need to understand the fest value in different ways. business, the manufacturing process, and the objec- tives of the organization. Henderson and Venkatra- 13 Align Business and IT Strategies man present four perspectives of strategic alignment based on the driving force—business strategy or IT Aligning business and IT strategies is the first step in strategy. Business strategy can dictate internal IT in- the alignment phase, as shown in Figure 3. Companies take various approaches to this step. For example, frastructure and drive the IT strategy, just as IT can be an enabler of business strategy. The key is their when the insurance company USAA partnered with alignment. IBM to invest in a document management system, it was aligning its business strategy of providing low- cost insurance services with the enabling potential of • Alignment driven by business strategy manifests in two forms. One is strategy execution, where the IT. Similarly, Sotheby.com utilized Amazon.com’s business strategy determines organizational de- infrastructure to auction artwork and earn commis- sions even on art sales of it competitors. sign, IT investments, an d IT infrastructure. The second is technology transformation, where the business strategy leads the organization to explore Organizations invest significant time and effort evalu- innovative IT, such as at USAA. ating the strengths and weaknesses of their business strategy, to determine where and how they can capital- • Alignment driven by IT strategy also takes two ize on their strengths to generate business opportuni- forms. One exploits the competitive potential of ties. Yet, that same vigor in planning and alignment is IT, as at Sothebys.com. The second establishes a often missing in IT investment decisions. Instead, world-class service using IT, such as Apple pro- these decisions are based on costs and immediate viding the iTunes online channel for the sale of benefits. music. Each functional department should align its strategy Techniques for aligning business and IT strategies. with the organization’s strategy and how its use of IT Michael Porter’s Value Chain Analysis 14can be used supports that strategy. For instance, finance and mar- to make a business case for IT investment and value— keting functions should ensure that IT investments to to identify where IT can contribute to generating support a marketing campaign are in line with organ- 10 izational goals and will lead to expected customer re- “Who’s In-charge: CIO or CFO?” by Gawiser, Management Ac- sponses. Similarly, the corporate development func- 11unting, (76:4), October, 1994. tion should explore where IT can enable business op- Koller and Peacock, “Time for CFO to Step-up”The McKinsey 12arterly, 2002 Number 2, Risk and resilience portunities that support the business strategy. “Competing interests,” CIO magazine, Interview: Michel E. Porter, 13tober 1, 1995, 63-68. When the responsible business functions are not in- Henderson and Venkatraman have created a large body of IT- volved in this investment-strategy alignment step, the Business strategy related research. For the framework cited here. see “Strategic Alignment: Leveraging Information Technology for Trans- organization may end up with a fancy computer sys- 14rming Organizations,” IBM Systems Journal, 38(2), 1999, 472-484. For detailed discussion and examples of applying the value chain analysis, see Porter, M.E.. Competitive Strategy: Techniques for Ana- lyzing Industries and Competitors, Free Press, New York, 1980. 58 MIS Quarterly Executive Vol. 3 No. 1 / March 2004 © 2004 University of Minnesota Kohli & Devaraj l Business Value of IT Investments value. His value chain anal ysis framework offers a man resource development, and organizational redes- lens to view the value added by each constituency that ign. comes together on a product or service. Types of complementary assets. Complementary He classifies organizational activities as primary or assets need not be physical assets. Consider the IT- secondary. Primary activities start with the receipt of enabled business processes at Amazon.com and cus- raw materials and continue through conversion to tomer order fulfillment processes at Dell Computer. products, shipment to customers, marketing the prod- Both have led to extraordinary payoffs and competi- uct, and after-sales service. These activities are in- tive value. In both cases, the physical IT infrastructure bound logistics, operations, outbound logistics, mar- and process know-how can be viewed as complemen- keting and sales, and service. IT can add business tary assets to other IT investments. value at each activity by reducing costs, strengthening relationships with business partners, and creating In referring to the firm’s IT infrastructure as a com- market flexibility. The secondary activities, which cut plementary investment, Weill and Vitale propose that the infrastructure is critical in executing a firm’s busi- across the primary activities, are procurement, tech- ness strategy.15 They emphasize that it is the responsi- nology development, human resources, and firm infra- structure. bility of IT governance to involve IT in infrastructure strategy and decisions so that the performance of the Another technique for viewing IT contributions to IT investment can be monitored. competitiveness is called the resource-based view. It looks at how a firm uses its resources and capabilities In a competitive marketplace, training for employees better than its competitors. who can take advantage of available IT is critical to the success of the investment. GE’s Answer Center Strategy alignment at HCHS . Consistent with the and Progressive Insurance’s online quote center are above-mentioned IT-business strategy alignment and examples where trained employees can be viewed as Porter’s value chain analysis, HCHS decided that its complementary assets because they exploit the tech- hospitals’ cost containment motivation made ‘opera- nology to provide extraordinary customer service. In tions’ the primary focus. Th e business strategy was to both organizations, the IT investments would have strengthen operations using clinical and information less value without the knowledge assets of trained technology as well as managerial resources. employees. As one executive remarked, Similarly, product marketing campaigns are comple- mentary assets when they are essential to IT invest- “Without accurate procedure costs, the hospi- ments, such as those designed to accept and fulfill tals are ‘flying blind.’ The managers must customer orders. For instance, although the informa- know the actual costs so that they can decide tion technology and employee reward systems sur- where to cut costs and which contracts to ac- rounding AT&T’s Universal Card were exemplary, cept.” they were exploited only after commercials aired dur- ing the Super Bowl led to a large number of customers HCHS decided to draw on domain experts to assess 16 the business requirements for an activity-based Cost applying by phone for the cards. The IT assets pro- Information System (CIS). This investment required vided vital information about the target customers so that future marketing campaigns (another complemen- IT professionals, business managers, financial ana- tary asset) could be targeted effectively. lysts, and clinicians to be involved. A multi- dimensional database tool, On-Line Analytical Proc- Barua and colleagues invoke the theory of comple- essing (OLAP), would give the hospitals a way to mentarity to mathematically demonstrate that changes align the IT investment with the business strategy be- in business processes are n ecessary to observe an or- cause it would allow them to simultaneously allocate ganizational impact. 17 Well-designed business proc- costs to produce accurate activity-based costs. esses, strategically supported with complementary IT, Invest In Complementary Assets 15 Weill, P., and Vitale, M. “WhIT infrastructure capabilities are Investing in complementary assets is the second step needed to implement e-business modelsMIS Quarterly Executive in the alignment phase. An organization can expect 16:1), Mar 2002, 17-34 meaningful payoff only when its IT investments are Shapiro, Roy D., Michael D. Watkins, Susan Rosegrant. Measure of accompanied by changes in business processes, hu- Delight: The Pursuit of QualitAT&T Universal Card Services , 17rvard Business School Case 9-694-047 (1993). Barua, A., C.H.S. Lee, and A.B. Whinston, “The calculus of reengi- neering,” Information Systems Research (7:4) 1996, 409-428. © 2004 University of Minnesota MIS Quarterly Executive Vol. 3 No. 1 / March 200459 Kohli & Devaraj l Business Value of IT Investments can create organizational assets that are difficult for nologies of the future even though they might not pro- competitors to imitate. Conversely, failure to invest in vide short-term returns). complementary changes or appropriate assets can Investing at HCHS. The market conditions dictated damage current operations. For instance, when medi- cal equipment manufacturer MacroMed did not redes- that accurate cost information was critical for the hos- ign its manufacturing processes and restructure its pitals to thrive. Therefore, HCHS decided to enhance its existing decision support system by adding cost organi18tion, the new technology worsened its opera- tions. allocation and activity cost calculation capabilities. In doing so, HCHS managers developed models of mar- Complementary assets at HCHS. HCHS decided ket behavior under different scenarios of managed that one complementary asset should be training— care. Accurate costs and associated activities would training its cost accounting managers, educating its enable HCHS to redesign its clinical processes and departmental managers to exploit cost information for automate its business processes. Combined with clini- cost control and process redesign, and showing its cal outcome information, cost information would also marketing managers how to generate reports to use in establish best practices for treating patients. Thus, the contract negotiations. decision to enhance an existing system, rather than the other options, was consistent with HCHS’ business Process redesign was a se cond complementary asset objectives of developing modeling capabilities to because it would increase the financial and patient 19 forecast market conditions. care quality benefits to the hospitals. The hospitals used a spreadsheet to identify processes to redesign. Phase II: Involvement The spreadsheet ranked processes by total cost (cost x volume) as well as evaluation by managers of how Involvement implies involving (i) internal customers, such as finance, human resources or marketing profes- well HCHS performed the activities in each process. sionals, and (ii) external end customers, such as online Low-performing processes with high total costs were chosen for redesign. For instance, most of the hospi- banking customers or software users. tals conducted a high volume of cardiac catheteriza- Involvement hinges on IT organization and IT gov- tion procedures, each of which costs tens of thousands ernance. Agarwal and Sambamurthy 20 discuss various of dollars. As clinical techniques evolved, hospitals models for organizing the IT function, all of which found it more difficult to track which procedures depend on the familiarity of internal customers’ (busi- yielded the best outcomes. HCHS chose to redesign its ness leadership, in this case) with IT and desire for catheterization process by partnering with the Ameri- involvement in the IT function. The authors suggest can College of Cardiologists and implementing an IT- that IT functions identify the value propositions of the based benchmarking system. various models, determine the appropriate model for their enterprise, manage the transformation of the IT Other complementary assets included using informa- organization, and continuously assess and adapt the tion systems to generate online cost reports and exe- cute ‘what-if’ decision-making scenarios. organization to the changing business needs. Given that business requirements evolve over time, customer involvement serves as an early warning system of Choose the IT Investment Type trouble spots in the functionality or utility of the IT Choosing the IT investment type is the third step in organization in solving business problems. From a the alignment phase. social perspective, early customer involvement in IT investments makes the resulting system more likely to Four types of investments. Four options for investing in IT include: new investment (replacing existing be accepted, adopted, and used by them. technology with new technology if it is close to satu- Clearly, creating and meas uring IT business value ration), maintenance (‘no investment,’ if the business depends on involving internal customers in creating an objectives so dictates), upgrade (enhancing an exist- agile, adaptive, and responsive IT organization. With- ing technology), and prospective (investing in tech- out a close relationship with business leadership, the value of IT can be less than needed. 18 Brynjolfsson, E., A.A. Renshaw, and M. VanAlstyne, “The matrix 19 change,” Sloan Management Review (38:2), Winter 1997, pp 37-54. Devaraj, S. and R. Kohli, ormation Technology Payoff in the Healthcare Industry: A Longitudinal StJournal of Management 20 Information Systems , 16, 4 (2000), 41-67. This study reported thatgarwal, R., and Sambamurthy, V. “Principles and models for orga- although IT investments paid the payoffs were most pronounced nizing the IT function,” MIS Quarterly Executive (1:1), March 2002, pp when the process redesign initiatives were taken into account. 1-16. 60 MIS Quarterly Executive Vol. 3 No. 1 / March 2004 © 2004 University of Minnesota Kohli & Devaraj l Business Value of IT Investments Involve Customers managers, and business analysts. The end users were department managers who would use the CIS to gen- Involving customers is the first step in the involve- ment phase of the AIAC framework . End customers erate cost information and align their operating ex- should be involved in an IT investment, whether it is penses with expected reimbursement. developed in-house (make) or procured from a vendor The project team was responsible for determining the (buy). Their involvement differs between the two. capabilities and features of the CIS that would provide Techniques for involving customers. End customers strategic value to HCHS. They were also involved in procuring the supporting technology and insuring can be continuously involved in ‘make’ systems by, CIS’s integration with other financial information sys- for example, developing the systems using a Joint Application Design (JAD) approach. This promotes tems. The team held weekly conference calls to dis- close contact and continuous feedback between end cuss business needs, challenges encountered, and re- source requirements. An intr anet website held docu- users and developers to ensure that the system is de- signed to capture the users’ perspective. ments, meeting minutes, and project plans, and a quar- terly workshop made sure the requirements encom- Bus operator Greyhound Lines lost its IT payoff be- passed the needs of all the participants. In addition, two hospitals were to serve as pilots for the first im- cause it failed to sufficiently involve internal and end customers when developing its reservation and ticket- plementation of the CIS. ing system. To receive a bus ticket, customers had to pay by credit card and agents had to fill out informa- Create Tangible and Intangible Metrics tion in multiple screens. The system went unused be- Creating tangible and intangible metrics is the second cause most Greyhound passengers did not own a step in the involvement phase of the AIAC frame- credit card and ticketing took significantly longer. 21 work. Customer involvement in identifying metrics conveys what is important to them. In the past, many Recently, a study commissioned by the US Census companies have focused on short-term ROI, not rec- Bureau found that getting a handle on payoff metrics ognizing that IT investments often require a longer- is a challenge and that involving customers in defining 22 term perspective. It is argued that insistence on quanti- such metrics is necessary. fiable ROI may resu lt in missed future opportunities that might not be apparent in the short term. 23 In a ‘buy’ decision, user involvement in system pro- curement is shorter, but intense. While the IT function Clearly, some IT investments have an operational fo- conducts technical and pricing analysis, end users cus and quantifiable metrics are needed to justify costs need to build business scenarios to evaluate the func- versus benefits. However, increasingly, IT is being tionality of potential systems in their business envi- used as a competitive advantage to ensure customer ronment. Vendors tend to demonstrate the most ap- loyalty and to protect market share, both of which can pealing features of their system. End users must play take many years to acquire. Therefore, pre-investment the role of ensuring that the prospective technology cost-benefit analyses of such IT investments are often can truly handle the day-to-day business functions under the stress of everyday work conditions. no more than educated guesses. With the increased scrutiny of quantifiable corporate metrics, the pendu- lum may have swung too far because there appears to HCHS’s involvement of customers. HCHS was care- be a backlash against tangible Return on Investment ful to involve customers early in the CIS implementa- tion. The CIO and CFO initiated the CIS project by (ROI) metrics when assessing IT value. assigning a task force to select the project team mem- In situations where benefits are hard to quantify, the bers, including internal customers, external customers, business strategy can guide the selection and deploy- and end users. ment of IT. The internal customers included the DSS development Payoff metrics. While the above discussion points to team, VP of Finance, and VP of Corporate Develop- the overuse of ROI as a metric for evaluating tech- ment. The external customers were the hospital coun- nologies, a more recent and well-rounded perspective terparts of the internal customers, cost accounting 24 has appeared in the balanced scorecard (BSC). The 21 23 Tomsho, R. “How Greyhound Lines Re-engineered Itself Right Into Sawhney, M. “Damn the ROI, Full Speed AheadCIO Magazine, 22Deep Hole,” Wall Street Journal, October 20, 1994, pp. 1 24ly 15, 2000. Mesenbourg, T. “Measuring Electronic Business,” U.S. Bureau of Robert S. Kaplan and David P. Norton, “Putting the Balanced Score- Census, Suitland, Maryland, pp. 1-20, http://www.census. card to Work,”Harvard Business Review , (71:5) 1993, September- gov/eos/www/papers/ebusasa.pdf. October, pp. 134-142. © 2004 University of Minnesota MIS Quarterly Executive Vol. 3 No. 1 / March 200461 Kohli & Devaraj l Business Value of IT Investments BSC is used to draw managerial attention to a com- gation, customer loyalty, and organizational reputa- pendium of metrics for operational and financial per- tion. formance, short term and long term. A business case is more convincing if the IT invest- A second metric technique is to track actual usage, to ment can demonstrate impact upon one or more organ- study patterns of use such as who uses a system, how izational CSF. Gliedman 26 suggests that an organiza- they use it, and what modules and features they use – tion must be able to summarize its IT case in one sen- thereby tying use to payoff. tence, such as: Payoff metrics at HCHS. At HCHS, the CIS team “We aredoing (investment) to make identified two initial CIS success metrics: (i) a reduc- (product or service)_ better, as measured by tion in the proportion of fixed costs to no more than __(metrics)_ , which is worth $_ (payoff)_.” 30% of overall costs, and (ii) an improvement in ex- pected vs. incurred contract costs. Two downstream He argues that organizations that cannot fill in the metrics would be higher productive hours and flexible blanks in this statement need to make their business case objectives clearer. staffing. Intangible metrics were to be staff turnover rate, contract renewal rate, and physician satisfaction. Another technique for making a business case is fail- HCHS’s previous micro-costing-based CIS was mar- ure analysis. Learning from past failures can help or- ganizations understand pitfalls and develop strategies ginally used because, although quite accurate, it re- quired significant time to identify the current cost of and metrics to sidestep those pitfalls. For instance, each item. Therefore, the CIS team defined ‘actual organizations investing in Enterprise Resource Plan- ning (ERP) can learn from the failure of FoxMeyer usage’ of the new CIS as a tangible success metric. Drugs. 27 In creating the metrics, internal as well as external benchmarks were developed. For internal benchmarks, The business case at HCHS. The CIS project team the team identified best pr actices within the health presented senior management with the business case and a development plan for the CIS investment. The system, while a consulting company provided external benchmarking data. As a result of the early customer case summarized the urgency of the IT investment, its involvement in defining the payoff metrics, the team’s benefits, and the metrics for judging its success. mandate was clear: the CIS must lower the percentage Managed care, and its accompanying decreases in re- of fixed costs to give managers more information and imbursement for services, increased the urgency of greater flexibility in managing their operations. this investment. Based on the models of market be- havior (described in Phase 1), the plan outlined the Make the Business Case timeframe for CIS completion and the risks for not Making the business case is the third step in the in- containing costs. The business case projected the volvement phase. Most organizations investing in IT losses each hospital might incur from the reimburse- need to convince stakeholders of the need for the in- ment shortfalls from the insurance companies. The vestment and the usefulness of the payoff metrics. The best metrics are controllable and link to business per- plan also showed that innovative ways to control costs, and therefore lower pr ices, could attract larger formance. service contracts that could further improve hospital profitability. Techniques for making the business case. A suc- cessful business case presents convincing payoffs. In summary, the involvement phase targets the IT in- Calculating the right types of payoffs is a key element vestment by engaging the customers, internal as well in business case development. One technique is as external, and utilizes thei r involvement to identify Rockart’s Critical Success Factors (CSF’s). 25Devel- appropriate metrics. An expected outcome of this oped more than two decades ago, they capture payoffs phase is customer buy-in and an understanding that important to executives (internal IT customers). CSFs represent tangible IT payoff metrics such as quality, 26 customer satisfaction, referrals, systems usage, and Glithman, C. “Marketing the Business Value of IT.” Presentation at the 5Fall Conference on Managing Information Technologies, Oak- market share, and intangible metrics such as risk miti- 27nd University, Rochester, Michigan, Oct 9-12, 2002. Scott, J. “The FoxMeyer Drugs’ Bankruptcy: Was it a Failure of ERP?” in Proceedings of The Association for Information Systems Fifth Americas Conference on Information Systems , Milwaukee, WI, August 25 1999 available at http://carbonudenver.edu/~j1scott/publications Rockart, J.F. “Chief executives define their own dataHar-ds,” /ScottFM99.pdf. This paper presents an in-depth analysis of the causes vard Business Review (52:2) 1979, pp 81-93. of ERP failure at FoxMeyer Drugs. 62 MIS Quarterly Executive Vol. 3 No. 1 / March 2004 © 2004 University of Minnesota Kohli & Devaraj l Business Value of IT Investments proper assets for IT investment have been created. A regression analysis is used to test the relationship Therefore, the business case and the metrics set up the between a variable(s) and a performance metric, such need for measuring what is important to the business as the relationship between investment in IT and pro- and how it is analyzed. Eventually, the credibility and ductivity. It is often used to test the effect of a number utility of the findings will depend upon the accuracy of variables on a performance metric. of the analysis and the re sulting actionable sugges- tions. The production function analysis technique has a rich tradition in economics literature. In this technique, the Phase III: Analysis primary function of a firm is viewed as transforming inputs into outputs. Input factors typically include la- The analysis of an IT investment’s payoffs is a stum- bling block for many organizations. Untrained project bor, capital, material, and energy, to name a few. Out- leaders may use inappropriate statistical or financial puts are the goods or services produced by the firm. If objective metrics for the principal inputs and outputs analysis tools, giving them erroneous assumptions and are available, a mathematical equation can represent misleading results. The types of analyses used depend on the timeframe in which the cost and benefit data the transformation of inputs into outputs, thereby es- will be captured, how the data will be captured, when timating the value of an IT investment (an input) on the firm’s operation. investments will be made, and when payoffs are to be expected. The real options technique is a financial analysis technique that can be used to estimate the value of an Establish the Analytics IT investment that provides a foundation (an option) Establishing the analytics is the first step in the analy- for undertaking a future business opportunity. For ex- sis phase of the AIAC framework. To realize payoffs, ample, a data warehouse could be used in the future to organizations must first calculate those payoffs using understand clusters of customers. High-risk, high- methods that match the data—so that meaningful re- yield businesses may find it necessary to use such sults are generated. Selecting these analytical methods proactive investment analyses approaches as produc- requires statistical and analytical expertise. The choice tion function and real options to achieve long-term IT of analytics depends on the context of the IT invest- success. ment, the availability of data, the assumptions of the Analysis techniques used at HCHS. One of our stud- analytic procedure, and the interplay among these fac- tors. ies at HCHS examined the impact of information sys- tem usage on hospital performance. We were able to Types of analytics. Longitudinal and cross-sectional use a longitudinal analysis to show that ‘usage,’ not analyses are two approaches. Longitudinal analyses ‘investment,’ had a significant impact on hospital per- 28 are useful for examining a phenomenon of interest formance. (e.g. an IT payoff) over a period of time. Cross- sectional analyses present a snapshot at a given point HCHS used a regression analysis to measure, in the in time. first stage, the ability of th e IT investment in a deci- sion support system to improve hospitals’ reimburse- Longitudinal analyses are most appropriate for exam- ment. In the second stage, that ‘reimbursement’ was ining the impact of IT investments on organizational used as one of the variables to determine overall hos- performance metrics. These analyses can also detect pital profitability. cyclical patterns and time-lagged effects of IT. Al- though they can present strong, valid results, those Validate Results results should not be generalized across firms or in- Validating results is the second step in the analysis dustries. A cross-sectional analysis is useful in exam- phase of the AIAC framework. To ensure there are no ining a specific type of IT investment across firms or surprises or questions about credibility, analysts industries. should validate their findings by conferring with end A cost-benefit analysis is commonly used to estimate customers. Undetected errors in findings can shake the confidence of users, especially those who were skepti- payoffs for a one-time IT investment or an investment cal of the investment from the start. that can be clearly identified at specific discrete points in time—such as releases of a system. However, this technique requires objective metrics for both costs and benefits, and the findings are restricted to specific in- 28Devaraj, S. and R. Kohli, “Perfo rmance impacts of information tech- vestments in a given context. nology: Is actual usage the missing link?,” Management Science, 49, 3 (2003), 273-289. © 2004 University of Minnesota MIS Quarterly Executive Vol. 3 N
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