IT Governance

Bab 1

IT Governance
IT governance means making decisions about IT, deciding who will make those decisions and
then laying out how they will make those decisions. This is an issue of IT Governance that is
leadership, organizational structures, and processes that ensure that the enterprises information
technology supports the organization's strategies and objectives. IT governance as the set of
processes that ensure the effective and efficient use of IT in enabling an organization to achieve
its goals.
Leadership:
• The directors on the board that are responsible for governing IT.
• Includes CIO or any other IT executive on the board that is responsible for governing
IT
• Includes any board level committees that are there to monitor and govern IT.
Leader do:

If there is a failure of IT governance, it means that more IT governance expertise is required.

The mechanism through which IT Governance contributes is, IT Governance leads to IT
business alignment and IT business alignment leads to superior firm performance. IT
Investment prioritization process is associated with IT-Business alignment

IT Governance Umbrella

Strategic Focus:
• Alignment of organizational and IT strategies - That is, does the organization have
processes, methods, standards in place to make sure that the business plans align with
IT plans and the IT plans align with the business plans
• Realization of IT opportunities - That is, are we making sure that we are taking
advantage of all the opportunities that IT provides. So, this is the strategic focus of IT
governance
Tactical Focus:
• Realization of IT project and operations value - So, IT investment is made in terms
of individual projects. Are we making sure that these individual projects are meeting
their goals? So, that is, are the projects on time? Are the projects realizing the value
that they were expected to provide?
 • Effective management and responsible use of IT resources - So, are we using our
IT resources responsibly? For example, if we are using different software in the
organization, are we making sure that all the software licenses are up to date?
• Management of IT related business risks - So, there are significant risks associated
with the IT investment portfolio as the target example illustrated. So, are we making
sure that we have evaluated our risks, and have safeguards in place?
• Complying with all the IT related laws and regulations
IT governance has a strategic element, and a tactical element. We make sure that we have an
IT governance in place that takes or leverages both dimensions of IT governance, the strategic
element as well as the tactical element

IT Key Decision

Decisions Technical Managerial

IT Infrastructure O X
IT Architect O X
IT Principles X O
IT Investment X O
Business Applications O O
Making Decision

Archetype Centralized Decentralized

Business Monarchy O X
IT Monarchy O X
Feudal X O
Federal O O
IT Duopoly O O
• Centralized - This approach to decision making may be appropriate when the key
objective of IT is to achieve efficiency or the organization wants to focus on
profitability. So, when profitability or efficiency are the key drivers of the organization,
then a centralized approach to IT decisions may be appropriate.
• Decentralized - if the organization is interested in differentiation or responsiveness,
then they may allow more autonomous decision-making. In this approach, decisions
are made in a feudal manner, that is, Individual business unit or individual geographic
units may make IT decisions that serve their best interests. So, that is, the decisions are
very decentralized.
• Hybrid - if an organization wants to balance efficiency on one hand and responsiveness
and differentiation and innovation on the other hand, then they may choose a federal
approach to decision making. In the federal approach, the corporate and the business
unit, with or without IT participation, make IT decisions. Similarly, in an IT duopoly,
IT and a business group, that is, the top management or the business unit, together make
IT decisions.
CIO’s most commonly report to the CEO
 • CIO report to CEO - if the company is competing on the basis of differentiation and
innovation and IT is the driver of this innovation and differentiation, then the CIO ought
to be reporting to the CEO.
• CIO report to CFO - if the company is competing on the basis of cost leadership, they
compete on the basis of efficiency, and the role of IT is to keep the lights on and provide
support

Decision on Structure
Decision Making Process

• IT investment approval process - which describes how do you present your idea, how
do you make the argument that your idea is aligned with business strategy, how do you
present financial analysis, and how do you describe the risk associated with an IT
project.
• IT architecture exception process - So, IT projects are expected to follow the defined
IT standards, so the IT architecture exception process is used to assess whether a new
project follows the defined IT standards should this project we allowed an exemption
to follow the standard.
• Service level agreement and Chargeback process - So, this process is used by the IT
organization to describe what services does the IT organization provide, and how much
will they charge the user for using this service. The objective of this process is to make
sure that the IT organization invests in developing services that are desired by the users,
and the price they charge for this service is aligned with the market price for these
services. These prices can be used by users to evaluate whether the IT organization is
operating efficiently. So, if the IT organization charges a very high price compared to
the market price, then the user understands that the IT organization is not very efficient.
• Project and business value tracking process - So, when a project is approved and it
is under development, the project tracking process helps the user, keeps track of the
project to make sure that the project will deliver what they expected from the project.
Once the project is completed and the system is implemented, a analogous process is
used to keep track of the benefits that the new system is producing. Here the objective
 is to make sure that the project produces the value the benefits that it was expected to
produce when the project was approved.

Best IT Governance Approach

The best IT governance approach is going to be determined by what is the goal the firm wants
IT to serve

IT Governance for Profitability

The organization may use a business monarchy to make decisions about IT principles, IT
infrastructure strategies, IT architecture, and IT investment and prioritization. That is,
principles, infrastructure strategies, architecture, and IT investment level and prioritization are
decided by senior business executives, maybe in conjunction with the CIO. However, business
applications are decided federally, that is, enterprise-wide applications are decided at the
corporate level whereas business unit applications are decided locally at the business unit level.

IT Governance for Growth

IT principles and IT investment and prioritization are decided as an IT duopoly, that is, IT
executives and business executives decide IT principles and the level of investment and their
prioritization, whereas infrastructure strategies and IT architecture are decided using an IT
monarchy. That is, senior executives decide the infrastructure and architecture. However,
business application needs are decided in a federal manner, that is, enterprise-wide applications
are decided at the corporate level, and business unit applications are decided in a decentralized
way by the individual business units.

Reason shortfall in project performance

This McKinsey study also found that the primary reason for the shortfall in project
performance, is missing focus, that is these projects didn't have clear objectives or if they had
clear objectives, these objectives were not aligned with the business goals and strategy of the
organization.

IT Alignment
IT Alignment is about making sure that IT investments are aligned with business goals and
strategies. Alignment of IT is one of the top 2 IT management issues in the last 10 years
The Operating Model
is the degree to which a company standardizes its core processes and integrates its data.
A very important concept in aligning IT with business goals and strategies is the concept. That
is how standardized the processes of a firm are across the different divisions or business units
of the firm, and how much data is shared across the different business units of a form. The
Operating Model is determined by process standardization and data integration across the
different divisions or business units of a firm. The Operating Model is important because the
operating model influences the enterprise architecture. Where the Enterprise Architecture is
the definition of how the organization performs different activities and what is the
standardization of applications, data and infrastructure services across the different divisions
or business units of the organization.

Operating models degree

In the coordination model, data is shared across business units, however processes are not
standardized
• The degree to which a company wishes to standardize its core processes.
Standardization in processes - means, that different business units perform a specific
activity in a very, very similar way. So, standardization reduces variation in companies
business processes. So, if a company standardizes its business processes, there is a
central control of business processes. There is a central body that coordinates how a
specific process will be performed. That is, how all the different processes in the
company will be performed. If the company does not standardize business processes,
then business units determine how a specific activity will be performed. Again, the
operating model is the degree to which a company standardize its core processes and
integrates its data.
• The degree to which a company integrates its data - Data integration means that data
is shared across different business units of the organization. If an organization shares
data across business units customer information, product information, supplier
information is shared across different business units of the organization. However, if
an organization does not integrate its data, then, each business units has its own
customer information, product information, supplier information and this information
is not shared across different business units.
4 Operating Models

• Unification - different business units share information. So, customer information is

shared across business units. Likewise, for products, suppliers or any other information.
Similarly, business processes are standardized and shared across different business
units. All the different business units perform a specific activity in a very similar
identical way.
• Coordination - In the coordination model, different business units share information.
So, customer information, products information, supplier information is shared across
different business units, but business units perform activities in their own way. So, data
is shared across but business processes are not standardized. Each business unit decides
on its own how it will perform a specific activating.
• Replication - In the replication model, different business units perform specific
activities in the same standardized way. So, inventory control, all the different business
units perform inventory control in a very similar standardized way, but, different
business units do not share information. So, a customer may be a customer of one
business unit but this information will not be shared across different business units.
• Diversification - In the diversification model, business units do their own thing. They
have their own customer information, products information, supplier information and
this information is not shared across business units. Each business unit has its own way
of performing specific activities, and different business units may perform a specific
activity differently
Operating Model and EA

Operating Model

Enterprise Architecture

Process Application Data Infrastructure

Architecture Architecture Architecture Architecture

Enterprise architecture as the organizing logic for business processes, applications, data, and
infrastructure technologies that enable a firm's business strategy. Enterprise architecture is like
a city plan. In the city plan, the city planner decides where to locate the residential areas, where
to locate the commercial areas, where to put the hospitals, playgrounds, schools, and how to
connect them with roads. In the same way, an Enterprise architect thinks about business
processes, database applications, and infrastructure technologies, and what standards to follow
for the design of business processes, databases, applications, and infrastructure technologies.
The key argument is that the operating model determines the enterprise architecture. The
operating model determines the enterprise architecture, where enterprise architecture means
what are the standards for processes, applications, data, and infrastructure.
4 IT Architecture Stages
In the standardized technology stage of enterprise IT architecture there are no standards for
data, so a standardized technology stage would not be appropriate in the coordination operating
model.
Architecture Stages Description Operating Models
Application Silo In the application silo Diversification model. in the
architecture, IT applications diversification model, there
are developed to help users is no standardization of data
perform specific activities. or processes. Business units
So, application silo is the do their own thing. So, the
architecture of individual application silo architecture
applications. In the stage is appropriate in the
application silo stage, local diversification operating
IT application are developed model, where users perform
to meet user needs activity just as they like, and
the IT organization develops
applications that help
individual users perform
specific activities in the way
that the user decides how
they will perform a specific
activity.
Standardized Technology In the standardized Diversification model. So,
technology architecture standardized technology is
stage, the organization appropriate when the
follows enterprise-wide organization is willing to
standards for IT commit to standards for the
infrastructure. So, compared infrastructure component of
to the application silo stage, the enterprise architecture.
where there is no They are not yet willing to
standardization in data, standardize on data and
processes, applications, or applications or processes,
infrastructure, in the but they are comfortable
standardized technology committing to standards for
architecture stage, the the infrastructure component
organization follows of the architecture
standards for the
infrastructure component of
the architecture.
Rationalized data or In this stage of the enterprise Coordination, Replication,
optimized core. architecture, in addition to or Unification model.
the infrastructure, the
organization is also
committed to
standardization of data and
processes. So, in the
rationalized data or
 optimized core stage of
enterprise architecture, the
organization standardizes on
data and processes. That is
data and processes are
standardized in addition to
the infrastructure.
Modular architecture. Modular architecture differs Coordination, Replication,
from rationalized data and or Unification model.
optimized core in the sense
that, in this stage, an
organization allows local
differentiation. That is, in
this stage, in addition to
having standards for data,
processes, and
infrastructure, the
organization allows business
units to experiment a little
bit, that is they allow
business units to modify the
standards to meet local
needs.
as one moves from stage one to stage two to stage three to stage four, an organization trades
off local flexibility for global flexibility. In the application silo stage, organizations have
significant local flexibility but they don't have any global flexibility. However, in the
rationalized data and optimized core, and in the modularity stages, organizations gain global
flexibility by giving up some local flexibility.

Application Silo
IT focuses on delivering individual applications that address the specific business needs of a
function, a business unit, or a geography. In the business silo stage applications serve local
needs. So it is important for the users to invest in applications that are worth the cost.
• Data is closely tied to applications - Each application defines its own data.
• Business users focus on the value of their applications - Business users want IT to
develop applications, when it can provide them some benefits. That is, when the
application can enable them to perform a specific activity in a more efficient way.
• Few shared infrastructure services.
Benefit and Risk Application Silo
• Local optimization and innovation. That is, each business user receives an application
that allows them to perform an activity in a more innovative and efficient way. They're
able to do that because there are no constraints on development. Each user or a group
gets an application that allows it to perform an activity in the best way possible.
• Projects can be funded on a simple cost benefit analysis - Because the benefits of an
application are very predictable and easily measured.
• No integration of applications within a business unit and across business units -
The risk is since users or groups of users all develop applications that best fit them and
no standardization
• Cost of maintenance is very high - Because of this independent free willing way

Standardized Technology Stage

The firm follows enterprise-wide standards for infrastructure.
• IT reduces the number of platforms or technologies that are supported
• Application Silo problem still exists as there are no standards for data and application
• Each application defines its own data. In this stage, firms think of enterprise
architecture in terms of shared infrastructure.

Benefit and Risk Standardized Technology

• IT efficiency, reduced IT cost as infrastructure is standardized
• Increase reliability and security. Since the infrastructure is managed centrally, it leads
to higher reliability and security.
• Conflict between users desire for the best solution versus the ITs desire to limit
the proliferation of technology platforms. So, the users may have to compromise in
the sense that they cannot use any infrastructure they like, their application has to run
on the standardized infrastructure that the company has committed to.
• Funding for infrastructure is harder compared to the application silo stage, where
users could see the benefit that their application provides and they are willing to pay
for that application. However, in the standardized technology stage, users may not see
the direct benefit of a standardized technology. They may even feel that IT is forcing
them to follow some standards, where the benefits of following a standards accrue to
 the organization as a whole, and an individual user or an individual group may not see
what benefit they get by following a standard that was set by somebody else.

Rationalized Data or Optimized Core

Organization follows enterprise-wide standards for data and applications. That is, compared to
the standardized technologies stage
• Data and applications are also standardized. In this stage, data from applications are
extracted and managed centrally and made available to other applications.
• Core business processes are also standardized and implemented using
standardized applications.

Benefit and Risk Rationalized Data or Optimized Core

• Process efficiency. Since data and business processes are standardize, the firm achieves
business process efficiency.
• Standardization also enables innovation. So, business processes are standardized,
they are integrated. So, business units and the organization can innovate on top of
standardized data and business processes.
• Business process standardization is hard to sell to managers. Managers may not see
the benefit of following standards for business processes set by some other business
unit. So, here, a manager may say that they are very unique and by following standards
set by some other business units, they may lose some uniqueness. So, business process
standardization is harder to sell than technology standardization.

Modular Architecture
Strategic agility from customized, reusable modules
• Firms allow customization and experimentation to meet local needs. So, even
though we have standardized data and business processes, business units are allowed
to experiment to meet local needs.
• Successful experiments are then made available to others. So, when an experiment
is successful, it is standardized and made available to other business units, so that
everybody can benefit from this experiment

Benefit and Risk Modular Architecture

 • Opportunity for innovation and responsiveness. So, there are good modules that
have been tested and used by others. So, different business units can have access to
applications and strategies that have worked elsewhere, so they can innovate.
• Flexibility without rationalized data and optimized core may lead to applications
silos. So, what this means is, you cannot skip stages, you cannot go from standardized
technology to modular architecture, you have to go from standardized technology to
rationalized data and optimized core before you can move to modularity phase. So, too
much flexibility without standardization will revert the organization back to the
application silo stage.

Implications of each stage of the enterprise architecture

Business Silo
• IT Capability: Focused on developing applications that meet local needs.
• Business Objective: The organization is focused on making investments that are worth
the investments, that is you are developing applications to meet individual users needs.
So you want to make sure that you make investments that have high return on
investment.
• Strategic Implication: Local functional optimization. You are investing in local
applications. So, you want to make sure that each application improves the business
process that it was designed to help.
Standardized Technology
• IT Capability: Implement an organization-wide standardized infrastructure platform
• Business Objective: Reduce IT costs. You want to standardize the infrastructure across
the organization, with the objective of reducing IT cost.
• Strategic Implication: IT efficiency

Rationalized Data/Optimize Core

• IT Capability: Standardize data and business processes.
• Business Objective: Cost and quality of business operations
• Strategic Implication: Standardize business processes, and you integrate them, so
that the company can operate as one efficient integrated organization. So, as an
organization, you are looking for operational efficiency of the business

Business Modularity
• IT Capability: Have a good system, that is you have standardized data processes and
infrastructure, but you also allow experimentation, so that your good system is
continuously being improved, and business units not only they have good systems, they
can also customize the systems to meet local needs, and take advantage of
improvements that others have come about. So, in some sense, IT is focused on
providing plug and play business process modules. That is IT is focused on developing
modules that have rubbed somewhere, so that other users can use them and improve the
processes, or take advantage of some new opportunities.
• Business Objective: Agility speed to market
• Strategic Implication: Agility responsiveness innovativeness.
Key Governance
Business Silo
• In the business silo stage, the key governance mechanism is writing good business
cases. You are investing in applications that are going to improve specific business
processes. So, you want to make sure that you invest on applications that have high
payoffs.
• Investment leads to an improved business process. So, you develop applications to
improve business processes. Once the investment is made, you want to make sure that
investment led to an improved business process.

Standardized Technology
• IT standards committee. So, senior IT executives defined technology standards, and
recognize when to retire standards and when to update standards.
• Infrastructure funding and renewal process.
• Requirement for a formal architecture compliance and exception process. You
want to make sure that individual project teams have architects who can ensure that
technical standards are observed, and whenever necessary exemptions are being
granted

Rationalized Data/Optimize Core

• Enterprise-wide process owners, that is individuals who define what the standards are
for core processes.
• Enterprise- wide standards for data.

Modular Architecture
• Standardized processes, and standardized data, and standardized infrastructure.
You want to decide what experiments are allowed. That is, you want businesses to
experiment. However, experimentation without boundaries will lead to chaos. So, the
key governance mechanism in the modularity stage is to specify what are the
boundaries of experiments.
• Decide which experiments have succeeded, and can be made available to other
business units as standardized modules. So, the two key governance mechanisms in
the modularity stage of the enterprise architecture are, allow specified experiments,
allow specific experiments, and then decide which experiments have succeeded, and
can be made available to other businesses as standardized modules.
References
Maturity EA
The maturity of the enterprise architecture determines what IT investments, what capabilities
are appropriate in each stage of the maturity of the enterprise architecture and what governance
mechanisms are appropriate in each stage of the maturity of the enterprise architecture to make
sure that the IT Investments are aligned with the goals and strategies of the organization.
BAB 2

Evaluate IT Investment
Allocating limited resources that will maximize the return of the investment. In practice, this
means identifying which projects should be funded so that we receive the value that we are
expecting from IT

• Order of Magnitude - That is, in this kind of estimate we have a general idea about
what system we want. We only know the top-level, high-level broad contours of the
solution. This kind of an estimate is a very rough estimate. We may be off by as much
as 50 percent in this kind of estimate.
• Budget - A budget estimate will be used to decide whether this project is worth
pursuing. If we decide that this project is worth pursuing, we will allocate the budgeted
amount for the next year's investment. So, a budget estimate has more details than an
order of magnitude estimate, but this is still a top down estimate and it can be off by as
much as 25 to 30 percent. The key idea behind a budget estimate is to consider the total
cost of owning a system
• Definitive - Once a project has been approved, then we need what is called a definitive
estimate. In the definitive estimate, we know individual elements that need to be
executed to complete the project. In the Microsoft Project terminology, in a definitive
estimate we know what packages that need to be completed to complete the project. So,
this kind of an estimate is very precise. It will be within plus or minus five percent.
Top Down Approach
The only function of a ballpark estimate should be to evaluate whether it would be useful to
get a more accurate estimate. Example: “So you ask a contractor about adding an extension to
your home without getting into what you want this extension to include. The contractor may
say it's going to cost about $350 per square foot for the extension.”

Bottom Up Approach
in bottom-up estimating we know the work. That is, we know all the individual work packages
that need to be executed to complete the project.

Budget Estimate: Total Cost of Ownership

• Acquisition and Procurement Cost - Includes the cost of developing the
specifications for the system and the actual hardware and software cost
• Operations and Maintenance - Once a system has been implemented, what are the
cost? That is, IT labor cost, and space, and energy, and furniture cost to operate and
maintain the system
• End of Life Management - Once the system has lived its life, what is the cost of
transferring data from the old system to the new system, and what is the cost associated
with physically decommissioning a system?
Estimating Software Costs: Use Case Points (UCP)
• Develop Use Case Diagram and Use Cases

Identify the Use Case from all the Actor and all the Action

• Calculate UAW (Unadjusted Actor Weight)

Identify how much Actor on the Use Case and Calculated the Weight
 Each Actor Weight and Classification

• Calculate UUCW (Unadjusted Use Case Weight)

Identify how much the Use Case and Calculated the Weight
 Each Use Case Weight and Classification

• Estimate TCF (Technical Complexity Factors)

Identify relevant sub-factors and identify their relative importance. And then, the
development team assigns value to each of the sub-factors based on the complexity of
the project. They will assign a value of 0 to a sub-factor if the sub-factor is irrelevant.
They will assign a value of 3 if the sub-factor has average influence. And they will
assign a value of 5 if a factor has a very strong influence. Higher assigned value means
that the factor is more important and increases technical complexity.
 These 13 factors are assigned relative weights. So the system assigns them relative
weights, but then the development team assigns a value to each of these 13 factors based
on the system that is being proposed.
TCF Calculation:
TCF = 0.6 + (TF / 100)

• ECF (Environmental Complexity Factors)

The environmental complexity factor is calculated based on eight sub-factors. Again,

these eight sub-factors has relative weights. And this are the rates assigned for this
matter of calculating software cost. These rates don't change based on the system being
proposed, however system being proposed determines assigned values. That is the
development team assigns values to each of these eight factors. So for example, the
development team may say that they have a very strong analyst and assign a value of 5
to the lead analyst factor.
ECF Calculation:
ECF = 1.4 + (0.03 * EF)
 • Calculate UCP
UCP = (UAW + UUCW) * TCF * ECF

• Calculate Effort
Effort = UCP * PF (Productivity Factor/Hour/Use Case Point/ This number can
be based on the data collected by the company, or it can come from an industry
standard. This number usually varies between 15 to 30.)

• Calculate Cost
Cost = Effort * Average Cost / Hour

Intangible Benefits

IT Investments have operational, tactical, and strategic benefits. Operational and tactical
benefits are tangible and quite easy to estimate. However, strategic benefits of an IT system
are intangible. For example, an IT system may lead to a strong brand for a company.
• Strategic
Improve the brand reputation of Symex. The system allowed Symex to give customers
a 20 Minute Delivery Window. This 20 Minute Delivery Window allowed Symex to
differentiate from competitors, and charge premium prices. So in some sense, though
the system had operational benefits that were very tangible, the system also had very,
very strong intangible benefits that improve the strategic positioning, and the value of
 the firm. So in some sense, the proposed Dynamic Synchronization System increase
the value of the firm
• Tactical
• Operational
The operational, and very very tangible benefits are reduced number of trucks and fuel
savings. So, the proposed Dynamics Synchronization System allowed Symex to meet
customer demand using fewer number of trucks while saving fuel. So, these are very
very tangible benefits.

Intangible Asset
Physical assets or tangible assets have a physical embodiment, blind or cash. However,
intangible assets do not have a physical embodiment.

Intangible Value

IT investments can create tangible value by reducing the number of tracks required, by saving
fuel. But the example also showed that the system can create intangible value by improving
the brand and the differentiation capability of the firm. So, in a very interesting study, Saunders
and Brynjolfsson examine the relationship between assets of the firm, and its market value.
Their objective was to evaluate if IT investments create intangible value for the firm. So, in
this study, they relate different assets of the firm to its market value. They considered ordinary
assets like the plant, property, and equipment of the company. Other assets. Other assets
include cash inventory. So, ordinary assets, and other assets are physical assets. They also
considered intangible assets like; R&D and brand. They also considered information
technology assets. They assessed information technology assets in three different ways:
hardware only, hardware and software, or all, that is hardware software consulting training,
everything included and they related assets with the market value of the company. They found
that each dollar of hardware is associated with about $9 of market value of the firm. So, in
other words, a dollar of hardware assets is associated with an additional $8 of intangible value.
When they thought of IT as hardware and software, a dollar of hardware and software is
correlated with about $6 of market value. That means a dollar of hardware and software creates
$5 of intangible value. Finally, when they considered everything IT, so hardware software
training consulting, again a dollar of IT creates about $1.15 of intangible value. So that means,
on average, IT investments create intangible value.

However, they dug deeper to see if all firms derive intangible value from their IT investments.
To do that, they classified different companies into grade A, grade B, Grade C grade D, and
grade F. They assess the information technology capabilities of firms based on HR capability,
management capability, internal communication capability, communication with suppliers, and
Internet capability. They classified firms in the top five percentile as Grade A firms. They
classified firms in the 85th to 95th percentile as Grade B firms. They considered Grade C firms
as the average firms. So, firms that are between 15 and 85th percentile. They considered firms
in the five to 15th percentile as great D firms. They considered the bottom five percentile as
Grade F firms.
This time they scaled based on employment or IT capital. They found that compared to the
average C firm, for the A grade firm, each employee was associated with about 120,000 of
higher intangible value compared to the average, that is Grade C firm. Whereas a Grade F firm,
each employee was associated with about 172,000 of less intangible value compared to the
Grade C firm. Similarly, when the scale based on IT capital for a grade A firm, each dollar of
IT capital was related with $15 of market value, whereas for a Grade F firm, each dollar of IT
capital was associated with five less dollars compared to the Grade C firm. What this analysis
illustrates is that IT investments create intangible value for the firm, but this intangible value
depends on IT Capabilities of the firm. If a firm has A level IT Capabilities, like if a firm has
a Symex type system then it creates significant intangible value for the firm. But if a firm is a
D firm or an F type firm, then IT investments decrease intangible value for the firm. So, bottom
line, IT investments can create tangible as well as intangible value, and this intangible value
that IT investments create is reflected in the market value of the firm.
Risk in IT Project
Risk in IT projects in this way: uncertainty is a fact of life for most large IT capital investments.
From enterprise applications to infrastructure technologies to IT-enabled strategic initiatives
of every flavor, a common element is doubt about whether the project will achieve its goals.
Risk in IT projects comes from three sources.

• Development risk. can the IS organization develop the proposed system? This means,
does the IS organization understand the domain? Is the technology mature? Can they
implement the requirements in the technology that is available?
• Organizational risk. which is, can the organization assimilate the change that the
proposed system entails? This means, can the user specify the requirements? Are they
prepared for the magnitude of change that is going to come about? Is there support from
the top management to plow through all the challenges that will invariably be faced?
• Market risk. how changes in the environment will affect the returns from the new
system. For example, if competitors preempt the client in the race to implement the new
system, then the returns from the system will be compromised. Similarly, any large
project or many large projects require cooperation from customers and suppliers. So,
the question is, are the clients, customers, and suppliers prepared for the changes that
the new system entail?
Deal with The Risk
• Downplay the risk.
• They penalize IT projects with high hurdle rate, that is, if a project is risky, they use a
higher hurdle rate.
• They treat setbacks on IT projects as inadequacies of the project team.

Limitation NPV Method

1. The NPV method has some debatable assumptions that make it problematic when it is
used to evaluate risky projects.
• Investment is reversible, that is, it can be undone if conditions change. So, in
calculating the NPV, we have some assumptions about the cash flows. So, here, it is
believed that these cash flows will not change, and if these cash flows change, the
investment can be undone, that is, the investment is reversible.
• Now or never decision, that is, if the NPV is positive, we will make the investment,
and if the NPV is negative, we will never make this investment.
2. Both these assumptions are invalid. Most investments are irreversible but can be delayed,
that is, if you make an IT investment, that is, you buy the hardware and software, however,
after the investment is made, the expected cash flows are not panning out, that is, you are not
receiving the cash flows that you were expecting, now, you cannot undo the investment, that
is, now you cannot sell back the hardware and software and get back your original investment.
So, what this means is that the investment is irreversible. It cannot be undone if conditions
change. It also means that a negative NPV means that a project should never be done.
3. Investment opportunities are options, rights, but not obligations, to take some action
in the future. So, for risky investment, we can take an options approach, that is, we think of
an investment opportunity as rights but not obligations to take some action in the future.
Approach IT Investment

Approach of IT Investment

• Defer - You have a risky investment, you defer the investment until the uncertainty
about that investment is resolved.
• Stage - you have an investment, but you are not sure about the cost and benefits of the
investment. So to resolve the uncertainty, you stage the investment. You execute stage
one and you use the outcome of stage one to decide whether to pursue the investment.
If there's risk, we do one stage. And based on the outcome of that stage, decide whether
to pursue the investment.
 • Growth - The idea here is that you make an investment not just because of the of the
investment but, what other follow-on investments are enabled by the investment? So
the investment in the Amazon infrastructure is a growth investment. It's a growth
option. It was started because they wanted to sell books, but it enabled them to sell
many other things later on.
• Abandon - You start an IT Investment with some expectation of costs and benefits,
however, if some conditions change and you realize that you are not going to receive
the benefits that you expect, there is no point in continuing the investment. You can
terminate the investment and reallocate resources to other, more profitable projects

Alternative Minimizes the Risk of Failure

The risk management approach with the second alternative is that you minimize failures by
failing small.
Minimize Risk Approach

• Option Contract - They tell themselves that we are going to implement one module.
And if that one module implementation goes well, then they will complete the project
by implementing the remaining four modules. They also commit to this, they also
commit to not pursuing the project if the one module implementation does not go well.
So, here the idea of option contracts is that, the company commits to a path where they
tell themselves that we will do one module implementation. And if that implementation
does not go well, we will terminate the project. And, we will implement the full system
only in the case that the one module implementation goes well, and they commit to this
fact at this point, right. So this decision about the analysis is being done at the start of
the project. So, the idea behind option contracts is that the client is committing to this
path of not doing the full project if the one module implementation does not go well.
And only doing the full system implementation if the one module implementation goes
right, okay, so that was the first point.
• Learning - we implement one module. And then, based on what happens in that one
module implementation, decide to pursue or not pursue the remaining modules. So the
idea here is, we should be able to learn about what is going to happen in module two,
three, four, and five by what happened in module one. So if we cannot learn about the
outcome of model two, three, four, and five based on what happened to module one
implementation, then this approach is not meaningful. This approach is meaningful
only when we can do one module implementation. And based on what happened in that
 one module implementation, infer what will happen if module two, three, four, and five
are implemented, right. The idea behind the second approach is that, we should be able
to infer what will happen to the system implementation by doing a one module
implementation and learn what is going to happen with the rest of the system.
• Probabilities - We said that with the 50% chance, the project can be well adopted, and
with the 50% chance of system may not be well adopted. So the question is, where are
the probabilities coming from? Play video starting at :3:48 and follow transcript3:48
These probabilities can come from two sources. The first is, that the company itself
may have done many projects in the past. And they can look at their own data and
decide which project the current project is most like, and what happened in that project.
So based on their own prior experience, they can tell what is the likelihood offered
option and what is the likelihood of resistance. So, they can derive or infer these
probabilities based on their own prior experience. This information can also be gleaned
from consultants who may have done similar projects with other clients in the industry.
Or the consultants may have done similar projects with clients in other industries. So
these probabilities can be inferred from the success or failure rate of similar projects
with clients in the same industry or with clients in different industry
• Simplification - In this analysis, the system consisted of five modules. And we said
that we're going to divide the project into two parts, module one, and then module two,
three, four, and five. As you can see, we can decompose this project in different ways.
For example, we can think of this project as five stages. Module one, based on what
happens to module one, we decide about module two. Based on what happens to what
we will do we decide about module three and so on and so forth. So, a company can
decide by itself, how many experiments it should conduct, or how should the project be
decomposed? Like we did, they can think of the full system as two parts, or they can
think of the full system as many parts. And based on the time and other considerations,
they can decide how this analysis will be done.
• Risks/Costs - second alternative has a higher expected pay off. However, it should be
clear that the second alternative is not free to learn about what is going to happen, you
have to do a one module implementation. That is, this uncertainty about what is going
to happen cannot be resolved in a vacuum. In this example, the company had to do a
one module implementation to learn about what is going to happen. So that's the first
point. The second point is, there are some risks associated with this deliberate approach
 to implementing the system. The company follows a very deliberate approach where
they implement one module and then, based on what happens, decide to implement or
not implement the rest of the modules. This has some cost associated with it. The first
and most obvious cost is, by delaying the implementation of the four modules, the
company delays the benefits it could get by implementing the four modules. So that is
the first cost. Another cost is, the client is very deliberate in managing the risk.
However, the client may be up against competitor who is very brush and they go ahead
and implement the full system, and are successful. So, the client is trying to manage
risk, but if they are up against the very aggressive competitor who goes ahead and
implements the full system and is successful, then the client is put at a disadvantage by
using a more deliberate approach to implement the system. So, these are some of the
considerations that have to be taken into account when the client decides to follow the
more deliberate approach of implementing their devices.

Evaluate IT Investment
The first dimension is uncertainty in the investment. Is a project very certain or does it face
high uncertainty? Similarly, the second dimension to evaluate a project is the managerial
flexibility associated with the project. If a project is a now or never project and it can only be
done in an all or nothing way, then there is no flexibility. However, if a project can be deferred
or it can be done in stages, then there is managerial flexibility associated with the project. If
uncertainty is high, the project is risky. If there is managerial flexibility, the risk can be
managed by using an options approach
 • No Option Value - if the uncertainty is low, and there is no managerial flexibility, that
is, managerial flexibility is low, then the options approach is not appropriate. There is
no option value. This is a now or never, all-or-nothing project with no uncertainty. So,
the normal NPV business case is the right way to evaluate the investment.
• High Option Value – However, if an investment has high uncertainty associated with
it and it also has high managerial flexibility associated with it, that is, it can be deferred,
it can be done in stages, in that case, the options approach is more appropriate to
evaluate such an investment. That is, the options approach is more appropriate when
the project faces high uncertainty and when there is flexibility about how the project
can be executed

Framework IT Investment

• Strategic Objective - Is it short-term profitability or profitability right now, or the

objective of the investment is long-term growth for the company
• Technology Stage - Is it an infrastructure project or is it an application or a business
solution project
Type of Investment Description
Renewal The company is trying to upgrade the
infrastructure to improve reliability, expand
functionality, and reduce maintenance costs.
So, the objective of this investment is to
improve profitability right now. That makes
the NPV based business case the more
appropriate method to evaluate the
investment.
Process Improvement The client is trying to implement a new
application to serve a specific business name.
 Again, given that the objective is to improve
profitability right now, the NPV based
business case is the right way to evaluate the
investment.
Transformation A transformation project is a next generation
infrastructure to shape competition in the
future. So, this is an investment that has a
long-term orientation. This long-term
orientation makes the investment very
uncertain. Thus, the real options approach is
more appropriate to evaluate this investment.
Experiments Projects about the next generation
technologies to shape competition in the
future. Again, this project has a long-term
orientation with an uncertain outcome which
makes the real options approach more
appropriate method to evaluate the
investment.

Pitfalls of Termination

If you terminate a project midway, here’s what happened:

• It is difficult to terminate a project midway because of what is referred to as
escalation of commitment. That is, once a project is started, often projects take a life of
their own and once started can't be stop.
• Termination may hurt the morale of employees, specifically team members who are
involved in the project.
• Credibility of team members because outsiders may not be aware of why the project
was terminated. They may confound two things. That is, they may wonder whether the
 project was terminated because of some factors beyond the control of the project team
or the project was terminated because of the failure of the project team.

Pitfalls of Deferral

• Expose yourself to some risks, primarily the risk of competitive preemption. A

client may defer a project because of risk. However, this deferral exposes the client to
competitors who may not be as deliberate and go ahead and execute a risky project and
are successful.
• Deferral can be problematic when direct experience with the innovation is needed
to resolve the uncertainty. That is, you defer a project because you are uncertain, but
the only way to resolve the uncertainty may be direct experience with the innovation.
In other words, deferral may lead to a loss of innovation ability.
BAB 3

IT Investment Portfolio
The main idea is that any large company will not do just one IT project in a given year, they
will do a collection of IT projects in a given year. So, IT portfolio management is about
selecting the right set of IT projects that are aligned with the organization's strategy and
improve returns on IT investments, that is, we want to not only do projects right, but select and
do the right projects. The goal of IT portfolio management is to examine all the IT projects
together

The main idea is that any large company will not do just one IT project in a given year, they
will do a collection of IT projects in a given year.
Main Key Investment Portfolio:
• IT portfolio management is about selecting the right set of IT projects that are
aligned with the organization's strategy and improve returns on IT investments,
that is, we want to not only do projects right, but select and do the right projects.
Flawless project execution is meaningless if the right projects are not being tackled.
• Difference between project management and portfolio management. Project
management ensures that projects are done right whereas portfolio management
ensures that right projects are done. So, in portfolio management, we take a unified
view of all the IT projects together, that is, we look at all the projects in unison.
• Portfolio management, we take a unified view of all the IT projects together, that
is, we look at all the projects in unison
IT investment portfolio consists of four elements that have different goals

• Firm Wide Infrastructure

Firm wide infrastructure is the foundation of network, computing, and database services
on which IT applications run. The goal of firm wide infrastructure is integration, that
is, allow different applications to be integrated, flexibility, that is, provide the flexibility
so that applications can be developed and implemented faster, and finally, reduced IT
cost through standardization of different elements of the infrastructure.
• Transactional Systems
Transactional systems are about processing repetitive/common transaction cost
effectively. So, for an airline, reservations, ticketing, checking-in, aircraft and crew
scheduling, and aircraft maintenance, these are transactions that happen repeatedly. An
airline may perform infinite number of these transactions. So, the goal of transactional
systems is to process basic transactions cost effectively, that is, reduce costs through
increased throughput
• Informational Systems
Informational systems are about aggregating operational information from
transactional systems to help make managerial decisions, Provide aggregated
information, that is, information aggregated from transactional systems to monitor and
control the performance of the organization. For example, for an airline, applications
that identify which routes have high occupancy and need more flights versus which
 routes have low occupancy and need fewer flights is an example of an informational
system. So, the goal of informational system is better information, increased control,
and improved quality.
• Strategic Systems
Are applications that provide a competitive advantage. They either provide a
competitive advantage, or they reduce a competitive disadvantage. For an airline,
applications to identify valuable customers so that they can be provided with
differentiated service to improve their loyalty is an example of strategic systems. So,
the goal of strategic systems is to increase sales, improve competitive advantage, or
reduce competitive disadvantage, that is, improve the market positioning of the firm.

IT Assets and Four Measures of Performance

• Profitability measured as return on assets
• Market Valuation measured as Tobin's Q. Tobin's Q is market value of the firm
divided by the total assets of the firm.
• Performance is operational performance measured as net margin and cost of goods
sold.
• Innovation measured as sales from new and modified products.

Measures of Performance on IT investment portfolio four elements

• Firm Wide Infrastructure
§ Investments made in anticipation of future business needs.
§ They expect Firm Wide Infrastructure to be associated with short-term costs,
lower short-term profitability, and higher profitability and performance in the
long run. So, they expect Firm Wide Infrastructure to cost in the short term, but
pay off in the long run.
§ Investments made in 2001 are negatively associated with the return on assets in
2001, and net margin in 2001 and 2002. That is, Firm Wide Infrastructure
reduces profitability in the short run.
§ Disrupts short-term affords at product innovation as measured as revenue from
modified products in 2001, that is, Firm Wide Infrastructure causes some
disruption that affects innovation in the short term.
 § Positively related with Tobin's Q, that is Firm Wide Infrastructure is an
investment that is rewarded by the market. So, in some sense, Firm Wide
Infrastructure has long-term payoff.
• Transactional Systems
§ Reduce the cost of performing day-to-day repetitive transactions. So, they
expect Transactional Systems to reduce the cost of performing day-to-day
activities.
§ Lower cost of goods sold for the firm but not with more innovation. So, they
find that Tansactional Systems reduce the cost of goods sold but do not improve
innovation. So, they reduce costs but they do not improve innovation
• Informational Systems
§ Tighten reporting and control functions to reduce costs, and they help identify
new opportunities for revenue generation. So, by reducing costs and improving
revenues, Informational Systems should improve profitability.
§ Positively related with the return on assets and net margin in 2001 and 2002.
So, they do find that Informational Systems improve profitability right away.
• Strategic Systems
§ Investments that are made to engender innovation.
§ Revenue from modified products but not lower costs. So, Strategic Systems
improve innovation but they do not lower costs. In some sense, they find that
Strategic Systems are like R&D investments.
IT Investment Average Firm
Firms spend the IT dollars:
• 58% on Infrastructure
• 12% on Transactional Systems
• 16% on Information Systems
• 14% on Strategic Systems.

Cost focused firm spends more than the average firm on transactional systems, but spends less
than the average firm on infrastructure and strategic systems. Because A cost focused firm
wants to process basic repetitive transactions cost effectively

The average firm's investment is very similar to the investment of a firm that is trying to balance
cost and agility
Agility focused firm, the firm that is looking to innovate, differentiate, that firm on average
spends 10 to 20 percent higher than the industry average firms. So, compared to the average
firm in the industry, the firm that competes on the basis of agility, differentiation, innovation,
spends 10 to 20 percent higher. Now, let's look at how the individual elements of agility focused
firm differ from the average firm. Here, we can see that the key difference is that the agility
focused firm invests more on strategic systems. So, here the difference look small, but if we
consider the fact that an agility focused firm can spend 20 percent more than the average firm,
we can see that the agility focused firms spends significantly more than average firm on
strategic systems.

IT Portfolio Management Process

• Inventory of All IT Projects
§ Identify all significant IT investments, both current and planned.
§ Project Description. What is this project about? So, described the project.
§ Strategic goal or high level business objective does this project align with or
contribute to?
§ Expected resource requirements for this project
§ Costs, milestones, and timeline.
§ Financial justification for this project
• Ranking and Selection of Projects
§ Alignment with corporate strategy. So, rich corporate goal or strategy the
project contributes to.
 § Technical architecture. How will this project integrate with other projects that
are planned and other projects that have already been executed? So, technical
architecture deals with, will this project integrate with the other IT assets
§ Evaluation is technology risk. So, what are the technical, organizational, and
market risks associated with this project. So, technology risk is we evaluate the
technology risk of the project whereas architecture risk is how this project will
work with other projects
§ Regulatory compliance. That is, does this project conform with all the rules
and regulations all IT projects have to comply with. So, the second step in the
IT portfolio management process is ranking and selection of projects, and we
said that we use four criteria to rank and select projects
• Managing the Project Portfolio
As business priorities and the competitive environment changes, a firms IT investment
portfolio must also evolve with time.
§ Manage change as business priorities change
§ Continuously review the entire portfolio to ensure that the projects remain
aligned with the organization.
§ Willing to restructure, delay or even terminate projects based on their
performance and changing business requirements
IT Chargeback
So the problem of IT chargeback is something like this. We made an IT investment. Now we
have the opposite problem, that is, how should the cost associated with the investment be
charged to the different user groups.
3 Approach IT Chargeback:

• Cost Center
§ The IT organization offers services, so users demand services, the IT
organization offers services. But the cost of IT is a corporate overhead
§ IT offers services, but the costs are charged to different divisions on some ad
hoc basis, such as the number of employees in the division, the sales of the
division, or the total assets of the division. So, in the cost center approach, IT is
a cost center. The costs are either a corporate overhead or the costs are charged
to different user groups or divisions on some ad hoc basis.
• Service Center
IT organization offers services, business units pay for consumption, and the price of the
service is set to recover the IT unit's costs of providing the service.
§ IT offer services such as application development, application support,
desktops, laptops, etc. Each of these services has a price associated with it.
 § Business units pay for consumption. So they pay for, say, application
development if an application is desired by them. If they have an application
that is supported by the IT organization, the business unit pay for the support.
§ Price is set to recover the IT unit's cost of providing the service. So in the service
center approach
• Profit Center
In a profit center, the IT units offers services, the users pay for consumption, and they
pay a price that is benchmarked against the market price. That is the IT unit's price is
set by the market.
§ IT offer services such as application development, application support,
desktops, laptops, etc. Each of these services has a price associated with it.
§ Business units pay for consumption. So they pay for, say, application
development if an application is desired by them. If they have an application
that is supported by the IT organization, the business unit pay for the support.
§ Price for the IT unit services is benchmarked against the market price. So if the
IT units double ups an application for a business user, the price the business
user pays for the application development is pegged against what an external
vendor would charge for developing the same application.

Cost Center Based Chargeback

The advantage is that, it is very simple to implement and it is very simple for users to
understand. But the main disadvantage is that, there is little incentive for the IT organization
to be efficient and there is no information for users to consume IT services prudently.
Advantage Disadvantage
Very simple to implement Little incentive for IT unit to be efficient
Easily understood by the users No incentive for users to consume prudently
Policization of prioritization
Service Center Based Chargeback
The advantage of the service center based approach to chargeback, is that, there is a price and
the price guides the user to consume prudently. However, the disadvantage of the service center
based approach to IT charge back is that, the IT organization charges whatever it costs the IT
organization to offer a service. They don't have much incentive to reduce the cost of offering a
service.
Advantage Disadvantage
The users can consume prudently. They can Little incentive for IT unit to be efficient
decide whether they need this service or how
many users need this service.

Profit Center Based Chargeback

The advantage is that, it is very simple to implement and it is very simple for users to the price
for the automated financial reporting service will be benchmarked against the market price for
offering this service. So, whatever the market will charge for offering this service is the price
the IT organization will have to offer this service at
Advantage Disadvantage
IT organization will have the incentive to Implementation is complex. That is, not only
offer a service at a price that is comparable to does the IT organization have to arrive,
the market price. That is the IT organization determined the costs of offering a service,
has the incentive to be as efficient as a market but they have to find out what is the
vendor for offering a service comparable market offering and how much
does the market charge for offering the
service. So, this is a complex endeavor, they
have to calculate their costs and they have to
find a compatible market offering for that
service
The users can consume prudently. They can
decide whether they need this service or how
many users need this service.

So, the chargeback process for a cost center is very simple. Users are either not charged
or charged on some ad hoc basis. However, if the chargeback mechanism works as a
service center or as a profit center, the service center or profit centers offers a set of
services, there is a price associated with each service, they publish the services, the users
consume and then users get a bill for the services they consume, and then the organization
drags consumption and usage of IT services.
Chargeback Policy
• Sourcing Policy
§ Are business units allowed to buy services from external providers? In the
service center and profit center approach to IT chargeback, the user
organizations are charged for IT services. So the business units may like it if
they have the option of procuring IT services from external providers.
§ Can the IT unit serve external customers? This is important because IT unit
is expected to offer services at prices that are comparable to market price
especially in the profit center approach to IT chargeback. So it will help the IT
organization reduce it's costs if the IT organization can serve external
customers, especially when the IT organization has excess capacity, it may
reduce, it may help the IT organization reduce it's costs when the IT
organization can serve external customers. Often, IT organizations follow a
policy where they will offer excess capacity to other organizations who are not
the client organizations direct competitors
• Cost Recovery Policy
§ Variable cost, Full cost/Average cost, Market price that is at what price
should the IT organization offer it's services to the users? Should they just
recover the variable cost of providing a service or should they charge the full
cost of offering a service to the users or should the price for a service be pegged
at the market price of that service?
§ How much profit should the IT organization make or should it continue to
reduce it's prices? If the IT organization can offer a service at less than the
market price for the service
§ What should be done with the profits? One idea here is when the IT
organization makes profits, those profits can be reinvested in technologies that
benefit the whole organization
Impact of Chargeback
• Economic
§ Affects the demand (use) and supply (investment) of IT services. So for
example, if users are charged a price for a service then that disciplines the user
and affects the demand for the service. Similarly, if IT services are benchmarked
against market prices, then it determines what IT services are offered by the IT
organization. The IT organization in that case will be offering services where
they can offer a service at a cost that is less than the market price for offering
that service. So, having a service center or a profit center-based approach to IT
chargeback affects the demand and supply of IT services. If users are charged a
price for consuming a service, it reduces demand as users only consume to the
point that the price is worth it.
§ Reduces resource consumption. That is when users are expected to pay a price
for a service, it disciplines them and they only demand the service when it is
worth the price.
§ Making better investment decisions: evaluating the cost and alternative
investments. Having a service center or a profit center-based approach, where
the users are charged a price helps the user evaluate different alternatives for a
service. So, the IT organization offers services at a price. So, the user can
evaluate different alternative investments and only those investments where the
investment is worth the price are pursued by the user. So, having a service center
or a profit center-based IT chargeback mechanism helps to make better
investment decisions.
• Evaluations
§ It affects business unit performance when the IT cost is a significant costs
for the business units. So a service center or a profit center affects the business
unit's performance because the IT costs are charged to the business unit.
§ Business unit managers conclusion about the competence of the IT unit. So
if the IT unit can offer services and business manager can compare the price of
the service with the market price that affects the business units manager's
perceptions about the competence of the IT unit. If the IT unit can offer a service
at a price that is less than the market price for that service, then the business unit
manager knows that the IT organization is very efficient.
When chargeback works well, it helps develop IT business partnerships. Business units
can help IT organization understand it's priorities. So when IT chargeback works well,
business units can help IT organization understand business units priorities. Similarly,
when IT chargeback works well, IT can help business units understand IT costs. So when
business units understand IT costs, an IT organization understands business units
priorities well, they can together make better IT investment decisions
BAB 4

Change Management
The idea behind change management is that you have made the IT investment, the new
application has been developed, and now you want the users to use the system. So the idea
behind change management is for the company to derive the value it expects from the new
system, the users have to use the new system. So change management is about making sure
that the users use the new system

User Resistance
Means by which employees communicate their discomfort with the system. If a system
threatens users in anyway, they will resist. By threat, we mean any loss of status, loss of power,
loss of revenue is a threat. If a system threatens users, they will resist. So better theories on
resistance will lead us to implement better strategies. If we understand why users are resisting
we will be able to implement better strategies. If the new system is easy to learn, users face
low transition costs that will reduce their resistance to adoption
Level of interest:
• Apathy – Inaction, lack of interest. Means inaction or lack of interest users don't show
any interest in using the new system
• Passive – Delay, excuses, persistence of former behavior, withdrawal. means they
delay using the new system, they make excuses for not using the new system and they
continue with their former behavior. That is, they continue to act as if the old system is
in place.
• Active – Voice opposing point of view, asking others to intervene, forming coalitions.
when the voice opposing points of view ask others to not use the new systems and form
coalitions of people who resist using the new system
• Aggressive – Infighting, making threats, boycott, sabotage. When users make threats
against people who are proposing to use the new system. And people who are interested
in using the new system, boycott, sabotage of the new system, are all manifestations of
aggressive resistance.
Status Quo Bias Protective
• Rational Decision Making
Users make a rational decision that the new system does not favor them. So they assess
the costs and benefits of the new system and they may see that there is a cost associated
with the new system. They have to learn the new system, there is some uncertainty and
risk associated with the new system. For example, the new system may make them feel
incompetent. So rationally thinking, they prefer the old system to the new system, so
they resist using the new system. So rational decision making leads to resisting using
the new system.
• Cognitive Misperception
So even small losses may seem like a big deal. So even small flaws in the new system
may seem like big hurdles to using the new system. So cognitive misperception may
lead users to resist the new system
• Psychological Commitment
Psychological commitment to the old system may lead users to resist the new system.
So, for example, all the effort invested in learning the old system may seem like a waste
which will cause users to resist using the new system. Similarly the effort required to
feel in control of the new system may seem like excess amount of effort. Which may
cause users to resist using the new system.
Coping Model User Adaption

Users choose different strategies of coping based on the assessment of consequences of a new
system. Is a new system an opportunity to improve their performance or is the new system a
threat to their position in the organization? The second dimension is a user's assessment of
control over the situation. That is, how much control do they feel they have over their work,
over themselves and over the technology? So based on their assessment of the consequences
of the new system, and their assessment of their control over their situation, they may choose
different strategies.

• Benefits Maximizing
Is when the users feel that the system presents and opportunity to improve their
performance, and they have high control. That is, they have control over how they will
perform their work, they have control over the technology. So in this case, users may
modify the technology or modify their behavior, that is, gain training so that they can
maximize, the benefits of the system. That is, they use the system to maximize their
performance.
• Benefits Satisficing
This is a situation where users feel that the new system presents an opportunity to
improve their performance. However, they don't have any control over how they will
perform their work and they don't have any control over the technology. So in the
benefits satisficing approach, users goal is to do the best they can, realizing that they
don't have any control over their work, themselves or the technology. But they believe
that the system can help them improve their performance, so they try to use the system
to maximize their performance.
• Disturbance Handling
Where users see the system as a threat to their position. But they feel that they have
control over their work, themselves, and the technology. So disturbance handling means
users doing everything that is in their control, such as gaining training, modifying the
system to minimize the threat of, for example, getting fired.
• Self Preservation
Which means that the user feel that the new system is a threat to their position, but they
don't have any control. So self preservation is like hoping that this new system will pass
and nothing will change. So self preservation is about hope and self deception to cope
with the situation. Where the new system is a threat, but they don't have any control
over the situation.
User Adoption

If users believe that the new system will help them to improve their performance, they will be
more likely to adopt the new system.
• Demand driven model of user adoption. The basic idea behind this model is if the
benefits are higher than costs of adoption, then users adopt
§ Performance Expectancy. That is, degree to which the individual believes that
using the system will help him or her attain gains in job performance. So, if the
new system will improve their performance, they are more likely to adopt the
system
§ Effort Expectancy. That is the degree of ease associated with the use of the
system. If the system is easy to use, they are more likely to use the system.
§ Social Influence. Degree to which an individual perceives that important others
believed that he or she should use the system. So, this dimension is about the
social pressure to adopt the new system. So, who else is using it? How many
other people are using it? If lot of other people who the users considers as
important are using the system, then the user is more likely to use the system
§ Facilitating Condition. So, the user asks this question. If I have difficulty using
the system, can I get help? So this dimension is about the degree to which an
individual believes that organizational and technical infrastructure exists to
support the use of the system. So, if the conditions support the use of the system,
then a user is more likely to use the system
So, in the demand driven models often referred to as the user acceptance model, users
look at four conditions; performance, expectancy, effort expectancy, social influence,
and facilitating conditions to decide if they will adopt in your system.
• Supply driven model. Here, the assumption is users want to adopt the new system but
they face knowledge barriers. So, removing the knowledge barriers helps to adopt the
innovation.

So, this model of adoption is about knowledge barriers. Resistance to innovation is due
to knowledge barriers. In this model, the assumption is users don't adopt if they face
knowledge barriers. So, to reduce resistance to the adoption of innovation, we need
institutions to lower the knowledge barriers. As knowledge barriers are lowered,
diffusion speeds up, adoption speeds up. So, thus, adoption is conceptualized in terms
of organizational learning, skill development, and knowledge barriers. So, if you
develop skill and knowledge and capabilities to overcome the knowledge barriers, then
adoption takes place.
Learning Enterprise Systems

So, to implement Enterprise Systems, firms have to overcome two knowledge barriers:
• Knowledge barriers associated with the assimilation of new work processes
• Knowledge barriers associated with the configuration of the ERP package.
This study found that a user training that included technical and business process training had
firms overcome assimilation knowledge barriers and a strong core team that included high-
performing technical and business managers and carefully managed consulting teams
addressed configuration knowledge barriers. So, user training that overcame that can overcome
assimilation knowledge barriers and a core team and consulting teams that can address
configuration knowledge barriers can help firms implement Enterprise Systems

Different Lever User Adoption

• User Involvement
§ So, the main idea is that if users are involved in the development of the
information system, they take ownership of the system, they believe that they
were involved in the development of the system, it is their system. In that case,
they are more likely to adopt the system. So, user participation affects attitudinal
and behavioral outcomes such as satisfaction, use intention and system use
§ Users are involved in the development of the system, the system that gets
developed is closer to what the users want. So, you develop a higher quality
system, system that actually meets the user's requirements. So, user
participation affects productivity outcomes such as time and budget goals and
project quality such as functionality that meets user requirements. So, if users
are involved in the development of the system, the system that is developed
 includes features that users want and does not include features that users have
no intention of using. So, in that sense, user involvement leads to system that is
developed on time and budget and functionality that users actually want to use
§ User participation has stronger impact on attitudinal and behavioral outcomes
than productivity outcomes. That is, user involvement is more likely to be
associated with the users actually using the system than being associated with
productivity outcomes like on time and on budget.
• Training
§ Training helps with application knowledge covering commands and tools in the
application.
§ Training also includes business knowledge about how the application enables
the performance of different business tasks, that is how the application allows
the task to be performed differently
§ Training also helps with collaboration. That is, users understand how they use
the system affects others and how others use the system affects how they do
their work.
Typically, experts explain the application to novices in a classroom setting
demonstrating how to use the system, observing the learners practicing using the system
and they provide feedback to the users. The relationship between training and
information systems implementation varies with technical complexity and task
interdependence.
Under conditions of high technical complexity, training becomes more important.
Technical complexity affects both application and business knowledge that users need
to use the application. Thus, as technical complexity increases, training becomes more
important.
For low complexity innovations, users face limited knowledge barriers. That is, for low
complexity innovations, users don't actually need formal training to use the system,
they can use the system on their own. That is, training is more important for
technologically complex systems. Training is also more important when the system
helps with interdependent tasks. So, when users need to understand how their work
affects the work of others and how the work of others affects their work, then training
becomes more important. So training is more important when the system helps with
tasks that are interdependent.
• Peer Support
An individual's coworkers can be an important source of help in overcoming knowledge
barriers.
§ It is easier to transfer knowledge between people with similar training
background and job characteristics. So, academic research has found that peer
support is very important in helping with adoption of new information systems.
§ People learn through self-discovery and through peer. So, that is having
coworkers who are knowledgeable about the information system is very helpful
in influencing an employee to use the system. So, if an employee's coworkers
use the system, then the employee is more likely to use the system because it is
easier for an employee to learn from a coworker than to learn from training.
This peer support can include any user outside of formal training. So, peer support can
include lead users, resident experts and formal consultants, any coworker from which
an employee can learn about the system.
Peers can be more helpful than helpdesk, as helpdesk may be understaffed and helpdesk
may lack the domain knowledge to resolve user problems. So, academic research has
found that peer support is a very important leaver in influencing the adoption of new
system
• Top Management Support
If users see that top management is committed to the implementation of the new system,
they are more likely to adopt the system
§ Top management support and commitment is essential in information systems
implementation as information system implementation is very very resource
intensive.
§ Top management is responsible for allocating scarce material and managerial
resources.
§ Top management support also legitimizes new information systems and
convinces users to expand effort to learn to use the new systems. So, this top
management support and commitment is communicated through active
championship and through organizational communication.
§ Top management support is more important if task interdependence is higher.
If the value from the system depends on lots of users performing interdependent
tasks using the system, then top management support is more important.
 • External Consultant
§ Firms have to overcome knowledge barriers associated with configuration of
the ERP package.
§ Carefully managed consulting teams addressed configuration knowledge
barriers. So, consultants or external vendors who may provide clients with
capabilities that the client lags is a very important leaver in influencing the
implementation of information systems

Critical Success Factors

Evolutionary vs Revolutionary Change

• Evolutionary change is the change that complies with the current values, norms, skills,
structures, and incentive systems. So, in evolutionary change, we want to implement a
new system but the new system is very consistent with the current ways of doing things.
In an evolutionary approach the idea is that things are going well but we want to make
some improvements without rocking the boat too much. So we are careful, the new
system is adapted to the employees and the employees adapt to the new system in a
deliberate manner to mitigate risk
• Revolutionary change is the change that challenges the status quo and accomplishes
fundamental change in the values, norms, work practices, and structures. So, in some
sense revolutionary change is a system where we are trying to use the systems to
radically change how the company does things.
Project Management vs Learning Approach

In the project management approach, a new system implementation is a one-time effort,

whereas in the learning approach the organization thinks of itself as being in a continuous
learning mode of implementing new and better ways of doing things
• Project Management
A project is a complex non-routine, onetime effort constrained by time, budget, and
performance specifications, that is designed to meet customer needs, resulting in a
unique and well-defined product, service, or result. So, we can treat implementing a
new information system as a project, and manage the implementation as we would
 manage a project. A different way of implementing information systems is to take the
learning approach
• Learning Approach
The learning approach means that the organization is continuously striving to learn and
implement better ways of performing its activities. So in the learning approach,
implementing a new system is part of what the organization does. That is, it is
continuously striving to learn and implement better ways of performing its activities.
So a new information system is not a one-time project. It is how the organization lives,
and it is always continuously trying to do things like this. In the learning approach users
develop capabilities to use the new system by actually using the new system.