To develop an effective information systems plan, the organization must have a clear understanding of both its long- and short-term information requirements. A strategic approach to information requirements, strategic analysis, or critical success factors argues that an organization’s information requirements are determined by a small number of key performance indicators (KPIs) of managers. KPIs are shaped by the industry, the firm, the manager, and the broader environment. For instance, KPIs for an automobile firm might be unit production costs, labor costs, factory productivity, re-work and error rate, customer brand recognition surveys, J.D. Power quality rankings, employee job satisfaction ratings, and health costs. New information systems should focus on providing information that helps the firm meet these goals implied by key performance indicators.
PORTFOLIO ANALYSIS
Once strategic analyses have determined the overall direction of systems development, portfolio analysis can be used to evaluate alternative system projects. Portfolio analysis inventories all of the organization’s information systems projects and assets, including infrastructure, outsourcing contracts, and licenses. This portfolio of information systems investments can be described as having a certain profile of risk and benefit to the firm (see Figure 14.3) similar to a financial portfolio. Each information systems project carries its own set of risks and benefits. Firms would try to improve the return on their portfolios of IT assets by balancing the risk and return from their systems investments. Although there is no ideal profile for all firms, information-intensive industries (e.g., finance) should have a few high-risk, high-benefit projects to ensure that they stay current with technology. Firms in non-information-intensive industries should focus on high-benefit, low-risk projects.
Most desirable, of course, are systems with high benefit and low risk. These promise early returns and low risks. Second, high-benefit, high-risk systems should be examined; low-benefit, high-risk systems should be totally avoided; and low-benefit, low-risk systems should be reexamined for the possibility of rebuilding and replacing them with more desirable systems having higher benefits. By using portfolio analysis, management can determine the optimal mix of investment risk and reward for their firms, balancing riskier high-reward projects with safer lower-reward ones. Firms where portfolio analysis is alignedwith business strategy have been found to have a superior return on their IT assets, better alignment of IT investments with business objectives, and better organization-wide coordination of IT investments.
PORTFOLIO ANALYSIS
Once strategic analyses have determined the overall direction of systems development, portfolio analysis can be used to evaluate alternative system projects. Portfolio analysis inventories all of the organization’s information systems projects and assets, including infrastructure, outsourcing contracts, and licenses. This portfolio of information systems investments can be described as having a certain profile of risk and benefit to the firm (see Figure 14.3) similar to a financial portfolio. Each information systems project carries its own set of risks and benefits. Firms would try to improve the return on their portfolios of IT assets by balancing the risk and return from their systems investments. Although there is no ideal profile for all firms, information-intensive industries (e.g., finance) should have a few high-risk, high-benefit projects to ensure that they stay current with technology. Firms in non-information-intensive industries should focus on high-benefit, low-risk projects.
Most desirable, of course, are systems with high benefit and low risk. These promise early returns and low risks. Second, high-benefit, high-risk systems should be examined; low-benefit, high-risk systems should be totally avoided; and low-benefit, low-risk systems should be reexamined for the possibility of rebuilding and replacing them with more desirable systems having higher benefits. By using portfolio analysis, management can determine the optimal mix of investment risk and reward for their firms, balancing riskier high-reward projects with safer lower-reward ones. Firms where portfolio analysis is alignedwith business strategy have been found to have a superior return on their IT assets, better alignment of IT investments with business objectives, and better organization-wide coordination of IT investments.
SCORING MODELS
A scoring model is useful for selecting projects where many criteria must be considered. It assigns weights to various features of a system and then calculates the weighted totals. Using Table 14.2, the firm must decide among two alternative enterprise resource planning (ERP) systems. The first column lists the criteria that decision makers will use to evaluate the systems. These criteria are usually the result of lengthy discussions among the decision- making group. Often the most important outcome of a scoring model is not the score but agreement on the criteria used to judge a system.
Table 14.2 shows that this particular company attaches the most importance to capabilities for sales order processing, inventory management, and warehousing. The second column in Table 14.2 lists the weights that decision makers attached to the decision criteria. Columns 3 and 5 show the percentage of requirements for each function that each alternative ERP system can provide. Each vendor’s score can be calculated by multiplying the percentage of requirements met for each function by the weight attached to that function. ERP System B has the highest total score. As with all “objective” techniques, there are many qualitative judgments involved in using the scoring model. This model requires experts who understand the issues and the technology. It is appropriate to cycle through the scoring model several times, changing the criteria and weights, to see how sensitive the outcome is to reasonable changes in criteria. Scoring models are used most commonly to confirm, to rationalize, and to support decisions, rather than as the final arbiters of system selection.
A scoring model is useful for selecting projects where many criteria must be considered. It assigns weights to various features of a system and then calculates the weighted totals. Using Table 14.2, the firm must decide among two alternative enterprise resource planning (ERP) systems. The first column lists the criteria that decision makers will use to evaluate the systems. These criteria are usually the result of lengthy discussions among the decision- making group. Often the most important outcome of a scoring model is not the score but agreement on the criteria used to judge a system.
Table 14.2 shows that this particular company attaches the most importance to capabilities for sales order processing, inventory management, and warehousing. The second column in Table 14.2 lists the weights that decision makers attached to the decision criteria. Columns 3 and 5 show the percentage of requirements for each function that each alternative ERP system can provide. Each vendor’s score can be calculated by multiplying the percentage of requirements met for each function by the weight attached to that function. ERP System B has the highest total score. As with all “objective” techniques, there are many qualitative judgments involved in using the scoring model. This model requires experts who understand the issues and the technology. It is appropriate to cycle through the scoring model several times, changing the criteria and weights, to see how sensitive the outcome is to reasonable changes in criteria. Scoring models are used most commonly to confirm, to rationalize, and to support decisions, rather than as the final arbiters of system selection.
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