Building a Business Case – Components

• Executive Summary

• Overview and Introduction

• Assumptions and Rationale

• Project Summary

• Financial Discussion and Analysis

• Benefits and Business Impacts

• Schedule and Milestones

• Risk and Contingency Analysis

• Conclusion and Recommendation • Appendices

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Sample of benefits in a business case for adding chat function linked from Facebook page

Busy chat operators; busy Facebook page; Customers seem happier

Sales improved by $250k; costs decreased by $50k after change

Facebook page likes; number of chats; Customer satisfaction scores moved from 3.3 to 4.1 (out of 5)

Converted 150 calls per day to chats; reaching 200 more customers per day

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IT Portfolio Management

• IT investments should be managed as any other investment.

• Evaluate and approve IT investments as they relate to other potential investments of all kinds

• Goals: • Pick the right mix of investments

• Invest in the most valuable IT initiatives

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Asset Classes

• Weill and Aral say that there are four asset classes of IT investments: • Transactional systems – systems that streamline or cut

costs on business operations.

• Informational systems – any system that provides information used to control, manage, communicate, analyze or collaborate.

• Strategic systems – any system used to gain competitive advantage in the marketplace.

• Infrastructure systems – the base foundation or shared IT services used for multiple applications.

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Average company’s IT portfolio profile (See Discussion Question 4)

Transactional

13%

Infrastructure

54%

Informational

20%

Strategic

13%

46%

25%

18% 11%

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Comparative IT portfolios for different business strategies (See discussion question 4)

Valuing IT Investments

• Soft benefits, such as the ability to make future decisions, make it difficult to measure the payback of IT investment • IT is expensive, thus under close scrutiny. • IT is complex; calculating the costs is an art, not a science.

• Payback period for infrastructure is much longer than other types of capital investments.

• With necessary systems (due to laws, etc.), the payback period cannot be calculated

• Many valuation methods are available…

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Valuation Method Description

Return on Investment (ROI) ROI= 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 −𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

Net Present Value (NPV) Discount the costs and benefits for each year of the

system’s lifetime using present value factor 1

1 + 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 𝑦𝑒𝑎𝑟𝑠

Economic Value Added (EVA) EVA = net operating profit after taxes

(capital x cost of capital)

Payback Analysis Time that will lapse before accrued benefits overtake

accrued and continuing costs

Internal Rate of Return (IRR) Return of the IT investment compared to the corporate

policy on rate of return

Weighted Scoring Methods Costs and revenues/savings are weighted based on their

strategic importance, accuracy/confidence, other

opportunities

Financial Valuation Methods

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IT Investment Monitoring

• Old saying: “If you can’t measure it, you can’t manage it”

• Management needs to achieve organizational benefits from IT investments

• Must agree upon a set of metrics for monitoring IT investments.

• Often financial in nature (ROI, NPV, etc.).

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The Balanced Scorecard

• Focuses attention on the organization’s value drivers (which include financial performance).

• Assesses the full impact of corporate strategies on customers and workforce, as well as financial performance.

• Allows managers to look at a business from four related perspectives:

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How do our customers see us?

At what must we excel?

Can we continue to improve and create value?

How do we look to shareholders?

The Four Balanced Scorecard perspectives

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The IT Balanced Scorecard

• Using it within the MIS department helps senior IS managers • Understand their organization’s performance

• Measure it in a way that supports its business strategy

• Linked to the corporate scorecard • By ensuring that the measures used by IT are those that

support the corporate goals.

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IT Dashboards

• Snapshot of metrics at a given point in time (often “right now”)

• Offer “at a glance” idea of how things are going

• Often colors depict conditions: • Areas with problems (red) • Areas in good shape (green) • In-between or average (yellow)

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Sample Black & White Dashboard

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ITDashboard.gov

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Architecture for Dashboards

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Funding the IT department

• How are costs of design, development, delivery and maintenance of IT systems recovered (or simply covered)?

• Chargeback • Allocation • Corporate budget

• The first two are done for management reasons

• The latter covers costs using corporate coffers

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Funding

Method

Assignment: Business Case Components

Description Why do it? Why not do it?

Chargeback Charges are

calculated based

on actual usage

Fairest method for

recovering costs

since it is based on

actual usage

Must collect

details on usage;

often expensive

and difficult

Allocation Expenditures are

divided by non-

usage basis

(revenues, headcount, etc.)

Less bookkeeping