As with other investment evaluations, an organisation must decide which proposed IT projects to finance and which projects to stay away from, with multiple projects fighting for organisations resources. Systems are chosen from lists of potential systems in an application portfolio depending on costs compared to likely benefits. Not all projects will be justifiable at once due to scarce resources.

Techniques used for evaluating projects can slow down the SDLC (system development life cycle) process that can affect IT projects with a greater impact that other areas due to the dynamic and changeable situations in which they exist. These techniques would preferably highlight the investments needed, allocation priorities and subsequent benefits derived from the projects.

There is little, if any, agreement on how IT projects should be properly appraised or evaluated. There is a universal understanding however, that it is not performed properly or rigorously in a large number of cases.

Up to 70% of organisations have no formal appraisal process or decision-making process when it comes to IT projects and less than half of this figure actually performs any type of review after an investment is agreed on and the project implemented. (This review takes place at the last stage of the decision making process – Intelligence, Design, Choice & Review).

It would seem that a number of appraisal methods will be required due to the variety of benefits that can be generated from IT ventures. Traditional financial methods such as Return on Capital Employed (COCE), Internal Rate of Return and Cost of Capital are becoming less and less suitable as stand alone methods.

Take for example the Socrate case that had a payback period of 10 years. A payback period of this length would not be entertained in other functions or organisational areas.

At the time of the proposal / plan, it is almost impossible to quantify certain benefits that would be expected of the project: (for example)

• Ease of use and user friendliness
• Change management issues
• E-commerce venture revenues and profits

Characteristics of IT investments:

• They normally do not have any specific calculatedly ROI (Return On Investment).
• Often investment in hardware or infrastructure cannot be linked to one individual area or to one project that derives all the benefits and therefore the issue of whose performance should be evaluated in order to see the benefits achieved.
• Training, maintenance and other post implementation costs are usually the most significant of the total project and are often not taken into account.
• Incremental purchasing is not always possible with IT projects
• Putting some of the benefits into financial figures is often near impossible. Quantifying increased customer satisfaction for example is near impossible

Now looking to different methods for different types of projects.

IT projects could fall into one of the following categories-

J Substitutive to improve existing systems (e.g. Socrate)

J Complementary to improve efficiency (e.g. DSS (decision support system) by improving customer information in the database which in turn will lead to better customer knowledge)

J Innovative to generate a sustainable competitive advantage (pursuing an e-commerce strategy).

All of the above projects would require different appraisal method and techniques.

All of the following Generic or Traditional methods should be used in IT investment appraisals, with some being more beneficial than others in certain situations.

J Traditional cost / benefit analysis is helpful with projects aimed at improving efficiency through substituting older systems. i.e. what costs will be reduced and what further benefits will be derived / savings from automation ventures.

J Value linking – good for estimating business improvements (an example would be the increased time that can spend generating customers due to the reduced billing processing time as a result of the implementation of a better system!)

J Value acceleration – used for identifying and quantifying non-financial positives of reducing the business process lead-time.

J Value restructuring – planning for ensuing productivity increases which will be derived from the improved systems and fundamental restructuring (total change) of the business. Reengineering involves a full restructuring of the organisation.

J Innovation evaluation – calculating the costs and benefits that will result from a venture into an area not before tackled by a company (e.g. – Dell (as ever) and Intel and their Pentium 4 chip).

• Future costs and benefits, financial and other, should be generated to help in investment appraisal.
• The five categories / appraisal method have been put forward (should be known). IS project appraisal will encounter all five with some projects focusing on others more depending on the project type e.g. substitute or innovation
• Long term and short term benefits must be estimated at least. Also the post implementation costs should not be ignored, as they are a major cost in IT ventures.
• Not all variables (costs/benefits) are financials or quantifiable. Intangibles should however be calculated in some manner.

The following portfolio analysis is put forward as a guide

(Expected contribution of IS in the future)

The way IS is regarded and its importance to achieving business objectives both now and in the future will determine the level of investment in the IT area.

Examples:

J Strategic – (attack) – Online and Internet ventures by banks. They need to pursue such a strategy in order to stay competitive.

J High Potential - (beware) – Not compulsory at the moment but will be in the future and key to competitiveness – e.g. online banking 5 years ago. The idea was in the embryo stage.

J Key Operational – (explore) –

J Support – (safe) – Construction industry !

To review:

All potential benefits of a potential project must be sought before any resources are afforded to it. These benefits must be in financial and quantitative measures as well as forming arguments around nonquantiative measures, which cannot be put into figures - such as staff acceptance and morale and change management issues.

It should also be kept in mind that the most economic solution is not always the best for the company.

However in the end the design and implementation process must left up to the IT function with the option of setting up task forces for the specific task.

Top management as with all projects is vital as they will have the last say as to where resources are deployed.

Other issues raised in the lecture:

High potential applications:

Benefits can only be anticipated and not estimated with too much certainty.

Projects of this nature will be seen as R&D.

A balance must be sought between spending too much and too little with these ventures.