School of Business

BSAD 556  TOPICS:  MANAGEMENT INFORMATION SYSTEMS

The Economics of IT and Capital Projects Case Study

Adapted from a case study developed by Alan Hansell

Background

You have recently been appointed to the Strategic Investment Review Committee by the CEO, who is on a 4-year assignment from XYZ Corporate Headquarters. He has told the company's managers that he has been charged with a mission of turning the company around and sees the effective use of IT as pivotal. He has said that his Critical Success Factors (what he must do in the short term to succeed) are:

At the meeting, where the appointment of yourself and two others was formally announced, the CEO stated that the purpose of the committee was to:

In private discussion after the meeting, the CEO mentioned to you that he asked you to join the committee because he felt you best understood the parameters for evaluating both IT related and Non IT projects. He also said he wanted you to bring an independent view to the table.

The other members of the committee are from Research and Development and Corporate Planning. One has a background in manufacturing and the other in marketing. They have little understanding of IT related projects, less still about how to assess them in relation to non IT projects.

XYZ Company Details

Over the last year revenue has been flat and administrative costs have risen due to the introduction of a complex ordering procedure. Of particular concern to the CEO has been the increase in credit notes issued to customers, due to claims for faulty goods. The CEO has introduced a Total Quality Program to address this, but is unaware of the indirect costs of the program.

Investment capital for all projects is scarce in XYZ at present. In the past, there have been major disagreements at the Board level on where this scarce resource should be invested. The previous CEO favored allocating it to manufacturing related projects. The new CEO has said he will review all projects on their merits. He has also been critical of managers who try to hide their capital projects from review under the guise of there being an operational task, e.g. by using operating leases or rental agreements.

Your Challenge

You perceive your tasks in the short term to involve:

  1. Assisting your colleagues on the committee to understand how to assess the potential contribution to the organization of all projects. Privately, you are convinced they will focus on the immediate payback and ignore long-term benefits, particularly from those projects which have intangible benefits or are essential to building infrastructure.
  2. Having gotten your colleagues to the level of understanding needed concerning the value of IT related projects, suggest to them criteria, and a ranking system for ranking them, for all projects. On a personal level, you are concerned that they might challenge your ideas and overrule you. You are unsure how to counter this and recognize the need to develop a strategy to win them over.
  3. Assuming they accept your suggested criteria, apply this to the projects in the attachment and rank them.

Assignment

In your syndicate group:

  1. Develop criteria for evaluating and ranking projects.
  2. Determine how you would sell the ranking system to your colleagues and get them to accept it.
  3. Rank the projects described under Project Details.

Please give priority to tasks 1 and 3.

Reference

For background reading, see Laudon & Laudon Chapter 11.

Project Details

The details for 8 competing projects are listed below, in random sequence.

Project 1

A proposal has been received from the director of Sales and Marketing that PCs should be provided for use at home by representatives and their field managers. He envisages making data available for down loading to his field staff every evening reflecting current orders, sales and credits for each customer by product. Year to date and comparative data, e.g. budgets and position for same period last year will also be provided.

Field managers will get summarized data for representatives they manage. Representatives will be able to enter customer / location specific data, e.g. advertising programs and retail prices, into a specially provided program to enable them to relate this data to orders. This will help them understand trends in their territories. Programs will also be written for execution on the PCs to graphically depict customer buying patterns.

The objective of the Sales and Marketing Director are to:

He says these objectives cannot be accomplished without up to date information. Our competitors provide a similar system to their field staff.

Project 2

A proposal has been received to replace the existing Distribution Center, which was built in 1960 and has outlived its usefulness. The existing building will be sold and a new facility in a more convenient location will be built. In conjunction with this, automated picking and dispatch equipment will be acquired to improve productivity and accelerate the movement of goods into and out of the building.

Project 3

Pressure from XYZ customers to place orders electronically via EDI has prompted the Director of Sales and Marketing to propose that links be established and LOB (Line Of Business) systems upgraded to accommodate this requirement. He envisages a bi-directional electronic link for processing of:

Note, payment will not be handled via EDI, as this is part of a separate system.

Project 4

The purchasing manager has proposed we establish electronic links via EDI with XYZ suppliers. In a similar vein to the requirements statement for Project 3, he envisages it being integrated with our LOB systems, e.g. request for quotations, Purchase Order placement, scheduling and distribution details. He does not want to re-enter into the Purchasing / Payables System Purchase Orders raised on the electronic link (via PC) courtesy of a major supplier - something he has to do today.

Project 5

Considerable interest in the possibilities of MRPII (Manufacturing Resource Planning II) has prompted a proposal that XYZ undertake a study in this area. The study will look into possible modifications to management procedures and what has to be done to implement a software package.

The study will involve staff from manufacturing, MIS, Logistics and Marketing and should take 6 months to complete. The group will specify requirements and estimate the cost of implementation.

Full implementation is likely to be 2 to 3 years away and will involve major changes in the manufacturing organization. Nevertheless, the management believes that it is important to start the study now so the potential impact of MRPII is understood.

Project 6

Interest is high in providing Electronic Mail facilities for internal use. It is envisaged that up to 250 people could be connected and able to create, transmit and distribute correspondence and notes. Corporate HQ, which is pressing affiliates to implement this system, are also keen to establish an international network. The CEO has come out in favor of the system.

Project 7

A new Personnel and Skills management system is proposed. No central repository of personal data such as training undertaken, skills, work experience in XYZ and career aspirations exist today in the company.

If this data were available it would be used by Human Resources to identify training needs, find appropriately qualified staff for vacancies and assist succession planning. An informal system for identifying staff capable of filling vacancies exists today. Unfortunately, it is not working well, and its inefficiencies have led to many staff resigning when opportunities for their redeployment have existed and they have not been consulted. Managers are also frustrated as they spend inordinate amounts of time looking a replacement when a member of staff is transferred.

There is recognition in XYZ that this is an infrastructure project.

Project 8

The Quality Department is insisting XYZ improve its product testing facilities and update its analytical procedures to comply with statutory requirements. If this is done, it should considerably aid in the detection of product deficiencies and help bring new products to the market quicker than is the case today.

There is a proposal that new analyzers be bought and linked to a PC, which in turn will be linked to the mainframe. This will facilitate preparation of reports for statutory authorities as well as transmission of results to XYZ affiliates worldwide.

There is a widely held view in XYZ that this project by itself will only return marginal benefits. However, there is a consensus that if it is introduced in conjunction with Project 6 (Electronic Mail), and integrated into an international network, it will accelerate the time it takes to bring new products to market.

Project Priority Assessment Template

Suggestion only

Evaluation Criteria

A

B

...

AA

Total

Ranking

Weighting

9.9

9.9

...

Project

Risk

1

x

9

9

...

9

99

9

2

x

9

9

...

9

99

9

3

x

9

9

...

9

99

9

4

x

9

9

...

9

99

9

5

x

9

9

...

9

99

9

6

x

9

9

...

9

99

9

7

x

9

9

...

9

99

9

8

x

9

9

...

9

99

9

Notes:

Equation for calculating Total from Evaluation Criteria should be stated.

Definition of Risk - perhaps H, M and L

Definition of Evaluation Criteria

A = ...

B = ...

C = ...

D = ...

... ...

Projects Costs / Benefits

Task Description

Estimated Costs

Estimated Benefits

Payback Period

Project 1 - Home PC Program
Provide PCs for Reps. and Field Managers + Programs and Charts One time $750K Annual Oper. $250K Revenue Protection +
Net Rev 1% = $500K Improve customer service
24 months
Project 2 - Replace Distribution Center
Upgrade with auto picking and labels and collation Net Capital = $4.5M cost Staff reductions of 20 = $1M p.a. + earlier dispatch of 2 days = $0.5M Interest Saved 36 months
Project 3 - EDI Link to Customer
Change LOB Systems to accept quotes, orders and generate dispatch docs. Programming costs $500K Network costs $200 p.a. Operating costs $300K p.a. Reduce staff by 2 Earlier orders Reduce stock by $1M p.a. $24m Revenue Protection 12 months
Project 4 - EDI Link to Suppliers
Automatically raise Purchase Orders and monitor status Programming costs $200K One-time $50K Avoid re-entry $50K Reduce Raw Materials Stock $200K 12 Months
Project 5 - MRPII Impact Study
Set up study team from MIS, Manufacturing, Marketing and Logistics 4 staff x $50K for 6 months Prepare for implementation where estimated total net benefits > $10m Unclear
Project 6 - Electronic Mail
Implement software and train staff connect to international network One time $300K Operating costs $400K p.a. Reduce internal memo preparation costs of $300K p.a. Reduce Telex costs of $200K pa Accelerate time to market 36 months
Project 7 - Personnel and Skills Database
Collect data and implement Personnel Database Collect data $400K Programming costs $700K Operating costs $300K p.a. 2 Management hrs p.w. in staff admin x $100 p.h. = $500K p.a. è flatten management structure 48 months
Project 8 - Improved PC Based Testing Facilities
Improve testing facilities in labs with PC and mainframe link + analyzers One time $150K Operating costs $50K Reduce staff by 1 = $50K Reduce claims = $75K 24 months
N.B. Figures quoted above are for guidance. Do not take them literally.

Strategic Investment Project Ranking

Clarification of Terms

Expense Reduction

i.e. short term ROI

Customer Partnership

or ease of order placement

Quality Products

i.e. zero credits or warranty claims

Strategic Marketing Objectives

e.g. quick to market

Revenue Protection

i.e. combating competition

Infrastructure Project

or long term positioning

 
Last Modified: Sunday, April 13, 2003 10:29 PM