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Information Technology FOR Managers

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Information Technology Managers

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Information Technology for Managers, Second Edition George W. Reynolds

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TABLE OF CONTENTS

Preface xiii

Chapter 1 Managers: Key to Information Technology Results 1 The E-Borders Program 1

Why Managers Must Provide Leadership for Information Technology (IT) 1 Why Managers Must Understand IT 3 What Is Information Technology? 4

Personal IT 5 Group IT 6 Enterprise IT 7

The Role of Managers Vis-À-Vis IT 11 Identifying Appropriate IT Opportunities 12 Smooth Introduction and Adoption of IT 13 Ensuring That IT Risks Are Mitigated 18

What if Managers Do Not Participate in IT Projects? 19 Overview of Remaining Text 20 Key Terms 23 Chapter Summary 23 Discussion Questions 24 Action Needed 24 Web-Based Case 25 Case Study 25 Notes 28

Chapter 2 Strategic Planning 31 Apple’s Innovative Business Strategy 31 Why Managers Must Understand the Relationship Between Strategic Planning and IT 33 Strategic Planning 33

Analyze Situation 35 Set Direction 37 Define Strategies 41 Deploy Plan 42

Setting the IT Organizational Strategy 43 Identifying IT Projects and Initiatives 45 Prioritizing IT Projects and Initiatives 46

Effective Strategic Planning: Chevron 47 Background 47 Situation Analysis 48 Set Direction 51 Define Strategies 52 Deploy Plan 52

Key Terms 57 Chapter Summary 57 Discussion Questions 57 Action Needed 58 Web-Based Case 59 Case Study 59 Notes 59

Chapter 3 Project Management 61 The BBC Digital Media Initiative 61 Why Managers Must Understand Project Management 63 What Is a Project? 64

Project Variables 64 What Is Project Management? 69 Project Management Knowledge Areas 69

Scope Management 70 Time Management 71 Cost Management 72 Quality Management 75 Human Resource Management 76 Communications Management 78 Risk Management 80 Procurement Management 83 Project Integration Management 85

Key Terms 87 Chapter Summary 87 Discussion Questions 88 Action Needed 89 Web-Based Case 89 Case Study 90 Notes 92

Chapter 4 Business Process and IT Outsourcing 95 Salesforce.com and Its Cloud-Based Success 95 Why Managers Must Understand Outsourcing 97 What Are Outsourcing and Offshore Outsourcing? 98

Why Do Organizations Outsource? 99 Issues Associated with Outsourcing 102

IT Outsourcing 105 Public Cloud Computing 105 Virtualization 108 Autonomic Computing 108 Private Cloud Computing 109 Hybrid Cloud Computing 109

Planning an Effective Outsourcing Process 109 Establish a “Smart” Outsourcing Strategy 111 Evaluate and Select Appropriate Activities and Projects for Outsourcing 111 Evaluate and Select Appropriate Service Providers 112 Evaluate Service Provider Locations 113 Benchmark Existing Service Levels 114 Define the Service-Level Agreement 115 Develop an Outsourcing Contract 116 Establish an Outsourcing Governance Process 116 Measure and Evaluate Results 117

Key Terms 119 Chapter Summary 119 Discussion Questions 120 Action Needed 121 Web-Based Case 121 Case Study 122 Notes 125

viii Table of Contents

Chapter 5 Corporate and IT Governance 129 Credit and Debit Card Theft 129

Why Managers Must Get Involved in IT Governance 129 What Is IT Governance? 131

Ensuring That an Organization Achieves Good Value from Its Investments in IT 133 Mitigating IT-Related Risks 134

Why Managers Must Understand IT Governance 137 IT Governance Frameworks 137

IT Infrastructure Library (ITIL) 139 Control Objectives for Information and Related Technology (COBIT) 140 Using PDCA and an IT Governance Framework 142

Business Continuity Planning 144 Process for Developing a Disaster Recovery Plan 148

Key Terms 153 Chapter Summary 153 Discussion Questions 154 Action Needed 154 Web-Based Case 155 Case Study 155 Notes 158

Chapter 6 Collaboration Tools 161 Eagle Investment Employs Unified Communications 161 Why Managers Must Understand Collaboration Tools 164 Collaboration Tools 164

Electronic Bulletin Boards 164 Blogs 165 Calendaring Software 168 Desktop Sharing 168 Instant Messaging (IM) 169 Podcasts 170 Really Simple Syndication (RSS) 171 Shared Workspace 171 Online Project Management 171 Web Conferencing, Webinars, and Webcasts 172 Wikis 175 Presence Information 176 Unified Communications (UC) 176

Key Terms 179 Chapter Summary 179 Discussion Questions 180 Action Needed 180 Web-Based Case 181 Case Study 181 Notes 183

Chapter 7 E-commerce 185 Alibaba Opening the Door to the Largest Domestic Retail Market in the World 185 Why Managers Must Understand E-Commerce 187 Forms of E-Commerce 189

Business-to-Business (B2B) E-Commerce 189 Business-to-Consumer (B2C) E-Commerce 192 Consumer-to-Consumer (C2C) E-Commerce 194 E-Government Commerce 194 Mobile Commerce 196

Table of Contents ix

E-Commerce Critical Success Factors 198 Identifying Appropriate E-Commerce Opportunities 198 Acquiring Necessary Organizational Capabilities 198 Directing Potential Customers to Your Site 200 Providing a Good Customer Online Experience 201 Providing an Incentive for Customers to Purchase and Return in the Future 201 Providing Timely, Efficient Order Fulfillment 202 Offering a Variety of Easy and Secure Payment Methods 203 Handling Returns Smoothly and Efficiently 205 Providing Effective Customer Service 205

Advantages of E-Commerce 206 Issues Associated with E-Commerce 207

Customers Fear That Their Personal Data May Be Stolen or Used Inappropriately 207 Cultural and Linguistic Obstacles 208 Difficulty Integrating Web and Non-Web Sales and Inventory Data 208

Key Terms 210 Chapter Summary 210 Discussion Questions 211 Action Needed 212 Web-Based Case 212 Case Study 213 Notes 215

Chapter 8 Enterprise Systems 219 Coca-Cola: Global Reach Through Local Distribution 219 What Is an Enterprise System? 222 Enterprise Resource Planning 222

Benefits of Using an ERP System 225 Tier I, Tier II, and Tier III ERP Vendors 228 ERP Customization 229 Supply Chain Management (SCM) 230

Customer Relationship Management 232 Product Life Cycle Management (PLM) 236 Avoiding Enterprise Systems Failures 240 Hosted Software Model for Enterprise Software 241 Key Terms 244 Chapter Summary 244 Discussion Questions 245 Action Needed 246 Web-Based Case 246 Case Study 247 Notes 249

Chapter 9 Business Intelligence and Big Data 253 Amazon: Beating the In-Store Advantage with Business Intelligence 253 What Is Business Intelligence? 255

Data Warehouse/Data Marts 256 Big Data 258

Structured and Unstructured Data 259 Business Intelligence Tools 263

Spreadsheets 264 Reporting and Querying Tools 265 Online Analytical Processing (OLAP) 265 Drill-Down Analysis 266

x Table of Contents

Data Mining 267 Dashboards 268 Data Governance 269

Challenges of Big Data 272 Key Terms 275 Chapter Summary 275 Discussion Questions 276 Action Needed 277 Web-Based Case 277 Case Study 278 Notes 281

Chapter 10 Knowledge Management 285 How Knowledge Management Is Helping Nelnet Service Student Loans 285 What Is Knowledge Management (KM)? 287

Knowledge Management Applications and Associated Benefits 289 Best Practices for Selling and Implementing a KM Project 290

Technologies That Support KM 292 Communities of Practice 293 Social Network Analysis (SNA) 293 Web 2.0 Technologies 295 Business Rules Management Systems 295 Enterprise Search Software 297

Key Terms 300 Chapter Summary 300 Discussion Questions 301 Action Needed 302 Web-Based Case 302 Case Study 302 Notes 305

Chapter 11 Cybercrime and IT Security 307 Health Data Cybertheft: The Plunder of Anthem 307 Why Managers Must Understand IT Security 309

Why Computer Incidents Are So Prevalent 309 Types of Exploits 313 Federal Laws for Prosecuting Computer Attacks 324

Implementing Trustworthy Computing 325 Risk Assessment 326 Establishing a Security Policy 327 Educating Employees and Contract Workers 329 Prevention 329 Detection 333 Response 333

Key Terms 339 Chapter Summary 339 Discussion Questions 340 Action Needed 341 Web-Based Case 342 Case Study 342 Notes 345

Table of Contents xi

Chapter 12 Ethical, Legal, and Social Issues of Information Technology 349 Artificial Intelligence: Robots on the Rise 349 What Is Ethics? 352

The Difference Between Morals, Ethics, and Laws 352 Including Ethical Considerations in Decision Making 353

Privacy 355 Data Brokers 360 Treating Customer Data Responsibly 360 Workplace Monitoring 362 Social Networking and Privacy 364

Internet Censorship 367 Internet Access 368

The Digital Divide 369 E-Rate Program 370 Net Neutrality 370 Internet of Things 371

Key Terms 376 Chapter Summary 376 Discussion Questions 378 Action Needed 378 Web-Based Case 379 Case Study 379 Notes 382

Glossary 387 Index 401

xii Table of Contents

PREFACE

Why This Text? The undergraduate capstone course on information technology and the MBA level infor- mation technology course required of College of Business graduates are two of the most challenging courses in the business curriculum to teach. Students in both courses often start the term skeptical of the value of such a course. Indeed, “Why do I need to take this course?” is frequently their attitude. Unfortunately, this attitude is only perpetuated by most texts, which take the approach of “Here is a lot of technical stuff you have to understand.” As a result, students complete the course without getting as much from it as they could. The instructors of such courses are disappointed, receive poor student eva- luations, and wonder what went wrong. An opportunity to deliver an outstanding and meaningful course has been missed.

Information Technology for Managers, 2nd edition, takes a fundamentally different approach to this subject in three ways. First, it is targeted squarely at future managers, making it clear why IT does indeed matter to them and the organization. Second, it enables future business managers to understand how information technology can be applied to improve the organization. Third, it provides a framework for business managers to understand their important role vis-à-vis information technology. Said another way, Information Technology for Managers, 2nd edition, answers three basic questions—Why do I need to understand IT? What good is IT? What is my role in delivering results through the use of IT?

Approach of This Text Information Technology for Managers, 2nd edition, is intended for future managers who are expected to understand the implications of IT, identify and evaluate potential oppor- tunities to employ IT, and take an active role in ensuring the successful use of IT within the organization. Thoroughly updated, the text is also valuable for future IT managers who must understand how IT is viewed from the business perspective and how to work effec- tively with all members of the organization to achieve IT results.

Organization and Coverage in the 2nd Edition Chapter 1: Managers: Key to Information Technology Results presents a clear rationale for why managers must get involved in information technology strategic planning and project implementation. The chapter helps managers identify what they must do to advance the effective use of IT within their organizations, and it helps them understand how to get involved with IT at the appropriate times and on the appropriate issues, as demonstrated by new examples from Walmart, Avon, Ellie Mae, and more.

Chapter 2: Strategic Planning describes how to develop effective strategic planning by defining key business objectives and goals, which are used to identify a portfolio of

potential business projects that are clearly aligned with business needs, as illustrated by the new opening vignette featuring Apple, Inc. Further refinement is required to narrow the portfolio to the projects that should be executed and for which sufficient resources are available. This process is illustrated by the example of Chevron, a major global organiza- tion respected for its highly effective use of IT to support business objectives.

Chapter 3: Project Management provides a helpful overview of the project manage- ment process. The presentation is consistent with the Project Management Institute’s Body of Knowledge, an American National Standard. The chapter describes the nine proj- ect management knowledge areas of scope, time, cost, quality, human resources, commu- nications, risk, procurement, and integration. This chapter identifies the many roles a business manager might take throughout the project life cycle, including champion, spon- sor, project manager, subject matter expert, project team member, and end user, whether in private enterprise, such as Vermont Health Connect, or government facilities, such as the National Audit Office of the United Kingdom or the Russian Olympic committee.

Chapter 4: Business Process and IT Outsourcing discusses the major business rea- sons for outsourcing as well as many of its potential pitfalls. It also outlines and describes an effective process for selecting an outsourcing firm and successfully transitioning work to the new organization. The chapter provides a thorough discussion of cloud computing as an example of IT outsourcing. Using current examples from Supervalu, Amazon, and others, the chapter covers the importance of establishing service-level agreements and monitoring performance.

Chapter 5: Corporate and IT Governance describes the responsibilities and practices that a company’s executive management uses to ensure delivery of real value from IT and to ensure that related risks are managed appropriately, all brought to life with real-world examples from Home Depot, Target, and Michaels. The chapter covers two frameworks for meeting these objectives: the IT Infrastructure Library (ITIL) and Control Objectives for Information and Related Technology (COBIT). The discussion includes related issues such as mitigating IT-related risks, use of the PDCA model to improve IT governance, and business continuity planning.

Chapter 6: Collaboration Tools identifies and discusses the variety of collaboration tools that managers can use to improve communications and enhance productivity, such as blogs, Webinars, and wikis. It also discusses the benefits and some of the issues that can arise from their use, as demonstrated by the opening vignette about Eagle Investment Systems.

Chapter 7: E-Commerce discusses the use of electronic business methods to buy and sell goods and services, interact with customers, and collaborate with business partners and government agencies. Several forms of e-business are covered, including business-to- business (B2B), business-to-consumer (B2C), consumer-to-consumer (C2C), and e-government commerce. The chapter also covers m-commerce, an approach to conduct- ing e-commerce in a wireless environment. The chapter prepares managers to understand and deal with many of the business, legal, and ethical issues associated with e-business, and contemporary examples like Alibaba and Amazon reinforce the international reach of e-commerce.

Chapter 8: Enterprise Systems discusses enterprise planning, customer relationship, and product life cycle management systems used to ensure that business transactions are processed efficiently and accurately and that the resulting information can be accessed by end users and managers in all business areas. Including references to Coca-Cola, IBM, and

xiv Preface

others, it identifies several of the benefits associated with enterprise system implementa- tion, outlines measures to take to avoid enterprise system failures, and describes the hosted software model for enterprise software. The chapter also explains the key role that business managers play in successfully implementing enterprise systems.

Chapter 9: Business Intelligence and Big Data discusses a wide range of applications that help businesses gather and analyze data to improve decision making at organizations like Amazon and Memorial Sloan Kettering Cancer Center, including spreadsheets, reporting and querying tools, online analytical processing, drill-down analysis, data min- ing, and dashboards. The chapter also covers many big data topics, including structured and unstructured data, ACID properties, NoSQL Databases, Hadoop, in-memory data- bases, and data governance. The challenges associated with business intelligence systems and big data are also discussed as well as the role of the business manager in developing and using these systems.

Chapter 10: Knowledge Management describes explicit and tacit information and how organizations like NASA and Nelnet use knowledge management to identify, select, organize, and disseminate that information. In this chapter, you will learn about techni- ques for capturing tacit knowledge, communities of practice, social network analysis, Web 2.0 technologies, business rules management systems, and enterprise search. The chapter also covers how to identify and overcome knowledge management challenges, and it includes a set of best practices for selling and implementing a knowledge management project.

Chapter 11: Cybercrime and IT Security discusses commonly occurring computer- related security incidents (using recent examples from Anthem and Sony), describes why computer incidents are so prevalent, identifies various perpetrators of computer crime, offers a computer security self-assessment test, describes types of exploits, outlines vari- ous federal laws for prosecuting computer attackers, and describes how to implement trustworthy computing, including specific tasks to prevent, detect, and respond to com- puter security incidents.

Chapter 12: Ethical, Legal, and Social Issues of Information Technology provides a brief overview of ethics and how to include ethical considerations in decision making. A variety of topics related to privacy, freedom of expression versus censorship, and Internet access—all based on current situations from Verizon, Zendesk, and more—are discussed from the perspective of what managers need to know about these topics.

Chapter Features Opening Vignette: Business majors and MBA students often have difficulty appreciating why they need to comprehend IT or what their role (if any) is vis-à-vis IT. In recognition of this, each chapter begins with an opening vignette that raises many of the issues that will be covered in the chapter. The vignette touches on these topics in such a way as to provide a strong incentive to the student to read further in order to gain clarity regarding the potential impact of IT on the business as well as management’s responsibility in rela- tion to IT.

Learning Objectives: A set of learning objectives follows the opening vignette and provides a preview of the major themes to be covered in the chapter.

Real-World Examples: In an effort to maintain the interest and motivation of the reader, each chapter includes numerous real-world examples of business managers

Preface xv

struggling with the issues covered in the chapter—some successfully, some unsuccessfully. The goal is to help readers understand the manager’s role in relation to information tech- nology and to discover key learnings they can apply within their organizations.

What Would You Do: This special feature presents realistic scenarios that encourage students to think critically about the concepts presented in the chapter. There are three of these features placed appropriately in each chapter to cause the reader to reflect on the topics just covered.

A Manager’s Checklist: Each chapter contains a valuable set of guidelines for future business managers to consider as they weigh IT-related topics, including how they might use IT in the future within their organization.

Chapter Summary: Each chapter includes a helpful summary that highlights the managerial implications and key technical issues of the material presented.

Discussion Questions: A set of thought-provoking questions to stimulate a deeper understanding of the topics covered in the chapter.

Action Needed: Each chapter includes three mini-cases requiring a decision or response from the reader. These mini-cases provide realistic scenarios and test the stu- dent’s knowledge, insight, and problem-solving capability.

Web-Based Case: Each chapter includes an “open-ended” case that requires students to gather their own research information and do some critical thinking to address the questions raised in the case.

Case Study: Each chapter ends with a challenging real-world case of managers strug- gling with the issues covered in the chapter. These cases are unique because they look at IT from a manager’s perspective, not from an IT technologist’s point of view.

INSTRUCTOR RESOURCES

The teaching tools that accompany this text offer many options for enhancing a course. As always, we are committed to providing one of the best teaching resource packages available in this market.

Instructor’s Manual An Instructor’s Manual provides valuable chapter overviews, chapter learning objectives, teaching tips, quick quizzes, class discussion topics, additional projects, additional resources, and key terms. It also includes solutions to all end-of-chapter discussion ques- tions, exercises, and case studies.

Test Bank and Test Generator Cognero® is a powerful objective-based test generator that enables instructors to create paper-, LAN- or Web-based tests from test banks designed specifically for their Course Technology text.

PowerPoint Presentations A set of Microsoft PowerPoint slides is available for each chapter. These slides are included to serve as a teaching aid for classroom presentation. The presentations help

xvi Preface

students focus on the main topics of each chapter, take better notes, and prepare for examinations. The slides are fully customizable. Instructors can either add their own slides for additional topics they introduce to the class or delete slides they won’t be covering.

CourseMate Engaging and affordable, the new Information Technology for Managers CourseMate Web site offers a dynamic way to bring course concepts to life with interactive learning, study, and exam preparation tools that support this printed edition of the text. Watch student comprehension soar with flash cards, games, and quizzes that help them prepare for exams. A complete e-book provides you with the choice of an entire online learning experience. Information Technology for Managers CourseMate goes beyond the book to deliver what students need.

ACKNOWLEDGMENTS

I want to thank all of the folks at Cengage Learning for their role in bringing this text to market. I offer many thanks to Mary Pat Shaffer, my wonderful development editor, who deserves special recognition for her tireless efforts and encouragement. Thanks also to the many people who worked behind the scenes to bring this effort to fruition, includ- ing Joe Sabatino, product director and Jason Guyler, product manager. Special thanks to Jennifer King, the content development manager, and Anne Merrill, the content developer, for coordinating the efforts of the team of many people involved in this project and for keeping things moving forward.

I especially want to thank Naomi Friedman, who wrote the opening vignettes and end- of-chapter cases.

Last, but not least, I want to thank my wife, Ginnie, for her patience and support in this major project.

TO MY REVIEWERS

I greatly appreciate the following reviewers for their perceptive feedback on this text: Larry Booth, Clayton State University Nicole Brainard, Principal, Archbishop Alter High School, Dayton, Ohio Ralph Brueggemann, University of Cincinnati Rochelle A. Cadogan, Viterbo University Wm. Arthur Conklin, University of Houston Barbara Hewitt, Texas A&M University, Kingsville William Hochstettler, Franklin University Jerry Isaacs, Carroll College Marcos Sivitanides, Texas State University Gladys Swindler, Fort Hays State University Jonathan Whitaker, University of Richmond

Preface xvii

MY COMMITMENT

I welcome your input and feedback. If you have any questions or comments regarding Information Technology for Managers, 2nd edition, please contact me through Course Technology at www.cengage.com or through your local representative.

George W. Reynolds

xviii Preface

CHAPTER 1 MANAGERS: KEY TO INFORMATION TECHNOLOGY RESULTS

PROVIDING LEADERSHIP “A leader takes people where they want to go. A great leader takes people where they don’t necessarily want to go, but ought to be.”

—Rosalynn Carter, former First Lady of the United States

THE E-BORDERS PROGRAM

Why Managers Must Provide Leadership for Information Technology (IT)

In late August 2014, the British government raised the terror threat level for the United Kingdom to

four—or “severe.” According to the government, at least 500 British citizens had recently left the

United Kingdom and traveled to Syria or Iraq to join the Islamic fundamentalist militant group ISIL

(also known as ISIS and the Islamic State), which had conquered large swaths of territory in the

Middle East. The government suspected that many of those citizens were being trained to return to

the United Kingdom to carry out terrorist attacks. The British government’s chief defense strategy

against this threat lay in border control—preventing U.K. citizens from flying out of the country to

join ISIL, canceling the citizenship of those U.K. residents who were already fighting for ISIL, and

apprehending ISIL trainees returning to the United Kingdom.

In 2003, anticipating the need for tighter border control, the British government launched

the e-Borders project. The main objective of the program was to collect information about all

scheduled inbound and outbound passengers in advance of travel. This data would then be

used to prevent passengers considered a threat from entering or leaving the country, arrest ter-

rorist and organized crime suspects, and improve passenger clearance times. In March 2014,

the government canceled the project at a cost of £224 million ($350 million) to British

taxpayers. An evaluation of the e-Borders program in 2013 had determined that while the IT

system supporting the program had been effectively deployed at London’s Heathrow Airport,

the system had failed in the maritime and rail sectors. The effective elements of the e-Borders

system were subsequently merged into the new Border Systems Programme with the hope that

the capabilities of this system would be expanded.

Many factors contributed to the failure of the e-Borders program to fulfill all its initial goals.

A British court eventually determined that the responsibility for the failure lay primarily with the U.K.

Border Agency and not the vendor Raytheon. Specifically, the U.K. Border Agency did not establish

appropriate benchmarks to track the project’s progress, and it did not engage competent subject

matter experts during the procurement of resources. Finally, the agency did not define and stabilize

requirements, resulting in changing goals and an underestimation of the complexity of the project.

Bottom line, there was a failure of management to provide strong leadership for the effort.

The e-Borders project did, however, enjoy some success. The police were able to locate and

arrest thousands of wanted individuals identified by the system. Unfortunately, one evaluation

reported that the e-Borders program was collecting a mere 65 percent of data on incoming and

Chapter 1

outgoing passengers in advance of their travel. The ability of the new Border Systems Programme

to extend the collection and analysis of this data will be critical as the United Kingdom faces future

threats posed by ISIL and other terrorist and criminal organizations.

L E A R N I N G O B J E C T I V E S

As you read this chapter, ask yourself:

Why must managers understand critical principles of IT system development and provide leadership for these projects?

Am I prepared to get involved with IT at the appropriate times and on appropriate issues?

This chapter provides a working definition of information technology, discusses the essential role of managers in ensuring good results from various types of IT systems, and warns of the dire consequences that can follow when managers fail to meet these responsibilities. But first we will answer the question—why should managers under- stand IT?

WHY MANAGERS MUST UNDERSTAND IT

Why learn about information technology? Isn’t this area of the business best left to the IT professionals, and not managers? The answer is a simple, emphatic No. This section pro- vides several reasons why managers must understand IT and why they must lead the effort to decide what IT to invest in and how to use it most effectively.

New IT business opportunities, as well as competitive threats, are coming at a faster and faster rate. Managers play a key role—they must frame these opportunities and threats so others can understand them, prioritize them in order of importance, and eval- uate proposed solutions. Finally, managers must lead the effort to define IT strategies and policies that best meet organizational needs.

Even if two different companies invest in the same IT systems from the same vendors, the organizations will not necessarily end up with identical solutions or use the systems in the same ways. As a result, one firm may profit greatly from an IT deployment while another struggles with unsatisfactory results. Managers, working in conjunction with IT specialists, must make many decisions when implementing a new IT solution, including how broad the project will be in scope, what data to capture, how databases and applications should be tailored, what information will flow from the systems and to whom, and, most importantly, how people will use the system to make a difference.

Managers: Key to Information Technology Results

True productivity improvements seldom come simply from automating work pro- cesses. Real gains in productivity require innovations to business practices and then automating these improved processes to take advantage of IT capabilities. Companies that merely insert IT into their operations without making changes that exploit the new IT capabilities will not capture significant benefits. Managers are the key to ensuring that IT innovations pay off; they must lead a holistic approach that includes encouraging the acceptance of change, addressing changes in business processes and organizational struc- ture, establishing new employee roles and expectations, and creating new measurement and reward systems.

To gain a sustainable competitive advantage, companies must consistently deliver increasing value to customers. Doing so requires essential information gained through the effective use of IT that better defines customers and their needs. This information can help companies improve products and develop better customer ser- vice, leading to sustained increases in revenue and profits. Managers must recognize the value of this information, know how to communicate their needs for it, and be able to work with IT staff to build effective IT systems that make useful information available.

In a rapidly changing global business environment, managers require lifelong learning and flexibility in determining their business roles and career opportunities. Given the widespread use of IT, managers must be able to understand how technology affects their industry and the world at large.

WHAT IS INFORMATION TECHNOLOGY?

Information technology (IT) includes all tools that capture, store, process, exchange, and use information. The field of IT includes computer hardware, such as mainframe computers, servers, desktops, laptops, tablets, and smartphones; software, such as operating systems and applications for performing various functions; networks and related equipment, such as modems, routers, and switches; and databases for storing important data.

An organization’s defined set of IT hardware, software, and networks is called its IT infrastructure. An organization also requires a staff of people called its IT organization to plan, implement, operate, and support IT. In many firms, some or all IT support may be outsourced to another firm.

An organization’s IT infrastructure must be integrated with employees and proce- dures to build, operate, and support information systems that enable a firm to meet fundamental objectives, such as increasing revenue, reducing costs, improving decision making, enhancing customer relationships, and speeding up its products’ time to market.

Most organizations have a number of different information systems. When considering the role of business managers in working with IT, it is useful to divide information systems into three types: personal IT, group IT, and enterprise IT. Figure 1-1 shows the relation- ship among IT support staff, IT infrastructure, and the various types of information sys- tems. These systems are explained in the following sections.

Chapter 1

FIGURE 1-1 IT infrastructure supports personal, group, and enterprise information systems

Personal IT

Personal IT includes information systems that improve the productivity of individual users in performing stand-alone tasks. Examples include personal productivity software such as word processing, presentation, and spreadsheet software; decision support systems, and online learning systems.

A decision support system (DSS) employs analytic models to help users gain insights into a problem situation, examine alternative solutions, and recommend an appropriate course of action. For example, VisualDx is a clinical decision support sys- tem that provides instant access to concise disease information and high-quality medi- cal images. Its database encompasses more than 1300 medical conditions and nearly 30,000 images. Physicians can search this database by symptoms, visual clues, and other patient factors to diagnose diseases and develop treatment plans. The system can be downloaded as an app that runs on a smartphone or it can be accessed via desktop computer or laptop.1

Online learning systems encompass a number of computer-enhanced learning tech- niques, including computer-based simulations, multimedia DVDs, Web-based learning materials, hypermedia, podcasts, and Webcasts. Such use of information systems quali- fies as an example of personal IT. With the rapid changes in today’s business environ- ment, managers and employees must be continual learners to keep pace. For example,

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Managers: Key to Information Technology Results

Avanade is a global IT consulting company with over 21,000 professionals spread across 70 locations in 20 countries. Its clients expect the company’s assigned consultants to be well-trained, competent advisors with a broad set of consulting skills and deep domain- specific skills. Avanade University is an online hub for employees to access the training they need anytime, anywhere. Avanade consultants spend an average of 80 hours per year on education with a focus on various technical and management topics, language education, and more.2

Group IT In today’s fast-moving global work environment, success depends on our ability to com- municate and collaborate with others, including coworkers, colleagues, clients, and custo- mers. Group IT includes information systems that improve communications and support collaboration among members of a workgroup. Examples include the use of Web confer- encing, wikis, and electronic corporate directories.

Web conferencing uses IT to conduct meetings or presentations in which partici- pants are connected via the Internet. Screen sharing is the most basic form of Web conference—each participant sees whatever is on the presenter’s screen, be it a spreadsheet, legal document, artwork, blueprint, or MRI image. Conference partici- pants can communicate via voice or text. Another form of Web conferencing is Webcasting, in which audio and video information is broadcast from the presenter to participants. Still another type of Web conference, a Webinar, is a live Internet presentation that supports interactive communications between the presenter and the audience.

One company that makes effective use of Web conferencing is Heritage Log Homes, a producer of log homes with 30 employees and 70 independent dealers across North America. The firm offers a variety of standard layouts within five basic styles of log homes; however, 90 percent of it projects are custom homes. The customization process used to be quite lengthy, involving mailing engineering drawings back and forth between the design team and the customer. Each would take turns marking up the drawings with their suggested changes. Finalizing the plans typically took months. Heritage moved to a real- time collaboration system using the GoToMeeting Web conferencing system, which allows the architect and the customer to review the house plans together—identifying design ideas, discussing issues, and incorporating changes into the design. In this manner, it is possible to finalize a design in just a few sessions over a week or two.3 The improved pro- cess has increased customer satisfaction and greatly improved the cash flow for Heritage Log Homes.

A wiki (Hawaiian for fast) is a Web site that allows users to edit and change its con- tent easily and rapidly. The wiki may be either a hosted Internet site or a site on a com- pany’s intranet. A wiki enables individual members of a workgroup or project team to collaborate on a document, spreadsheet, or software application without having to send the materials back and forth. FFmpeg is a free software project that produces libraries and programs for handling multimedia data. FFmpeg adopted the use of Trac, an enhanced wiki and issue tracking system, in June 2014 to provide support for software developers.4

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Electronic corporate directories are used in large organizations to find the right person with whom to collaborate on an issue or opportunity. Increasingly, organiza- tions are creating online electronic corporate directories to solve this problem. IBM created an application called Bluepages—IBM’s Facebook for the enterprise. This group IT application enables an employee to contact other employees and their backups, in case of an absence or vacation. The application was recently made available as a mobile app running on IBM’s WhirlWind infrastructure, which supports Apple, Android, and BlackBerry smartphones and can be downloaded to an employee’s smartphone.5

Enterprise IT Enterprise IT includes information systems that organizations use to define structured interactions among their own employees and/or with external customers, suppliers, government agencies, and other business partners. Successful implementation of these systems often requires the radical redesign of fundamental work processes and the automation of new processes. Target processes may include purely internal activities within the organization (such as payroll) and those that support activities with external customers and suppliers. Three examples of enterprise IT are transaction processing, enterprise, and interorganizational systems.

A transaction processing system (TPS) captures data from company transactions and other key events, and then updates the firm’s records, which are maintained in electronic files or databases. Each TPS supports a specific activity of the firm, and several may work together to support an entire business process. For example, some organizations use many TPSs to support their order processing, which includes order entry, shipment planning, shipment execution, inventory control, and accounts receiv- able, as shown in Figure 1-2. The systems work together in the sense that data cap- tured by an “upstream” system is passed “downstream” and made available to other systems later in the order processing cycle. Data captured using the order entry TPS is used to update a file of open orders—orders received but not yet shipped. The open order file, in turn, is used as input to the shipment planning TPS, which determines the orders to be filled, the shipping date, and the location from which each order will be shipped. The result is the planned order file, which is passed downstream to the ship- ment execution TPS, and so on.

Many organizations employ enterprise systems to support their operation and planning functions and to enable the sharing of information across all business functions and all levels of management. These systems employ a database of key operational and planning data that can be shared by all employees and, in some situations, customers and suppliers. The three most common types of enterprise systems are:

Enterprise resource planning (ERP) systems that support supply chain pro- cesses, such as order processing, demand planning, inventory management, and purchasing Customer relationship management (CRM) systems that support sales, mar- keting, and customer service processes

Managers: Key to Information Technology Results

FIGURE 1-2 TPS systems that support order capture and fulfillment

Product life cycle management (PLM) systems that support the processes associated with the various phases of the life cycle of a product, including sales and marketing, research and development, concept development, prod- uct design, prototyping and testing, manufacturing process design, production and assembly, delivery and product installation, service and support, and product retirement and replacement; see Figure 1-3 for an overview of the scope of PLM software.

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FIGURE 1-3 Scope of PLM software

CSX Corporation operates 21,000 miles of railway in 23 states across the United States. Recently, the firm began a CRM implementation project to improve its local opera- tions service. This required a team effort with participation from trainmasters, sales, and marketing to gather key data about some 5000 customer work sites. The data includes the customer’s site location in CSX’s maps, track infrastructure characteristics, and service challenges as well as information about the customer’s operations. Loading this data into its CRM system enables CSX employees to better manage their sales efforts, more closely meet customers’ needs, and enhance customer communication.6

Interorganizational information systems support the flow of data among different organizations to achieve shared goals. For example, some organizations need to share data

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Managers: Key to Information Technology Results

for purchase orders, invoices, and payments along with information about common sup- pliers and financial institutions. Interorganizational information systems speed up the flow of material, payments, and information, while allowing companies to reduce the effort and costs of processing such transactions.

To ensure efficient and effective sharing of information, organizations must agree in advance on the nature and format of information to be exchanged, and they must use com- patible technologies. The companies must work together to resolve technical issues relating to data definitions and formats, database designs, standards to ensure high data quality, and compatible technology infrastructures. The full integration of an interorganizational infor- mation system often requires new work processes and significant organizational change.

Walmart employs an interorganizational information system it calls vendor-managed inventory (VMI) to improve product flow and lower its store inventories. Under this program, suppliers are responsible for managing the inventory of their products in Walmart’s ware- houses. Suppliers are granted access to a Walmart database that contains item-level sales and inventory data for their products, which helps the vendors develop product demand projec- tions using a collaborative planning, forecasting, and replenishment process.7 Each link in the supply chain is interconnected using information technology that includes a central database, store-level point-of-sale systems, and a satellite network (see Figure 1-4).8

FIGURE 1-4 Walmart interorganization system for replenishment

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TABLE 1-1 Examples and characteristics of each type of information system

Personal IT Group IT Enterprise IT

Examples Personal productivity software, decision support system

Email, instant messa- ging, project manage- ment software

Transaction processing systems, enterprise sys- tems, interorganizational systems

Benefits Improved productivity

Increased collaboration

Increased standardization and ability to monitor work

Organizational com- plements (including better-skilled work- ers, better team- work, redesigned processes, and new decision rights)

Does not bring complements with it

Partial benefits can be achieved without all complements being in place

Brings comple- ments with it

Allows users to im- plement and modify complements over time

Full complements must be in place when IT “goes live”

Manager’s role Encourage use

Challenge workers to find new uses

Demonstrate how technology can be used

Set norms for participation

Identify and put into place the full set of organizational comple- ments prior to adoption

Intervene forcefully and continually to ensure adoption

Managers have a key role to play in the successful implementation and use of infor- mation systems. The role changes depending on which type of IT system is being addressed, as shown in Table 1-1, which also highlights other characteristics and provides examples of each type. The role of managers in relation to IT is discussed in more detail in the following section.

THE ROLE OF MANAGERS VIS-À-VIS IT

All too often when new IT is introduced, managers adopt the technology first and then try to figure out what to do with it and how to cope with its implications. Such an approach is strongly discouraged as it can cause an increase in costs, lost worker productivity, wasted effort, and missed business opportunities. Managers must recognize that IT is powerful and diverse and is increasingly entwined with the organization’s critical business practices.

Organizations that successfully adopt new technology recognize that managers have a crucial role in leading the successful introduction and adoption of IT. Managers have three critical responsibilities when it comes to capturing real benefits from IT: identifying appropriate opportunities to apply IT, smoothing the way for its successful introduction and adoption, and mitigating its associated risks. These responsibilities are discussed in the following sections.

Managers: Key to Information Technology Results

Identifying Appropriate IT Opportunities The sheer magnitude of dollars spent on IT demands that management must ensure a good return on the investment. Organizations typically spend 1 to 6 percent of their total rev- enues on IT; this spending is generally higher for industries in which IT is more critical to success, such as health care and financial services. IT spending as a percentage of revenue is also typically higher within small organizations than large organizations. Table 1-2 pro- vides a five-year summary of IT spending data averaged over small, medium, and large organizations across 18 different industry sectors.9

These numbers represent rough averages. IT-related spending varies greatly, even among similar-sized companies within the same industry. While one company may out- spend a competitor on IT, it is not necessarily making more effective use of IT. The most important consideration is what organizations are getting out of their investments in IT, not how much they are investing in IT. The most effective users of IT maximize value from IT investments that are aligned with their organization’s strategic needs and that are well man- aged and executed. In today’s global economy, new technologies, business opportunities, and business threats are coming at a faster and faster pace. Managers must evaluate IT investment opportunities against existing business needs and help frame these opportunities so others can understand them. Managers must provide the leadership to recognize and advocate for those opportunities that fit with the organization’s business strategy.

The next chapter will outline the strategic planning process and explain how managers can ensure that IT investments align with business strategies and support key objectives.

W H A T W O U L D Y O U D O ?

A new financial analyst at your firm has been tasked with performing a competitive analysis of your firm’s IT spending versus your three top competitors. Over lunch with you and a couple of other recent hires, the coworker shares that her analysis shows your firm is spend- ing just over 4 percent of revenue (recent annual revenue for the firm was $150 million) on IT while your company’s competitors are all spending less than 3 percent (recent revenue ranges from $300 million to $400 million). She asks the group if they think this spending dif- ference is significant and if she should highlight it in her report. What would you say?

TABLE 1-2 Summary of IT spending

Year Total IT Spending as a Percent of Revenue

IT Operational Budget per User (2010 2014)

Growth in IT Capital Spending

2014 2.1% $7385 0.0%

2013 2.0% $8118 4.0%

2012 2.0% $7531 2.0%

2011 2.4% $7114 1.8%

2010 2.2% $7464 0.0%

5-year average 2.1% $7522 1.6%

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Smooth Introduction and Adoption of IT To implement an IT system successfully, a company might need to change its business processes, worker roles and responsibilities, reward systems, and decision making. For some IT systems, the amount of change may be trivial; for others, it may be monumental. It is human nature to resist change; researchers J.P. Kotter and L.A. Schlesinger identified four reasons for this resistance (see Table 1-3).10 Many organizations have tried to implement a promising new IT system, only to have employees never use it or not use the system to its full potential. Managers must be able to overcome this resistance so that the new IT system is accepted and used throughout the organization.

Several theories on organizational change management can help smooth the introduc- tion and adoption of IT. The following sections present three such theories: the Change Management Continuum Model, the Unified Theory of Acceptance and Use of Technology, and the Diffusion of Innovation Theory.

Change Management Continuum Model D.R. Conner developed the Change Management Continuum Model, which describes key activities that are needed to build commitment for change.11 This model provides a roadmap to guide management actions at each stage of the introduction of a new system. Table 1-4 briefly describes each phase and stage. An organization must completely and successfully execute each of the seven stages to get employees to com- mit to a new IT system. People will resist adoption of the new system if a stage is skipped or not successfully completed. For example, if a company fails to ensure that employees understand the new IT system, the workers will not comprehend how they are expected to use it, and the company will be unable to achieve the system’s benefits. Managers must work with the information systems development team and key stake- holders to develop appropriate strategies and deliverables to successfully complete each stage in the model.

TABLE 1-3 Four reasons people resist change

Reason to Resist Change Explanation

Parochial self-interest Some people are more concerned with the impact of the change on themselves than with how it might improve the organization.

Misunderstanding Some people have misconceptions or lack information about the change.

Low tolerance to change Some people require security and stability in their work.

Different assessments of the situation Some people disagree about the reasons for the change or do not support the process.

Managers: Key to Information Technology Results

TABLE 1-4 The phases and stages of the Change Management Continuum Model

Phase Goal Stage Description

Inform Make people aware of the change and why it is occurring

Contact Person first becomes aware that change is to take place

Awareness Person has basic knowledge of the change

Understanding Person comprehends the nature and intent of the change and how he or she will be affected

Educate People recognize the impact of change on them and their way of working

Positive perception Person develops positive disposition toward the change

Adoption Change has demonstrated a positive impact on the organization

Institutionalization Change is durable and has been formally incorporated into rou- tine operating procedures of organization

Commit The change is fully accepted and has become part of everyday life

Internalization People are highly committed to the change because it matches their interests, goals, and values

Unified Theory of Acceptance and Use of Technology The Unified Theory of Acceptance and Use of Technology identifies four key factors that directly determine a user’s acceptance and usage of IT. In order for end users to embrace and use a new information system or technology they must be convinced of the following:

Use of the new technology and associated work processes will improve the workers’ job performance, making it possible for them to do their jobs as well—or better—as they did in the past. A twist on this is when end users see that a new information system will expand their role and responsibilities in a way that is challenging and exciting for them. The new system is easy to use and makes it easier for end users to complete their work than their old way of doing things. Nobody wants to take a step backward and make his or her job more difficult. Management expects everyone to use the new technology and to behave in a manner consistent with the new work processes. Management must commu- nicate their expectations, measure progress toward meeting those expecta- tions, and provide feedback to end users regarding their use of the new information system and work process. The necessary organizational and technical infrastructures are in place to support end users in learning and using the new technology. End users want to know that they will be provided with sufficient time to be trained in a quality manner and that there will be others (help desk or “super users”) available to help when necessary.

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These factors are listed in Table 1-5 and illustrated in Figure 1-5.12 Managers can use this theory to help people accept and use new IT.

Avon employs a multitier marketing approach to distribute its products through a system of sales reps who sell directly to family, friends, and other personal contacts—typically through in-home parties. Avon recently piloted a new order management system designed to streamline the sales ordering process for its Canadian sales reps. The tablet-based system was expected to reduce costs by roughly $40 million per year while allowing Avon to better meet its customers’ needs. Unfortunately, there were serious ease-of-use issues—sales agents had pro- blems performing even the most basic functions, such as logging in, saving orders, and checking inventory. The agents much preferred their existing smartphone apps, which supported the existing order management process and could be easily navi- gated with the touch of a finger. The new system simply did not meet sales reps’ expectations of how an “improved” order management system should work. It failed the ease-of-use key factor for acceptance of new technology. Hundreds of the Cana- dian sales reps quit the firm rather than continue struggling with the new system. Eventually, the pilot project was abandoned after the company spent somewhere between $100 million and $125 million.13

TABLE 1-5 Key factors of IT acceptance and usage

Factor Definition

Usefulness Belief that using the system will help job performance

Ease of use Degree of ease associated with the use of the system

Management expectations Degree of belief that management wants employees to use the system

Facilitating conditions Belief that an organizational and technical infrastructure exists to support the system

FIGURE 1-5 Technology acceptance model defines the key factors needed to overcome resistance to a new information system

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Managers: Key to Information Technology Results

W H A T W O U L D Y O U D O ?

Imagine instead that the new Avon order management system was well designed and extremely easy to use. Identify key actions that the Avon management team must take to ensure a successful rollout of an easy-to-use system for the Canadian sales reps.

Diffusion of Innovation Theory The Diffusion of Innovation Theory was developed by E.M. Rogers to explain how a new idea or product gains acceptance and diffuses (or spreads) through a specific population or subset of an organization. A key point of this theory is that adoption of any innovation does not happen all at once for all members of the targeted population; rather, it is a drawn-out process, with some people quicker to adopt the innovation than others. See Figure 1-6. Rogers defined five categories of adopters, shown in Table 1-6, each with different attitudes toward innovation. When promoting an innovation to a target population, it is important to understand the characteristics of the target population that will help or hinder adoption of the innovation and then to apply the appropriate strategy. This theory can be useful in planning the rollout of a new information system.

Introducing an enterprise IT system requires large amounts of resources and significant changes in procedures, roles and responsibilities, reward systems, and decision making. In other words, it represents a major organizational change. Managers have their work cut out to gain acceptance of all these changes. A successful enterprise IT system requires the top-down imposition of standards and procedures that spell out exactly how transactions must be conducted and how the supporting information must be captured, stored, and shared. As a result, senior management sometimes encourages adoption of enterprise IT by threatening penalties for nonconformance.

FIGURE 1-6 Diffusion of Innovation model

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TABLE 1-6 Five categories of innovation adopters

Adopter Category Characteristics Strategy to Use

Innovator Risk takers; always the first to try new products and ideas

Simply provide them access to the new system and get out of their way

Early adopter Opinion leaders whom others listen to and follow; aware of the need for change

Provide them assistance getting started

Early majority Listen to and follow the opinion leaders

Provide them evidence of the system’s effectiveness and success stories

Late majority Skeptical of change and new ideas Provide them data on how many others have tried the new system and used it successfully

Laggards Very conservative and highly skeptical of change

Have their peers demonstrate how this change has helped them; bring pressure to bear from other adopters

For example, the U.S. Health Insurance Portability and Accountability Act (HIPAA) specifies standards for the capture, storage, and sharing of electronic healthcare transactions—such as medical claims, electronic remittances, and claim status inquiries among healthcare providers, health insurance plans, and employers. As organizations scrambled to meet the many HIPAA rules, including modifications to the HIPAA security and privacy rules, there were complaints that several years of management time and mil- lions of dollars in programming expenses and hardware equipment and services were required to implement the full HIPAA standards. To encourage organizations to conform to the standards and meet the deadline, the Department of Health and Human Services (DHHS) decreed that organizations not following the HIPAA standards would be ineligible to receive Medicare/Medicaid payments for the services they provide patients. DHHS also established investigation procedures and set civil and criminal penalties for violating HIPAA rules. Companies handling electronic protected health information (ePHI) have implemented strong measures to avoid these penalties.

In spite of its efforts to conform to HIPAA regulations, a New York hospital—and a uni- versity that provided faculty members to serve as physicians at that hospital—was fined a total of $4.8 million to settle charges that it potentially violated HIPAA’s Privacy and Security Rules. Because of a lack of technical safeguards, deactivation of a server on the university’s network resulted in the ePHI of thousands of patients being accessible on Internet search engines.14

W H A T W O U L D Y O U D O ?

The board of directors at City Hospital is determined not to be fined for violation of HIPAA rules. They asked your consulting group to prepare a comprehensive strategy to communicate to employees and contractors the importance of following HIPAA regula- tions. Brainstorm the key elements of your communications strategy. What actions might you request of the board of directors and other executives at the hospital to strengthen your strategy?

Managers: Key to Information Technology Results

Ensuring That IT Risks Are Mitigated IT resources are used to capture, store, process, update, and exchange information that controls valuable organizational assets. As a result, special measures are needed to ensure that the information and its control mechanisms can stand up to intense scrutiny. Data assets must be secure from unwanted intrusion, loss, and alteration, and personal data must be secured to protect individual privacy rights. If information technology assets including data, software, hardware, and networks are rendered inoperable due to a disaster of any type, business continuity plans must be in place to ensure the ongoing operation of critical business functions that depend on those assets. Failure to ensure that IT risks are mitigated can lead to serious problems, such as business disruptions, data breaches exposing employee and/or customer personal data, and legal penalties. Table 1-7 identifies several examples of IT-related risks that concern managers.

Ellie Mae, Inc. provides end-to-end business automation software for the residential mortgage industry. Roughly 20 percent of all U.S. mortgage obligations flow through its system. On March 31 and April 1, 2014, a critical end-of-the-month processing period, the firm’s loan origination system was not functioning and lenders were unable to finish clos- ing their loans. The outage was suspicious and raised speculation of a cyberattack designed to test the defenses of critical banking systems.15

Data breaches involving large databases of personal information are all too common. The cost to an organization that suffers a data breach can be quite high, including lost business opportunity associated with customers whose patronage has been lost due to the incident, public relations–related costs to manage the firm’s reputation, and increased customer support costs for information hotlines and credit monitoring services for victims. In 2014, Gregg Steinhafel stepped down from the CEO position at Target Corporation following a massive data breach that affected as many as 110 million custo- mers and damaged the firm’s reputation. Steinhafel held himself “personally responsible” for the breach.16

Section 404 of the Sarbanes-Oxley Act requires that all reports filed with the Securi- ties and Exchange Commission (SEC) include a statement signed by the CEO and CFO attesting that the information contained in the reports is accurate. The company also must submit to an audit to prove that it has controls in place to ensure accurate information. The SEC brought charges against the CEO and CFO of a Florida-based computer equip- ment company for misrepresenting to external auditors and the investing public the state of its internal controls over financial reporting. The CFO agreed to pay a $23,000 penalty and to be barred from serving as an officer and director of a publicly traded company for five years. The SEC is continuing to litigate its case against the company’s CEO.17

W H A T W O U L D Y O U D O ?

You are the new office manager for a small accounting firm of 12 people. You just received a complaint of an employee viewing pornography while at work. Not only is the employee wast- ing company time but he is also creating a potential liability for a sexual harassment lawsuit if the practice is allowed to continue. What action would you take to handle this situation?

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TABLE 1-7 Examples of IT risks

IT Risks Example

Inability to continue operations due to a natural disaster or accident

Fire destroys IT resources at corporate headquarters

Inability to continue operations due to a deliber- ate attack on IT assets

Hackers carry out a denial-of-service attack on an organization’s Web site

Compromise of confidential data regarding orga- nizational plans, products, or services

Senior executive loses laptop containing critical data

Compromise of private data about employees or customers

Hackers access and download customer data, including account numbers

Violation of legally mandated procedures for controlling IT assets

IT system controls are inadequate to meet specific federal Sarbanes-Oxley guidelines that require companies to maintain the integrity of financial data

Violation of generally accepted accounting principles

IT system controls are violated so that the same person can both initiate a purchase order and approve the invoice for that purchase order

Violation of the organization’s defined procedures and/or accounting practices

IT system controls are circumvented by granting access to inappropriate people to adjust finished product inventory counts

Loss of physical IT assets Theft of computers from a corporate training facility

Inappropriate use of IT resources that places firm in a compromising position

Employees use corporate email to disseminate sexually explicit material; firm is subjected to a sexual harassment lawsuit

Inappropriate use of IT resources that reduces worker productivity

Employees waste time at work visiting Web sites unrelated to their work

WHAT IF MANAGERS DO NOT PARTICIPATE IN IT PROJECTS?

Managers cannot afford to ignore IT projects, because failed IT projects lead to increased costs, missed opportunities, and wasted time and effort. Far too much money and time has been wasted on failed, ineffective, or wasted information systems in both the private industry and public service arenas. Here is just a small sample of recent information sys- tem fiascos that could have been avoided with more effective management involvement:

Confusion, lack of planning, and failure to appreciate the problems faced by the project led to cancellation of an effort to produce new in-house produc- tion tools, an online digital archive, and a new database for the British Broadcasting Corporation (BBC). Over £98.4 million ($157 million) was ulti- mately spent on the organization’s Digital Media Initiative project with almost nothing to show for it.18

A contentious $100 million student data collection project funded by the Gates Foundation and operated by a nonprofit organization called inBloom

Managers: Key to Information Technology Results

was shut down after the project managers failed to convince educators and parents that the system, which would hold very detailed data about millions of school children, was sufficiently secure.19

The U.S. government spends billions of dollars on information systems each year, with $80 billion spent in the fiscal year 2013 alone. The Government Accounting Office (GAO) conducted a check of the three federal departments with the largest IT budgets—the Defense Department, the Department of Homeland Security, and the Department of Health and Human Services. The GAO uncovered a total of $321 million spent in the six-year period from 2008 to 2013 on projects that duplicated other efforts within those same agencies.20

This chapter has discussed why proper involvement by business managers at the right time is essential to obtain real and lasting value from investments in IT. This involvement is needed throughout the project, not just at certain key moments. The checklist in Table 1-8 recommends a set of actions that business managers can take to ensure that they are appropriately involved in their organization’s IT. The appropriate answer to each question is yes.

OVERVIEW OF REMAINING TEXT

Chapter 2: Strategic Planning describes how to develop effective strategic planning by defining key business objectives and goals, communicating those objectives and goals to multifunctional teams, and then identifying a portfolio of potential business projects that is clearly aligned with business needs. Further refinement is required to narrow the port- folio to the projects that should be executed and for which sufficient resources are avail- able. The strategic planning process is illustrated using Chevron, a major global organization respected for its highly effective use of IT to support business objectives.

TABLE 1-8 A manager’s checklist

Recommended Action Yes No Do you get involved in identifying and evaluating potential opportunities to apply IT?

Do you work to smooth the introduction and adoption of IT in your area of the business?

Do you work with appropriate resources to identify and mitigate IT-related risks?

Do you understand that the successful implementation of each type of IT (personal, group, and enterprise) requires different degrees and types of organizational change?

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Chapter 3: Project Management provides a helpful overview of the project manage- ment process. The presentation is consistent with the Project Management Institute’s Body of Knowledge, an American National Standard. The chapter describes the nine proj- ect management knowledge areas of scope, time, cost, quality, human resources, commu- nications, risk, procurement, and integration. A business manager can take many roles throughout the project life cycle, including champion, sponsor, project manager, change agent, and end user. The chapter identifies frequent causes of project failure and offers invaluable suggestions for how to avoid these problems.

Chapter 4: Business Process and IT Outsourcing discusses the major business rea- sons for outsourcing and identifies many of its issues and potential pitfalls. It also outlines and describes an effective process for selecting an outsourcing firm and successfully tran- sitioning work to the new organization. The chapter covers common outsourcing scenar- ios including cloud computing, software as a service (SaaS), and use of third-party software.

Chapter 5: Corporate and IT Governance describes the responsibilities and practices that a company’s executive management uses to ensure delivery of real value from IT and to ensure that related risks are managed appropriately. The chapter covers two frame- works for meeting these objectives: the IT Infrastructure Library (ITIL) and Control Objectives for Information and Related Technology (COBIT). The discussion includes related issues such as industry and government standards, business continuity planning, and oversight of outsourcing arrangements.

Chapter 6: Collaboration Tools covers the fundamentals of electronic communica- tions systems, with a focus on conferencing, desktop sharing, enterprise content manage- ment, enterprise social networks, shared workspace, Web conferencing, and wikis. You will learn about the benefits and disadvantages of these various collaboration tools and how managers can understand and deal with related business issues.

Chapter 7: E-Commerce discusses the use of electronic business methods to buy and sell goods and services, interact with customers, and collaborate with business partners and government agencies. Several forms of e-business are covered, including business- to-business (B2B), business-to-consumer (B2C), consumer-to-consumer (C2C), and government-to-citizen (G2C). The chapter also covers mobile-commerce, an approach to conduct e-commerce using mobile devices such as smartphones and tablets. The chapter prepares managers to understand and deal with many of the business, legal, and ethical issues associated with the use of e-commerce.

Chapter 8: Enterprise Systems explains what an enterprise system is, identifies sev- eral of the benefits associated with enterprise system implementation, outlines a best practices approach to implementing an enterprise system, and discusses future trends. The chapter also explains the key role that business managers play in successfully imple- menting enterprise systems.

Chapter 9: Business Intelligence and Big Data discusses a wide range of applications that help businesses gather and analyze data to improve decision making, including data extraction and data cleaning, data warehousing and data mining, online analytical proces- sing (OLAP), information visualization, business activity monitoring, and dashboards. The chapter also defines “big data” and analytics and discusses the complications and issues associated with big data. The chapter outlines the role of the business manager in devel- oping and using these systems.

Managers: Key to Information Technology Results

Chapter 10: Knowledge Management describes how organizations use knowledge management to identify, select, organize, and disseminate important information that is part of the organization’s memory. Unfortunately, in many organizations, much of this information and expertise is very unstructured and informally communicated. In this chapter, you will learn about communities of practice, social network analysis, Web 2.0 technologies, business rules management systems, and enterprise search. The chapter also covers how to identify and overcome knowledge management challenges, and it includes a set of best practices for selling and implementing a knowledge management project.

Chapter 11: Cybercrime and IT Security identifies and discusses the motivation of several different types of cybercrime and cybercriminals. It also discusses the security issues that managers need to consider in their use of IT to achieve organizational benefits. An overall multilayer strategy for implementing trustworthy computing to deliver secure, private, and reliable computing experiences based on sound business practices is presented.

Chapter 12: Ethical, Legal, and Social Issues of Information Technology provides a brief overview of ethics and identifies key legal and social issues that managers need to consider in their use of IT to achieve organizational benefits. Ethics, legal concerns, and social issues are discussed from the perspective of what managers need to know about these topics.

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KEY TERMS Change Management Continuum Model

decision support system (DSS)

Diffusion of Innovation Theory

enterprise IT

enterprise system

group IT

information system

information technology (IT)

interorganizational information system

IT infrastructure

IT organization

online learning system

personal IT

Section 404 of the Sarbanes- Oxley Act

transaction processing system (TPS)

Unified Theory of Acceptance and Use of Technology

Web conferencing

wiki

CHAPTER SUMMARY

Managers must frame business opportunities and competitive threats so that others can understand them, prioritize them, and evaluate proposed solutions.

Real gains in productivity require innovations to business practices and then automating these improved processes to take advantage of IT capabilities.

Managers are the key to ensuring that IT innovations pay off; they must lead a holistic approach that includes encouraging the acceptance of change, addressing changes in business processes and organizational structure, addressing new employee roles and expectations, and establishing new measurement and reward systems.

Managers have three critical responsibilities when it comes to IT: identifying appropriate opportunities to apply IT, smoothing the way for its successful introduction and adoption, and mitigating its associated risks.

The most effective users of IT maximize value from IT investments that are aligned with the organization’s strategic needs and that are well managed and executed.

Four organizational complements—better-skilled workers, higher levels of teamwork, redesigned processes, and new decision rights—allow IT to improve performance. Per- sonal IT can deliver results without the complements being in place, group IT allows the complements to emerge over time, and enterprise IT requires the complements to be deployed with the new technologies.

Managers must help others to overcome the natural resistance to change so that new sys- tems and work processes are accepted and used throughout the organization.

The Change Management Continuum Model describes key activities that are needed to build commitment for organizational change and provides a roadmap to guide manage- ment actions at each stage of the introduction of a new system.

The Unified Theory of Acceptance and Use of Technology identifies four key factors that directly determine a user’s acceptance and usage of IT: usefulness, ease of use, manage- ment expectations and feedback, and organizational and technical support.

The Diffusion of Innovation Theory identifies five categories of adopters, each with differ- ent attitudes toward innovation. When promoting an innovation to a target population, it is important to understand the characteristics of the target population that will help or hinder adoption of the innovation and then to apply the appropriate strategy.

Managers: Key to Information Technology Results

Managers must be able to vouch for the effectiveness of the organization’s internal con- trols for financial reporting, protect the security and privacy of customer data, implement workable continuity plans that cover IT assets, and mitigate IT risks.

DISCUSSION QUESTIONS

1. Reflecting on what you read in this chapter and looking forward to a successful course, iden- tify three learning objectives you want to meet this term.

2. Identify and briefly discuss an example of an enterprise or interorganizational system with which you have recently interacted.

3. Based on your own experience and reading, identify and briefly discuss an example of an organization that has invested greatly in IT and yet has relatively little to show as a result. Identify and briefly discuss an organization where the opposite is true. To what do you attri- bute the difference?

4. What percentage of revenue should an organization spend on IT? Explain the rationale for your answer.

5. What are the basic reasons that people resist change? How can this resistance be overcome?

6. What is meant by management expectations, and how can they affect the acceptance of new IT?

7. Develop a timeline that identifies the approximate times at which the various stages of the Change Management Continuum Model should occur for the implementation of a major enter- prise system. Assume that the project will last 18 months and has these key milestones:

Systems definition complete at 3 months

System design complete at 7 months

System construction complete at 12 months

System testing complete at 16 months

System cutover starts at 18 months

8. Considering the Diffusion of Innovation theory, which categories of adopters might you enlist to help in gaining acceptance of a new information system? What specifically would you ask of these different categories of adopters? Which category of adopters may actually impede the rollout of a new information system? What can be done to avoid this?

9. Identify six key actions managers can take to increase end users’ acceptance and usage of a new information system and associated work processes.

10. Should it be the responsibility of IT or business managers to identify and define tasks for the successful introduction and adoption of a new IT system?

ACTION NEEDED

1. You are a new hire in the Marketing Department and just received a vague text message from your manager asking you to “get involved” in a major new marketing MIS effort. How do you respond?

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2. You are a member of the Human Resources Department of a medium-sized organization that is implementing a new interorganizational system that will impact employees, customers, and suppliers. Your manager has requested that you work with the system development team to create a communications plan for the project. He would like to meet with you in two hours to review your thoughts on the key objectives of the communications plan. What should those objectives be?

3. You are the newest member on the IT development team contracted to implement an enterprise resource planning system for a small retail chain. You are surprised after the project’s initial kick-off meeting that no one was there to represent the client. Following the meeting, you encounter the project manager in the hallway. What do you say?

WEB-BASED CASE

e-Borders Revisited In 2003, the United Kingdom’s Immigration and Nationality Directorate (IND) developed the initial plan of work for the e-Borders program. In 2004, the British government signed a three-year contract with IBM to deliver Project Semaphore, the first deliverable of the e-Borders project. In the following years, new government agencies, such as the Joint Border Operations Centre and the National Border Targeting Centre, were created to implement e-Borders. Private contracts were awarded to Raytheon and other IT companies to construct the IT infrastructure.

Do research online to investigate where the project went wrong during its 11-year history. Document the actions taken by both government agencies and private companies.

In August 2014, the U.K. courts ordered the Home Office to pay £224 million to Raytheon for breach of contract after Theresa May, the British home secretary, terminated the company’s con- tract to build the immigration computer system. Explain why you think the court decided in favor of Raytheon in its breach of contract decision.

Then, do research to discover if the government agencies involved with the development of this system implemented lessons learned from the e-Borders’ failures. Do further research to assess whether the new Border Systems Programme is robust enough to protect U.K. citizens from looming terrorist threats.

CASE STUDY

Walmart Reworking Its Supply Chain Management Systems In the mid-1980s, Walmart founder Sam Walton and company CEO David Glass came up with a revolutionary idea. Up until then, traditional brick-and-mortar stores had engaged in an age-old process of buying and selling merchandise. A store would order products from suppliers, sell the products to customers, reorder more products when stocks became low, and so on. Products that did not sell would be returned to the supplier or sold at a discount. At regular periods, store employees would conduct inventories to check the supply level of all products. Walmart was already a technological leader in this process. As early as 1977, Walmart had deployed a com- panywide computer network for ordering and reordering products from suppliers. In 1983, the

Managers: Key to Information Technology Results

company implemented a bar code system to scan point-of-sale (POS) data. The following year, company employees began using handheld devices to reorder merchandise. The devise could scan a label, provide a description of the merchandise found on the shelf, and display information about prior quantities ordered.

But Walton and Glass wanted to go beyond that. They wanted to leverage Walmart’s tech- nology to introduce a whole new way of getting merchandise into and out of their rapidly growing number of stores. This new method became known as vendor-managed inventory (VMI). Rather than having Walmart’s employees track merchandise on the shelves, Walmart would make its sales and in-stock data available to suppliers who would then issue a replenishment request and send the merchandise to Walmart. This new data-driven supply chain system improved in-stock inventory rate, reduced physical warehousing costs, and helped the stores become more responsive to cus- tomer demands. Moreover, the system moved most of the costs and responsibilities associated with replenishment to Walmart’s suppliers.

To provide historical purchasing and customer behavior data, Walmart created a data ware- house prototype in 1990 and the Retail Link database system in 1992. The company spent $4 bil- lion on the system and took years to perfect it. By 1996, vendors were able to access Retail Link through the Internet. Retail Link became a model of supply chain success. Today, Walmart suppli- ers use Retail Link to review the need for orders every day on every item in every store.

Walmart also developed the use of unique cross-docking systems. Cross docking allows sup- pliers or manufacturing plants to ship products packaged for individual stores so that store ship- ments can be easily moved from the incoming dock to the outgoing dock without having to be first moved to a storage location in the warehouse. Cross docking takes place in distribution centers located on average 130 miles away from each store. Products flow from one loading dock to another within 24 hours. At the end of the cross-docking process, the merchandise is repackaged and sent to the retail store.

Walmart passed its cost savings on to its customers, propelling the company to its current position as the largest retailer on the planet. Between 1993 and 2001, Walmart went from con- ducting $1 billion in transactions a week to $1 billion in transactions every 36 hours. Today, Walmart conducts $1 billion in transactions in just under 28 hours. The company employs over 2.2 million associates in over 11,000 stores in 27 countries, serving over 200 million customers each week.

In 2013, the retail giant’s continued success was threatened as it began to suffer acutely from an “empty-shelf” syndrome. Customers, who had come to rely on Walmart as their one-stop, low- priced retail solution, encountered out-of-stock signs and could not locate the products they needed within the store. Bloomberg News broke the story, and people began to wonder what had hap- pened to the once-reliable retail giant. Finally in 2014, Walmart admitted that it was working on improving its in-stock supplies. It turned out that between 2008 and 2014, Walmart had allowed U.S. staff at Walmart and its sister-chain Sam’s Club to fall by 20,000 employees—all while open- ing more than 650 new stores. There simply were not enough workers on hand at the retail chains to carry the merchandise to the right shelf.

Richard Reynoso, an overnight stocker at Walmart for over three years, explained to a reporter investigating the story that he and his coworkers often had to work outside their assigned departments. Each night he might have to restock items in the Hardware, Sporting Goods, Auto, or Toy departments. “Some people don’t know where things are supposed to go, so the merchandise

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ends up getting scrambled everywhere,” Reynoso explains. “Either that or they don’t have enough time to put it in the real spot.”

Walmart has recently committed itself to increasing labor hours, recognizing its low labor investment in the United States as a significant problem. Additionally, the company is trying to curb inventory growth in order to cut costs and reduce the amount of slow-moving merchandise on its shelves. In recent years, inventory growth has exceeded sales growth, cutting into the profit of the retail giant.

As part of its efforts to better manage its inventory, Walmart is planning to roll out a new global replenishment and inventory control system. The Global Replenishment System (GRS) will provide a better forecasting engine for Retail Link and should help Walmart streamline inventory. The main goal is to provide “just-in-time” inventory, so that products sit on shelves for as short a time as possible before being replenished. The system is now being tested with a handful of Wal- mart’s larger vendors. The company hopes that this new system, along with increased labor hours, will help it overcome its recent shelving woes.

Meanwhile some critics have viewed Walmart’s Retail Link program and its approach to inventory management as a means through which the company has gained complete control over suppliers. “At the heart Walmart’s offer to share its software program,” writes Sam Hornblower of Frontline, “was a Faustian bargain for suppliers: Use our Retail Link program, play by our new rules, and we will be your gateway to sales beyond your wildest dreams. Or refuse, and be shut out of America’s dominant retail chain. In fact, by sharing Retail Link, Walmart gained command over its suppliers and effectively penetrated their executive decision-making.”

Indeed, the learning curve to master Retail Link is a steep one, particularly for companies that have little expertise with POS data analysis. Small suppliers often spend thousands of dollars on training. New suppliers need to be trained to use the system effectively. A Retail Link user group was also formed to support Retail Link users. Furthermore, reaching the replenishment managers at Walmart can be challenging for suppliers. The reordering system, though automated, does not run perfectly, and each Walmart replenishment manager is responsible on average for 75 suppliers and 700 products. Hence, when the process goes wrong, suppliers can have a hard time reaching their Walmart contact to get the ordering back on track.

Yet the opportunities offered by Retail Link and the future GRS are enticing. Small, lean, but technologically savvy companies can gain access to the 200 million customers who traipse through the aisles of the one-stop retail giant weekly.

Discussion Questions

1. Outline a strategy that could be used by Walmart to encourage vendors to not just accept the new GRS system and processes but to embrace them. What will it take to implement these measures?

2. Write a paragraph that could be included in an email sent to all vendors that explains why it is to their benefit to participate in the new GRS system and processes and motivates them to embrace the new program.

3. Identify several measures that could be taken to ease the vendors’ transition to Walmart’s new system. Why might it be worth Walmart’s time and effort to do so?

4. What could Walmart do to provide more support for suppliers in using the new GRS system?

Managers: Key to Information Technology Results

5. Besides putting in a new GRS system, what else must Walmart do to improve its supply situa- tion and its relationships with vendors? How important is it for Walmart to maintain good vendor relationships?

Sources: Wailgum, Thomas, “45 Years of Wal-Mart History: A Technology Time Line,” CIO, October 17, 2007, www.cio.com/article/2437873/infrastructure/45-years-of-wal-mart -history--a-technology-time-line.html; “Wal-Mart Company Statistics,” Statistic Brain, August 31, 2014, www.statisticbrain.com/wal-mart-company-statistics/; “History Timeline,” Walmart, http://corporate.walmart.com/our-story/history/history-timeline, accessed October 10, 2014; Traub, Todd, “Wal-Mart Used Technology to Become Supply Chain Leader,” Arkansas Busi- ness, July 2, 2012, www.arkansasbusiness.com/article/85508/wal-mart-used-technology-to -become-supply-chain-leader?page=all; Matthews, Christopher, “10 Ways Walmart Changed the World: Data-Driven Management,” Time, June 29, 2012, http://business.time.com /2012/07/02/ten-ways-walmart-changed-the-world/slide/data-driven-management/; Dudley, Renee, “Wal-Mart Sees $3 Billion Opportunity Refilling Empty Shelves,” Bloomberg News, March 28, 2014, http://www.bloomberg.com/news/articles/2014-03-28/wal-mart-says -refilling-empty-shelves-is-3-billion-opportunity; Dudley, Renee, “Wal-Mart’s New U.S. Chief Faces Empty Shelves, Grumpy Shoppers,” Bloomberg News, July 25, 2014, www.bloomberg .com/news/2014-07-24/wal-mart-s-new-u-s-chief-facing-empty-shelves-grumpy-shoppers.html; Souza, Kim, “Biggest Lessons Listed for New Wal-Mart Suppliers,” The City Wire, November 20, 2013, www.thecitywire.com/node/30601#.VAN_1sVdUrU, accessed August 31, 2014.

NOTES

Sources for the opening vignette: “UK Terror Threat Level Raised to ‘Severe’,” BBC News, August 29, 2014, www.bbc.com/news /uk-28986271; “Why Projects Fail—British Home Office,” Calleam Consulting, August 18, 2014, http://calleam.com/WTPF/?p=6773; Vine, John, “Exporting the Border? An Inspection of e-Borders October 2012–March 2013,” Independent Chief Inspector of Borders and Immigrations, October 2013, http://icinspector.independent.gov.uk/wp-content/uploads/2013/10/An-Inspection-of -eborders.pdf; Glick, Bryan, “Government Finally Ends E-Borders Programme,” Computer Weekly, March 12, 2014, www.computerweekly.com/news/2240216029/Government-finally-scraps -e-Borders-programme.

1 “Designed for the Point of Care,” VisualDx, www.visualdx.com/features/how-it-works, accessed August 18, 2014.

2 “Training and Career Development,” Avanade, www.avanade.com/en-us/about-avanade /careers/life-at-avanade/people-and-culture, accessed August 18, 2014.

3 “Heritage Log Homes Builds Strong Customer Relationships with GoToMeeting,” Citrix, https:// l1.osdimg.com/online/dam/pdf/en/case_studies/manufacturing/GoToMeeting_Heritage_Log _Homes_Case_Study.pdf?_ga=1.14800694.1073788373.1408478528, accessed August 19, 2014.

4 “Who Uses Trac?” Trac, http://trac.edgewall.org/wiki/TracUsers, accessed August 25, 2014. 5 Kass, Kelly, “Creating a Whirlwind of Connectivity for IBM Employees,” Simply-Communicate.com,

www.simply-communicate.com/case-studies/ibm/creating-whirlwind-connectivity-ibm-employees, accessed August 25, 2014.

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6 “Know Your Customers: How a Premier US Railway Company Takes Charge with CRM,” Microsoft, www.microsoft.com/en-us/dynamics/customer-success-stories-detail.aspx?casestudyid= 395000000081, accessed March 13, 2014.

7 “Walmart’s Secret Sauce … How the Largest Survives & Thrives,” Integrated Marketing Solutions, March 13, 2013, www.imsresultscount.com/resultscount/2013/03/walmarts-secret-sauce-how-the -largest-survives-thrives.html.

8 Mishra, Uday, “Supply Chain Management in Retail,” www.slideshare.net/ukmishra85/scm-in -retail?related=1, accessed August 25, 2014.

9 “IT Spending and Staffing Benchmarks 2014/2015,” Computer Economics, www.computer economics.com/page.cfm?name=it%20spending%20and%20staffing%20study, accessed August 24, 2014.

10 J.P. Kotter and L.A. Schlesinger, “Choosing Strategies for Change,” Harvard Business Review 57, pages 106–114, March/April 1979.

11 D. R. Conner, Managing at the Speed of Change: How Resilient Managers Succeed and Prosper Where Others Fail, Villard Books, pages 147–160, 2006.

12 Viswanath Venkatesh, Michael G. Morris, Gordon B. Davis, and Fred D. Davis, “User Acceptance of Information Technology,” MIS Quarterly, Volume 27, no. 3, pages 425–478, September 2003.

13 “Why Projects Fail—Avon,” Catalogue of Catastrophe, Calleam Consulting, January 21, 2014, http://calleam.com/WTPF/?=6248.

14 “Data Breach Results in $4.8 Million HIPAA Settlements,” U.S. Department of Health and Human Services, May 7, 2014, www.hhs.gov/news/press/2014pres/05/20140507b.html.

15 Swanson, Brenda, “Was Ellie Mae Attack the Work of Cyberterrorists?,” Housingwire, April 4, 2014, www.housingwire.com/blogs/1-rewired/post/29571-was-ellie-mae-attack-the-work-of -cyberterrorists.

16 Dignan, Larry, “Target CEO Departure Watershed for IT, Business Alignment,” ZDNet, May 5, 2014, www.zdnet.com/target-ceo-departure-watershed-for-it-business-alignment-7000029069.

17 U.S. Securities and Exchange Commission, “SEC Charges Company CEO and Former CFO with Hiding Internal Controls Deficiencies and Violating Sarbanes-Oxley Requirements,” July 30, 2014, www.sec.gov/News/PressRelease/Detail/PressRelease/1370542561150#.U_3uMixMtjq.

18 “ ‘Confusion’ Led to BBC Digital Project Failure,” BBC, January 28, 2014, www.bbc.com/news /entertainment-arts-25925357.

19 Strauss, Valerie, “$100 Million Gates-Funded Student Data Project Ends in Failure,” Washington Post, April 21, 2014, www.washingtonpost.com/blogs/answer-sheet/wp/2014/04/21 /100-million-gates-funded-student-data-project-ends-in-failure/.

20 Gallagher, Sean, “De-Dupe Time: GAO Finds $321 Million in Redundant Government IT Spending,” Ars Technica, September 17, 2013, http://arstechnica.com/information-technology /2013/09/de-dupe-time-gao-finds-321-million-in-redundant-government-it-spending/.

Managers: Key to Information Technology Results

CHAPTER 2 STRATEGIC PLANNING

RISK TAKING AND STRATEGIC PLANNING “The biggest risk is not taking any risk…. In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

—Mark Zuckerberg, founder and CEO of Facebook

APPLE’S INNOVATIVE BUSINESS STRATEGY

When Steve Jobs resigned from his position as CEO of Apple in August 2011, Apple shares

dropped as much as 7 percent across markets around the world. When Jobs died of cancer a

few months later, Apple stock prices took another hit. Why was there such an extreme reaction to

the loss of one individual from a company with tens of thousands of employees worldwide? Steve

Jobs had created a vision for Apple, a strategic plan that had propelled the company into its posi-

tion as a market leader and allowed it to remain there for decades.

Steve Jobs and Steve Wozniak founded Apple in 1976, introducing the first personal desktop

computer into the market. When faced with competition from personal computers (PCs) manufac-

tured and sold by IBM, Apple pioneered other innovations—the mouse, the desktop, and icons

that users could click, rather than having to enter commands using the keyboard. In the fight to

maintain its market position, Apple eventually began to manufacture laser printers, hard drives,

and other hardware to supplement its desktop computers. By the 1990s, however, both founders

had left the company after a series of power struggles, and Apple was suffering from mismanage-

ment. Apple overestimated demand for its PowerBook laptops and then significantly underesti-

mated demand for its Power Macintosh laptops, leaving $1 billion in unfulfilled orders.

With Jobs’ return to the company in 1997, Apple reset its business strategy to focus on inno-

vation within the desktop and portable computer market. Apple released the iMac in 1998 and

then in 2001, the wildly successful iPod. Restoring its reputation for innovation, Apple began to

branch out, opening its online iTunes store in 2004 and launching the iPhone in 2007. In 2008,

Apple opened its online App Store and released the MacBook. In 2010, Apple introduced the

iPad, quickly acquiring more than 80 percent of the tablet market.

By 2012, however, some analysts were noting that innovation from Apple’s competitors had

begun to draw customers away from the ecosystem of Apple products. In response to that

encroachment, Apple released the iPad Mini, in an effort to prevent Amazon’s Kindle Fire and

Google’s Nexus 7 from chipping away at its consumer base. Yet, some people believed that

Apple could coast for a while on its earlier years of innovation. Over one-fifth of iPhone users

said that they were committed to the Apple product line—not only because of Apple’s perceived

superior quality, but also because of the integration of Apple devices—as music, videos, and

other data could be shared seamlessly from one Apple device to another through iCloud. Still, the

iPhone’s market share began to drop.

In 2014, Apple released the iPhone 6 with larger screen sizes to compete with Samsung and

other smartphone products. On the same day when Apple unveiled the iPhone 6, CEO Tim Cook

quietly added that there was “one more thing” he had to show the audience, and as they cheered,

he gave them a sneak peak at the long-rumored top-secret Apple watch, which went on sale in

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2015. “It will change what people expect from a watch,” Cook hinted. And with this, Cook

seemed to persuade the audience that the death of the man who cofounded Apple would not

mean the collapse of Apple’s innovative business strategy.

L E A R N I N G O B J E C T I V E S

As you read this chapter, ask yourself:

What is an effective strategic planning process, who needs to participate in it, and what are the deliverables of such a process?

How is IT planning tied to overall strategic planning, so that business objectives and IT activities are well aligned?

This chapter defines strategic planning and outlines an effective process for good planning. It also provides an example of effective IT planning at Chevron.

WHY MANAGERS MUST UNDERSTAND THE RELATIONSHIP BETWEEN STRATEGIC PLANNING AND IT

Ever since the dawn of the computer age, various surveys of business and IT executives have stressed the need to improve alignment between business and IT as a top business priority. In this context, alignment means that the IT organization and its resources are focused on efforts that support the key objectives defined in the strategic plan of the busi- ness. This implies that IT and business managers have a shared vision of where the organi- zation is headed and agree on its key strategies. This shared vision will guide the IT organization in hiring the right people with the correct skills and competencies, choosing the right technologies and vendors to explore and develop, installing the right systems, and focusing on those projects that are needed to move the organization closer to its vision and meeting its mission. The impact of the IT staff on the rest of the organization will be extremely positive, and the IT group will be viewed as a well-respected business partner.

An IT organization not aligned with the key objectives of the business will find it dif- ficult to gain management support for its proposed efforts. Much of its work will fail to hit the mark and it will not be well received by the rest of the organization.

STRATEGIC PLANNING

Strategic planning is a process that helps managers identify desired outcomes and formu- late feasible plans to achieve their objectives by using available resources and capabilities.

Strategic Planning

The strategic plan must take into account that the organization and everything around it is changing: consumers’ likes and dislikes change; old competitors leave and new ones enter the marketplace; the costs and availability of raw materials and labor fluctuate, along with the fundamental economic situation (interest rates, growth in gross domestic product, inflation rates); and the degree of industry and government regulation changes.

The following is a set of frequently cited benefits of strategic planning:

Provides a framework and a clearly defined direction to guide decision mak- ing at all levels throughout the organization Ensures the most effective use is made of the organization’s resources by focusing those resources on agreed-on key priorities Enables the organization to be proactive and take advantage of opportunities and trends, rather than passively reacting to them Enables all organizational units to participate and work together toward accomplishing a common set of goals Provides a set of excellent measures for judging organizational and personnel performance. Improves communication among management and the board of directors, shareholders, and other interested parties

In some organizations with immature planning processes, strategic planning is an annual process timed to yield results used to prepare the annual expense budget and capital forecast. The process is focused inward, concentrating on the individual needs of various departments. Organizations that are more advanced in their planning processes develop multiple-year plans based on a situational analysis, competitive assessments, consideration of factors external to the organization, and an evaluation of strategic options.

The CEO of an organization must make long-term decisions about where the orga- nization is headed and how it will operate, and has ultimate responsibility for strategic planning. Subordinates, lower-level managers, and consultants typically gather useful information, perform much of the underlying analysis, and provide valuable input. But the CEO must thoroughly understand the analysis and be heavily involved in setting high-level business objectives and defining strategies. The CEO also must be seen as a champion and supporter of the chosen strategies or the rest of the organization is unlikely to “buy into” those strategies and take the necessary actions to make it all happen.

There are a variety of strategic planning approaches, including issues based, organic, and goals based. Issues-based strategic planning begins by identifying and analyzing key issues that face the organization, setting strategies to address those issues, and identifying projects and initiatives that are consistent with those strategies. Organic strategic plan- ning defines the organization’s vision and values and then identifies projects and initia- tives to achieve the vision while adhering to the values.

Goals-based strategic planning is a multiphase strategic planning process that begins by performing a situation analysis to identify an organization’s strengths, weak- nesses, opportunities, and threats. Next, management sets direction for the organiza- tion by defining its mission, vision, values, objectives, and goals. The results of the

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situation analysis and direction setting phases are used to define strategies to enable the organization to fulfill its mission. Initiatives, programs, and projects are then identified and executed to enable the organization to meet the objectives and goals. These ongoing efforts are evaluated to ensure that they remain on track toward achieving the goals of the organization. The major phases in goals-based strategic planning are (1) analyze situation, (2) set direction, (3) define strategies, and (4) deploy plan (see Figure 2-1).

Analyze Situation All levels and business units of an organization must be involved in assessing its strengths and weaknesses. Preparing a historical perspective that summarizes the company’s devel- opment is an excellent way to begin this step of strategic planning. Next, a multitude of data is gathered about internal processes and operations, including survey data from cus- tomers and suppliers and other objective assessments of the organization. The collected data is analyzed to identify and assess how well the firm is meeting current objectives and goals, and how well its current strategies are working. This process identifies many of the strengths and weaknesses of the firm.

Strategic planning requires careful study of the external environment surrounding the organization and assessing where the organization fits within it. This analysis begins with an examination of the industry in which the organization competes: What is the size of the market? How fast is it growing or shrinking? What are the significant indus- try trends?

Next, the organization must collect and analyze facts about its key customers, competitors, and suppliers. The goal is two-fold: capture a clear picture of the strategi- cally important issues that the organization must address in the future and reveal the firm’s competitive position against its rivals. During this step, the organization must get input from customers, suppliers, and industry experts, who can provide more objective viewpoints than employees. Members of the organization should be prepared to hear things they do not like, but that may offer tremendous opportunities for improvement. It is critical that unmet customer needs are identified to form the basis for future growth.

FIGURE 2-1 The goals-based strategic planning process

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Strategic Planning

The most frequently used model for assessing the nature of industry competition is Michael Porter’s Five Forces Model (see Figure 2-2).

The following fundamental factors determine the level of competition and long-term profitability of an industry:

1. The threat of new competitors will raise the level of competition. Entry bar- riers determine the relative threat of new competitors. These barriers include the capital required to enter the industry and the cost to customers to switch to a competitor.

2. The threat of substitute products can lower the profitability of industry com- petitors. The willingness of buyers to switch and the relative cost and perfor- mance of substitutes are key factors in this threat.

3. The bargaining power of buyers determines prices and long-term profitability. This bargaining power is stronger when there are relatively few buyers but many sellers in the industry, or when the products offered are all essentially the same.

4. The bargaining power of suppliers can significantly affect the industry’s profitability. Suppliers have strong bargaining power in an industry that has many buyers and only a few dominant suppliers, or in an industry that does not represent a key customer group for suppliers.

5. The degree of rivalry between competitors is high in industries with many equally sized competitors or little differentiation between products.

Many organizations also perform a competitive financial analysis to determine how their revenue, costs, profits, cash flow, and other key financial parameters match up against those of their competitors. Most of the information needed to prepare such comparisons is readily available from competitors’ annual reports.

FIGURE 2-2 Porter’s Five Forces Model

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TABLE 2-1 SWOT analysis for Coca-Cola

Strengths

The best global brand in the world in terms of value ($77,839 billion)

World’s largest market share in beverage

Strong marketing and advertising

Most extensive beverage distribution channel

Strong customer loyalty

Bargaining power over suppliers

Corporate social responsibility

Weaknesses

Significant focus on carbonated drinks

Undiversified product portfolio

High debt level due to acquisitions

Negative publicity

Brand failures or many brands with insignificant amount of revenues

Opportunities

Bottled water consumption growth

Increasing demand for healthy food and beverage

Growing beverages consumption in emerging markets (especially BRIC)

Growth through acquisitions

Threats

Changes in consumer preferences

Water scarcity

Strong dollar

Legal requirements to disclose negative infor- mation on product labels

Decreasing gross profit and net profit margins

Competition from PepsiCo

Saturated carbonated drinks market

The analysis of the internal assessment and external environment is summarized into a Strengths, Weaknesses, Opportunities, Threats (SWOT) matrix, as shown in Table 2-1, which provides a SWOT matrix for Coca-Cola.1 The SWOT matrix is a simple way to illustrate what the firm is doing well, where it can improve, what opportunities are avail- able, and what environmental factors threaten the future of the organization. Typically, the internal assessment identifies most of the strengths and weaknesses, while the analysis of the external environment uncovers most of the opportunities and threats. The tech- nique is based on the assumption that an effective strategy derives from maximizing a firm’s strengths and opportunities and minimizing its weaknesses and threats.

Set Direction The direction setting phase of strategic planning involves defining the mission, vision, values, objectives, and goals of the organization. Determining these will enable identification of the proper strategies and projects as shown in Figure 2-3.

Vision and Mission Senior management must create a vision/mission statement that communicates an organi- zation’s overarching aspirations to guide it through changing objectives, goals, and strate- gies. The organization’s vision/mission statement forms a foundation for making decisions and taking action. The most effective vision/mission statements inspire and require employees to stretch to reach its goals. These statements seldom change once they are formulated. An effective statement consists of three components: a mission statement, a vision of a desirable future, and a set of core values.

Strategic Planning

FIGURE 2-3 The strategic planning pyramid

The mission statement concisely defines the organization’s fundamental purpose for existing. It usually is stated in a challenging manner to inspire employees, customers, and shareholders. For example, Google’s mission is “to organize the world’s information and make it universally accessible and useful.”2

The organization’s vision is a concise statement of what the organization intends to achieve in the future. The following are the earmarks of a good vision:

It motivates and inspires. It is easy to communicate, simple to understand, and memorable. It is challenging, yet achievable and moves the organization toward greatness.

Core values identify a few widely accepted principles that guide how people behave and make decisions in the organization.

Objectives The terms objective and goal are frequently used interchangeably. For this discussion, we distinguish between the two—defining objective as a statement of a compelling business need that an organization must meet to achieve its vision and mission.

Johns Hopkins Medicine, with headquarters in Baltimore, Maryland, is a $6.5 billion global healthcare organization that operates six academic and community

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hospitals along with four healthcare and surgery centers. The organization employs more than 41,000 full-time faculty and staff and has more than 2.8 million outpatient encounters per year.3 The organization has defined its mission, vision, values, and objectives as shown in Table 2-2.4

Goals A goal is a specific result that must be achieved to reach an objective. In fact, several goals may be associated with a single objective. The objective states what must be accomplished, and the associated goals specify how to determine whether the objective is being met.

Goals track progress in meeting an organization’s objectives. They help managers determine if a specific objective is being achieved. Results, determined by how well the goals are met, provide a feedback loop. Depending on the difference between the actual and desired results, adjustments may be needed in the objectives, goals, and strategies as well as with the actual projects being worked on.

Some organizations encourage their managers to set Big Hairy Audacious Goals (BHAGs) that require a breakthrough in the organization’s products or services to achieve. Such a goal “may be daunting and perhaps risky, but the challenge of it grabs people in the gut and gets their juices flowing and creates tremendous forward momentum.”5

TABLE 2-2 Johns Hopkins Medicine mission, vision, values, and objectives

Mission: To improve the health of the community and the world by setting the standard of excellence in medical education, research, and clinical care.

Vision: Johns Hopkins Medicine pushes the boundaries of discovery, transforms health care, advances medical education, and creates hope for humanity. Together we will deliver the promise of medicine.

Values:

Excellence and discovery

Leadership and integrity

Diversity and inclusion

Respect and collegiality

Objectives:

Attract, engage, develop, and retain the world’s best people.

Become the exemplar for biomedical research by advancing and integrating discovery, innovation, translation, and dissemination.

Be the national leader in the safety science, teaching, and provision of patient- and family-centered care.

Lead the world in the education and training of physicians and biomedical scientists.

Become the model for an academically based, integrated healthcare delivery and financing system.

Create sustainable financial success and implement continuous performance improvement.

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In April 2012, Facebook purchased the two-year-old photo-sharing service Instagram for $1 billion, a move that many industry analysts viewed as an imprudent investment at the time.6 However, since then, Instagram usage has grown rapidly, and the app has captured a large share of the micro-video market. Achieving the goal of successfully inte- grating Instagram with Facebook expanded the company’s mobile offerings while removing a rival for users’ attention.7

The use of so called SMART goals has long been advocated by management consul- tants.8 The principal advantage of SMART goals is that they are easy to understand, are easily tracked, and contribute real value to the organization. The SMART acronym stands for:

Specific—Specific goals have a much greater chance of being understood and accomplished than vague goals. Specific goals use action verbs and specify who, what, when, where, and why. Measurable—Measurable goals include numeric or descriptive measures that define criteria such as quantity, quality, and cost so that progress toward meeting the goal can be determined. Achievable—Goals should be ambitious yet realistic and attainable. Goals that are either completely out of reach or below standard performance are worthless and demotivating. Relevant—Goals should strongly contribute to the mission of the department, else why expend the effort? Time constrained—A time limit should be set to reach the goal to help define the priority to assign to meeting the goal.

W H A T W O U L D Y O U D O ?

You were just hired to fill an entry-level position in the customer service organization of a large retail store. You are completing the first day of new hire orientation when the trainer shares with your class the set of organizational goals listed in the following bul- leted list. She asks you to identify which of the goals would be considered SMART goals. What is your response?

Achieve 100 percent customer satisfaction within the next year. Improve customer service by 50 percent. Reduce customer complaints about mispriced merchandise from 12 per day to less than 3 per day by June 30. The customer is always right.

For each of its objectives, Johns Hopkins Medicine has defined SMART goals. Table 2-3 shows the organization’s financial objectives as well as the goal tied to those objectives.

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TABLE 2-3 Johns Hopkins Medicine financial objectives and goal

Objective:

Create sustainable financial success and implement continuous performance improvement.

Ensure that financial operations, performance indicators, and results support the strategic priorities, as well as the individual entity requirements.

Identify new and expand existing sources of revenue and implement operating efficiencie consistent with the tripartite mission and with a commitment to reducing healthcare costs.

Establish a transparent financial reporting system available to and understood by all organizational constituents.

Goal: Add $150 million in annual net operating income by June 2016.

Define Strategies A strategy describes how an organization will achieve its vision, mission, objectives, and goals. Selecting a specific strategy focuses and coordinates an organization’s resources and activities from the top down to accomplish its mission. Indeed, creating a set of strategies that will garner committed supporters across the organization, all aligned with the mission and vision, is key to organizational success.

Frequently used themes in setting strategies include “increase revenue,” “attract and retain new customers,” “increase customer loyalty,” and “reduce the time required to deliver new products to market.” In choosing from alternative strategies, managers should consider the long-term impact of each strategy on revenue and profit, the degree of risk involved, the amount and types of resources that will be required, and the potential com- petitive reaction. In setting strategies, managers draw on the results of the SWOT analysis and consider the following questions:

How can we best capitalize on our strengths and use them to their full potential? How do we reduce or eliminate the negative impact of our weaknesses? Which opportunities represent the best opportunities for our organization? How can we exploit these opportunities? Will our strengths enable us to make the most of this opportunity? Will our weaknesses undermine our ability to capitalize on this opportunity? How can we defend against threats to achieve our vision/mission, objectives, and goals? Can we turn this threat into an opportunity?

Amazon has made a strategic decision to explore the possible use of delivery drones to gain a real technological advantage over competitors who rely on less efficient ground transportation. Because nearly 86 percent of Amazon packages weigh less than 5 pounds, drones could make the ideal rapid-delivery vehicles.9 Such a strategy has the potential to attract new customers and increase revenue.

Strategic Planning

W H A T W O U L D Y O U D O ?

Johns Hopkins Medicine strives to create a culture in which diversity, inclusion, civility, collegiality, and professionalism are championed through actions, incentives, and accountability. You are a member of a three-person team within the finance organization that is working under the direction of the CFO to define a set of strategies that will support Johns Hopkins Medicine’s financial objectives and goals. The CFO has asked each member of the team to speak for five minutes to present his or her thoughts on two topics: (1) Should any resources from outside the finance organization be recruited to help identify and evaluate alternative strategies? (2) How should potential strategies be evaluated? What would you say?

Deploy Plan The strategic plan defines objectives for an organization, establishes SMART goals, and sets strategies on how to reach those goals. These objectives, goals, and strategies are then communicated to the organization’s business units and functional units so that everyone is “on the same page.” The managers of the various organizational units can then develop more detailed plans for initiatives, programs, and projects that align with the firm’s objec- tives, goals, and strategies. Alignment ensures that the efforts will draw on the strengths of the organization, capitalize on new opportunities, fix organizational weaknesses, and min- imize the impact of potential threats.

The extent of strategic planning done at lower levels within the organization depends on the amount of autonomy granted those units as well as the leadership style and capa- bilities of the managers in charge of each unit. For these reasons, the amount of effort, the process used, and the level of creativity that goes into the creation of a business unit stra- tegic plan can vary greatly across the organization.

Alstom Transport, which develops and markets railway systems, equipment, and services, won a contract to supply Virgin Trains in operating its West Coast Mainline in the United Kingdom.10 Alstom supplied Virgin Trains 52 of its high-speed (125 mph) Pendolino trains. However, the train was initially too unreliable—too many trains were shut down on any given day due to maintenance issues.11 Only 38 of the 52 trains were available on a given day; however 46 trains were needed to meet service-level goals. The situation was affecting Alstom’s relationship with Virgin Trains, and, if not improved, would likely affect contract renewal. Alstom Transport executives met and set key objectives to improve the relationship with Virgin Trains:

Meet availability goals and improve reliability Do not increase costs Provide greater value to the customer

Alstom leaders then employed a “catch-ball” process to deploy these objectives to other workers at the firm. The management team “threw” the goals back and forth with

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the entire management chain, including senior management, operations leaders, and depot and production management. By means of this process, Alstom identified over 15 potential improvement projects to support the goals, leading to an increased train availability rate— 72 percent to 90 percent—while headcount and costs were kept flat. Alstom won renewal of a service maintenance contract with Virgin Trains three years earlier than expected because of its improved service.12

SETTING THE IT ORGANIZATIONAL STRATEGY

The strategic plan of the IT organization must identify those technologies, vendors, com- petencies, people, systems, and projects in which the organization will invest to support the corporate and business unit objectives, goals, and strategies. The IT strategic plan is strongly influenced by new technology innovations (e.g., increasingly more powerful mobile devices, advanced printers that can generate three-dimensional objects from a digital file, access to shared computer resources over the Internet, advanced software that can analyze large amounts of structured and unstructured data) and innovative thinking by others both inside and outside the organization (see Figure 2-4).

FIGURE 2-4 Drivers that set IT organizational strategy and determine IT investments

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The strategic planning process for the IT organization and the factors that influence it depend on how the organization is perceived by the rest of the organization. An IT organization can be viewed as either a cost center/service provider, a business partner/ business peer, or as a game changer (see Table 2-4).

In a recent survey of 722 CIOs, 38 percent said they felt that their IT organization is viewed as a cost center/service provider that is expected to reduce IT costs and improve IT services.13 The strategic planning process for such an organization is typically directed inward and focused on determining how to do what it is currently doing but cheaper, faster, and better.

The IT organization of the state of Delaware is viewed as a cost center/service provider. One of the organization’s primary strategic initiatives is to consolidate IT resources and to eliminate redundant functions and resources within the various state agencies. The goal is to deliver significant improvements in customer service and to reduce costs.14

The majority of CIOs surveyed, about 52 percent, felt that their IT organization is viewed as a business partner/business peer that is expected to control IT costs and expand IT services in support of business initiatives.15 The strategic planning process of these organizations is based on understanding the col- lective business plans for the next year and determining what those mean for the IT organization in terms of new technologies, vendors, competencies, people, systems, and projects.

The IT organization for the city of Seattle operates under the constraint of a decreas- ing budget but is continually striving to expand its services and capitalize on the latest technology developments. It employs newer technologies such as mobile computing to improve the interaction of city government with its constituents and to support city ser- vices on the move. The organization also seeks opportunities to access shared computer resources as a utility over the Internet (cloud computing) to gain advantages and efficien- cies where it makes sense.16

TABLE 2-4 The IT strategic planning spectrum

Cost Center/ Service Provider

Business Partner/ Business Peer Game Changer

Strategic planning focus

Inward looking Business focused Outward looking

IT goals Reduce IT costs; improve IT services

Control IT costs; expand IT services

Make IT investments to deliver new products and services

Strategy React to strategic plans of business units

Execute IT projects to support plans of business

Use IT to achieve competitive advantage

Typical projects Eliminate redundant or ineffective IT services

Implement corporate database and/or enter- prise systems

Provide new ways for customers to interact with organization

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Only 10 percent of surveyed CIOs stated that their IT organization is viewed by fellow employees as a game-changing organization that is asked to lead product innovation efforts and open new markets.17 Their strategic planning process is outwardly focused and involves meeting with customers, suppliers, and leading IT consultants and vendors to answer questions like “What do we want to be?” and “How can we create competitive advantage?”18 In such organizations, IT is not only a means for implementing business- defined objectives, but also a catalyst for achieving new business objectives unreachable without IT.

GAF is a $3 billion privately held manufacturer of commercial and residential roofing. GAF’s IT employees regularly collaborate with external customers to learn from them and to help educate potential customers about why they should do business with GAF.19 Using these collaboration sessions to gain a better understanding of its customers’ needs, GAF developed a mobile app that allows a contractor to take a photo of a prospect’s house and then use that photo to allow the prospect to preview different GAF shingle styles and col- ors on an actual image of their home. The app was a game changer for the organization as it helps GAF contractors demonstrate the beauty of GAF shingles and eliminates one of the biggest barriers to closing the sale—answering the question, “How will it look on my house?”20

No matter how the IT organization is perceived, the odds of achieving good alignment between the IT strategic plan and the rest of the business are vastly increased if IT work- ers have experience in the business and can talk to business managers in business terms rather than technology terms. IT staff must be able to recognize and understand business needs and develop effective solutions. The CIO especially must be able to communicate well and should be accessible to other corporate executives. However, the entire burden of achieving alignment between the business and IT cannot be placed solely on the IT organization.

Identifying IT Projects and Initiatives In mature planning organizations, IT workers are constantly picking up ideas for potential projects through their interactions with various business managers and from observing other IT organizations and competitors. They also keep abreast of new IT developments and consider how innovations and new technologies might be applied in their firm. As members of the IT organization review and consider the corporate objectives, goals, and strategies, they can generate many ideas for IT projects that support corporate objectives and goals. They also recognize the need for IT projects that help other corporate units fulfill their business objectives. Often, experienced IT managers are assigned to serve as liaisons with the business units in order to gain a deeper understanding of each business unit and its needs. The IT managers are then able to help identify and define IT projects needed to meet those needs.

Most organizations find it useful to classify various potential projects by type. One such classification system is shown in Table 2-5.

Strategic Planning

TABLE 2-5 Project classification example

Project Type Definition Risk Factors Associated with Project Type

Breakthrough Creates a competitive advantage that enables the organization to earn a greater than normal return on invest- ment than its competitors

High cost; very high risk of failure and potential business disruption

Growth Generates substantial new revenue or profits for the firm

High cost; high risk of failure and potential business disruption

Innovation Explores the use of technology (or a new technology) in a new way

Risk can be managed by setting cost limits, establishing an end date, and defining criteria for success

Enhancement Upgrades an existing system to provide new capabilities that meet new busi- ness needs

Risk that scope of upgrade may expand, making it difficult to control cost and schedule

Maintenance Implements changes to an existing system to enable operation in a different technology environment (e.g., underlying changes in hardware, oper- ating systems, or database management systems)

Risk that major rework may be required to make system work in new technology environment; potential for system performance degradation

Mandatory Needed to meet requirements of a legal entity or regulatory agency

Risk that mandated completion date is missed; may be difficult to define tangible benefits; costs can skyrocket

Prioritizing IT Projects and Initiatives Typically, an organization identifies more IT-related projects and initiatives than it has the people and resources to staff. An iterative process of setting priorities and determining the resulting budget, staffing, and timing is needed to define which projects will be initiated and when they will be executed. Many organizations create an IT investment board of business unit executives to review potential projects and evaluate them from several dif- ferent perspectives:

1. First and foremost, each viable project must relate to a specific organiza- tional goal. These relationships make it clear that executing each project will help meet important organizational objectives (see Figure 2-5).

2. Can the organization measure the business value of the initiative? Will there be tangible benefits, or are the benefits intangible? Tangible benefits can be measured directly and assigned a monetary value. For example, the number of staff before and after the completion of an initiative can be measured, and the monetary value is the decrease in staff costs, such as salary, benefits, and overhead. Intangible benefits cannot directly be measured and cannot easily be quantified in monetary terms. For example, an increase in customer satis- faction due to an initiative is important but is difficult to measure and cannot easily be converted into a monetary value.

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FIGURE 2-5 Projects must relate to goals and objectives

3. What kinds of costs (hardware, software, personnel, consultants, etc.) are associated with the project, and what is the likely total cost of the effort over multiple years? Consider not just the initial development cost but the total cost of ownership, including operating costs, support costs, and main- tenance fees.

4. Preliminary costs and benefits are weighed to see if the project has an attractive rate of return. Unfortunately, costs and benefits may not be well understood at an early phase of the project, and many worthwhile projects do not have benefits that are easy to quantify.

5. Risk is another factor to consider. Managers must consider the likelihood that the project will fail to deliver the expected benefits; the actual cost will be significantly more than expected; the technology will become obsolete before the project is completed; the technology is too “cutting edge” and will not deliver what is promised; or the business situation will change so that the proposed project is no longer necessary.

6. Some projects enable other projects. For example, a new customer database may be required before the order-processing application can be upgraded. Therefore, some sequencing of projects must be considered.

7. Is the organization capable of taking on this project? Does the IT organiza- tion have the skills and expertise to execute the project successfully? Is the organization willing and able to make the required changes to receive their full value?

EFFECTIVE STRATEGIC PLANNING: CHEVRON

The preceding sections described the goals-based strategic planning process. The following section provides a thorough example of the goals-based strategic planning process. The subject company is Chevron.

Background Chevron is one of the world’s largest energy companies, with operations in over 100 countries. The company participates in every aspect of the oil and gas industry, including

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exploration and production, refining, marketing, and transportation of its product. Chev- ron is also involved in chemicals manufacturing and sales, geothermal energy sources, mining operations, and power generation.

Chevron can trace its origins to an 1879 oil discovery in Pico Canyon, north of Los Angeles. That discovery led to the formation of the Pacific Coast Oil Company, which later became Standard Oil Company of California. After several acquisitions throughout the twentieth century, the company eventually became Chevron when it acquired Gulf Oil Corporation in 1984. The merger with Gulf was then the largest in U.S. history and nearly doubled the company’s worldwide crude oil and natural gas reserves. Chevron merged with Texaco in 2001 and acquired Unocal Corporation in 2005. Today, Chevron is head- quartered in San Ramon, California, and employs about 64,500 people, including more than 3200 service station employees.

Chevron is divided into five major businesses including Upstream, Downstream and Chemicals, Gas and Midstream, Technology, and Renewable Energy and Energy Efficiency. Upstream explores for and produces crude oil and natural gas. Downstream and Chemicals businesses include those involved with refining as well as those that manufacture and market fuels, lubricants, petrochemicals, and additives. Gas and Midstream connects the Upstream and Downstream and Chemicals businesses to the markets by providing infrastructure and services. The Technology business includes three companies—Energy Technology, Technology Ventures, and Information Technology—that are responsible for developing and deploying technological solutions to all of Chevron’s operations. Renewable Energy and Energy Efficiency develops potential renewable sources of energy, including solar and advanced biofuels. This business works to improve the energy efficiency of Chevron operations as well as provide more energy-efficient solutions to Chevron customers in the United States.

Chevron continues to expand through both exploration and acquisitions. In 2013, the success rate of the company’s exploration wells was 59 percent, and it made crude oil and natural gas discoveries in 10 countries.

Situation Analysis The situation analysis for Chevron is based on an identification of its strengths, weak- nesses, opportunities, and threats.

Strengths The situation analysis of Chevron revealed the following strengths.

Financial strength—Chevron has a history of strong financial performance, leading its competitors with total stockholder returns of almost 15 percent over the previous 5- and 10-year periods. Sales and operating revenues for 2013 were $220 billion with a net income of $21 billion, or $11.09 per share. In that same year, Chevron earned a 13.5 per- cent return on capital and a 15 percent return on stockholder’s equity. See Table 2-6.

Presence in all phases of the energy industry—Chevron has expanded its scope of operations from a tunnel-vision oil company to a highly diversified conglomerate looking to capitalize on the changing world energy marketplace. The company has branched out beyond petroleum and petrochemicals to ventures in the coal, plastics, insurance, and real estate markets.

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TABLE 2-6 Select Chevron financial data (in billions of dollars)

Financial Result 2013 2012 2011 2010

Sales and other operating revenue $220,156 $230,590 $244,371 $198,198

Net income $21,423 $26,179 $26,895 $19,024

Total assets at year end $253,753 $232,982 $209,074 $184,769

Stockholders’ equity $149,113 $136,524 $121,383 $105,081

Cash provided by operating activities $35,002 $38,812 $41,098 $31,359

Common stock price at year end $124.91 $108.14 $106.40 $91.25

Return on equity 15.0% 20.3% 23.8% 19.3%

Return on capital 13.5% 18.7% 21.6% 17.4%

Broad geographic presence—Chevron is a global energy company, with substantial business activities in almost 30 countries.

High reserves ratio—The oil reserve replacement ratio represents the amount of proven reserves added to a company’s proven reserve base in a given year, relative to the amount of oil and gas produced during that year. Proven reserves lie below the surface and have not yet been produced but are believed to be eco- nomically, technically, and legally viable to extract and deliver to market. Long term, a company’s reserve replacement ratio must be at least 100 percent for the company to stay in business; otherwise, it will eventually run out of oil. Chevron’s three-year average oil reserve replacement ratio is 123 percent of net oil-equivalent production.

Leading position in the United States—Chevron is the second-largest integrated energy company in the United States. Its products are sold in more than 8000 Chevron and Texaco retail stations in the United States. The firm is also the major supplier of aviation fuel in the United States.

Weaknesses The situation analysis of Chevron revealed the following weaknesses.

Entanglement in environmental disaster in Ecuador—While operating in Ecuador, Texaco allegedly dumped 18 billion gallons of toxic wastewater directly into surface streams and rivers. In February 2011, an Ecuadorian court ordered Chevron, which had acquired Texaco in 2001, to pay $8 billion in compensation for the dumping, a ruling the company appealed. In March 2014, a U.S. district court judge ruled that the Ecuadorian plaintiff’s lead U.S. attorney had used “corrupt means,” to obtain the verdict in Ecuador. The judge did not rule on the underlying issue of environmental damages. While the U.S. ruling does not affect the decision of the court in Ecuador, it has blocked efforts to collect damages from Chevron in U.S. courts. The matter is still unresolved and has earned much negative publicity for Chevron.

Strategic Planning

Strain on sales of refined products—In 2014, refiners and blenders in the United States were delaying purchases of biodiesel until the Environmental Protection Agency released its 2014 Renewable Fuel Standard. This placed a severe strain on biodiesel manufacturers, causing a downward pressure on prices.

Opportunities The situation analysis of Chevron uncovered the following opportunities.

Planned investments for future development—Chevron has forecasted that between 2013 and 2017 the company will have launched 15 project start-ups, with an investment of more than $1 billion each.

Strategic acquisitions and agreements—Chevron continues to add resources to its reserves through both exploration and acquisitions.

Threats The situation analysis of Chevron recognized the following threats.

Rising production costs and capital expenditures—The demand for oil, natural gas, and other energy sources is growing dramatically, with worldwide energy con- sumption projected to increase by more than 40 percent by 2035. However, oil and gas companies are experiencing lower production from existing fields, with higher than expected costs and capital investment required to develop new fields. For example, the cost of Chevron’s Australian Gorgon project was initially estimated to be $37 billion in 2009. The estimated cost rose to $52 billion in 2013 and $54 billion in 2014. And Chevron ultimately put its $10 billion Rosebank North Sea project (estimated to contain the equivalent of 240 million barrels of oil) on hold due to rising costs.

Regulation of greenhouse gas emissions—The use of fossil fuels is a contributor to an increase in greenhouse gases (GHGs), mainly carbon dioxide (CO2), in the Earth’s atmosphere. In part due to increased regulation, Chevron must continue to make global investments in renewable and alternative energy and in energy efficiency, with the goal of modifying the com- pany’s energy portfolio over the long term.

Changing economic, regulatory, and political environments—Chevron’s businesses, especially its Upstream operations, can be affected by changing economic, regulatory, and political environments in the various countries in which it operates. From time to time, certain governments have sought to renegotiate contracts or impose additional costs on the company. Civil unrest, acts of violence, or strained relations between a government and Chevron or other governments may also impact the company’s operations or invest- ments. Those developments have at times significantly affected the company’s operations and results.

Commodity prices risks—The primary determinants of the value of an oil and gas company are its reserves, level of production, and commodity price at the time of assess- ment. Thus the valuation of Chevron tends to be very sensitive to variations in commodity prices. Indeed, in 2014, there was a dramatic drop in crude oil prices, which caused a drop in Chevron’s profits as well as its share price.

Table 2-7 provides a summary of the SWOT analysis for Chevron.

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TABLE 2-7 Chevron SWOT summary

Strengths

Financial strength Presence across the energy value chain Broad geographic presence High reserves ratio Leading position in the United States

Weaknesses

Entanglement in environmental disaster in Ecuador Strain on sales of refined products

Opportunities

Planned investments for future development Strategic acquisitions and agreements

Threats

Rising production costs and capital expenditures Regulation of greenhouse gas emissions Changing economic, regulatory, and political environments Commodity prices risks

Set Direction This section discusses the vision, mission, values, objectives, and goals for Chevron. Chevron’s senior managers have created a well-defined vision/mission statement and a set of corporate values that has remained essentially the same for several years. These are outlined in Table 2-8.

Objectives Chevron has seen its revenues and profit decline from $244 billion and $27 billion in 2011 to $220 billion and $21 billion in 2013. A key management objective is to increase reve- nue and profits in the years ahead. To support its objective of finding more oil and gas fields to increase production to create revenue growth, the company will invest over $40 billion per year for the next few years.

TABLE 2-8 Chevron mission, vision, values

Mission: The mission of Chevron Oil is to conduct business “the Chevron Way,” which means “getting results the right way.”

Vision: To be the global energy company most admired for its people, partnership, and performance.

Values: This vision means that the people at Chevron

safely provide products vital to sustainable economic progress and human development throughout the world; are people and an organization with superior capabilities and commitment; are the partner of choice; earn the admiration of all our stakeholders—investors, customers, host governments, local communities, and our employees—not only for the goals we achieve but how we achieve them; and deliver world-class performance.

Strategic Planning

Goals Chevron management has defined several growth-related measures for 2014 and beyond, including the following:

Reduce the time lag between initial exploration and start of production. Over the next four years, execute 15 project start-ups with a Chevron investment of over $1 billion each. Continue to add to its portfolio through both exploration and targeted acquisitions Maintain or improve the success rate of exploration wells, which is currently at 59 percent. Continue to be a leader in personal safety as measured by injuries requiring time away from work—with a goal of zero incidents and achieving world-class performance in all measures of safety.

Define Strategies Chevron’s five overarching strategies at the enterprise level are the following:

Create shareholder value and achieve sustained financial returns from opera- tions that will enable Chevron to outperform its competitors. Invest in people to strengthen organization capability and develop a talented global workforce that gets results the right way. Execute with excellence through rigorous application of operational excel- lence and capital stewardship systems and disciplined cost management. Grow profitably by using competitive advantages to maximize value from existing assets and capture new opportunities. Attain world-class performance in operational excellence with a goal of zero safety and operating incidents. This includes systematic management of pro- cess safety, personal safety and health, environment, reliability, and efficiency.

In addition, each major business has a key strategy.

Upstream—Grow profitably in core areas and build new legacy positions. Downstream and Chemicals—Deliver competitive returns and grow earnings across the value chain. Gas and Midstream—Apply commercial and functional excellence to enable the success of the Upstream and Downstream and Chemicals businesses. Technology—Differentiate performance through technology. Renewable Energy and Energy Efficiency—Invest in profitable renewable energy and energy-efficient solutions.

Deploy Plan The Chevron strategic plan is communicated to all business units worldwide, and each unit is encouraged to conduct its own strategic planning process to identify initiatives,

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programs, and projects that will lead to accomplishment of the corporate goals. Chevron focuses on technologies that improve its ability to find, develop, and produce crude oil and natural gas from conventional and unconventional resources.

Identifying Projects and Initiatives Louie Ehrlich was appointed CIO and president of the Chevron Information Technology Company in 2008. His organization is considered a “game changer” and is focused on “accelerating insights, automating operations, and connecting people.” Ehrlich believes that by becoming experts at choosing IT investments that will be “the biggest game chan- gers” for the company, Chevron IT can help to differentiate the company’s performance. His organization looks to hire IT professionals with a bachelor’s or master’s degree in computer science, management information systems, or a related technical or business field. It seeks candidates who have a collaborative work style, enjoy a teamwork-oriented environment, are solution oriented and outcome driven, can translate situations into scal- able solutions, and have a high level of integrity.

Chevron Information Technology Company supports all of Chevron’s businesses by developing and supporting information technologies that connect people, ideas, processes, and data. The company’s key applications include “intelligent” oil and gas fields, automa- tion and visualization technologies, and technical networks.

The world’s supply of easy-to-reach oil and gas is running low. To reach new supplies, Chevron must continue to drill deeper and pursue more difficult deposits. In these more challenging environments, the company counts on IT to help boost production. Chevron uses distributed sensors, high-speed communications, and sophisticated data analysis techniques to monitor and fine-tune remote drilling operations. Sensors and computing are used to capture and monitor data related to seismic and borehole activity, environ- mental readings, production utilization, transportation, inventory levels, and demand. Real-time data is used to make better decisions and predict problems before they happen. The industry term for this increased use of technology is the digital oil field. At Chevron it is called the i-field, and the company estimates it can yield 8 percent higher production rates and 6 percent higher overall recovery from a fully optimized i-field. The trend in the industry is toward cheaper computer and communications technology and a proliferation of data sensors and analytical software.

Prioritizing Projects and Initiatives Chevron has an IT governance board that decides strategic direction, defines resource constraints, and sets project priorities. The governance board has delegated responsibility for identifying viable projects to local business units. A business sponsor is required for each project, and the sponsor must review a checklist of investment decision criteria with an IT decision maker. The business sponsor and IT decision maker then decide if the project is feasible and worthwhile. The project ideas will be reviewed by the governance board and then passed back to the business sponsor and IT decision maker for the appro- priate Chevron business unit for further clarification and definition, if necessary, before

Strategic Planning

project execution begins. Following is a brief description of some of the programs identi- fied through the strategic planning process:

In order to identify new oil deposits, Chevron must be able to process seismic data quickly. To do so, the company uses sound waves to create images of the earth, deep below the ocean floor. Then high-powered computers search those images to find places where oil is likely to be. Chevron is continually upgrading the hardware and software used to collect massive amounts of data and process them as quickly as possible. Much of the software innovation that is key to the digitization of oil and gas fields is happening at oil service companies, such as Halliburton and Schlum- berger, and large IT companies including Microsoft and IBM. Chevron colla- borates with these companies on pilot projects and the evaluation of new software and techniques to obtain state-of-the-art solutions. As part of Chevron’s i-field program, it has established eight global “mission control” centers designed to improve the performance of forty of the com- pany’s biggest energy projects. Each center is assigned a specific goal—such as using real-time data to make drilling decisions. Chevron estimates these centers could save the company $1 billion per year. Chevron continues to focus on improving leak detection by using modeling technology in most of the company’s pipelines. Complex computer models allow Chevron to use real-time operations data to locate pipeline leaks and avoid major incidents. Chevron IT operates NetReady, a network that connects more than 50,000 desktops around the world, allowing Chevron employees to collaborate and communicate through a common network platform. Digital imaging helps Chevron better manage an oil field once it is producing oil. Newer imaging techniques can even show how oil is moving in a reservoir and tell Chevron if it needs to drill more wells to extract the remaining fluid. The IT organization is responsible for providing network operations and security, purchasing and deploying hardware, and setting global technology standards and strategy for the company.

Source: “Chevron 2013 Annual Report; Chevron 2011 Annual Report,” Chevron, www.chevron .com/annualreport/2013/documents/pdf/Chevron2013AnnualReport.pdf, accessed September 4, 2014; Gallant, John, “Chevron’s CIO Talks Transformation and Why IT Leaders Should Smile,” Computerworld, April 12, 2012, www.computerworld.com/article/2503109/it-management /chevron-s-cio-talks-transformation-and-why-it-leaders-should-smile.html; King, Rachael, “Gaming Chips Help Chevron Find Oil,” CIO Journal, November 6, 2012, http://blogs.wsj.com /cio/2012/11/06/gaming-chips-help-chevron-find-oil/; Farfan, Barbara, “Company Mission Statements—Complete List of World’s Largest Retail Missions,” About Money, http:// retailindustry.about.com/od/retailbestpractices/ig/Company-Mission-Statements/BP-Values -and-Mission-Statement.-1NI.htm, accessed September 5, 2014; “EPA’s Delay on RFS Hurting Biodiesel Producers,” BIC Magazine, August 21, 2014, http://bicmagazine.com/epa-rfs-delay -biodiesel; Kaiser, Mark J. and Yu, Yunke, “Part 1: Oil and Gas Company Valuation, Reserves, and Production,” Oil and Gas Financial Journal, February 1, 2012, www.ogfj.com/articles /print/volume-9/issue-2/features/part-1-oil-and-gas-company.html; “Form 10-Q for Chevron Corporation,” Yahoo! Finance, August 6, 2014, http://biz.yahoo.com/e/140806/cvx10-q.html;

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Keulen, Pim, “Shell vs. Chevron: An Analysis of 2 Completely Different Strategies,” Seeking Alpha, February 24, 2014, http://seekingalpha.com/article/2043123-shell-vs-chevron-an-analysis -of-2-completely-different-strategies; Choudhury, Nilanjan, “Oil & Gas Stock Roundup: Chevron, Shell Outlines Strategy Update,” Zacks, March 18, 2014, www.zacks.com/stock/news/126739 /Oil-amp-Gas-Stock-Roundup-Chevron-Shell-Outlines-Strategy-Update; Leber, Jessica, “Big Oil Goes Mining for Big Data,” MIT Technology Review, May 8, 2012, www.technologyreview.com /news/427876/big-oil-goes-mining-for-big-data/; “Exxon Mobil Corporation Announces 2013 Reserves Replacement Totaled 103 Percent,” Exxon, February 21, 2014, http://news.exxonmobil .com/press-release/exxon-mobil-corporation-announces-2013-reserves-replacement-totaled-103 -percent; Griffith, Saul, “Oil Majors’ Reserves of Oil and Gas in 2013,” Value Walk, April 14, 2014, www.valuewalk.com/2014/04/oil-majors-reserves-oil-gas-2013/; “The Global Oil Indus- try: Supermajordämmerung,” Economist, August 3, 2013, www.economist.com/news/briefing /21582522-day-huge-integrated-international-oil-company-drawing; Findlay, Keith, “Chevron to Axe 225 Aberdeen Jobs,” Energy Voice, July 16, 2014, www.energyvoice.com/2014/07 /chevron-axe-255-aberdeen-jobs/.

W H A T W O U L D Y O U D O ?

You are an experienced and well-respected member of the Chevron human resources organi- zation and are frequently asked for advice on personnel matters. So you are not surprised when you receive a call from a member of the IT organization staff asking your opinion on two candidates to fill an open position as IT decision maker in the Upstream business unit.

An IT decision maker fills a key role—working with the Upstream business sponsor to tailor an IT strategic plan for the business unit and helping to identify and evaluate which potential projects should be staffed and resourced. The IT decision maker must have a good understanding of how Chevron operates and an appreciation for how IT can move the organization ahead. You are familiar with both candidates—Kendall Adair and Bud Fox from working with each of them on a couple of brief special projects.

Kendall spent her first 10 years working on oil crews in her native Australia, the Congo, Kazakhstan, and Argentina. It was during this time that she earned an online bachelor of science in geology from the University of Florida. When Chevron began to pilot its global mission control centers five years ago, Kendall was recruited to help define the business requirements and evaluate various prototypes. Once the first mission control center was complete, she was selected to be the operations manager. Kendall’s leadership and performance have been outstanding, although she is well known for her frequent outbursts in meetings as she argues strongly for her point of view.

Bud Fox has risen quickly through the ranks during his 10 years at Chevron. His education includes undergraduate degrees in both computer science and geological and environmental sciences from Stanford (he graduated with honors) and an MBA from Harvard. Bud has led a number of IT projects in the areas of leak detection using model- ing technology and the use of high-powered computers and analytics to evaluate seismic data. He is well regarded for his sound and deliberate decision making.

Ken Wilson, the business sponsor for the Upstream business unit for the past three years, is the person with whom the new IT decision maker will work most closely. His background is strictly finance, with no real field experience. However, he is a genius at working with the right people to determine the economic feasibility of various projects. He has an easy going management style and people find it easy to collaborate with him.

Which candidate would you recommend and why?

Strategic Planning

The checklist in Table 2-9 provides a set of recommended actions for business managers to take to ensure that their organization follows an effective strategic planning process. The appropriate answer to each question is yes.

TABLE 2-9 A manager’s checklist

Recommended Action Yes No Are the efforts of the IT group aligned with the organization’s strategies and objectives?

Do business managers clearly communicate your organization’s vision/mission, objectives, goals, strategies, and measures? Does this communication help everyone define the actions required to meet organizational goals?

Do you have an effective process to choose from alternative strategies that considers many factors, including the long-term impact of each strategy on revenue and profit, the degree of risk involved, the amount and types of required resources, and potential competitive reaction?

Does your organization establish measures to track the progress of chosen strategies?

Does your organization have an effective way to identify and prioritize potential projects?

Does your organization measure and evaluate the results of projects as they progress, with an eye toward making necessary adjustments?

Is your organization willing to cancel a project if results do not meet expectations?

Chapter 2

KEY TERMS core values

goal

goals-based strategic planning

intangible benefit

issues-based strategic planning

Michael Porter’s Five Forces Model

mission statement

objective

organic strategic planning

strategic planning

strategy

Strengths, Weaknesses, Opportunities, Threats (SWOT) matrix

tangible benefit

vision

vision/mission statement

CHAPTER SUMMARY

Strategic planning is a process that helps managers identify desired outcomes and formu- late feasible plans to achieve their objectives using available resources and capabilities.

Goal-based strategic planning is divided into six phases: analyze situation, set direction, define strategies, deploy plan, execute plan, and evaluate results.

Analyze situation involves looking internally to identify the organization’s strengths and weaknesses and looking externally to determine its opportunities and threats.

Analysis of the internal assessment and external environment are frequently summarized into a Strengths, Weaknesses, Opportunities, Threats (SWOT) matrix.

Set direction involves defining the mission, vision, values, objectives, and goals of the organization.

SMART goals are specific, measurable, achievable, relevant, and time constrained.

Define strategies involves describing how an organization will achieve its mission, vision, objectives, and goals.

Deploy plan includes communicating the organization’s mission, vision, values, objec- tives, goals, and strategies so that everyone can help define the actions required to meet organizational goals.

IT organizations typically take one of three approaches to strategic planning: cost center/ service provider, business partner/business peer, or game changer.

IT strategic planning is influenced by the corporate and business unit strategic plans as well as technology innovations and innovation thinking.

The IT strategy will set direction for the technologies, vendors, competencies, people, sys- tems, and projects.

DISCUSSION QUESTIONS

1. To what degree do you think an organization’s strategic plan is influenced by the vision, per- sonality, and leadership capabilities of the CEO? Do research to identify an example of a strategic plan developed by a CEO you consider to be a strong, charismatic leader. Briefly summarize the notable aspects of this plan.

Strategic Planning

2. Identify an event that would trigger a need to redefine the organization’s vision/mission statement.

3. What would it imply if, while performing a SWOT analysis, an organization could not identify any opportunities? What if it could not identify any threats?

4. How would you distinguish between an organizational weakness and a threat to the organi- zation? How would you distinguish between a strength and an opportunity?

5. Brainstorm an approach you might use to gather data to identify the strengths and weaknesses of a competing organization. Identify resources, specific tools, or techniques you might apply to gain useful insights.

6. Would you recommend that an organization set BHAGs? Why or why not? Identify an exam- ple of a BHAG from a real organization. Was that BHAG achieved?

7. Discuss what it means to deploy an organization’s strategic plan. Why is deployment impor- tant? Outline an effective approach for a medium-sized organization with operations in six states to deploy its strategic plan.

8. In comparing two potential IT projects, one project has an economic rate of return of 22 per- cent but does not directly relate to any identified strategic objectives. Another project has no apparent tangible benefits but strongly contributes to an important strategic objective. Which project would you support? Explain why.

ACTION NEEDED

1. You are a facilitator for a strategic planning session for a new, small organization that was spun off from a much larger organization just six months ago. The CEO and four senior man- agers involved in the session seem drained at the close of the first day of a two-day off-site meeting. As the team discusses their results, you are struck by how conservative and uninspir- ing their objectives and goals are. What do you do?

2. You are a member of the finance organization of a mid-sized manufacturer. You serve as a liaison between the finance group and the IT organization for budget review. The IT organization has just completed its annual strategic planning and budgeting process. Their plans, which include a $10 million budget (a 6 percent increase over last year), were forwarded to you for review by the recently hired CIO. Frankly, you do not understand the plan, nor do you see a close connection between the proposed projects and the strategic goals of the organization. The CIO is on the phone, asking to meet with you to discuss his plans and budget. How do you respond?

3. You are pleased to find yourself sitting in the office of the CIO along with four other new employees in the IT department. The CIO welcomes you all to the firm and firmly shakes each of your hands. She expresses her hope that you all will bring some exciting new ideas to the company. She then switches the topic to the three-day annual strategic planning off-site meet- ing for senior IT managers coming up in a few weeks. The CIO expresses her concern that the senior managers simply do not have the time to stay current with the latest technology devel- opments and that this lack of knowledge may limit their strategic thinking. She asks, “What can be done to provide us with a quick update on those technical developments pertinent to our firm and industry? Any ideas?” Your heart is racing; it is clear she actually wants you to try to answer the question. What do you say?

Chapter 2

WEB-BASED CASE

Jobs vs. Cook Steve Jobs was a strong, charismatic leader who cofounded Apple and is credited with much of the success of the company. Some believe that Tim Cook, who became CEO in 2011, embraces a more collaborative leadership style. Do research to compare and contrast the leadership styles of the two CEOs. (You may wish to view the 2013 movie Jobs, which portrays the story of Steve Jobs’ ascension from college dropout to Apple CEO.) Which CEO—Jobs or Cook—do you think developed and executed the most effective strategic plan? What evidence can you find to support your opinion?

CASE STUDY

Strategic Plan: Company of Your Choice Choose a company that interests you and document its strategic plan. Include the following:

A SWOT analysis

Vision, mission, objectives, goals, and strategies

Identify two IT-related projects that would be consistent with this plan. Recommend one of the two projects for implementation.

NOTES

Sources for the opening vignette: Satariano, Adam, “Apple Shares Drop After Steve Jobs Resigns,” Bloomberg News, August 24, 2011, www.bloomberg.com/news/2011-08-25/apple-shares-decline-after-steve-jobs-resigns-as -chief-executive-officer.html; “Apple Inc.,” CNN Money, http://money.cnn.com/quote/profile /profile.html?symb=AAPL, accessed September 12, 2014; “Apple Computer, Inc. History,” Fund- ing Universe, www.fundinguniverse.com/company-histories/apple-computer-inc-history/, accessed September 12, 2014; Canada, Alonzo, “Take a Lesson from Apple: A Strategy to Keep Customers in Your Ecosystem,” Forbes, November 12, 2012, www.forbes.com/sites/jump/2012/11/12 /take-a-lesson-from-apple-a-strategy-to-keep-customers-in-your-ecosystem/; Edwards, Jim, “Steve Jobs Turned Out to Be Completely Wrong About Why People Like the iPhone,” Business Insider, September 12, 2014, www.businessinsider.com/steve-jobs-was-wrong-about-big-phones-2014 -9#ixzz3D8lm75VG; Risen, Tom, “Apple Watch on Sale in 2015,” U.S. News and World Report, September 9, 2014, www.usnews.com/news/articles/2014/09/09/tim-cook-apple-watch-on sale-in-2015.

1 “SWOT Analysis of Coca-Cola,” Strategic Management Insight, February 23, 2013, www .strategicmanagementinsight.com/swot-analyses/coca-cola-swot-analysis.html.

2 “Company Overview,” Google, www.google.com/about/company/, accessed September 3, 2014.

3 “About Johns Hopkins Medicine,” Johns Hopkins Medicine, www.hopkinsmedicine.org/about/, accessed September 17, 2014.

Strategic Planning

4 “Johns Hopkins Medicine Strategic Plan (revised June 2013),” Johns Hopkins Medicine, www.hopkinsmedicine.org/strategic_plan/vision_mission_values.html.

5 Collins, James and Porras, Jerry, Built to Last: Successful Habits of Visionary Companies (New York: Harper Collins Publishers, 1994, 1997), page 9.

6 Raice, Shayndi and Ante, Spencer, E., “Insta-Rich: $1 Billion for Instagram,” Wall Street Journal, April 10, 2012, http://online.wsj.com/news/articles/SB100014240527023038 15404577333840377381670.

7 Kuittinen, Tero, “On Oculus Rift and Facebook’s Grand Acquisitions,” BGR, March 26, 2014, http://bgr.com/2014/03/26/facebook-oculus-rift-acquisition-analysis/.

8 Doran, George. T., Miller, Arthur, Cunningham, J., “There’s a S.M.A.R.T. Way to Write Man- agement’s Goals and Objectives,” Management Review, Volume 70, no. 11, pages 35–36, 1981.

9 Mikoluk, Kasia, “Business Strategy Examples: Four Strategies Businesses Use to Make Money,” Udemy (blog), January 7, 2014, www.udemy.com/blog/business-strategy-examples/.

10 “About Us,” Alstom Transport, www.alstom.com/microsites/transport/about-us/, accessed October 21, 2014.

11 “Our Trains,” Virgin Trains, www.virgintrains.co.uk/trains/, accessed October 21, 2014. 12 “‘Unreasonable Ambition’ Puts Alstom on the Fast Track for Growth,” Op Ex Review, Decem-

ber 2012, Issue 5, www.tbmcg.com/misc_assets/newsletter/opex_1212_cover_story.pdf. 13 Nash, Kim S., “State of the CIO 2014: The Great Schism,” CIO, January 1, 2014, www.cio

.com/article/2380234/cio-roletate-of-the-cio-2014-the-great-schism/cio-role/state-of-the-cio -2014-the-great-schism.html.

14 “Statewide Information Technology 2012–2014 Strategic Plan,” Delaware Department of Technology and Information, http://dti.delaware.gov/pdfs/strategicplan/Delaware-Statewide -IT-Strategic-Plan.pdf, September 2012.

15 Nash, Kim S., “State of the CIO 2014: The Great Schism,” CIO, January 1, 2014, www.cio .com/article/2380234/cio-roletate-of-the-cio-2014-the-great-schism/cio-role/state-of-the-cio -2014-the-great-schism.html.

16 “City of Seattle Enterprise Information Technology Strategic Plan 2012–2014,” City of Seattle, www.seattle.gov/Documents/Departments/InformationTechnology/RFP/SOHIPRFP AppendixCEnterpriseITStrategicPlan20122014.pdf, accessed September 16, 2014.

17 Nash, Kim S., “State of the CIO 2014: The Great Schism,” CIO, January 1, 2014, www.cio .com/article/2380234/cio-roletate-of-the-cio-2014-the-great-schism/cio-role/state-of-the-cio -2014-the-great-schism.html.

18 May, Thornton, “A Strategy for Strategy: Figuring Out How to Figure Out What IT Should Do Next,” Computerworld, September 2, 2014, www.computerworld.com/article/2600346 /it-management/a-strategy-for-strategy-figuring-out-how-to-figure-out-what-it-should-do-next.html.

19 Nash, Kim S., “State of the CIO 2014: The Great Schism,” CIO, January 1, 2014, www.cio .com/article/2380234/cio-roletate-of-the-cio-2014-the-great-schism/cio-role/state-of-the-cio -2014-the-great-schism.html.

20 “GAF Creates First Ever Virtual Home Remodeler App with ‘Instantaneous’ Roof Mapping Feature,” GAF, www.gaf.com/About_GAF/Press_Room/Press_Releases/65077248, accessed September 3, 2014.

Chapter 2

CHAPTER 3 PROJECT MANAGEMENT

THE ESSENCE OF PROJECT MANAGEMENT “First, have a definite, clear practical ideal; a goal, an objective. Second, have the necessary means to achieve your ends; wisdom, money, materials, and methods. Third, adjust all your means to that end.”

—Aristotle, ancient Greek philosopher and scientist

THE BBC DIGITAL MEDIA INITIATIVE

In 2007, the British Broadcasting Corporation (BBC) launched the Digital Media Initiative, an IT

project meant to digitize media production and media asset management across the organization.

Originally estimated at a cost of £80 million ($128 million), DMI was intended to introduce a tape-

less workflow—from raw footage to finished programs—and give BBC staff immediate desktop

access to the entire BBC archive. It was predicted that the DMI would save the company 2.5 percent

in media production costs per hour, bringing a return of £100 million ($160 million) by 2015. In

2008, the BBC awarded the contract to Siemens, its long-time technology partner; however, that

partnership broke down in 2009, with neither company taking direct responsibility for the failure.

Rather, the two companies issued a statement saying, “The media environment has changed a great

deal since the DMI project began, and both organizations have been in discussions about the way

forward. The BBC and Siemens have reached an agreement that allows the BBC to complete the

project in-house.” DMI was dubbed the “Don’t Mention It” project and delegated to the BBC’s chief

technical architect and executive producer.

Once in-house, however, DMI ran into a series of obstacles. Behind schedule, the IT team

struggled to get end users to commit to firm project requirements and priorities. “Throughout the

project, the team informed me that the biggest single challenge facing the project was the changes

to requirements requested by the business,” said the former chief technology officer John Linwood.

The result was a constantly fluctuating project scope.

In addition, the technology team sought to adopt an agile development approach, so that the

software would be produced bit-by-bit, with the business units exploring each incremental release

as it was developed. Linwood claims, however, that the business units did not want to take the

time to test the releases. Eventually, the IT team simply developed major system components with

minimal business unit testing. Meanwhile, the project was falling further and further behind sched-

ule. In addition, the BBC did not assign anyone the responsibility or the authority to oversee the

adoption of the program by the business units, depriving the DMI of effective project integration

management. Because the transition from tape-based production and asset management to digital

production and asset management necessitated a significant shift in work processes, management

of the adoption and integration of the DMI into business units was essential.

In May 2013, the BBC announced that it was scrapping the entire DMI project and firing its

chief technology officer. In January 2014, the National Audit Office (NAO) of the United Kingdom

released an in-depth report on the project, which was originally intended to include seven parts: an

archive database, a virtual warehouse for storing audio and video content, production tools, pro-

duction reporting, a music reporting system, a media infrastructure that would allow the files to

Chapter 3

move freely among the BBC staff, and enterprise services. Of these seven parts, only the music

reporting system had been successfully built and deployed. According to the NAO report, DMI cost

£98.4 million ($157 million), took six years, and left the BBC relying on its original tape-based

production and asset managing system.

L E A R N I N G O B J E C T I V E S

As you read this chapter, ask yourself:

What is project management, and what are the key elements of an effective project management process?

How can an effective project management process improve the likelihood of project success?

This chapter clarifies the importance of project management and outlines a tried and proven process for successful project management.

WHY MANAGERS MUST UNDERSTAND PROJECT MANAGEMENT

Projects are the way that much of an organization’s work gets done. No matter what the industry and no matter whether the organization is a for-profit company or a nonprofit organization—large or small, multinational or local—good project management is a positive force that enables your organization to get results from its efforts.

Unfortunately, IT-related projects are not always successful. The Standish Group has been tracking the success rate of IT projects for over 20 years, and although the success rate has improved over time due to improved methods, training, and tools, roughly 61 percent of all IT projects failed or faced major challenges such as lateness, budget overruns, and lack of required features.1 The Project Management Institute also found a gap between what organizations should be doing—aligning projects to the organization’s strategy—and what they are able to accomplish. The result is that 44 percent of strategic initiatives are unsuccessful.2 This chapter provides information and guidance that will help you avoid failed and challenged information technology projects.

Researchers Gary Hamel and C.K. Prahalad defined the term core competency to mean something that a firm can do well and that provides customer benefits, is hard for competitors to imitate, and can be leveraged widely to many products and markets.3

Today, many organizations recognize project management as one of their core compe- tencies and see their ability to manage projects better as a way to achieve an edge over

Project Management

competitors and deliver greater value to shareholders and customers. As a result, they spend considerable effort identifying potential project managers and then training and developing them. For many managers, their ability to manage projects effectively is a key to their success within an organization.

WHAT IS A PROJECT?

A project is a temporary endeavor undertaken to create a unique product, service, or result. Each project attempts to achieve specific business objectives and is subject to certain constraints, such as total cost and completion date. As previously discussed, organizations must always make clear connections among business objectives, goals, and projects; also, projects must be consistent with business strategies. For example, an organization may have a business objective to improve customer service by offering a consistently high level of service that exceeds custo- mers’ expectations. Initiating a project to reduce costs in the customer service area by eliminating all but essential services would be inconsistent with this business objective.

At any point in time, an organization may have dozens or even hundreds of active projects aimed at accomplishing a wide range of results. Projects are different from operational activities, which are repetitive activities performed over and over again. Projects are not repetitive; they come to a definite end once the project objectives are met or the project is cancelled. Projects come in all sizes and levels of complexity, as you can see from the following examples:

A senior executive led a project to integrate two organizations following a corporate merger. A consumer goods company executed a project to launch a new product. An operations manager led a project to outsource part of a firm’s operations to a contract manufacturer. A hospital executed a project to load an app on physicians’ smartphones that would enable them to access patient data anywhere. A computer software manufacturer completed a project to improve the scheduling of help desk technicians and reduce the time on hold for callers to its telephone support services. A staff assistant led a project to plan the annual sales meeting. A manager completed a project to enter her departmental budget into a pre- formatted spreadsheet template.

Project Variables Five highly interrelated parameters define a project—scope, cost, time, quality, and user expectations. If any one of these parameters changes for a project, there must be a corresponding change in one or more of the other parameters. A brief discussion of these parameters follows.

Chapter 3

Scope Project scope is a definition of which tasks are and which tasks are not included in a project. Project scope is a key determinant of the other project factors and must carefully be defined to ensure that a project meets its essential objectives. In general, the larger the scope of the project, the more difficult it is to meet cost, schedule, quality, and stake- holder expectations.

For example, the California Case Management System was a major IT project intended to automate court operations for the state of California with a common system across the state that would replace 70 different legacy systems. At the start of the project, planners expected the system to cost $260 million. Court officials terminated the project after spending $500 million on the effort. Today, it is estimated that the project would have cost nearly $2 billion if it had run to completion. While a variety of factors contrib- uted to this waste of resources, one primary cause was inadequate control of the project scope, with some 102 changes in requirements and scope approved over the life of the project.4

Cost The cost of a project includes all the capital, expenses, and internal cross-charges associ- ated with the project’s buildings, operation, maintenance, and support. Capital is money spent to purchase assets that appear on the organization’s balance sheet and are depreci- ated over the life of the asset. Capital items typically have a useful life of at least several years. A building, office equipment, computer hardware, and network equipment are examples of capital assets. Computer software also can be classified as a capital item if it costs more than $1000 per unit, has a useful life exceeding one year, and is not used for research and development.

Expense items are nondepreciable items that are consumed shortly after they are purchased. Typical expenses associated with an IT-related project include the use of out- side labor or consultants, travel, and training. Software that does not meet the criteria to be classified as a capital item is classified as an expense item.

Many organizations use a system of internal cross-charges to account for the cost of employees assigned to a project. For example, the fully loaded cost (salary, benefits, and overhead) of a manager might be set at $120,000 per year. The sponsoring organization’s budget is cross-charged this amount for each manager who works full time on the project. (The sponsoring business unit is the business unit most affected by the project and the one whose budget will cover the project costs.) So, if a manager works at a 75 percent level of effort on a project for five months, the cross-charge is $120,000 0.75 5/12 $37,500. The rationale behind cross-charging is to enable sound economic decisions about whether employees should be assigned to project work or to operational activities. If employees are assigned to a project, cross-charging helps organizations determine which project makes the most economic sense.

Organizations have different processes and mechanisms for budgeting and controlling each of the three types of costs: capital, expense, and internal cross-charge. Money from the budget for one type of cost cannot be used to pay for an item associated with another type of cost. Thus, a project with a large amount of capital remaining in its budget cannot

Project Management

use the available dollars to pay for an expense item even if the expense budget is overspent.

Table 3-1 summarizes and classifies various types of common costs associated with an IT-related project.

Time The timing of a project is frequently a critical constraint. For example, in most organiza- tions, projects that involve finance and accounting must be scheduled to avoid any conflict with operations associated with the closing of end-of-quarter books. Often, projects must be completed by a certain date to meet an important business goal or a government mandate.

CGI, a Canadian consulting, systems integration, outsourcing, and solutions company was awarded a $36 million contract in December 2012 to build the Vermont Health Con- nect state health exchange.5 Work on the project quickly fell behind schedule—with CGI failing to meet more than half of Vermont’s 21 performance deadlines—so the state and CGI entered into an amended $84 million contract in August 2013 to complete the proj- ect.6 The Vermont Health Connect site launched in October 2013 as required to meet American Affordable Care Act mandates, but with serious deficiencies. Users were unable to edit their information, and the site did not work for small businesses. Despite calls to dump CGI after the flawed launch, state officials decided to continue working with CGI to complete the site. In April 2014, the state and CGI signed off on yet another agreement

TABLE 3-1 Typical IT-related project costs Development Costs

Capital Internal Cross-Charge Expense

Employee-related expenses

Employees’ effort X

Travel-related expenses X

Training-related expenses X

Contractor and consultant charges X

IT-related capital and expenses

Software licenses (software purchases that qualify as a capital expense)

Software licenses (software that does not qualify as a capital expense)

Computing hardware devices X

Network hardware devices X

Data entry equipment X

Total development costs X X X

Chapter 3

that set a new schedule for delivering missing functionality and included financial penal- ties for missed deadlines.7 When CGI failed to meet a May deadline for enabling users to edit their information, the state extended the deadline again—without assessing any pen- alties.8 CGI failed to meet the revised deadline, and in August 2014, the state fired CGI and announced it would transition the remaining work to a new contractor. In the end, Vermont paid CGI $66.7 million for completed work on the $84 million contract.9, 10 CGI was replaced by Optum, a healthcare technology company based in Minnesota that is owned by UnitedHealth Group, the nation’s largest health insurer.11

W H A T W O U L D Y O U D O ?

You are the Optum project leader taking over responsibility for implementing the Vermont Health Connect state health exchange. Your manager has just sent you a text asking you if you think it necessary to debrief Vermont state officials on what caused the project with CGI to spiral out of control. How do you reply?

Quality The quality of a project can be defined as the degree to which the project meets the needs of its users. The quality of a project that delivers an IT-related system may be defined in terms of the system’s functionality, features, system outputs, performance, reliability, and maintainability. For example, Apple sold an astounding 10 million of its new iPhone 6 and iPhone 6 Plus models in the first few days they were available. Unfortunately, the new iPhones had both hardware and software problems that caused the devices to fail to meet users’ functionality and performance expectations. Apple’s new mobile operating system iOS 8 for the devices came without promised apps that used a health and fitness feature called HealthKit. In addition, it turned out that the iPhone 6 Plus was too pliable, with some users complaining that the phone bent when sitting in their pockets for extended periods. Then when Apple released an iOS 8 update aimed at fixing the HealthKit problem, some users complained the update had caused their iPhones to lose the ability to make phone calls.12 Failure to meet users’ functionality and performance needs detracted from the initial introduction of the new iPhone 6.

User Expectations As a project begins, stakeholders will form expectations—or will already have expectations— about how the project will be conducted and how it will affect them. For example, based on previous project experience, the end users of a new IT system may expect that they will have no involvement with the system until it is time for them to be trained. However, the project manager may follow a more interactive development process that requires users to help define system requirements, evaluate system options, try out system prototypes, develop user docu- mentation, and define and conduct the user acceptance test.

As another example, end users may expect to participate in weekly project status meetings to hear progress reports firsthand. However, the project manager may not have

Project Management

considered involving them in the status meetings or may not even be planning weekly meetings.

Both examples illustrate the significant differences in expectations that can exist between stakeholders and project members. It is critical to a project’s success to identify expectations of key stakeholders and team members; if there are differences, they must be resolved to avoid future problems and misunderstandings.

The five project parameters—scope, cost, time, quality, and user expectations—are all closely interrelated, as shown in Figure 3-1. For example, if the time allowed to complete the project is decreased, it may require an increase in project costs, a reduction in project quality and scope, and a change of expectations among the project stakeholders, as shown in Figure 3-2.

FIGURE 3-1 The five parameters that define a project

FIGURE 3-2 Revised project definition

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Chapter 3

WHAT IS PROJECT MANAGEMENT?

Project management is the application of knowledge, skills, and techniques to project activities to meet project requirements. Project managers must deliver a solution that meets specific scope, cost, time, and quality goals while managing the expectations of the project stakeholders—the people involved in the project or those affected by its outcome.

The essence of artistic activity is that it involves high levels of creativity and freedom to do whatever the artist feels. Scientific activity, on the other hand, involves following defined routines and exacting adherence to laws. Under these definitions, part of project management can be considered an art, because project managers must apply intuitive skills that vary from project to project and even from team member to team member. The “art” of project management also involves salesmanship and psychology in convincing others of the need to change and that this project is right to do.

Project management is also part science because it uses time-proven, repeatable processes and techniques to achieve project goals. Thus, one challenge to successful project management is recognizing when to act as an artist and rely on one’s own instinct, versus when to act as a scientist and apply fundamental project management principles and practices. The following section covers the nine areas associated with the science of project management.

PROJECT MANAGEMENT KNOWLEDGE AREAS

According to the Project Management Institute, project managers must coordinate nine areas of expertise: scope, time, cost, quality, human resources, communications, risk, procurement, and integration as shown in Figure 3-3.

FIGURE 3-3 The nine project management knowledge areas

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Project Management

Scope Management Scope management includes defining the work that must be done as part of the project and then controlling the work to stay within the agreed-upon scope. Key activities include initiation, scope planning, scope definition, scope verification, and scope change control.

Functional decomposition is a frequently used technique to define the scope of an information system by identifying the business processes it will affect. Figure 3-4 shows an example of a functional decomposition chart for a stock management system. A process is a set of logically related tasks performed to achieve a defined outcome. A process is usu- ally initiated in response to a specific event and requires input, which it processes to cre- ate output. Often the process generates feedback that is used to monitor and refine the process.

To create the functional decomposition chart, begin with the name of the system and then identify the highest-level processes to be performed. Each process should be given a two-word “verb-subject” name that clearly defines the process. Next, break those high- level processes down into lower-level subprocesses. Typically, three or four levels of decomposition are sufficient to define the scope of the system.

To avoid problems associated with a change in project scope, a formal scope change process should be defined before the project begins. The project manager and key business managers should decide whether they will allow scope changes at any time during the project, only in the early stages of the project, or not at all. The trade-off is that the more flexibility you allow for scope changes, the more likely the project will meet user needs for features and performance. However, the project will be more difficult to complete within changing time and budget constraints as it is harder to hit a moving target.

The change process should capture a clear definition of the change that is being requested, who is requesting it, and why. If the project team has decided not to allow any scope changes during the project, then each new requested scope change is filed with other requested changes. Once the original project is complete, the entire set of requested

FIGURE 3-4 Functional decomposition is used to define the scope of the system

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Chapter 3

scope changes can be reviewed and the project team can decide which, if any, of the changes will be implemented and when. Often, it is cheaper to initiate one project to implement numerous related changes than to start several independent projects. A follow- on project can then be considered to implement the recommended changes. The scope, cost, schedule, and benefits of the project must be determined to ensure that it is well defined and worth doing.

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