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I N F O R M A T I O N T E C H N O L O G Y F O R
M A N A G E R S
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I N F O R M A T I O N T E C H N O L O G Y F O R
M A N A G E R S
George W. Reynolds University of Cincinnati
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Information Technology for Managers
George W. Reynolds
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TABLE OF CONTENTS
Preface xii
Chapter 1 Managers: Key to Information Technology Results 1 Belarusbank JSSB 1
Why Managers Must Get Involved in Information Technology (IT) 1 Why Managers Must Understand IT 4 What Is Information Technology? 4
Function IT 6 Network IT 6 Enterprise IT 8
The Role of Managers Vis-À-Vis IT 11 Identifying Appropriate IT Opportunities 11 Smooth Introduction and Adoption of IT 12 Ensuring that IT Risks Are Mitigated 17
What if Managers Do Not Participate in IT? 19 Overview of Remaining Text 20 Chapter Summary 22 Discussion Questions 22 Action Memos 23 Web-Based Case 23 Case Study 23 Endnotes 28
Chapter 2 Strategic Planning 31 FDA Illustrates Why Managers Must Understand Strategic Planning 31 Why Managers Must Understand the Relationship between Strategic Planning and IT 33 What Is Strategic Planning? 34
Defining Vision and Mission 34 Conducting Internal Assessment 36 Analyzing External Environment 36 Defining Objectives 38 Establishing Goals 39 Setting Strategies 39 Defining Measures 42 Deploying OGSM 42 Identifying Projects and Initiatives 43 Prioritizing Projects and Initiatives 44 Executing Projects and Initiatives 47 Measuring and Evaluating Results 47
Effective Strategic Planning: United Parcel Service (UPS) 47 Defining Vision and Mission 47 Conducting Internal Assessment 48 Conducting External Assessment 50 Defining Objectives 52 Establishing Goals 53 Setting Strategies 53
Defining Measures 53 Deploying OGSM to IT 54 Identifying and Prioritizing Projects and Initiatives 54 Executing Project, Then Measuring and Evaluating Results 56
Chapter Summary 58 Discussion Questions 58 Action Memos 59 Web-Based Case 60 Case Study 60 Endnotes 60
Chapter 3 Project Management 63 Brown-Forman: Good Project Management Process Delivers Outstanding Results 63 Why Managers Must Understand Project Management 66 What Is a Project? 67
Project Variables 67 What Is Project Management? 71 Project Management Knowledge Areas 72
Scope Management 72 Time Management 73 Cost Management 74 Quality Management 76 Human Resource Management 76 Communications Management 78 Risk Management 80 Procurement Management 83 Project Integration Management 85
Chapter Summary 88 Discussion Questions 88 Action Memos 89 Web-Based Case 89 Case Study 89 Endnotes 94
Chapter 4 Business Process and IT Outsourcing 97 Eli Lilly: Why Managers Get Involved in Outsourcing 97 What Are Outsourcing and Offshore Outsourcing? 99
Why Do Organizations Outsource? 102 Issues Associated with Outsourcing 103 Planning an Effective Outsourcing Process 106
Chapter Summary 117 Discussion Questions 117 Action Memos 118 Web-Based Case 119 Case Study 119 Endnotes 123
Chapter 5 Corporate Governance and IT 127 Harley-Davidson 127
Why Managers Must Get Involved in IT Governance 127 What Is IT Governance? 131
Ensuring that an Organization Achieves Good Value From its Investments in IT 132 Mitigating IT-Related Risks 133
Why Managers Must Understand IT Governance 135
Table of Contents vii
IT Governance Frameworks 135 IT Infrastructure Library (ITIL) 136 Control OBjectives for Information and Related Technology (COBIT) 136 Using PDCA and an IT Governance Framework 139
Business Continuity Planning 142 Process for Developing a Business Continuity Plan 145
Chapter Summary 149 Discussion Questions 149 Action Memos 150 Web-Based Case 150 Case Study 150 Endnotes 154
Chapter 6 Collaboration Tools and Wireless Networks 157 IBM’s Innovation Factory 157 Why Managers Must Understand Networking and Collaboration Tools 159 Collaboration Tools 159
Bulletin Board 160 Blog 160 Calendaring 161 Desktop Sharing 162 Instant Messaging (IM) 162 Podcast 163 Really Simple Syndication (RSS) 163 Shared Workspace 164 Web Conferencing 164 Wikis 165
Wireless Communications 167 Communications Fundamentals 168 Cell Phone Services 170 Wi-Fi Solution for Local Area Networks 173 WiMAX, a Solution for Metropolitan Area Networks 175
Chapter Summary 178 Discussion Questions 179 Action Memos 179 Web-Based Case 179 Case Study 179 Endnotes 182
Chapter 7 E-business 185 Edmunds.com Inc. 185
Why Managers Must Get Involved in E-business 185 Why Managers Must Understand E-business 187
Business-to-Business (B2B) E-business 187 Business-to-Consumer (B2C) E-business 190 Consumer-to-Consumer (C2C) E-business 192 E-government Applications 193 Mobile Commerce 194 E-business Critical Success Factors 197 Advantages of E-business 206 Issues Associated with E-business 207
Chapter Summary 209 Discussion Questions 210 Action Memos 210 Web-based Case 211
viii Information Technology for Managers
Case Study 211 Endnotes 215
Chapter 8 Enterprise Resource Planning 219 BWA Water Additives 219
Why Managers Must Understand ERP 219 What Is ERP? 221
ERP and Customer Relationship Management (CRM) 225 ERP and Supply Chain Management (SCM) 226
Benefits of Implementing ERP 227 Establish Standardized Business Processes 227 Lower Cost of Doing Business 228 Improve Overall Customer Experience 229 Facilitate Consolidation of Financial Data 229 Support Global Expansion 230 Provide Fully Compliant Systems 230
ERP Issues 231 Post Start-Up Problems 231 High Costs 232 Lengthy Implementation 234 Difficulty in Measuring a Return on an ERP Investment 234 Organizational Resistance 234
ERP System Implementation Process 235 Best Practices to Ensure Successful ERP Implementation 237
Ensure Senior Management Commitment and Involvement 237 Choose the Right Business Partners 237 Assess Level of Customization Needed 238 Avoid Increases in Project Scope 239 Plan for Effective Knowledge Transfer 239 Test Thoroughly 240 Plan for a High Level of Initial Support 240
ERP Trends 242 ERP Solutions Targeted for SMBs 242 ERP as a Service 242 Open Source ERP Software 243
Chapter Summary 245 Discussion Questions 246 Action Memos 246 Web-based Case 247 Case Study 247 Endnotes 249
Chapter 9 Business Intelligence 251 Papa Gino’s Illustrates Why Managers Must Understand Business Intelligence 251 What Is Business Intelligence? 253
Data Warehouse/Data Marts 255 Business Intelligence Tools 256
Business Performance Management 261 Balanced Scorecard 262 Dashboards 264 BPM Software 265 Employing the BPM Process 266
Chapter Summary 270 Discussion Questions 270 Action Memos 271
Table of Contents ix
Web-Based Case 271 Case Study 271 Endnotes 275
Chapter 10 Knowledge Management 279 Goodwin Procter Illustrates Why Managers Must Understand Knowledge Management 279 What Is Knowledge Management? 281
Knowledge Management Applications and Associated Benefits 282 Best Practices for Selling and Implementing a KM Project 285 Technologies That Support KM 287
Chapter Summary 294 Discussion Questions 294 Action Memos 295 Web-Based Case 295 Case Study 295 Endnotes 297
Chapter 11 Enterprise Architecture 301 Enterprise Architecture Gives Google a Competitive Edge 301 What Is Enterprise Architecture? 303
Why Is Enterprise Architecture Important? 304 Software Architecture Styles 307 Developing an Enterprise Architecture 312
Chapter Summary 318 Discussion Questions 318 Action Memos 319 Web-Based Case 319 Case Study 319 Endnotes 322 Additional Bibliography 324
Chapter 12 Ethical, Privacy, and Security Issues 331 Hannaford Brothers Illustrates Why Managers Must Understand the Ethical, Privacy, and Security Issues Relating to IT 331 What Is Ethics? 333
Improving Corporate Ethics 333 Appointing a Corporate Ethics Officer 333 Ethical Standards Set by Board of Directors 334 Establishing a Corporate Code of Ethics 334 Requiring Employees to Take Ethics Training 335 Including Ethical Criteria in Employee Appraisals 336
Privacy 336 Right to Privacy 337 Treating Customer Data Responsibly 338 Workplace Monitoring 339
Cybercrime and Computer Security 343 Types of Attacks 343 Perpetrators 346 Defensive Measures 347 Prevention 350 Detection 354 Response 354
Chapter Summary 357 Discussion Questions 358
x Information Technology for Managers
Action Memos 358 Web-Based Case 358 Case Study 359 Endnotes 361
Glossary 363
Index 371
Table of Contents xi
PREFACE
Why This Text? The undergraduate capstone course on information technology and the MBA level information 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 skepti- cal 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 disap- pointed, receive poor student evaluations, and wonder what went wrong. An opportunity to deliver an outstanding and meaningful course has been missed.
Information Technology for Managers takes a fundamentally different approach to this sub- ject 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 pro- vides a framework for business managers to understand their important role vis-à-vis information technology. Said another way, Information Technology for Managers answers three basic ques- tions—Why do I need to understand IT? What good is IT? What is my role in delivering good results through the use of IT?
Approach of this Text Information Technology for Managers is intended for future managers who are expected to under- stand the implications of IT, identify and evaluate potential opportunities to employ IT, and take an active role in ensuring the successful use of IT within the organization. The text is also valu- able for future IT managers who must understand how IT is viewed from the business perspective and how to work effectively with all members of the organization to achieve IT results.
Organization and Coverage 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. It also helps them understand how to get involved with IT at the appropriate times and on the appropriate issues.
Chapter 2: Strategic Planning describes how to develop effective strategic planning by defin- ing key business objectives and goals, which are used to identify a portfolio of potential business projects that are clearly aligned with business needs. 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 the United Parcel Service, 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 project management knowledge areas of scope, time, cost, quality, human resources, communica- tions, 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 reasons 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 covers the importance of establishing service-level agreements and monitoring performance.
Chapter 5: Corporate Governance and IT 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 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 the Sarbanes-Oxley Act, business continuity planning, and oversight of outsourcing arrangements.
Chapter 6: Collaboration Tools and Wireless Networks covers the fundamentals of electronic communications systems, with a focus on wireless and mobile communications. The chapter presents the benefits and disadvantages of various wide area and local area wireless networks, and how managers can understand and deal with related business issues.
Chapter 7: E-Business 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, business-to-consumer, consumer-to-consumer, and government-to-consumer. The chapter also covers m-commerce, an approach to conduct 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.
Chapter 8: Enterprise Resource Planning explains what an ERP system is, identifies several of the benefits associated with ERP implementation, outlines a “best practices” approach to implementing an ERP system, and discusses future trends of ERP systems. The chapter also explains the key role that business managers play in successfully imple- menting ERP systems.
Chapter 9: Business Intelligence discusses a wide range of applications that help busi- nesses gather and analyze data to improve decision making: data extraction and data cleaning, data warehousing and data mining, online analytical processing (OLAP), business activity monitoring, key performance indicators, dashboards, and balanced scorecards. The chapter discusses the complications and issues associated with each business intelligence system, and discusses the role of the business manager in developing and using these systems.
Chapter 10: Knowledge Management describes explicit and tacit information and how organizations use knowledge management to identify, select, organize, and disseminate
Preface xiii
that information. In this chapter, you will learn about communities of practice, social net- work analysis, Web 2.0 Technologies, business rules management systems, and enterprise search. The chapter also covers how to identify and overcome knowledge management challenges, as well as a set of best practices for selling and implementing a knowledge man- agement project.
Chapter 11: Enterprise Architecture describes the use of enterprise architecture to establish a series of reference frameworks that define necessary business and IT changes. The chapter also describes the business manager’s role in defining the architecture and business needs of an organization. You will learn about current architecture styles, includ- ing centralized, distributed, client/server, and service-oriented architectures. The chapter focuses on the differences between these models and how are they used in practice. You will also be exposed to the Open Group Architecture Framework, a proven process for developing enterprise architecture.
Chapter 12: Ethical, Privacy, and Security Issues provides a brief overview of ethics and identifies key privacy and security issues that managers need to consider in their use of IT to achieve organizational benefits. Ethics, privacy, and computer security are dis- cussed 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 cov- ered 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 relation to IT.
Learning Objectives: A set of learning objectives follow the opening vignette and pro- vide 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 many real-world examples of business managers struggling with the issues covered in the chapter—some successfully, some unsuccessfully. The goal is to help the reader understand the manager’s role in relation to information technology and to discover key learnings they can apply within their organizations.
A Manager Takes Charge: This special feature presents a real-world example of a man- ager taking the initiative to ensure the successful use of IT within his/her organization.
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 mana- gerial 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 Memos: Each chapter includes two action memos, which are mini-cases writ- ten in the style of an e-mail or text message, demanding a response, usually in the form of a decision or recommendation. The action memos provide realistic scenarios and test the student’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.
xiv Information Technology for Managers
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.
I N S T R U C T O R R E S O U R C E S
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A C K N O W L E D G M E N T S
I want to thank all of the folks at Course Technology for their role in bringing this text to market. I offer many thanks to Mary Pat Shaffer and Dan Seiter, my wonderful develop- ment editors, who deserve special recognition for their tireless efforts and encouragement.
Preface xv
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Heather Furrow, the Content Product Manager, guided the text through the production process. Thanks also to all the many people who worked behind the scenes to bring this effort to fruition including Charles McCormick, the Senior Acquisitions Editor. Special thanks to Kate Hennessy Mason, the Product Manager, for coordinating the efforts of these many people and keeping things moving forward.
I want to thank two contributors to the text: Ralph Brueggemann for his excellent help in providing material on enterprise architecture as well as his insightful feedback on the early chapters of the text, and Naomi Friedman, who wrote several of the opening vignettes and cases.
Last, but not least, I want to thank my wife, Ginnie, for her patience and support in this major project.
T O M Y R E V I E W E R S
I greatly appreciate the following reviewers for their perceptive feedback on early drafts of 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 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
M Y C O M M I T M E N T
I welcome your input and feedback. If you have any questions or comments regarding Information Technology for Managers, please contact me through Course Technology at www.cengage.com/coursetechnology.
George Reynolds
xvi Information Technology for Managers
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C H A P T E R 1 MANAGERS: KEY TO INFORMATION TECHNOLOGY RESULTS
H O W C A N Y O U E N S U R E Y O U R F U T U R E V A L U E A N D S U C C E S S A S A L E A D E R A N D M A N A G E R ? “The most valuable and successful leaders and managers today are those who consistently deliver the promised results of strategic initiatives. While visionary thinking and break- through innovation are still important ingredients, organizations are increasingly recogniz- ing that the real competitive differentiator is the ability to execute strategic initiatives reliably and deliver expected results—every time.”
—Daryl Conner, founder of Conner Partners, a consulting firm that helps companies address the human side of organizational change
B E L A R U S B A N K J S S B
Why Managers Must Get Involved in Information Technology (IT) Belarusbank Joint Stock Savings Bank is one of the top 50 financial institutions in Europe. Its headquar-
ters is in Minsk, the capital of Belarus, a country in Eastern Europe with a population of 10 million. The
bank operates with six regional branches, 111 local branches, and 1812 outlets; it has 24,000 employees
and approximately $4 billion in assets. It offers customers a wide range of banking products and services,
including cash settlements, lending, deposit banking, leasing, foreign currency exchange and conversion,
and depository services.
Belarusbank began operations when Belarus was part of the Soviet Union. Its legacy systems and
work processes were based on the Soviet style of banking, which emphasized tight control over
efficiency. Each bank unit had its own separate accounting, reporting, and administrative systems and
processes. The bank’s operations were highly inefficient and overly complex.
Senior executives decided to compete globally, but recognized that the bank’s convoluted systems
were hindering its growth. For Belarusbank to achieve its objectives, it needed to change its decentral-
ized systems and antiquated work processes. It needed a single system that would support streamlined,
standard work processes and enable employees to share business and customer data stored anywhere
in the company.
After studying the situation and evaluating many alternatives, management initiated a $20 million
project to implement software from German vendor SAP AG and modernize the bank’s operations. The
software will replace many systems deployed over decades by various banking units. The new central-
ized banking operations will process some 2 million transactions daily and support 5000 employees. All
credit, deposit, and payment processes will be standardized. The bank will be able to meet international
accounting standards, international financial reporting standards, and Basel II financial reporting
requirements, which are critical for expansion into international money markets. Management is working
to identify the new roles, rewards, and expectations that employees must adopt to use the new
information systems and work processes effectively.
The bank’s new systems also will improve the efficiency of all the bank’s business processes and
provide a quicker “time to market” for new products and product enhancements. Customer satisfaction
Chapter 1
2
also is expected to improve through increased customer responsiveness and consistency of business
processes. Business unit managers are preparing workers to recognize these new capabilities and take
advantage of them in their everyday work.
A major portion of the project’s benefits will come from a 10 percent reduction in employees, with
a significant reduction in the number of accountants and IT workers. Further benefits will come from cost
savings in computer software, hardware, and maintenance. These savings will recover the total cost of
the SAP implementation over several years.
“IT solutions in the banking industry today are the essential part of a bank’s strategy,” said Vladimir
Novik, deputy to the chairman of the board. “Belarusbank is the leader of the Belarus banking market
and should become the example for other Belarus-based banks in every respect, including the modern
banking business processes and solutions.” 1,2,3
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 must managers do to advance the effective use of IT within their organizations?
● Am I prepared to get involved with IT at the appropriate times and on the 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 let’s answer the question—why should managers understand IT?
Managers: Key to Information Technology Results
3
W H Y M A N A G E R S M U S T U N D E R S T A N D I T
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 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, and then evaluate and prioritize problems and solutions. Finally, man- agers must lead the effort to pursue IT policies that best meet organizational needs.
Even if organizations invest in the same IT systems from the same vendors, they 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 choices about the scope of the IT solution, 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 data to make a difference.
True productivity improvements seldom come simply from automating work processes. 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 structure, addressing new employee roles and expectations, and establishing new measurement and reward systems.
To gain a sustainable competitive advantage, companies consistently must 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 service, 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 life-long learn- ing and flexibility in determining their business roles and career opportunities. Given the strong shift toward the use of IT, managers must be able to understand how technology affects their industry and the world at large.
W H A T I S I N F O R M A T I O N T E C H N O L O G Y ?
Information technology (IT) includes all tools that capture, store, process, exchange, and use information. The field of IT includes computer hardware, such as mainframe com- puters, servers, laptops, and PDAs; software, such as operating systems and applications for performing various functions; networks and related equipment, such as modems, rout- ers, and switches; and databases for storing important data.
Chapter 1
4
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 the IT support organization to plan, implement, operate, and support IT. In many firms, some or all technology 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. These systems enable a firm to meet fundamental objectives, such as increasing revenue, reducing costs, improving deci- sion making, enhancing customer relationships, and speeding up their products’ time to market. For example, the new systems at Belarusbank will streamline work processes, pro- vide access to customer data, and enable the bank to compete globally by offering new ser- vices to new customers. The bank’s information system has many IT components: the mainframe computer and database that store business and customer information, the desk- top and laptop computers used by employees, and network components that capture data at various branches and update the central database. A streamlined work process enables bank tellers, IT support staff, and other system users to operate efficiently and reliably.
Most organizations have a number of different information systems. When consider- ing the role of business managers for working with IT, it is useful to divide information sys- tems into three types: function IT, network IT, and enterprise IT.4 Figure 1-1 shows the relationship among IT support staff, IT infrastructure, and the various types of informa- tion systems. These systems are explained in the following sections.
Information Systems: IT, People,
and Procedures
Function Network Enterprise
IT Infrastructure: Hardware, Software, Networks, and Databases
IT Support Organization
FIGURE 1-1 IT infrastructure supports function, network, and enterprise information systems
Managers: Key to Information Technology Results
5
Function IT Function IT includes information systems that improve the productivity of individual users in performing stand-alone tasks. Examples include using computer-aided design (CAD) software, word processors, spreadsheet software, decision support systems, and e-learning systems. One company that makes good use of function IT is Care Rehab, a small manu- facturer of traction, electrotherapy, and biofeedback products that patients use for physi- cal therapy and rehabilitation. Care Rehab engineers and scientists generate a constant stream of product innovations—they come out with a new medical device every six months and release upgrades for older devices every couple of months. Product designers use CAD software to create virtual product prototypes that are good enough to eliminate the need for physical prototypes. The firm can move directly into production using its CAD designs, cutting weeks off the time it takes to put new devices on the market.5
A decision support system (DSS) employs models and analytic tools to help users gain insights into data, draw conclusions from the data, and make recommendations. For example, a buyer might use a DSS to analyze supplier bids and select the least expensive provider for raw materials. The system must account for the suppliers’ raw material costs and the cost of transporting the material from the supplier to the manufacturer. The DSS then quickly selects one or more suppliers that can provide the needed volume of raw materials for the best price. Without the DSS, such a task could otherwise take a buyer days or weeks. The DSS can even let a decision maker evaluate alternatives to the least expen- sive solution. Such “what if” analysis can provide the buyer with valuable options; for example, it can reduce the risk of a disruption in production by suggesting multiple suppli- ers instead of just one.
E-learning systems encompass a number of computer-enhanced learning techniques, including computer-based simulations, multimedia CD-ROMs, Web-based learning mate- rials, hypermedia, podcasts, and Webcasts. Such use of information systems qualifies as an example of function IT. With the rapid changes in today’s business environment, manag- ers and employees must be continual learners to keep pace. For example, organizations like Whirlpool use e-learning systems to accelerate the development of new skills and aid employee performance. With manufacturing facilities in 15 countries that produce a vari- ety of home appliances, Whirlpool was having trouble providing effective, cost-efficient training to its 20,000 salaried employees. Its traditional approach of face-to-face training was costly, and disrupted employees’ work schedules. Therefore, Whirlpool imple- mented a new e-learning system called “Virtual University” that combines Web-enabled courseware and self-paced online modules with traditional instructor teaching. The elec- tronic courses are available globally through the company’s corporate portal, a Web site that provides a gateway to corporate information from a single point of access. There, stu- dents can review material in real time, get test results, and register both for electronic learning and face-to-face classes. The system also provides comprehensive tracking and reporting to monitor training progress.6
Network IT In today’s fast-moving, global work environment, success depends on the ability to com- municate and collaborate with others, including co-workers, colleagues, clients, and customers. Network IT includes information systems that improve communications and
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support collaboration among members of a workgroup. Examples include the use of Web conferencing, 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 spread- sheet, legal document, artwork, blueprint, or MRI image. Conference participants can com- municate 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 interac- tive communications between the presenter and the audience.
One company that uses Web conferencing is Cerner Corporation, which provides soft- ware solutions for hospitals and medical facilities. Cerner’s 7300 employees are spread over 36 offices in 12 countries. Sales, marketing, and technology workers must be able to collaborate on customer activities, software demos, and internal meetings. Cerner imple- mented an online Web conferencing service to increase the frequency of meetings with cli- ents and improve communications. Such Web conferencing is a good example of network IT; it shortens the time required to plan and conduct meetings, and greatly reduces travel expenses.7
Wiki (Hawaiian for fast) is a Web site that allows users to edit and change its content easily and rapidly. The wiki may be either a hosted Internet site or a site on the com- pany intranet. A wiki enables individual members of a workgroup or project team to col- laborate on a document, spreadsheet, or software application without having to send the materials back and forth. One company that uses wikis is MWW Group, a public relations and marketing firm of 200 employees in 11 locations. MWW Group serves such corpo- rate clients as Bally Total Fitness, McDonald’s, Nikon, Sarah Lee, and Verizon worldwide. A new director of media strategies introduced wikis to the company’s copywriters and design- ers, who quickly caught on and began using wikis to produce ad campaigns and a cli- ent’s new logo. Wikis have reduced e-mails, meetings, and conference calls so much that the creative teams at MWW Group claim their productivity has doubled.8
Electronic corporate directories are used in large organizations to find the right per- son with whom to collaborate on an issue or opportunity. Increasingly, organizations are creating online electronic corporate directories to solve this problem. IBM added many new features and capabilities when it recently reworked its online employee directory, called BluePages. This network IT application consists of three components—a database of infor- mation about employees’ skills, knowledge areas, and experience; a search engine; and col- laboration features that connect employees and facilitate the sharing of information. Employee profiles contain a photo and an audio file that provides the correct pronuncia- tion of their name. Each profile is updated continually to show the local time at the per- son’s location and his availability for immediate contact. The application is extremely popular with workers, who claim it saves them an average of one hour per month.9
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Enterprise IT Enterprise IT includes information systems that organizations use to define interactions among their own employees and/or with external customers, suppliers, and other busi- ness partners. These systems often require the radical redesign of fundamental work pro- cesses 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 systems are transaction processing, enterprise resource planning, and interorganizational systems. All three sys- tems are explained in this section.
A transaction processing system (TPS) captures data for company transactions and other key events and 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, ship- ment execution, inventory control, and accounts receivable, as shown in Figure 1-2. The systems work together in the sense that data captured 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 plan- ning 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 shipment execution TPS, and so on.
Many organizations are moving from a collection of loosely linked transaction process- ing systems to an enterprise resource planning system (ERP)—a group of computer pro- grams with a common database that a firm uses to plan, manage, and control its routine business operations (see Figure 1-3). This system enables information to be shared across business functions and all levels of management. The shared database eliminates such problems as lack of information and inconsistent information, which are common in mul- tiple transaction processing systems that support only one business function or one department in an organization. Depending on an organization’s needs, it may implement ERP software to support its finance, human capital management, manufacturing, or dis- tribution operations. An ERP system can replace two or more independent TPSs, eliminat- ing the need to pass files between the systems.
For example, Beall’s Inc. is a Florida-based retailer with more than 600 department stores and outlet stores, primarily in Arizona, Florida, and Georgia. Recent annual sales of its apparel, footwear, gifts, and housewares were $1 billion. Beall’s uses a hodgepodge of software packages and internally developed programs to run its business, but it has a three- year plan to replace all the programs with ERP software. The initial phase focuses on human resources, payroll, and point-of-sale operations. Later phases will address finance, merchandise management, and supply chains. Beall’s is making this conversion for sev- eral reasons. The older software can no longer keep pace as the number of customers, inven- tory items, stores, and resulting business transactions continues to increase. The old software also is difficult to modify and support; few IT workers are familiar with the 20-year legacy systems. The new ERP system will improve many areas of the business, including inventory management, merchandise planning, and stock allocation and replenishment. These improvements should generate significant revenue increases and cost reductions.10
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Interorganizational information systems support the flow of data among organiza- tions to achieve shared goals. For example, some organizations need to share data for pur- chase orders, invoices, and payments, along with information about common suppliers and financial institutions. Such a system speeds up the flow of material, payments, and infor- mation, while allowing companies to reduce the effort and costs of processing such transactions.
To ensure efficient and effective sharing of information, these organizations must agree in advance on the nature and format of information to be exchanged, and must use com- patible technologies. Companies must resolve such technical issues as data definitions and
Open Order File
Planned Orders File
Shipments File
Inventory File
Order Entry TPS
Shipment Planning TPS
Shipment Execution File
Inventory TPS
Accounts Receivable TPS
Customer Orders
FIGURE 1-2 TPS systems that support order capture and fulfillment
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formats, database designs, standards to ensure high data quality, and compatible network infrastructures. The full integration of interorganizational information systems often requires new work processes and significant organizational change.
One type of interorganizational system is electronic data interchange (EDI). EDI sup- ports the direct, computer-to-computer transfer of information in the form of predefined electronic documents. EDI standards dictate which data is required for each type of docu- ment and which data is optional. These standards also specify the sequence in which data must be presented and its length and format (numeric, alphabetic, or alphanumeric). For example, an EDI advanced shipment notification is sent from a shipper to a receiver with detailed information about the contents of the shipment and how it is packaged. Other infor- mation may be included if the parties agree to include it.
Two widely used sets of EDI standards exist. One standard, the United Nations/EDI for Administration, Commerce, and Transport (UN/EDIFACT) is defined and refined under the auspices of the United Nations. It is the only international standard, and is predomi- nant outside North America. The other popular standard, ANSI ASC X12, includes more than 300 transaction sets that have been developed, integrated, and tested since the early 1980s. The ANSI standard is used in North America.
For example, Toys “R” Us employs EDI to perform effective cross docking, which reduces logistical costs and speeds products to market. Cross docking means that inbound materials are received and immediately loaded for shipping to clients, completely elimi- nating the intermediate step of warehouse storage. This process also eliminates the need to schedule and stage the shipment later, which saves on labor costs. To facilitate cross dock- ing, suppliers transmit an advance shipment notice to Toys “R” Us for each inbound shipment. This notice provides a purchase order number, vendor identification number, product identification number, and carton counts for each item in the shipment. The EDI data is not handled manually, but flows directly from the suppliers’ computers into the Toys “R” Us warehouse management system. With this information, Toys “R” Us distribu- tion centers can anticipate inbound volume, prepare for receiving, and schedule the appro- priate number of warehouse workers.11
Finance Human Resources
Distribution
Shared database
FIGURE 1-3 Common database used to plan, manage, and control an organization’s routine busi- ness operations
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TABLE 1-1 Examples of information systems in each of the Three Worlds of IT
Function IT Network IT Enterprise IT
Personal productivity software Web conferencing Transaction processing system
Decision support system Wikis ERP
E-learning system Electronic corporate directories
EDI
T H E R O L E O F M A N A G E R S V I S - À - V I S I T
When new IT is introduced in some organizations, managers adopt the technology first, then try to figure out what to do with the new information and cope with its implications. Such an approach is wrong, and can trigger major business disruptions. New IT is more powerful and diverse than the old systems, and is increasingly entwined with the organiza- tion’s critical business practices.
Companies that successfully adopt new technology recognize that managers have a cru- cial 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 appro- priate opportunities to apply IT, smoothing the way for its successful introduction and adoption, and mitigating its associated risks. These responsibilities are discussed in the fol- lowing sections.
Identifying Appropriate IT Opportunities The sheer magnitude of dollars spent on IT demands that management must ensure a good return on the investment. IT-related expenses in many organizations can account for 50 per- cent or more of capital spending.12 Organizations typically spend one to six percent of their total revenues on IT; this spending is generally higher for industries in which IT is more criti- cal to success, such as financial services (see Table 1-2).13 IT spending as a percentage of rev- enue is also higher within small organizations than large organizations (see Table 1-3).14
These numbers represent rough averages. Great variation exists in IT-related spend- ing, even among similar-sized companies within the same industry. While one company may outspend 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 managed and executed. In today’s global economy, new technologies, business opportu- nities, and business threats are coming at a faster and faster rate. According to industry observers Keri Pearlson and Carol Sanders, “Management’s role is to frame these opportu- nities so others can understand them, to evaluate them against existing business needs, and finally to pursue any that fit with an articulated business strategy.”15 The next chap- ter will outline the strategic planning process and explain how managers can ensure that IT investments align with business strategies and support key objectives.
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TABLE 1-2 IT spending based on industry
Industry Percent of Revenue Spent on IT
Overall average 3-6%
Financial services 5-7%
Telecommunications 5-7%
Professional services 5-7%
Health care 4-5%
Insurance 3-5%
Utilities 3-4%
Retail 1-3%
Construction 1-2%
TABLE 1-3 IT spending based on size of firm
Firm Size Annual Revenue Percent of Revenue Spent on IT
Small Less than $50 million 6.9%
Medium $50 million to $2 billion 4.1%
Large Over $2 billion 3.2%
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 identi- fied four reasons for this resistance (see Table 1-4).16 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.
TABLE 1-4 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 them- selves 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 sup- port the process
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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 Three Worlds of IT model.
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.17 This model can identify actions to help an organization successfully introduce and adopt a specific IT system. Figure 1-4 depicts the change management continuum, which illustrates seven stages of commitment grouped into three major phases: inform, educate, and commit.18 Table 1-5 briefly describes each phase and stage. An organization must execute each of the seven stages to get employees to commit 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 make employees understand the new IT system, they will not comprehend how they are expected to use it, and the company will be unable to achieve the system’s benefits.
TABLE 1-5 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 nature and intent of change and how he/she will be affected
Educate People recognize 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 for- mally incorporated into routine oper- ating procedures of organization
Commit The change is fully accepted and has become part of everyday life
Internalization People are highly committed to change because it matches their interests, goals, and values
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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. These factors are listed in Table 1-6.19
Companies can use the theory to help workers accept new IT.
TABLE 1-6 Key factors of IT acceptance and usage
Factor Definition
Performance expectancy
Belief that using the system will help job performance
Effort expectancy Degree of ease associated with the use of the system
Social influence Degree of belief that important company officials want employees to use the system
Facilitating conditions Belief that an organizational and technical infrastructure exists to support the system
For example, Payless ShoeSource is a retailer that implemented software from Kronos to automate the scheduling of its 20,000 sales associates in its 4600 stores.20 The goal was to better balance the needs of its customers and employees while increasing sales
VIII. Internalization
VII. Institutionalization
VI. Adoption
V. Experimentation
IV. Positive Perception
III. Understanding
II. Awareness
I. Contact
Unawareness
Confusion
Negative Perception
Inaction
Rejection
Termination
Action Threshold
Disposition Threshold
C om
m itm
e nt
P
h a
se A
cc e
pt a
nc e
P
h a
se P
re pa
ra tio
n
P h
a se
Time
D eg
re e
o f
S u
p p
o rt
f o
r th
e C
h a
n g
e
Reversibility Threshold
FIGURE 1-4 Change management continuum
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and decreasing labor costs. Initially, some young, part-time employees were concerned that they could not negotiate their work hours to meet personal needs. Store managers were skeptical of the system’s value—they believed they did not need a computer to develop a schedule. Fortunately, managers were sensitive to these concerns and addressed them effectively. They insisted on running a test of the software in 23 California stores before roll- ing it out nationally. The test demonstrated that managers easily could use the software to create schedules in 15-minute increments, accounting for minimum staffing require- ments, employees’ positions and pay rates, and any budgetary constraints.
Testing showed that the system also had the flexibility to account for individual work preferences and availability. The real payoff came when the improved schedules led to increased sales by ensuring that employees could complete assigned tasks without losing “face time” with customers. Managers used these successful test results of increased per- formance to overcome initial resistance to the system.21 They also made it clear that store managers needed to use the system and that an organizational and technical infrastruc- ture existed to support system use. Payless had successfully addressed the four factors that increase acceptance and usage of IT systems.
Three Worlds of IT
Successfully implementing the three types of IT (function, network, and enterprise) requires different types of organizational change, as summarized in Table 1-7. Manage- ment researcher Andrew McAfee suggests that companies need to change the way they get work done to enable improved performance with IT.22 Four organizational comple- ments allow these improvements with IT: better-skilled workers, higher levels of team- work, redesigned processes, and new decision rights (which specify who can make certain types of decisions). Function IT can deliver results without the complements being in place, network IT allows the complements to emerge over time, and enterprise IT requires the complements to be deployed with the new technologies. Read the following feature, “A Manager Takes Charge,” to learn how one manager identified the need for key comple- ments and put them in place to ensure the smooth introduction and adoption of IT. These complements were overlooked in the initial implementation of the enterprise IT system.
TABLE 1-7 Manager’s role in the Three Worlds of IT model
Function IT Network IT Enterprise IT
Benefits Improved productivity Increased collaboration
Increased standardiza- tion and ability to monitor work
Examples Personal productivity software, decision sup- port system
E-mail, instant messag- ing, project manage- ment software
TPS, ERP, IOS
Organizational complements (better- skilled workers, better teamwork, redesigned processes, new deci- sion rights)
Does not bring comple- ments with it Partial benefits can be achieved without all complements being in place
Brings complements with it Allows users to imple- ment and modify complements over time
Full complements must be in place when IT “goes live”
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TABLE 1-7 Manager’s role in the Three Worlds of IT model (continued)
Function IT Network IT Enterprise IT
Manager’s role Encourage use, chal- lenge workers to find new uses
Demonstrate how technology can be used, set norms for participation
Must identify and put into place the full set of organizational complements prior to adoption Intervene forcefully and continually to ensure adoption
A M A N A G E R T A K E S C H A R G E
Toys “R” Us EDI System Rescued
Toys “R” Us is a leading retailer of toys and baby products worldwide. The company sells merchandise through its stores and its Internet site. Toys “R” Us operated as a public com- pany from 1978 until July 2005, when a private investment group acquired the company for $6.6 billion.
Tim Meester came to Toys “R” Us in 2003, as the director of vendor partnerships. His primary responsibility was to develop compliance and supply-chain performance programs. Before he could start any new initiatives, however, he saw a need for signifi- cant improvements in the accounts payable and electronic data interchange (EDI) groups. A recently implemented EDI system was creating problems in payment processes and information flows between the company and its vendors. Meester and his team learned that errors in EDI data exchanged between the company and its vendors was making it diffi- cult for the vendors to get paid. The errors also were creating extra work and inefficien- cies both for Toys “R” Us and its suppliers.
“We had to clean our own house before we could even address vendor perfor- mance,” Meester said. “We estimated that 60 to 80 percent of the issues came from a lack of internal consistency and discipline, so we worked together with our vendors and inter- nal partners to understand the process issues, identify gaps, and ensure that processes were integrated, product kept flowing, and vendors were paid accurately and on time.”23
Perhaps the biggest challenge was to change the Toys “R” Us culture and make employees realize that less than 100 percent accuracy was unacceptable. Resolving the accuracy problems required cleaning up the data that Toys “R” Us transmitted to its vendors and the information they sent back. Meester and his team had to learn the detailed technical aspects of the EDI system and the business needs it was intended to address. Then the team had to develop corrective actions, address recurring problems both at Toys “R” Us and the vendor sites, and provide consistent advice to each vendor. To aid in this process, Toys “R” Us implemented an extranet to link itself with all 1300 of its vendors. The extranet enabled the company to share information, identify problems with the EDI system, and resolve them.24
continued
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Discussion Questions
1. What essential complements and managerial actions were missed during the ini- tial implementation of the EDI system? Why do you think they were missed?
2. Was there really any negative impact from the initial “poor implementation” of this system? After all, Toys “R” Us was able to correct the situation.
3. How do you think Meester got employees to improve the accuracy of EDI data?
Introducing an enterprise IT system requires large amounts of resources and signifi- cant 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.
For example, the U.S. Health Insurance Portability and Accountability Act (HIPAA) specifies standards for the capture, storage, and sharing of electronic healthcare transac- tions, such as medical claims, electronic remittances, and claim status inquiries among healthcare providers, health insurance plans, and employers. As organizations scrambled to meet the May 2007 implementation deadline, there were complaints that several years of management time and millions of dollars in programming expenses were required to implement the full HIPAA standards for patient registration, medical records, billing, and claims processing. To encourage organizations to conform to the standards and meet the deadline, the Department of Health and Human Services (DHHS) required that the HIPAA standards be followed for organizations to receive payment for the services they provide patients. DHHS also established investigation procedures and set civil monetary penal- ties for violating HIPAA rules.25
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 stand up to intense scrutiny. In the United States and many other countries, laws mandate stringent control requirements and accurate record keeping for publicly held corporations. For example, the U.S. Public Company Accounting Reform and Investor Protection Act of 2002—better known as the Sarbanes-Oxley Act, or simply SOX—was enacted in response to public outcry over sev- eral major accounting scandals, including those at Enron, WorldCom, Tyco, Adelphia, Global Crossing, and Qwest. Section 404 of the Sarbanes-Oxley Act states that all reports filed with the SEC must contain a signed statement by the CEO and CFO attesting that the information is accurate. The company also must submit to an audit to prove that it has con- trols in place to ensure accurate information. The penalties for false attestation are quite severe—up to 20 years in federal prison and significant monetary fines for senior executives. Because most, if not all, information in an SEC filing comes from information systems,
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managers have an additional incentive to ensure that appropriate controls exist for infor- mation systems, their associated processes, and the people who enter and process data.
Managers also are responsible for ensuring that physical IT assets, such as applica- tions, databases, networks, and hardware, are protected against loss or damage. If assets are lost or destroyed as the result of a disaster, business continuity plans must be in place to ensure the ongoing operation of critical business functions. Management’s responsibility also includes ensuring that data assets are secure from unwanted intrusion, loss, and alter- ation, and ensuring that personal data is secured to protect individual privacy rights. Table 1-8 identifies several examples of IT-related risks that concern managers.
TABLE 1-8 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 denial-of-service attack on organization’s Web site
Compromise of confidential data about organiza- tional plans, products, or services
Senior executive loses laptop containing critical data
Compromise of personal, private data about employees or customers
Hackers access and download customer data, including account numbers
Violation of legally mandated procedures for con- trolling IT assets
IT system controls are inadequate to meet spe- cific SOX guidelines for maintaining the integrity of financial data
Violation of established, 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 proce- dures 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 corporate training facility
Inappropriate use of IT resources that places firm in a compromising position
Employees use corporate e-mail 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 that are not related to their work
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W H A T I F M A N A G E R S D O N O T P A R T I C I P A T E I N I T ?
Managers cannot afford to ignore IT, because failed IT projects can lead to lowered returns on investment and missed opportunities. For example, A.G. Edwards had a long track record of unsuccessful project completions—nearly half of all projects exceeded cost and schedule limits. Worse yet, IT applications were often developed that did not fit the orga- nization’s overall strategic plan. As a result, projects failed to meet business objectives or deliver anticipated results. Some projects ended up being complete write-offs with no ben- efits delivered, including one that cost $46 million.26 In recent times, however, the firm has taken strong actions to turn the situation around.
CFO Research Services and Deloitte Consulting recently completed a study that con- cluded “the billions invested in information technology still aren’t producing great information.”27 The results showed that managers at 80 percent of surveyed firms believe that their operational and financial data is not as effective as it should be for developing strategies and planning. In addition, the data is not available when it is needed, nor is it suf- ficiently accurate. Too much time is spent reconciling data from different internal sources, creating a drain on profits and causing managers to miss opportunities.
Failure to ensure that IT risks are mitigated can lead to serious problems, such as unwanted oversight from federal regulators, IT-related fraud, and costly business disruptions. BearingPoint provides an example of what can go wrong. Previously known as KPMG Consulting, BearingPoint was spun off from KPMG LLC in 2001 when the “Big Five” accounting firms became concerned over potential conflicts of interest—many account- ing clients were being encouraged to use associated consulting services to fix problems uncovered during audits.
In 2003, BearingPoint took on a challenging project to implement a new internal accounting system and associated standard business practices. The system was needed to make the firm compliant with Section 404 of the Sarbanes-Oxley regulations.28 Because of delays in completing the project, BearingPoint had to negotiate several extensions to its SEC filing deadlines—quite embarrassing for a firm that promoted its ability to help cli- ents comply with Sarbanes-Oxley.
Following several missed deadlines, the New York Stock Exchange announced that it would start suspension and delisting procedures if the company’s 2005 Form 10-K annual report was not filed with the SEC by April 2007.29 If this occurred, BearingPoint stock would be suspended from trading and it would be almost impossible to raise additional capi- tal in the equity or debt markets. These well-publicized problems scared off potential cus- tomers, generated class-action shareholder lawsuits, diverted more than $100 million of company funds to resolve the accounting problems, and temporarily increased employee attrition to more than 25 percent. Fortunately, BearingPoint filed the report before the dead- line and avoided delisting. BearingPoint managers realize that they should have man- aged the project more carefully and that they missed opportunities to make better choices.
This chapter has presented a powerful argument for why proper involvement by busi- ness managers at the right time is essential to obtain real value from the use of IT. This involvement is needed throughout the project, not just at certain key moments. The check- list in Table 1-9 recommends a set of actions that business managers can take to support and ensure the successful use of IT.
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TABLE 1-9 A manager’s checklist
Recommended Management Actions (appropriate response is “Yes”) 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 (function, net- work, and enterprise) requires different degrees and types of organization change?
O V E R V I E W O F R E M A I N I N G T E X T
This section provides a brief summary of the rest of the book. Chapter 2: Strategic Planning describes how to develop effective strategic planning by
defining key business objectives and goals and then applying them to multifunctional teams to identify a portfolio of potential business projects. The resulting set of projects is clearly aligned with business needs. Further refinement is required to narrow the portfo- lio to the projects that should be executed and for which sufficient resources are available. This process is illustrated by the example of the United Parcel Service, a major global orga- nization 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 project management knowledge areas of scope, time, cost, quality, human resources, communica- tions, 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 out- lines and describes an effective process for selecting an outsourcing firm and successfully transitioning work to the new organization. The chapter covers the importance of estab- lishing service-level agreements and monitoring performance.
Chapter 5: Corporate Governance and IT 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 Objec- tives for Information and Related Technology (COBIT). The discussion includes related issues such as the Sarbanes-Oxley Act, business continuity planning, and oversight of out- sourcing arrangements.
Chapter 6: Collaboration Tools and Wireless Networks covers the fundamentals of electronic communications systems, with a focus on wireless and mobile communications. You will learn about the benefits and disadvantages of various wide area and local area wire- less networks, and how managers can understand and deal with related business issues.
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Chapter 7: E-Business 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, business-to-consumer, consumer-to-consumer, and government-to-consumer. The chapter also covers m-commerce, an approach to conduct e-commerce in a wireless environment. The chapter prepares managers to understand and deal with many of the busi- ness, legal, and ethical issues associated with the use of e-business.
Chapter 8: Enterprise Resource Planning explains what an ERP system is, identifies several of the benefits associated with ERP implementation, outlines a “best practices” approach to implementing an ERP system, and discusses future trends of ERP systems. The chapter also explains the key role that business managers play in successfully implement- ing ERP systems.
Chapter 9: Business Intelligence discusses a wide range of applications that help busi- nesses gather and analyze data to improve decision making: data extraction and data clean- ing, data warehousing and data mining, online analytical processing (OLAP), information visualization, business activity monitoring, dashboards, and scorecards. The chapter dis- cusses the complications and issues associated with each business intelligence system, and discusses the role of the business manager in developing and using these systems.
Chapter 10: Knowledge Management describes how organizations use knowledge man- agement to identify, select, organize, and disseminate important information that is part of the “organization’s memory.” Unfortunately, much of this information and expertise is highly 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, as well as a set of best practices for selling and implementing a knowledge management project.
Chapter 11: Enterprise Architecture describes the use of enterprise architecture to establish a series of reference frameworks that define necessary business and IT changes. The chapter also describes the business manager’s role in defining the architecture and business needs of an organization. You will learn about current architecture topics, includ- ing common object request broker architecture (CORBA), the distributed component object model (DCOM), service-oriented architecture (SOA), and Web 2.0. The chapter focuses on the differences between these models and how are they used in practice.
Chapter 12: Ethical, Privacy, and Security Issues provides a brief overview of ethics and identifies key privacy and security issues that managers need to consider in their use of IT to achieve organizational benefits. Ethics, privacy, and computer security are dis- cussed from the perspective of what managers need to know about these topics.
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Chapter Summary
● An organization’s IT infrastructure is integrated with people and procedures to build, oper- ate, and support information systems that enable a firm to meet fundamental objectives.
● Managers have three critical responsibilities when it comes to IT: identifying appropri- ate opportunities to apply IT, smoothing the way for its successful introduction and adop- tion, and mitigating its associated risks.
● The most effective users of IT obtain maximum value from IT investments that align with the organization’s strategic needs, and that are well managed and executed.
● Management’s role is to frame changes, opportunities, and threats so that others can understand them, evaluate them against business needs, and address any opportuni- ties that fit within an articulated business strategy.
● The Change Management Continuum Model describes key activities that are needed to build commitment for an organizational change, such as the introduction and adop- tion of IT.
● The Unified Theory of Acceptance and Use of Technology identifies four key factors that directly determine IT user acceptance and IT usage behavior: performance expect- ancy, effort expectancy, social influence, and facilitating conditions.
● Successfully implementing the three types of IT (function, network, and enterprise) requires different types of organizational change. Four organizational compliments— better-skilled workers, higher levels of teamwork, redesigned processes, and new deci- sion rights—allow IT to improve performance. Function IT can deliver results without the complements being in place, network IT allows the complements to emerge over time, and enterprise IT requires the complements to be deployed with the new technologies.
● 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, imple- ment workable continuity plans that cover IT assets, and mitigate IT risks.
Discussion Questions
1. Do you agree that it is important for managers to understand IT? Write a paragraph to sup- port your opinion.
2. Briefly define IT infrastructure, IT support organizations, and information systems. Describe how these entities are related.
3. Identify and briefly discuss two examples of function IT.
4. Why do some organizations have little to show for their investments in IT?
5. What is an enterprise resource planning system? How does it differ from a transaction pro- cessing system?
6. What percentage of revenue should a retail organization spend on IT? Discuss.
7. What are the basic reasons that people resist change? How can this resistance be overcome?
8. What is meant by social influence, and how can it affect the acceptance of new IT?
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9. Which kind of system (from the three worlds of IT) requires the most management atten- tion to ensure successful acceptance and adoption? Why?
10. What unfavorable results could occur if management is not appropriately involved with IT?
11. Should it be the responsibility of IT or management to identify and define tasks for the suc- cessful introduction and adoption of a new IT system?
Action Memos
1. You are the IT division controller for a company, and you just received the following e-mail from your manager, the organization’s CFO. How do you respond?
Preliminary results from the competitive analysis we commissioned show we spend 4 percent of annual revenue on IT-related expenses, while our top competitors spend just 3 percent. I’m meeting with the CEO in 10 minutes and he’s bound to ask about this. What should I say?
2. You are a member of the Human Resources Department of Belarusbank, which was described in the opening vignette of this chapter.You have experience in expediting organi- zational change. The vice president for bank operations wants you to give him a list of actions he should take to ensure the smooth adoption and acceptance of the new IT system. He then wants to meet with you on this subject. What actions would you identify? What are your key talking points for this meeting?
Web-Based Case
Do research on the Web to find an example of a major IT-related project in which the actions of business managers made a major difference (either favorable or unfavorable) in the outcome. Document what you think were the key actions taken by business managers, and the key missed opportunities to take action.
Case Study
The Progressive Group of Insurance Companies
Managers Leverage Ongoing IT Investments to Achieve Competitive Advantages
The Progressive Group of Insurance Companies literally started from a garage. Today, it is the third largest U.S. auto insurance group in terms of net premiums written. The company sells auto insurance, other specialty property-casualty insurance, and related services through a network of 30,000 independent insurance agents, via direct sales over the phone, and through its Web site. Its premiums increased from $2 billion to $14 billion between 1993 and 2005, as shown in Figure 1-5. Much of Progressive’s success is due to the leadership of its managers in investing in IT to support its many business innovations and fundamental business objectives for over 25 years. Progressive provides an excellent example for how a business can generate a sustain- able advantage through continuous IT innovation.
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Joe Lewis and his friend Jack Green were two young lawyers trying to eke out a living in Cleveland, Ohio, during the Great Depression. In 1937, they started Progressive on their own. Times were tough for starting a new business—many people were out of work and typical fac- tory workers earned just $36 per week, when they could find work at all. To keep expenses down, the friends used an old garage for the company headquarters. They charged $25 for an annual insurance policy, which was a lot of money given the state of the economy. In recogni- tion of the hard times, they allowed their customers to pay their premiums in installments. In another insightful innovation, they offered clients a drive-in claims service.30
Peter Lewis, Joe’s son, began his career in sales at Progressive shortly after graduating from Princeton in 1955. He was a bright, energetic young man who proposed many new ideas in an attempt to distinguish the company from its competitors.31
Peter Lewis often heard people complain about independent insurance agents who tried to persuade the company to cover high-risk drivers, including young drivers, people with points on their license, and people with a record of driving under the influence. At the time, other insur- ance companies wanted nothing to do with such drivers because they were considered unprofitable. Lewis, however, challenged the organization: “They’re bringing us potential business. Can’t we find a way to write these people?” It took a while for the idea to catch on—less than $100,000 worth of such policies were written in 1957. Over the next decade, however, this niche in the insurance market greatly expanded and became the foundation for future company growth.32
-2
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Revenue
Profit
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FIGURE 1-5 Twenty-five years of annual revenue and profit growth at Progressive Insurance
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Early on, Progressive recognized the need to make significant investments in IT to achieve high-quality, efficient data processing. Such investments were planned well in advance as part of a five-year program, and each potential investment was subjected to vigorous cost/benefit analysis before proceeding.With each passing year, IT became a more important part of achiev- ing operating efficiency and marketing success. Progressive’s pricing strategies were increas- ingly dependent on using more data than its competitors. For example, Progressive segments its customer groups more precisely than competitors, giving it more price points for a given group. This precision requires superior customer and claims data and excellent data processing capabilities.
One of Progressive’s first major IT initiatives was to develop an online computer system called PROTEUS (Progressive Online Transaction, Enquiry, and Update System). This system was developed to support the firm’s policy processing;33 it enabled workers to inquire into custom- ers’ policy files and to quote rates for customers online. The most significant productivity and service gain from PROTEUS was the ability to enter, endorse, and cancel business online.
In 1988, Progressive faced two major challenges to its continued growth and profitability. First, a consumer backlash in California led to the passage of a referendum called Proposition 103, which ordered all insurance companies to roll back rates by 20 percent and forced them to refund $1.2 billion in excessive premiums to Californians. Progressive’s share of this total was $50 million.34 Second, Progressive learned that Allstate had surpassed it in its specialty of high-risk auto insurance, making Allstate the firm’s most threatening competitor.
Lewis sought out Ralph Nader, a longtime friend, Princeton classmate, and outspoken advo- cate of Proposition 103, to help him understand why consumers were so upset with insurers.35
It became clear that the source of customer ire was uniformly poor claim service and the inabil- ity to do comparison shopping for the best rates. In what proved to be a strategic move, Progressive decided to streamline and improve its services in assessment, adjustment, repair management, and claims processing.36
In a second strategic move, the firm decided to move from being a niche provider of high-risk auto insurance to a broad-based provider of personal auto insurance. This move put Progressive in direct competition with such major carriers as State Farm and Allstate.
Progressive managers moved quickly to identify and implement several key IT innovations in sup- port of these new business strategies. In 1989, Progressive introduced the next generation of its claims processing system, Progressive Automated Claims Management System (PACMAN).The goal was to expedite the claims process and squeeze out excess costs. PACMAN was a large, central- ized, online database built on technology that was state of the art at the time. The system required many years of management time to define the system requirements, develop streamlined work pro- cesses, evaluate prototypes, and test all aspects of the system. Not only were claims representa- tives given extensive training for using the system, they were sent to an empathy training program to help them relate to the plight of their customers and focus on solving their problems.The new claims- handling process and automated system reduced the average time it took Progressive to process and pay a claim to six days. (The industry average was 42 days.) The improved process led to signifi- cant improvements in customer satisfaction and reduced customer defections by two-thirds.
To further speed up the claims process, Progressive managers implemented an Immediate Response® claims service in 1990.The service was available 24 hours a day, 7 days a week, and provided customers with personal service and support immediately after they reported a claim.
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Customers could now call Progressive at any hour and talk with a trained claims representative, who could begin resolving the claim and offer immediate help. Progressive’s claims representa- tives were on constant call to go to the scene of serious accidents, which helped to ease the trauma of injured people and their families during a difficult time. Claim reports were entered into the proprietary online computer system, allowing Progressive to verify coverage immediately and make the information available to a nearby claims representative. As a result of the new “24-7” reporting and response capability, Progressive was able to contact 90 percent of its customers and claimants within 24 hours and close one-third of its total claims within seven days.
These rapid settlements had several effects—the dramatic time reduction not only decreased the costs of claims processing and administration, it also cut the cost of litigation, shrank the amount of fraud, and slashed the number of customer defections to other insurance firms. Begin- ning in 1991, Progressive saw a major reduction in its general, sales, and administrative expenses as a percentage of total revenue, as shown in Figure 1-6. This led “CEO Peter Lewis to establish an outrageous objective: Because faster was better for the customer and cheaper for the company, Progressive would settle claims instantly!”37
To this end, Progressive introduced the Immediate Response Vehicle (IRV) in 1994.This spe- cially marked and outfitted vehicle takes an experienced claims representative wherever the cus- tomer needs him—even to the scene of an accident. Upon arrival, the representative’s first priority is to reassure the customer that Progressive understands his or her needs and is there
1975 1980 1985 1995 2000 2005 20101990
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Progressive Insurance
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FIGURE 1-6 General, sales, and administrative (GSA) expenses at Progressive Insurance
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to help. The rep then surveys the scene, takes digital photos of the damage, develops a dam- age estimate using data stored on a portable computer, and writes a check to cover the esti- mated costs—often within an hour of the accident.38
Also in 1994, Progressive introduced 1-800-AUTO-PRO, the first comparison rate service available for free by phone. With one call, consumers received a Progressive quote and compari- son quotes for up to three competitors. Customers then were given the option of buying insur- ance directly over the phone or through a local agent. (Today this service is available by dialing 1-800-PROGRESSIVE.) Because of the technical difficulty of developing accurate rates for other companies, and concern over the potential loss of customers from a competitor’s lower rates, Progressive first tested the program in California and then in Florida before rolling it out broadly.
In 1995, Progressive became the first major auto insurer in the world to launch a Web site. Policyholders can log in to update information, make payments, get vehicle recall information, and more. They can report accidents in minutes without picking up the phone. Customers also can schedule appointments with claims representatives and body shops while reporting claims online. Potential customers can view Progressive rates side-by-side with those of competitors.39
Never resting on its accomplishments, management identified further improvements for its claims service and rolled out the Claims Workbench in 1997. Progressive spent four years devel- oping this software application, which enables claims representatives to move information between their wireless laptops and a mainframe to keep claims moving forward to resolution. The Claims Workbench allows claims representatives to have all pertinent information at their finger- tips when they meet face-to-face with customers. Another application, Pathways, was devel- oped to provide an encyclopedic listing of parts for nearly every car on the road. The claims representative uses Pathways to scroll through a database of parts, prices, and labor estimates to develop a settlement amount.
Lewis retired as CEO in 2000, after 45 years of outstanding service. The role of CEO was turned over to Glenn Renwick, who had served as the CIO. Even with the change in top manage- ment, Progressive continued its 25-year strategy of making ongoing investments in IT to improve operations.
Progressive worked closely with representatives of its independent agents to improve work processes, and worked with the IT organization to reduce costs and increase flexibility for prod- uct changes.The independent agents were provided electronic access to customer data, enabling them to provide more responsive service to their customers. These improvements increased the number of policy changes made directly by agents; enabled a substantial number of policies to be underwritten at the point of sale, including all underwriting data validation checks; increased the number of policyholders who chose installment plans and electronic funds transfer; and elimi- nated paper files and reports. Progressive’s commitment to expanding technology and improv- ing workflows has made its expense ratios comparable to or lower than any competitor who distributes through agents.
By 2005, Progressive had successfully introduced its next-generation Web-quoting plat- form, which provided much faster online quotes and led to an increase in Web application completion. Progressive also introduced “talk to me” functionality, allowing Internet customers instant telephone access to a licensed professional who can access their quote in real time and provide counsel.
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In 2006, Progressive announced two major company initiatives: to replace the customer and policy management system that served it well, because it is not consistent with Progressive’s views of future needs; and to add a new data center that is not constrained by processing capac- ity and that assures a high level of system availability and disaster preparedness. The new policy management system will be implemented in 2008. Hundreds of workers are helping to define the new system through focus group sessions and prototype evaluations. Also in development is a clear implementation plan that includes extensive user acceptance testing and hands-on training.
“I have often described Progressive as a technology company in the auto insurance business. Much of what we have achieved has been made possible by our talented information technol- ogy staff, and we certainly would not have been able to support our growth without extraordi- nary commitment to our technology capacity and capabilities. We see the future and our agents being very dependent on technology and we are developing applications that allow us and our agents to do more, easier and at less cost. We are placing equal emphasis on infrastructure platforms to maintain strategic or cost advantages. Our continuous investment in technology over the past several years has positioned us well to remain a leader in technology solutions for ser- vice delivery to both our customers and agents, and we are committed to a level of technol- ogy investment that ensures we never constrain the business.”
—Glen M. Renwick, Progressive President and CEO, in the 2003 annual report
Discussion Questions
1. Visit the Progressive Web site and review recent press releases and financial statements. Can you find evidence that the firm continues to implement effective IT solutions that increase revenue, decrease costs, or improve customer service? Write a paragraph that summarizes your findings.
2. Why does Progressive keep modifying its basic claims processing system? After three or four generations of this system, shouldn’t it be right by now?
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