STRATEGIC PLANNING:

I.T. BUDGETS AND I.T. ORGANIZATIONAL STRUCTURES

What is Strategic Information Systems Planning?
“The process of deciding objectives for organizational computing, and identifying potential computer applications which the organization should implement, including operating and capital bugeting and sometimes changes in organizational structure.”
In general:

We argue that IT strategies must be aligned with business strategies.
But this is rarely done--SISP is a big IT management issue
Next time we will discuss the impediments to SISP and possible ways to overcome them.
This time, we will cover background information on IT budgets and organizational structure.

I.T. FUNCTIONS

Operations: Run data centers including mainframes, printers, OCR; provide hardware maintenance, provide security control, store user data on tape and DASD, run backs up, disaster recovery, help desks

Applications Development: Develop new business applications

Applications Support: Maintain business applications including fixes, enhancements, upgrades

End User Support: Training, consulting, end-user computing (spreadsheets, 4thGL, Word processors)

Telecom & Networks: Interconnectivity; phone lines, data lines, VANs, EDI, servers, protocols, microwaves, satellites, fiber optics, etc.

Residual Services: Office moves, report delivery, security requests, billing,

IT management: Create IT strategy, budget decisions, sourcing decisions, negotiate/monitor suppliers and vendors; set policies & standards, environmental scanning for new technologies, system development methodologies, recruiting and training of IT personnel, measures of IT performance & benchmarking,

I.T. BUDGETS

Operating Budgets

Expenses incurred for products and services used in a given year

Examples:

hardware maintenance
software licensing fees
IT salaries

Capital Budgets

Investments on assets for products and services that are used over multiple years

Examples:

investment in a new mainframe
development of a large integrated software system

Questions:

I.T. OPERATING BUDGETS

 How much do organizations spend on IT?

MINOLI’S TABLE

How are operating budgeting decisions made? How are these costs distributed across the entire organization?

Chargeback system: an accounting procedure for allocating the costs of IT to user departments.

Different chargeback systems motivate user behavior differently

Chargeback systems can be categorized into:

1. GENERAL ALLOCATION CHARGEBACK SYSTEMS

IT operating budget is viewed as an overhead expense.

At year end, some algorithm is used to spread costs across the organization.

In-class example

2. USAGE ALLOCATION CHARGEBACK SYSTEMS

IT is viewed as an overhead account

Costs are spread across the organization based on usage

In-class example

3. PROFIT CENTER

The IT department sets a price list for each product and service:

$15.00 CPU minute costs
$100.00 Gigabyte of storage costs
$1.00 Printed page
$50.00 1 man-hour of a programmer
$80.00 1 man-hour of an analyst
$10,000.00 Each new workstation

Pros:

Users take more responsibility for their IT expenditures
Users can compare internal prices with external vendor prices
Motivates efficient user behavior

Cons:

Very difficult to set the right prices to re-coup the IT budget properly
Users may focus on cost comparisons rather than service comparisons
If they go to the external market, they may neglect costs associated with integration, data integrity, backup

CAPITAL BUDGETS

Capital budget: budget for acquisition/development of products or services that will be used over many years. The item becomes an assets on the balance sheet, with a yearly depreciation expense

Capital budgets can be up to twice the operating budget

Examples:

Purchase of a mainframe for $15 million in 1990
Depreciation expense at $3 million for 5 years
Purchase & Customization of a large, integrated software package: $17 million
Creation of a global network infrastructure for $10 million

IT Managers compete for capital investment funding with all departments, such as production, marketing, etc.

How do senior managers evaluate such diverse proposals as investment in new manufacturing equipment verses investment in a network infrastructure?

Financial analysis of costs/benefits translated into NPV, IRR, Payback period, etc.

Very difficult to estimate the costs and benefits of IT proposals

WHO ULTIMATELY PAYS FOR CAPITAL PROJECTS?

It depends on if the asset is used by

Everybody (maybe the mainframe & global network)
The depreciation expense is allocated in numerous ways

Only one department
That User Department will “sponsor”, i.e., pay for the project
Example:

A credit card system for marketing
A CAD/CAM system for manufacturing
The project will get an account number, and all expenses are charged to the project

HOW SHOULD WE ORGANIZE THE IT DEPARTMENT?

The general issue with organizational structure: centralization verses decentralization

Centralization: “lower cost”
1. reap economies of scale
2. ensure integration
3. optimize scarce resources

Decentralization “better service”
1. better response to idiosyncratic business needs
2. local involvement in decision-making

General organizational forms:

U-Form: Functional organization--divide along production, marketing, finance, R&D, human resources, etc.

M-form: Multi-Divisional company with product divisions as well as shared resources like Sales & Marketing; division success depends not only on division itself, but effectiveness of shared resources.

H-Form: Holding company over diversified businesses--headquarters allocated resources based on P&L

FIVE WAYS TO STRUCTURE I.T.

Corporate Service
IT is centralized as an overhead function and reports to senior management
Strong cost control and other benefits of centralization
Reputation for non-responsiveness to users’ unique business needs

Internal Bureau
IT is centralized but is set up as a profit center;
users may buy services elsewhere
motivates efficient user behavior
difficult to set prices
users may focus on cost comparisons rather than service comparisons;
If users go to the external market
they may neglect costs associated with integration, data integrity, backup

Business Venture
IT is set up as a separate business unit with its own mission & revenue objectives;
will also attract external customers
Focus on costs and service
Attracting external customers may be difficult if IT is not competitive

Decentralized
Each business unit contains its own IS department
Users take responsibility for costs of IT
Meet idiosyncratic business needs
Redundant systems
Difficult to integrate systems

Federal
A mixed form; the centralized IT function sets standards and policies; departmental IT functions make own IT decisions within these policies & standards
Nice balance between the advantages of centralization & decentralization
Difficult to divvy up IT activities appropriately