IS Project Selection: The Role of Strategic Vision and IT ... - CiteSeerX

Proceedings of the 37th Hawaii International Conference on System Sciences - 2004

IS Project Selection: The Role of Strategic Vision and IT Governance Susan A. Sherer Lehigh University [email protected]

Abstract The prioritization of information systems projects is a function of the strategic vision of the organization. We develop a model of the IT selection process that is based upon the influence of strategic vision. Strategic vision influences both the type of projects considered, the resources allocated to information systems, and the processes and mechanisms for justifying IT investments. Two of the processes that influence the final project selection are the reporting structure of the IS organization and the involvement of a steering committee for investment prioritization. We suggest that this influences the criteria used to make IT investment decisions.

1. Introduction Information Systems have become a critical resource in today’s organizations. Companies are faced with many different opportunities to enhance or transform their products, services, markets, processes, and relationships using information systems. But these investments are costly. A recent Gartner group survey indicates IT budgets of companies worldwide amount to slightly more than 3.5% of revenue [1]. The high cost of information systems, coupled with the myriad of different choices for their use, combine to make IT investment decisionmaking a critical but difficult process. Most companies do not have adequate resources to tackle every project. One of the challenges they face is how to fund new systems when so many resources are tied up maintaining existing ones. Many firms have turned to outsourcing in an effort to lower

costs such as operations and maintenance so that they can focus more on new application development. Investment priorities differ among organizations. Some applications make existing processes more efficient. For example, workflow management in eprocurement applications makes the purchase approval process much more efficient. Other applications can change the basis of competition in an industry. Competition in the computer industry today is based upon pricing structures that require minimal inventory investment, a change driven by Dell’s highly sophisticated supply chain applications. Investment priorities vary based upon a company’s strategy, industry competition, and environmental forces. There are many different ways to evaluate information technology (IT) in order to prioritize investment options. Many firms use quantitative criteria to justify their IT investments. These criteria include standard financial analysis such as discounted cash flow, net present value, payback, and internal rate of return. However, because information systems offer intangible value, these quantitative justification processes do not account for all of the benefits of information systems. Thus, other criteria have been suggested that incorporate intangibles [2]. Approaches such as information economics have been suggested to evaluate the value of these intangibles [3]. Other methods such as the real options approach enable multi-phase investment analysis [4, 5]. No single justification method has been found to be optimum. Little research has considered the impact of using specific justification methods on investment decisions.

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Considerable diversity exists in the patterns of IT governance in firms today. IT governance is the system of structures and processes for directing and controlling information systems. Over the last 20 years, three primary modes of IT governance arrangements have emerged: centralized, decentralized, and federal, driven by multiple contingencies including corporate governance, economics of scope, and absorptive capacity [6]. Today novel IT organizational models, such as the partner, platform, and scalable model are emerging [7]. These arrangements may affect application prioritization decisions. While information systems personnel are typically involved in prioritization decisions, their degree of authority in these decisions can vary. The status of the information systems department varies in different organizations. As information systems have become more strategic, many senior IS managers have become peers of other functional leaders [8]. IS managers who are close to the CEO should have a greater understanding of organizational goals, impacting their assessment of key issues [9]. However, even with the move towards more strategic systems, by the late 1990s only about 1/5 of CIOs directly reported to CEOs. Two different surveys reported that in the late 1990s, between 1/3 and ½ of senior level IS executives continued to report to the chief financial officer (CFO) or an equivalent finance-oriented role [10, 11], as shown in Table 1. In addition, some firms have moved their top IS managers into marketing department with the move towards ecommerce enablement of business applications; e.g. Rosenbluth Travel’s CIO is also VP of Marketing [12]. There has been no research to investigate whether reporting relationship affects investment decisions. The objective of this paper is the development of a model that investigates the factors that may affect IT investment decisions. In particular, we explore the following questions:

Table 1. The Chief Information Officer’s boss

CIO’s Boss’ Title

Percentage of CIOs reporting to title 1997 1998 E&Y* FEI*

CFO 32% 55% CEO/President/Chair22% 21% man Executive or Senior 19% Vice President/Director Vice President of 8% IT/IS/MIS COO 5% 11% Other 14% 13% *E&Y = Ernst & Young [10]; FEI = Financial Executives Institute [11] 1. How does strategic vision affect the project selection process? 2. How does the organizational location of the IT function affect the project selection process? 3. What is the role of the IT steering committee in project selection?

2. Strategic vision Strategic IT vision is the shared, aspired state of the role that IT should play in the firm [13]. The shared vision connotes institution values and meanings, symbols, and images that shape member’s behaviors [14]. Four major categories for strategic IT vision, described in Table 2, are: automate, informate up, informate down, and transform [15]. We expect that the strategic vision of a firm will affect the projects that are evaluated for investment, the resources allocated to information systems, and the IT governance structures. 2.1 Strategic vision: impact on projects evaluated The strategic vision of information systems should drive the choice of information

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Table 2. Strategic IT vision* The role of IT is the replacement of expensive, unreliable human labor with information technology Informate IT provides information to higher levels of the up organization to aid in coordination Informate IT distributes information to lower level of the Down organization to empower them is a vehicle to Transform IT fundamentally alter the structure and competitive forces of the industry *Adapted from [14] Automate

systems investment projects. IS investment priorities in contemporary organizations have been classified into the following six categories, described in Table 3: strategic, traditional, decision support, infrastructure, business process redesign, and maintenance [16]. Organizations differ in the degree to which these different types of investments are important. Typically, it is assumed that corporations in which top management understands the strategic role of IS and corporations in which IS and corporate planning are integrated tend to give higher priority to investments in strategic systems [16]. We expect that the distribution of projects evaluated by a firm is a function of the strategic vision of that firm. We suggest that: Proposition 1: The IT projects considered for investment are influenced by the strategic IT vision. Proposition 1.1: A greater proportion of strategic IT projects will be evaluated when the vision is transform. Proposition 1.2: A greater proportion of BPR/DSS projects will be evaluated when the vision is informate. Proposition 1.3 A greater proportion of traditional development and maintenance projects will be evaluated when the strategic vision is automate.

Table 3. IS investment priorities* Strategic systems

Traditional development Decision support systems

Infrastructure

Business process redesign Maintenance

Support and influence current competitive strategy Support transaction processing and information reporting Support managerial decision making (includes executive information systems, group decision support systems, expert systems) Corporate wide technology such as database or network construction Major changes to existing business processes Upgrades and enhancements to existing systems

*Adapted from [16] 2.2 Strategic vision and resources Strategic vision not only affects the types of projects evaluated but also the resources allocated to information systems in an organization. The percentage of revenue allocated to IT differs among industries. We expect that: Proposition 2: Within an industry, the percentage of budgeted resources allocated to information systems will be greatest when the IT strategic vision is transform, least for automate. 2.3 Strategic vision and IT governance We believe that strategic vision affects IT governance decisions. In particular, we focus on the organizational reporting relationship of the top IT manager. Rank of the IT leader has significant linkages to the firm’s IT strategic orientation. IT leader’s rank and role must be aligned with a firm’s

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competitive strategy [17]. Studies have shown that there are significant relationships between the rank of an IT leader and a firm’s IT strategic orientation [18, 19]. IS managers’ perception of CEO’s goals are influenced by the closeness of the IS manager to the CEO. For firms competing in industries undergoing IT-driven transformation, announcements of newly created CIO positions provoke positive reactions from the marketplace [20]. CIO’s membership in top management teams and their informal interactions with top management team (TMT) members enhance their business knowledge. The intensity of the relationship between CIO’s interactions with the TMT and their level of IT and business knowledge is much stronger in firms that articulate a transformational IT vision [14]. While studies have considered the reporting rank of the IT leader (number of levels to the CEO) [9, 17, 18], physical closeness to the CEO [9], and role of IT leaders [17], they have not focused on the organizational home of the IT leader, whether IT reports directly to the CEO or to an operating officer or a financial officer. The chairman of the Financial Executive Institute’s committee on finance and information technology suggests that it may be wiser to have a direct CIO/CEO reporting relationship when companies are technology dependent on information systems [11]. Companies whose vision is transformation require CIOs who have open lines of communication with CEOs to help craft strategy. In companies where the vision is to informate businesses, business processes within and across business units will need to change. IS managers in companies whose vision is informating with information systems may have more senior IS managers reporting within operating units. When the vision for IT is to make the company more efficient, reporting to the CFO may be a sound strategy. We will need to control for the size of the organization. CIO’s report to finance in about 2/3 of smaller organizations, but only 12% of large companies. There seems to be in inverse relationship between size and IS-

to-finance reporting relationship [21]. We suggest that: Proposition 3: The reporting structure of IT is influenced by strategic vision. Proposition 3.1: As the strategic vision moves from automate to informate to transform, the rank of the reporting level of the senior IS manager increases. Reporting level is the number of levels between the senior IS manager and the CEO. Proposition 3.2: Strategic vision of transform leads to more senior IS managers reporting to CEOs. Proposition 3.3: Strategic vision of informate is associated with more senior IS managers reporting to COOs. Proposition 3.4: Strategic vision of automate is associated with more senior IS managers reporting to financial managers.

3. IT governance and investment decision criteria Most firms rely on both financial and nonfinancial criteria in ex ante justifications of proposed information systems projects [22]. Traditional capital investment evaluation processes such as net present value, internal rate of return, and payback primarily utilize financial data. However, managers do use qualitative arguments when benefits of capabilities are difficult to quantify [23]. Bacon et. al. [22] reported that "support of business objectives" and "internal rate of return" were the top two criteria used to select high value IT projects. The Advisory Board [24] argues for the use of a portfolio of financial measurement methods. Strassman suggests “return on management” metrics [25, 26]. Information economics proponents include less tangible items such as improved customer service or improved competitiveness [27]. Others suggest the use of multi-objective, multi-criteria methods, value analysis, and critical success factors to measure intangible benefits [3]. The Balanced Scorecard approach can also augment financial metrics with goal related measures from the perspective of the customer, internal business process, and

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learning and growth [28-32]. There has been no research to suggest that the choice of criteria may be impacted by the organizational home of the IT leader. There has been research to suggest that managers in different functional areas may think differently about issues. Upper echelons theory suggests that top managers’ background characteristics, such as their career experiences affect the strategic behavior of their organizations. Executives can suffer from selective perception. Strategic leadership theory attributes organizational outcomes to the choices made by top managers and suggests that variability of background of top managers influences strategic choices that they make [33]. Demographic variables such as a top manager’s functional background and formal education have been associated with organizational outcomes. Career experiences shape top management team members’ cognitive and attitudinal perspectives, and how the top team identifies, formulates, and evaluates strategic decisions [34]. Different functional experiences possessed by an executive have been found to influence the type of information used in evaluating specific acquisition opportunities [34]. Functional background has an effect on which changes executives perceive in their organizations’ effectiveness [35]. It has been suggested that because financial executives are technologically literate and objective, prospective projects get a balanced analysis [11]. Mintzberg suggests that managers are in fact specialists, required to perform a particular set of specialized managerial roles that are dependent upon the functional area and hierarchical level in which they work [36]. Empirical studies have shown that managers within different functional areas place different importance on their managerial roles [37, 38]. For example, a background in marketing has been linked to successful implementation of a prospector strategy [39], while executives with predominantly finance and production backgrounds appear to be more successful with defender strategies [40]. Hierarchical level of management also influences roles

[36], so that it is expected that higher level managers may focus more on external roles. Grover et al. found that CIOs differ from manufacturing and sales executives in the relative importance they place on managerial roles [19]. We expect that IS managers in different functional areas may approach decision processes differently. This will affect the criteria that they use to evaluate IT investment decisions. We propose the following: Proposition 4: The reporting structure for IT impacts the justification criteria used. Proposition 4.1: When CIOs report directly to CEOs, strategic criteria are used more often when justifying IT investments. Proposition 4.2: When senior IS managers report to CFOs, financial criteria are primarily used in justifying IT investments. Proposition 4.3: When senior IS managers report to operating managers, intangible factors may be used more frequently in investment decisions than when they report to CFOs. We expect that the influence of the organizational home of the IS manager on selection decisions is moderated by the existence of a steering committee. The process of investment decision-making should involve managerial and user participation, which can influence the justification criteria used. A steering committee is a high-level team of representatives from multiple division or functions who are entrusted with the task of linking IT strategy with business strategy by setting a strategic direction, matching corporate concerns with technological potential, and building commitment to policies [41]. An important role of the IT steering committee is to prioritize IT activities and make resource allocation decisions [42]. The presence of IT steering committees enhances the level of IT sophistication [43]. Higher levels of management sophistication serve as a foundation for the appropriate selection and utilization of IT resources. We expect that the presence of a cross functional IT steering committee will affect the types of projects

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selected. More cross functional and strategic projects will be selected. Organizations that recognize and cultivate the influence of users in IS project selection will find it easier to migrate from traditional development projects [16]. It is expected that greater involvement of more users in the selection will add variation to the different criteria used to justify IT investments. Proposition 5: The existence of a steering committee results in a greater variety of criteria for justification of IT investments.

4. Projects selected We have argued that strategic vision influences the types of projects evaluated for investment, the resources allocated to IT, and the organizational home of the top IS managers. We have also suggested that the location of the top IS managers may influence the criteria that are used to evaluate investments. Thus, the projects ultimately selected are influenced by the projects considered, available resources, and justification criteria. The criteria used or not used in the justification process and the way in which they are applied or not applied significantly impact the effectiveness with which IS investment decisions are made, determining if the right projects are selected [22]. Our model for IT project evaluation and selection is illustrated in Figure 1. We expect that company size and industry will moderate the relationships shown in the model.

5. Conclusions We have focused on the IT investment application prioritization and justification process in organizations. We expect that both process and people affect the decisions. Strategic vision drives the process by influencing not only the projects evaluated and resources allocated, but also the governance of information systems in an organization. We suggest that IT governance plays a role in influencing IT project

IS Steering Committee P5 P4

IS Reporting Structure

IS Justification Criteria

P3 Strategic IT Vision

P1

IS Projects Evaluated

IS Projects Selected

P2 Resources Allocated to IS

Figure 1. The role of strategic vision, IT governance, justification criteria, and steering committees on IS project selection selection through its influence on criteria for project justification. However, since IT is not solely responsible for investment outcomes, it is wise to involve business disciplines in the decisions. IT steering committees play this role in many organizations today. We believe that their involvement not only enables more business focus on decisions but widens the choice of criteria that are used in the analysis of any IT investment option. Our next step in this research is to test the propositions put forth here by analyzing a sample of investment decisions in different organizations with different IT strategies and options for governance. We want to explore how the IT structure influences decisions.

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