Skip to 0 minutes and 4 seconds LUBNA ALAM: To recap, last week you saw how the order processing system at a small restaurant automated the order taking transactions. The transactions data further provided essential information to improve business processes beyond simple efficiency gains. That’s automation, or IT investment leading to multiple business value returns. Now let’s think about the same IT Investment for two different contexts. Context supermarket. When Woolworths introduced self-checkouts, their aim was to cut costs to gain more profit.
Skip to 0 minutes and 39 seconds Context: fast food chain, McDonald’s. When McDonald’s introduced self ordering through mobile app, they were aiming to provide a seamless service to digital natives, a strategic objective to stay relevant in the increasingly digital world. So we see that the same IT investment can have different business value returns, depending on the underlying business objective. So organisations can choose different IT investments to match different business objectives, to align with their business model and goals. That’s what’s coming up next. Just as investors address their objectives for risk and return using portfolios of financial investments, some organisations also use IT portfolio management to better match IT investments to strategic objectives.
Skip to 1 minute and 30 seconds The more aligned the IT portfolio is with their business model, the chances of business success increases.
The IT portfolio
Welcome to Week 2 where we will explore how different kinds of IT investments provide different types of business value.
Researchers at the MIT Sloan School of Management investigated IT investments across 640 key US companies (Weill & Aral 2006).
They identified four key types of IT investments that contribute to an ‘IT portfolio’ or investment spread. These include:
- Transactional investments: used to cut costs or increase throughput for the same cost. IT that processes and supports the basic, repetitive transactions of the firm. Uses underlying infrastructure services.
- Informational investments: to provide information for decision making and management control such as accounting, reporting, compliance, communication or analysis. Uses IT infrastructure and transactional systems.
- Strategic investments: used to gain competitive advantage by supporting entry into new markets or by helping to develop new products, services or business processes. Note what was once strategic, can become transactional or infrastructural (initially automated teller machines (ATMs) were a strategic IT initiative; they became transactional over time).
- Infrastructure investments: are the shared IT services used by multiple applications (such as servers, networks, laptops, customer databases). Depending on the service, infrastructure investments provide a flexible base for future business initiatives or reduce long-term IT costs via consolidation.
Thus IT portfolio theory is a sophisticated investment decision approach that permits an investor to classify, estimate and control both the kind and amount of expected risk and return (Adapted from Downes & Goodman 1991).
Beyond just automating and information
Thinking of IT investments as a portfolio or a balanced set of investments provides a comprehensive approach to different types of business value returns accrued from ICT investments.
|IT Portfolio Investment Type||Business Value||Risk|
|Informational (typically 17% of investment)||Increased control; Better information; Better integration; Improved quality; Better cycle time||Moderate risk/return|
|Strategic (typically 11% of investment)||Product innovation; Process innovation; Competitive advantage; Renewed service delivery; Increased sales; Market positioning||High risk, potentially high return|
|Transactional (typically 26% of investment)||Cut costs; Increase throughput||Low risk, solid return|
|Infrastructure (typically 46% of investment)||Business integration; Business flexibility; Reduced marginal cost of business unit’s IT; Reduced IT costs; Standardisation||Moderate risk / return. Risk of lock-in|
Adapted from (Weill & Aral 2006).
Pick one of the four IT investments types that most interests you and conduct further research.
Share one of the resources you find in the comments and discuss why you found it useful.
Remember to use our 3C philosophy this week in engaging with other learners – through Curious, Compassionate and Constructive feedback.
Downes, J & Goodman, JE (1991). Dictionary of Finance and Investment Terms, Barron’s Educational Series, NY.
Peter Weill, S. A. (2006). Generating premium returns on your IT investments. MIT Sloan Management Review, 47(2), 39.
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