MIS_KC_Laudon

514 Part Four Building and Managing Systems

FIGURE 13-10 TOTAL COST OF OFFSHORE OUTSOURCING

If a firm spends $10 million on offshore outsourcing contracts, that company will actually spend 15.2
percent in extra costs even under the best-case scenario. In the worst-case scenario, where there is a
dramatic drop in productivity along with exceptionally high transition and layoff costs, a firm can
expect to pay up to 57 percent in extra costs on top of the $10 million outlay for an offshore contract.

nities. Companies are starting to use shorter, more informal development
processes that provide fast solutions. In addition to using software packages
and external service providers, businesses are relying more heavily on
fast-cycle techniques such as rapid application development, joint application
design, agile development, and reusable standardized software components
that can be assembled into a complete set of services for e-commerce and e-
business.

RAPID APPLICATION DEVELOPMENT (RAD)

Object-oriented software tools, reusable software, prototyping, and fourth-
generation language tools are helping systems builders create working systems
much more rapidly than they could using traditional systems-building methods
and software tools. The term rapid application development (RAD) is used
to describe this process of creating workable systems in a very short period
of time. RAD can include the use of visual programming and other tools for
building graphical user interfaces, iterative prototyping of key system
elements, the automation of program code generation, and close teamwork
among end users and information systems specialists. Simple systems often
can be assembled from prebuilt components. The process does not have to be
sequential, and key parts of development can occur simultaneously.

Sometimes a technique called joint application design (JAD) is used to
accelerate the generation of information requirements and to develop
the initial systems design. JAD brings end users and information systems
specialists together in an interactive session to discuss the system’s design.
Properly prepared and facilitated, JAD sessions can significantly speed up the
design phase and involve users at an intense level.

Agile development focuses on rapid delivery of working software by
breaking a large project into a series of small subprojects that are completed
in short periods of time using iteration and continuous feedback. Each

Chapter 13 Building Information Systems 515

mini-project is worked on by a team as if it were a complete project, including
planning, requirements analysis, design, coding, testing, and documentation.
Improvement or addition of new functionality takes place within the next
iteration as developers clarify requirements. This helps to minimize the overall
risk, and allows the project to adapt to changes more quickly. Agile methods
emphasize face-to-face communication over written documents, encouraging
people to collaborate and make decisions quickly and effectively.

COMPONENT-BASED DEVELOPMENT AND WEB
SERVICES

We have already described some of the benefits of object-oriented development
for building systems that can respond to rapidly changing business environ-
ments, including Web applications. To further expedite software creation,
groups of objects have been assembled to provide software components for
common functions such as a graphical user interface or online ordering
capability that can be combined to create large-scale business applications. This
approach to software development is called component-based development,
and it enables a system to be built by assembling and integrating existing
software components. Increasingly, these software components are coming
from cloud services. Businesses are using component-based development to
create their e-commerce applications by combining commercially available
components for shopping carts, user authentication, search engines, and
catalogs with pieces of software for their own unique business requirements.

Web Services and Service-Oriented Computing

Chapter 5 introduced Web services as loosely coupled, reusable software compo-
nents delivered using Extensible Markup Language (XML) and other open pro-
tocols and standards that enable one application to communicate with another
with no custom programming required to share data and services.
In addition to supporting internal and external integration of systems, Web
services can be used as tools for building new information system applications
or enhancing existing systems. Because these software services use a universal
set of standards, they promise to be less expensive and less difficult to weave
together than proprietary components.

Web services can perform certain functions on their own, and they can also
engage other Web services to complete more complex transactions, such as
checking credit, procurement, or ordering products. By creating software
components that can communicate and share data regardless of the operating
system, programming language, or client device, Web services can provide
significant cost savings in systems building while opening up new opportuni-
ties for collaboration with other companies.

516 Part Four Building and Managing Systems

13.5 HANDS-ON MIS PROJECTS

The projects in this section give you hands-on experience analyzing business
process problems, designing and building a customer system for auto sales, and
redesigning business processes for a company that wants to purchase goods
over the Web.

Management Decision Problems

1. A customer purchasing a Sears Roebuck appliance, such as a washing machine,
can also purchase a three-year service contract for an additional fee. The con-
tract provides free repair service and parts for the specified appliance using an
authorized Sears service provider. When a person with a Sears service contract
needs an appliance repaired, such as a washing machine, he or she calls the
Sears Repairs & Parts department to schedule an appointment. The depart-
ment makes the appointment and gives the caller the date and approximate
time of the appointment. The repair technician arrives during the designated
time frame and diagnoses the problem. If the problem is caused by a faulty
part, the technician either replaces the part if he is carrying the part with him
or orders the replacement part from Sears. If the part is not in stock at Sears,
Sears orders the part and gives the customer an approximate time when the
part will arrive. The part is shipped directly to the customer. After the part has
arrived, the customer must call Sears to schedule a second appointment for a
repair technician to replace the ordered part. This process is very lengthy.
It may take two weeks for the first repair visit to occur, another two weeks to
receive the ordered part, and another week for the second repair visit to occur
in which the ordered part is installed.

• Diagram the existing process.

• What is the impact of the existing process on Sears’ operational efficiency
and customer relationships?

• What changes could be made to make this process more efficient? How could
information systems support these changes? Diagram the new improved
process.

2. Management at your agricultural chemicals corporation has been dissatisfied
with production planning. Production plans are created using best guesses of
demand for each product, which are based on how much of each product has
been ordered in the past. If a customer places an unexpected order or requests
a change to an existing order after it has been placed, there is no way to adjust
production plans. The company may have to tell customers it can’t fill their
orders, or it may run up extra costs maintaining additional inventory to prevent
stock-outs.
At the end of each month, orders are totaled and manually keyed into the
company’s production planning system. Data from the past month’s production
and inventory systems are manually entered into the firm’s order management
system. Analysts from the sales department and from the production depart-
ment analyze the data from their respective systems to determine what the sales
targets and production targets should be for the next month. These estimates are
usually different. The analysts then get together at a high-level planning meeting
to revise the production and sales targets to take into account senior
management’s goals for market share, revenues, and profits. The outcome of the
meeting is a finalized production master schedule.
The entire production planning process takes 17 business days to complete.
Nine of these days are required to enter and validate the data. The remaining

Chapter 13 Building Information Systems 517

days are spent developing and reconciling the production and sales targets and
finalizing the production master schedule.

• Draw a diagram of the existing production planning process.
• Analyze the problems this process creates for the company.
• How could an enterprise system solve these problems? In what ways could it

lower costs? Diagram what the production planning process might look like if
the company implemented enterprise software.

Improving Decision Making: Using Database Software
to Design a Customer System for Auto Sales

Software skills: Database design, querying, reporting, and forms
Business skills: Sales lead and customer analysis

This project requires you to perform a systems analysis and then design a
system solution using database software.

Ace Auto Dealers specializes in selling new vehicles from Subaru. The
company advertises in local newspapers and is also listed as an authorized
dealer on the Subaru Web site and other major auto-buyer Web sites. The com-
pany benefits from a good local word-of-mouth reputation and name recogni-
tion and is a leading source of information for Subaru vehicles in the Portland,
Oregon, area.

When a prospective customer enters the showroom, he or she is greeted by
an Ace sales representative. The sales representative manually fills out a form
with information such as the prospective customer’s name, address, telephone
number, date of visit, and make and model of the vehicle in which the customer
is interested. The representative also asks where the prospect heard about
Ace—whether it was from a newspaper ad, the Web, or word of mouth—and this
information is noted on the form also. If the customer decides to purchase an
auto, the dealer fills out a bill of sale form.

Ace does not believe it has enough information about its customers. It cannot
easily determine which prospects have made auto purchases, nor can it identify
which customer touch points have produced the greatest number of sales leads
or actual sales so it can focus advertising and marketing more on the channels
that generate the most revenue. Are purchasers discovering Ace from newspa-
per ads, from word of mouth, or from the Web?

Prepare a systems analysis report detailing Ace’s problem and a system
solution that can be implemented using PC database management software.
The company has a PC with Internet access and the full suite of Microsoft
Office desktop productivity tools. Then use database software to develop a sim-
ple system solution. Your systems analysis report should include the following:

• Description of the problem and its organizational and business impact
• Proposed solution, solution objectives, and solution feasibility
• Costs and benefits of the solution you have selected
• Information requirements to be addressed by the solution
• Management, organization, and technology issues to be addressed by the

solution, including changes in business processes

On the basis of the requirements you have identified, design the database
and populate it with at least 10 records per table. Consider whether you can use
or modify Ace’s existing customer database in your design. You can find this

518 Part Four Building and Managing Systems

database on the myMISlab. Print out the database design. Then use the system
you have created to generate queries and reports that would be most useful to
management. Create several prototype data input forms for the system and
review them with your instructor. Then revise the prototypes.

Achieving Operational Excellence: Redesigning
Business Processes for Web Procurement

Software skills: Web browser software
Business skills: Procurement

This project requires you to rethink how a business should be redesigned when
it moves to the Web.

You are in charge of purchasing for your firm and would like to use the
Grainger (www.grainger.com) B2B e-commerce site for this purpose. Find out
how to place an order for painting supplies by exploring the Catalog, Order
Form, and Repair Parts Order capabilities of this site. Do not register at the site.
Describe all the steps your firm would need to take to use this system to place
orders online for 30 gallons of paint thinner. Include a diagram of what you
think your firm’s business process for purchasing should be and the pieces of
information required by this process.

In a traditional purchase process, whoever is responsible for making the
purchase fills out a requisition form and submits it for approval based on the
company’s business rules. When the requisition is approved, a purchase order
with a unique purchase order identification number is sent to the supplier.
The purchaser might want to browse supplier catalogs to compare prices and
features before placing the order. The purchaser might also want to determine
whether the items to be purchased are available. If the purchasing firm were an
approved customer, that company would be granted credit to make the
purchase and would be billed for the total cost of the items purchased and
shipped after the order was shipped. Alternatively, the purchasing company
might have to pay for the order in advance or pay for the order using a credit
card. Multiple payment options might be possible. How might this process have
to change to make purchases electronically from the Grainger site?

LEARNING TRACK MODULES

The following Learning Tracks provide content relevant to topics covered in
this chapter:

1. Unified Modeling Language (UML)
2. A Primer on Business Process Design and Documentation
3. A Primer on Business Process Management

Chapter 13 Building Information Systems 519

Review Summary

1. How does building new systems produce organizational change?
Building a new information system is a form of planned organizational

change. Four kinds of technology-enabled change are (a) automation, (b)
rationalization of procedures, (c) business process redesign, and (d) paradigm
shift, with far-reaching changes carrying the greatest risks and rewards. Many
organizations are using business process management to redesign work flows
and business processes in the hope of achieving dramatic productivity break-
throughs. Business process management is also useful for promoting, total
quality management (TQM), six sigma, and other initiatives for incremental
process improvement.

2. What are the core activities in the systems development process?
The core activities in systems development are systems analysis, systems

design, programming, testing, conversion, production, and maintenance.
Systems analysis is the study and analysis of problems of existing systems and
the identification of requirements for their solutions. Systems design provides
the specifications for an information system solution, showing how its
technical and organizational components fit together.

3. What are the principal methodologies for modeling and designing systems?
The two principal methodologies for modeling and designing information

systems are structured methodologies and object-oriented development.
Structured methodologies focus on modeling processes and data separately.
The data flow diagram is the principal tool for structured analysis, and the
structure chart is the principal tool for representing structured software design.
Object-oriented development models a system as a collection of objects that
combine processes and data. Object-oriented modeling is based on the concepts
of class and inheritance.

4. What are the alternative methods for building information systems?
The oldest method for building systems is the systems life cycle, which

requires that information systems be developed in formal stages. The stages
must proceed sequentially and have defined outputs; each requires formal
approval before the next stage can commence. The systems life cycle is useful
for large projects that need formal specifications and tight management control
over each stage of systems building, but it is very rigid and costly.

Prototyping consists of building an experimental system rapidly and
inexpensively for end users to interact with and evaluate. Prototyping encour-
ages end-user involvement in systems development and iteration of design
until specifications are captured accurately. The rapid creation of prototypes
can result in systems that have not been completely tested or documented or
that are technically inadequate for a production environment.

Using a software package reduces the amount of design, programming,
testing, installation, and maintenance work required to build a system.
Application software packages are helpful if a firm does not have the internal
information systems staff or financial resources to custom develop a system. To
meet an organization’s unique requirements, packages may require extensive
modifications that can substantially raise development costs.

End-user development is the development of information systems by end
users, either alone or with minimal assistance from information systems
specialists. End-user-developed systems can be created rapidly and informally
using fourth-generation software tools. However, end-user development may

520 Part Four Building and Managing Systems

create information systems that do not necessarily meet quality assurance standards and that are not
easily controlled by traditional means.

Outsourcing consists of using an external vendor to build (or operate) a firm’s information systems
instead of the organization’s internal information systems staff. Outsourcing can save application
development costs or enable firms to develop applications without an internal information systems
staff. However, firms risk losing control over their information systems and becoming too dependent
on external vendors. Outsourcing also entails “hidden” costs, especially when the work is sent
offshore.

5. What are new approaches for system building in the digital firm era?
Companies are turning to rapid application design, joint application design (JAD), agile develop-

ment, and reusable software components to accelerate the systems development process. Rapid
application development (RAD) uses object-oriented software, visual programming, prototyping, and
fourth-generation tools for very rapid creation of systems. Agile development breaks a large project
into a series of small subprojects that are completed in short periods of time using iteration and con-
tinuous feedback. Component-based development expedites application development by grouping
objects into suites of software components that can be combined to create large-scale business appli-
cations. Web services provide a common set of standards that enable organizations to link their sys-
tems regardless of their technology platform through standard plug- and-play architecture

Key Terms Parallel strategy, 500
Phased approach strategy, 500
Acceptance testing, 499 Pilot study strategy, 500
Agile development, 514 Postimplementation audit, 501
Automation, 489 Process specifications, 503
Business process management, 491 Production, 501
Business process redesign, 490 Programming, 499
Component-based development, 515 Prototype, 507
Computer-aided software Prototyping, 507
Query languages, 509
engineering (CASE), 505 Rapid application development (RAD), 514
Conversion, 500 Rationalization of procedures, 490
Customization, 510 Request for Proposal (RFP), 510
Data flow diagram (DFD), 502 Six sigma, 490
Direct cutover strategy, 500 Structure chart, 503
Documentation, 501 Structured, 502
End-user development, 508 Systems analysis, 496
End-user interface, 507 Systems design, 498
Feasibility study, 497 Systems development, 494
Fourth-generation languages, 508 Systems life cycle, 506
Information requirements, 497 System testing, 499
Iterative, 507 Test plan, 500
Joint application design (JAD), 514 Testing, 499
Maintenance, 501 Total quality management (TQM), 490
Object, 504 Unit testing, 499
Object-oriented development, 504
Offshore outsourcing, 511
Paradigm shift, 490

Review Questions • Define business process management and
describe the steps required to carry it out.
1. How does building new systems produce organiza-
tional change? • Explain how information systems support
process changes that promote quality in an
• Describe each of the four kinds of organiza- organization.
tional change that can be promoted with
information technology.

2. What are the core activities in the systems Chapter 13 Building Information Systems 521
development process?
• Define information system prototyping.
• Distinguish between systems analysis and Describe its benefits and limitations. List
systems design. Describe the activities for each. and describe the steps in the prototyping
process.
• Define information requirements and explain
why they are difficult to determine correctly. • Define an application software package.
Explain the advantages and disadvantages of
• Explain why the testing stage of systems developing information systems based on
development is so important. Name and software packages.
describe the three stages of testing for an
information system. • Define end-user development and describe
its advantages and disadvantages. Name some
• Describe the role of programming, conver- policies and procedures for managing end-
sion, production, and maintenance in user development.
systems development.
• Describe the advantages and disadvantages of
3. What are the principal methodologies for model- using outsourcing for building information
ing and designing systems? systems.

• Compare object-oriented and traditional 5. What are new approaches for system building in
structured approaches for modeling and the digital firm era?
designing systems.
• Define rapid application development (RAD)
4. What are the alternative methods for building and agile development and explain how they
information systems? can speed up system-building.

• Define the traditional systems life cycle. • Explain how component-based development
Describe each of its steps and its advantages and Web services help firms build and
and disadvantages for systems building. enhance their information systems.

Discussion Questions Video Cases

1. Why is selecting a systems development Video Cases and Instructional Videos illustrating
approach an important business decision? Who some of the concepts in this chapter are available.
should participate in the selection process? Contact your instructor to access these videos.

2. Some have said that the best way to reduce
systems development costs is to use application
software packages or fourth-generation tools.
Do you agree? Why or why not?

3. Why is is so important to understand how a
business process works when trying to develop a
new information system?

Collaboration and Teamwork: Preparing Web Site Design Specifications

With three or four of your classmates, select a system If possible, use Google Sites to post links to Web
described in this text that uses the Web. Review the pages, team communication announcements, and
Web site for the system you select. Use what you work assignments; to brainstorm; and to work collab-
have learned from the Web site and the description in oratively on project documents. Try to use Google
this book to prepare a report describing some of the Docs to develop a presentation of your findings for
design specifications for the system you select. the class.

522 Part Four Building and Managing Systems

Are Electronic Medical Records a Cure for Health Care?

CASE STUDY

C reating more efficient health care systems Evidence of EMR systems in use today suggests
in the United States has been a pressing that these benefits are possible for doctors and hospi-
medical, social, and political issue for tals, but the challenges of setting up individual sys-
decades. Despite the fact that 15 percent of tems, let alone a nationwide system, are daunting.
Americans are uninsured and another 20 percent on Even with stimulus money, many smaller practices
top of that are underinsured, or unable to pay for are finding it difficult to afford the costs and time
necessary health care, the U.S. spends more money commitment for upgrading their recordkeeping sys-
per person on health care than any other country in tems. In 2010, 80 percent of physicians and 90 per-
the world. In 2009, the United States spent $2.5 cent of hospitals in the United States are still using
trillion on health care, which was 17.6 percent of its paper medical records.
gross domestic product (GDP). Approximately 12
percent of that figure was spent on administrative It’s also unclear whether the systems being devel-
costs, most of which involve the upkeep of medical oped and implemented in 2010 will be compatible
records. with one another in 2015 and beyond, jeopardizing
the goal of a national system where all health care
The astronomical health care spending figures in providers can share information. And there are
the United States are inflated by inefficiency, errors, many other smaller obstacles that health care
and fraud. The good news is that information providers, health IT developers, and insurance com-
technology may present an opportunity for health panies need to overcome for electronic health
care providers to save money and provide better records to catch on nationally, including patients’
care. Health care providers have begun to create privacy concerns, data quality issues, and resistance
electronic medical record (EMR) systems at the urg- from health care workers.
ing of the government in an effort to eliminate much
of the inefficiency inherent in paper-based record- The government plans to pay out the stimulus
keeping. Many insurance companies are also lending money provided by the American Recovery and
their support to the development of EMR systems. Reinvestment Act to health care providers in two
ways. First, $2 billion will be provided up front to
An electronic medical record system contains all hospitals and physicians to help set up electronic
of a person’s vital medical data, including personal records. Another $17 billion will also be available as
information, a full medical history, test results, a reward for providers that successfully implement
diagnoses, treatments, prescription medications, and electronic records by 2015. The stimulus specifies
the effect of those treatments. A physician would be that to qualify for these rewards, providers must
able to immediately and directly access needed demonstrate “meaningful use” of electronic health
information from the EMR without having to pore record systems. The bill defines this as the successful
through paper files. If the record holder went to the implementation of certified e-record products, the
hospital, the records and results of any tests ability to write at least 40 percent of their total
performed at that point would be immediately prescriptions electronically, and the ability to
available online. exchange and report data to government health
agencies. Individual practices can receive up to
Many experts believe that electronic records will $64,000 for successful implementations, and
reduce medical errors and improve care, create less hospitals can make as much as $11.5 million.
paperwork, and provide quicker service, all of which
will lead to dramatic savings in the future: an But in addition to the reward of stimulus money,
estimated $77.8 billion per year. The government’s the government will also assess penalties on
short-term goal is for all health care providers in the practices that fail to comply with the new electronic
United States to have functional EMR systems in recordkeeping standards. Providers that cannot meet
place that meet a set of basic functional criteria by the standards by 2015 will have their Medicare and
the year 2015. Its long-term goal is to have a fully Medicaid reimbursements reduced by 1 percent per
functional nationwide electronic medical recordkeep- year until 2018, with further, more stringent
ing network. penalties coming beyond that time if a sufficiently

low number of providers are using electronic health Chapter 13 Building Information Systems 523
records.
percent and the length of their hospital stays by 20
Electronic medical recordkeeping systems percent. More patients receive necessary periodic
typically cost around $30,000 to $50,000 per doctor. treatments under VistA (from 27 percent to 83 per-
While the stimulus money should eventually be cent for flu vaccines and from 34 percent to 84 per-
enough to cover that cost, only a small amount of it cent for colon cancer screenings).
is available up front. For many providers, especially
medical practices with fewer than four doctors and Patients also report that the process of being
hospitals with fewer than 50 beds, this creates a treated at the VA is effortless compared to paper-
significant problem. The expenditure of overhauling based providers. That’s because instant processing of
recordkeeping systems represents a significant claims and payments are among the benefits of EMR
increase in the short-term budgets and workloads of systems. Insurance companies traditionally pay
smaller health care providers. Smaller providers are claims about two weeks after receiving them, despite
also less likely to have started digitizing their records quickly processing them soon after they are
compared to their larger counterparts. received. Additionally, today’s paper-based health
care providers must assign the appropriate diagnostic
Many smaller practices and hospitals have balked codes and procedure codes to claims. Because there
at the transition to EMR systems for these reasons, are thousands of these codes, the process is even
but the evidence of these systems in action suggests slower, and most providers employ someone solely
that the move may be well worth the effort. The to perform this task. Electronic systems hold the
most prominent example of electronic medical promise of immediate processing, or real-time claims
records in use today is the Veterans Affairs (VA) adjudication, just like when you pay using a credit
system of doctors and hospitals. The VA system card—claim data would be sent immediately, and
switched to digital records years ago, and far exceeds diagnostic and procedure code information are auto-
the private sector and Medicare in quality of preven- matically entered.
tive services and chronic care. The 1,400 VA facilities
use VistA, record-sharing software developed by the VistA is far from the only option for doctors and
government that allows doctors and nurses to share hospitals starting the process of updating their
patient histories. A typical VistA record lists a records. Many health IT companies are eagerly
patient’s health problems, weight and blood pressure awaiting the coming spike in demand for their EMR
since beginning treatment at the VA, images of the products and have developed a variety of different
patient’s X-rays, lab results, and other test results, health record structures. Humana, Aetna, and other
lists of medications, and reminders about upcoming health insurance companies are helping to defray
appointments. the cost of setting up EMR systems for some doctors
and hospitals. Humana has teamed up with health
But VistA is more than a database; it also has IT company Athenahealth to subsidize EMR systems
many features that improve quality of care. For for approximately 100 primary care practices within
example, nurses scan tags for patients and medica- Humana’s network. Humana pays most of the bill
tions to ensure that the correct dosages of medicines and offers further rewards to practices that meet
are going to the correct patients. This feature reduces governmental performance standards. Aetna and
medication errors, which is one of the most common IBM, on the other hand, have launched a cloud-
and costly types of medical errors, and speeds up based system that pools patient records and is
treatment as well. The system also generates licensed to doctors both inside and outside of Aetna.
automatic warnings based on specified criteria. It can
notify providers if a patient’s blood pressure goes There are two problems with the plethora of
over a certain level or if a patient is overdue for a options available to health care providers. First, there
regularly scheduled procedure like a flu shot or a are likely to be many issues with the sharing of
cancer screening. Devices that measure patients’ medical data between different systems. While the
vital signs can automatically transmit their results majority of EMR systems are likely to satisfy the
into the VistA system, which automatically updates specified criteria of reporting data electronically to
doctors at the first sign of trouble. governmental agencies, they may not be able to
report the same data to one another, a key require-
The results suggest that electronic records offer ment for a nation-wide system. Many fledgling
significant advantages to hospitals and patients alike. systems are designed using VistA as a guide, but
The 40,000 patients in the VA’s in-home monitoring many are not. Even if medical data are easily shared,
program reduced their hospital admissions by 25 it’s another problem altogether for doctors to actually
locate the information they need quickly and easily.

524 Part Four Building and Managing Systems could affect the success of the system and quality of
care provided. One in eight Americans have skipped
Many EMR systems have no capacity to drill down doctor visits or regular tests, asked a doctor to change
for more specific data, forcing doctors to wade a test result, or paid privately for a test, motivated
through large repositories of information to find the mostly by privacy concerns. A poorly designed EMR
one piece of data they need. EMR vendors are devel- network would amplify these concerns.
oping search engine technology intended for use in
medical records. Only after EMR systems become Sources: Katherine Gammon, “Connecting Electronic Medical
more widespread will the extent of the problems Records,” Technology Review, August 9, 2010; Avery Johnson,
with data sharing and accessibility become clearer. “Doctors Get Dose of Technology From Insurers,” The Wall Street
Journal, August 8, 2010; David Talbot, “The Doctor Will Record
The second problem is that there is a potential Your Data Now,” Technology Review, July 23, 2010; Tony Fisher and
conflict of interest for the insurance companies Joyce Norris-Montanari, “The Current State of Data in Health
involved in the creation of health record systems. Care,” Information-Management.com, June 15, 2010; Laura
Insurers are often accused of seeking ways to avoid Landro, “Breaking Down the Barriers,” The Wall Street Journal,
providing care for sick people. While most insurers April 13, 2010; Jacob Goldstein, “Can Technology Cure Health
are adamant that only doctors and patients will be Care?”, The Wall Street Journal, April 13, 2010; Deborah C. Peel,
able to access data in these systems, many “Your Medical Records Aren’t Secure,” The Wall Street Journal,
prospective patients are skeptical. In 2009, a poll March 23, 2010; Jane E. Brody, “Medical Paper Trail Takes
conducted for National Public Radio found that 59 Electronic Turn,” The New York Times, February 23, 2010; and
percent of respondents said they doubted the Laura Landro, “An Affordable Fix for Modernizing Medical
confidentiality of online medical records; even if the Records,” The Wall Street Journal, April 30, 2009.
systems are secure, the perception of poor privacy

CASE STUDY QUESTIONS 4. What are the business and social benefits of
digitizing medical recordkeeping?
1. What management, organization, and technology
factors are responsible for the difficulties in 5. Name two important information requirements for
building electronic medical record systems? physicians, two for patients, and two for hospitals
Explain your answer. that should be addressed by electronic medical
records systems.
2. What stages of system building will be the most
difficult when creating electronic medical record 6. Diagram the “as-is” and “to-be” processes for
systems? Explain your answer. prescribing a medication for a patient before and
after an EMR system is implemented.
3. What is the business and social impact of not
digitizing medical records (to individual physi-
cians, hospitals, insurers, patients)?

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Chapter 14

Managing Projects

LEARNING OBJECTIVESS CHAPTER OUTLINE
After reading this chapter,
you will be able to answer 14.1 THE IMPORTANCE OF PROJECT
the following questions: MANAGEMENT
Runaway Projects and System Failure
1. What are the objectives of project Project Management Objectives
management and why is it so
essential in developing information 14.2 SELECTING PROJECTS
systems? Management Structure for Information Systems
Projects
2. What methods can be used for Linking Systems Projects to the Business Plan
selecting and evaluating informa- Critical Success Factors
tion systems projects and aligning Portfolio Analysis
them with the firm’s business Scoring Models
goals?
14.3 ESTABLISHING THE BUSINESS VALUE OF
3. How can firms assess the business INFORMATION SYSTEMS
value of information systems Information System Costs and Benefits
projects? Real Options Pricing Models
Limitations of Financial Models
4. What are the principal risk factors
in information systems projects? 14.4 MANAGING PROJECT RISK
Dimensions of Project Risk
5. What strategies are useful for Change Management and the Concept of
managing project risk and system Implementation
implementation? Controlling Risk Factors
Designing for the Organization
Interactive Sessions: Project Management Software Tools

DST Systems Scores with Scrum 14.5 HANDS-ON MIS PROJECTS
and Application Life Cycle Management Decision Problems
Management
Improving Decision Making: Using Spreadsheet
Motorola Turns to Project Software for Capital Budgeting for a New CAD
Portfolio Management System

Improving Decision Making: Using Web Tools for
Buying and Financing a Home

LEARNING TRACK MODULES
Capital Budgeting Methods for Information System
Investments
Information Technology Investments and
Productivity
Enterprise Analysis (Business Systems Planning)

.COCA-COLA: “OPENING HAPPINESS” WITH A NEW
PROJECT MANAGEMENT SYSTEM

T he Coca-Cola Company is the world’s leading owner and marketer of nonalcoholic
beverage brands and the world’s largest manufacturer, distributor, and marketer of
concentrates and syrups used to produce nonalcoholic beverages. Coke sells its con-
centrates to independent bottlers in 200 countries. Arguably, Coke is the most valuable brand
in the world. In fact, Coke owns 12 brands that sell more than $1 billion a year. It’s corporate
branding handle in 2010 is “Open happiness.” Coke revenues were $30.9 billion in 2009.

Coca-Cola Bottling Co. Consolidated (“Coke Bottling”) is the second largest Coca-Cola bottler
in the United States. The company operates in 11 states in the Southeast and has revenues of
$1.5 billion. The company has hundreds of projects under management at any point in time.
Coke Bottling had been using an older project management software tool to coordinate these
projects, but by 2010 it lacked many of the features that good project managers want. Not all
projects in the company used the system, and information about these projects was spread
across many legacy systems. The software could not track cost elements, such as labor and
material cost, in one repository. Senior management wanted cost details and capital require-
ments for projects that could not be delivered. Project teams would typically need to go back
and ask senior management for more money because projects routinely exceeded their
budgets. Time and money were wasted gathering data from several locations and performing
ad hoc analyses on spreadsheets. The software was unable to report on compliance of projects
with various federal laws, including Sarbanes-Oxley.

Management wanted a new project management tool that could track all projects in the
firm, utilize existing SAP databases and reporting tools, and integrate with its Microsoft Server
environment. Coke Bottling chose the Microsoft Office Enterprise Project Management (EPM)
Solution, which includes Microsoft Office Project Portfolio Server 2007, Microsoft Office
Project Server 2007, and Microsoft Office Project Professional 2007. The hope was to simplify
the firm’s software footprint to consist primarily of SAP and Microsoft products and thereby
reduce maintenance costs.

The EPM is integrated with Windows SharePoint Services so that users can update project
information, manage documents, and track risks and issues using common SharePoint sites,
known as project workspaces. For training employees and help implementing the system, Coke
Bottling hired Project Solutions Group, a consulting and training firm in Marlborough,
Massachusetts.

A number of benefits have
flowed from this choice of
project management software.
For the first time, the company
has a centralized repository of
the cash flow and capital
requirements of projects. This
helps reduce its financing
costs. With the EPM solution,
managers can request the
amount of capital they need
with a high degree of accuracy
from the start of a project. The
firm can manage its human
resources and schedules more
effectively because it now
knows who is working on
which projects. Based on the

527

528 Part Four Building and Managing Systems

number of hours people spend on tasks, resource managers can see whether
they have the right spread of resources, and they can take decisive and
informed action by seeing where people are spending their time.

The firm also implemented a Project Gate methodology that consists of five
gates: qualify need, define, design, build/test, and deploy/measure. In the past,
managers just used checklists to manage projects, and there was no consistency
across projects or managers. The gate methodology ensures all projects go
through the same management process. To ensure enterprise-wide implementa-
tion of its new EPM solution, Coke Bottling created a new project management
office to bring consistency and structure to all the firm’s projects.

Sources: Microsoft Corporation, “Microsoft Case Studies. Coca-Cola Bottling Co. Improves
Project Cost Reporting,” August 2009, www.microsoft.com/casestudies, accessed November
5, 2010; Microsoft Corporation, “Microsoft Enterprise Project Management (EPM) Solution.”
www.microsoft.com/project., accessed November 5, 2010; and The Coca-Cola Company,
Form 10K for the Fiscal Year Ending December 31, 2009, filed with the Securities and
Exchange Commission, February 26, 2010.

One of the principal challenges posed by information systems is ensuring
they deliver genuine business benefits. Many information systems pro-
jects don’t succeed because organizations incorrectly assess their business
value or because firms fail to manage the organizational change surrounding
the introduction of new technology.
Coke Bottling’s management knew this when it implemented its enterprise
project management system. The new system involved an enterprise-wide
change in management and organizational behavior, in addition to careful
introduction of an entire set of software tools. Coke Bottling succeeded in this
project because it took a balanced view of the management, organizational, and
technical changes needed.
The chapter-opening diagram calls attention to important points raised by this
case and this chapter. Coke Bottling manages several hundred projects each year.
The existing software was unable to account for costs, predict financial needs,
comply with federal regulations and due diligence requests, and allocate resources
efficiently. This increased the likelihood of project failure, and raised the costs of
company operations. The company was able to improve project inventory man-
agement by implementing an enterprise-wide project management software tool
that was tightly integrated with its existing enterprise database environment and
its desktop software. Management was wise enough to also change the organiza-
tion by creating a Project Management Office, and develop a new set of manage-
ment practices to ensure the software performed up to expectations.

Chapter 14 Managing Projects 529

14.1 THE IMPORTANCE OF PROJECT MANAGEMENT

T here is a very high failure rate among information systems projects.
In nearly every organization, information systems projects take much
more time and money to implement than originally anticipated or the
completed system does not work properly. When an information system
does not meet expectations or costs too much to develop, companies
may not realize any benefit from their information system investment, and the
system may not be able to solve the problems for which it was intended. The
development of a new system must be carefully managed and orchestrated, and
the way a project is executed is likely to be the most important factor influencing
its outcome. That’s why it’s essential to have some knowledge about managing
information systems projects and the reasons why they succeed or fail.

RUNAWAY PROJECTS AND SYSTEM FAILURE

How badly are projects managed? On average, private sector projects are
underestimated by one-half in terms of budget and time required to deliver the
complete system promised in the system plan. Many projects are delivered
with missing functionality (promised for delivery in later versions). The
Standish Group consultancy, which monitors IT project success rates, found
that only 29 percent of all technology investments were completed on time, on
budget, and with all features and functions originally specified (Levinson,
2006). A 2007 Tata Consultancy Services study of IT effectiveness reported sim-
ilar findings (Blair, 2010). Between 30 and 40 percent of all software projects are
“runaway” projects that far exceed the original schedule and budget projections
and fail to perform as originally specified.

As illustrated in Figure 14-1, a systems development project without proper
management will most likely suffer these consequences:

• Costs that vastly exceed budgets
• Unexpected time slippage
• Technical performance that is less than expected
• Failure to obtain anticipated benefits

The systems produced by failed information projects are often not used in
the way they were intended, or they are not used at all. Users often have to
develop parallel manual systems to make these systems work.

The actual design of the system may fail to capture essential business
requirements or improve organizational performance. Information may not be
provided quickly enough to be helpful, it may be in a format that is impossible
to digest and use, or it may represent the wrong pieces of data.

FIGURE 14-1 CONSEQUENCES OF POOR PROJECT MANAGEMENT

Without proper management, a systems development project takes longer to complete and most often
exceeds the allocated budget. The resulting information system most likely is technically inferior and
may not be able to demonstrate any benefits to the organization.

530 Part Four Building and Managing Systems

The way in which nontechnical business users must interact with the system
may be excessively complicated and discouraging. A system may be designed
with a poor user interface. The user interface is the part of the system with
which end users interact. For example, an online input form or data entry
screen may be so poorly arranged that no one wants to submit data or request
information. System outputs may be displayed in a format that is too difficult to
comprehend.

Web sites may discourage visitors from exploring further if the Web pages are
cluttered and poorly arranged, if users cannot easily find the information they
are seeking, or if it takes too long to access and display the Web page on the
user’s computer.

Additionally, the data in the system may have a high level of inaccuracy or
inconsistency. The information in certain fields may be erroneous or ambigu-
ous, or it may not be organized properly for business purposes. Information
required for a specific business function may be inaccessible because the data
are incomplete.

PROJECT MANAGEMENT OBJECTIVES

A project is a planned series of related activities for achieving a specific
business objective. Information systems projects include the development of
new information systems, enhancement of existing systems, or upgrade or
replacement of the firm’s information technology (IT) infrastructure.

Project management refers to the application of knowledge, skills, tools, and
techniques to achieve specific targets within specified budget and time
constraints. Project management activities include planning the work, assessing
risk, estimating resources required to accomplish the work, organizing the work,
acquiring human and material resources, assigning tasks, directing activities,
controlling project execution, reporting progress, and analyzing the results. As
in other areas of business, project management for information systems must
deal with five major variables: scope, time, cost, quality, and risk.

Scope defines what work is or is not included in a project. For example, the
scope of project for a new order processing system might be to include new
modules for inputting orders and transmitting them to production and account-
ing but not any changes to related accounts receivable, manufacturing, distrib-
ution, or inventory control systems. Project management defines all the work
required to complete a project successfully, and should ensure that the scope of
a project does not expand beyond what was originally intended.

Time is the amount of time required to complete the project. Project
management typically establishes the amount of time required to complete
major components of a project. Each of these components is further broken
down into activities and tasks. Project management tries to determine the time
required to complete each task and establish a schedule for completing the
work.

Cost is based on the time to complete a project multiplied by the cost of human
resources required to complete the project. Information systems project costs
also include the cost of hardware, software, and work space. Project management
develops a budget for the project and monitors ongoing project expenses.

Quality is an indicator of how well the end result of a project satisfies the
objectives specified by management. The quality of information systems
projects usually boils down to improved organizational performance and
decision making. Quality also considers the accuracy and timeliness of
information produced by the new system and ease of use.

Chapter 14 Managing Projects 531
Risk refers to potential problems that would threaten the success of a project.
These potential problems might prevent a project from achieving its objectives
by increasing time and cost, lowering the quality of project outputs, or prevent-
ing the project from being completed altogether. Section 14.3 describes the
most important risk factors for information systems.

14.2 SELECTING PROJECTS

Companies typically are presented with many different projects for solving
problems and improving performance. There are far more ideas for systems
projects than there are resources. Firms will need to select from this group the
projects that promise the greatest benefit to the business. Obviously, the firm’s
overall business strategy should drive project selection.

MANAGEMENT STRUCTURE FOR INFORMATION
SYSTEMS PROJECTS

Figure 14-2 shows the elements of a management structure for information
systems projects in a large corporation. It helps ensure that the most important
projects are given priority.

At the apex of this structure is the corporate strategic planning group and the
information system steering committee. The corporate strategic planning
group is responsible for developing the firm’s strategic plan, which may require
the development of new systems.

The information systems steering committee is the senior management group
with responsibility for systems development and operation. It is composed of

FIGURE 14-2 MANAGEMENT CONTROL OF SYSTEMS PROJECTS

Each level of management in the hierarchy is responsible for specific aspects of systems projects, and
this structure helps give priority to the most important systems projects for the organization.

532 Part Four Building and Managing Systems

department heads from both end-user and information systems areas. The steer-
ing committee reviews and approves plans for systems in all divisions, seeks to
coordinate and integrate systems, and occasionally becomes involved in select-
ing specific information systems projects.

The project team is supervised by a project management group composed of
information systems managers and end-user managers responsible for oversee-
ing several specific information systems projects. The project team is directly
responsible for the individual systems project. It consists of systems analysts,
specialists from the relevant end-user business areas, application programmers,
and perhaps database specialists. The mix of skills and the size of the project
team depend on the specific nature of the system solution.

LINKING SYSTEMS PROJECTS TO THE BUSINESS PLAN

In order to identify the information systems projects that will deliver the most
business value, organizations need to develop an information systems plan
that supports their overall business plan and in which strategic systems are
incorporated into top-level planning. The plan serves as a road map indicating
the direction of systems development (the purpose of the plan), the rationale,
the current systems/situation, new developments to consider, the management
strategy, the implementation plan, and the budget (see Table 14-1).

The plan contains a statement of corporate goals and specifies how informa-
tion technology will support the attainment of those goals. The report shows
how general goals will be achieved by specific systems projects. It identifies
specific target dates and milestones that can be used later to evaluate the plan’s
progress in terms of how many objectives were actually attained in the time
frame specified in the plan. The plan indicates the key management decisions
concerning hardware acquisition; telecommunications; centralization/decen-
tralization of authority, data, and hardware; and required organizational
change. Organizational changes are also usually described, including manage-
ment and employee training requirements, recruiting efforts, changes in busi-
ness processes, and changes in authority, structure, or management practice.

In order to plan effectively, firms will need to inventory and document all of
their information system applications and IT infrastructure components. For
projects in which benefits involve improved decision making, managers should
try to identify the decision improvements that would provide the greatest
additional value to the firm. They should then develop a set of metrics to
quantify the value of more timely and precise information on the outcome of
the decision (see Chapter 12 for more detail on this topic).

CRITICAL SUCCESS FACTORS

To develop an effective information systems plan, the organization must have a
clear understanding of both its long- and short-term information requirements.
The strategic analysis, or critical success factors, approach argues that an
organization’s information requirements are determined by a small number of
critical success factors (CSFs) of managers. If these goals can be attained,
success of the firm or organization is assured (Rockart, 1979; Rockart and
Treacy, 1982). CSFs are shaped by the industry, the firm, the manager, and the
broader environment. For example, CSFs for the automobile industry might
include styling, quality, and cost to meet the goals of increasing market share
and raising profits. New information systems should focus on providing infor-
mation that helps the firm meet these goals.

Chapter 14 Managing Projects 533

TABLE 14-1 INFORMATION SYSTEMS PLAN

1. Purpose of the Plan
Overview of plan contents
Current business organization and future organization
Key business processes
Management strategy

2. Strategic Business Plan Rationale
Current situation
Current business organization
Changing environments
Major goals of the business plan
Firm’s strategic plan

3. Current Systems
Major systems supporting business functions and processes
Current infrastructure capabilities
Hardware
Software
Database
Telecommunications and Internet
Difficulties meeting business requirements
Anticipated future demands

4. New Developments
New system projects
Project descriptions
Business rationale
Applications’ role in strategy
New infrastructure capabilities required
Hardware
Software
Database
Telecommunications and Internet

5. Management Strategy
Acquisition plans
Milestones and timing
Organizational realignment
Internal reorganization
Management controls
Major training initiatives
Personnel strategy

6. Implementation Plan
Anticipated difficulties in implementation
Progress reports

7. Budget Requirements
Requirements
Potential savings
Financing
Acquisition cycle

534 Part Four Building and Managing Systems
The principal method used in CSF analysis is personal interviews—three or

four—with a number of top managers identifying their goals and the resulting
CSFs. These personal CSFs are aggregated to develop a picture of the firm’s
CSFs. Then systems are built to deliver information on these CSFs. (For the
method of developing CSFs in an organization, see Figure 14-3.)

Only top managers are interviewed, and the questions focus on a small
number of CSFs rather than requiring a broad inquiry into what information
is used in the organization. It is especially suitable for top management and
for the development of decision-support systems (DSS) and executive support
systems (ESS). The CSF method focuses organizational attention on how
information should be handled.

The method’s primary weakness is that there is no particularly rigorous way in
which individual CSFs can be aggregated into a clear company pattern. In addi-
tion, interviewees (and interviewers) often become confused when distinguishing
between individual and organizational CSFs. These types of CSFs are not necessar-
ily the same. What may be considered critical to a manager may not be important
for the organization as a whole. This method is clearly biased toward top man-
agers, although it could be extended to elicit ideas for promising new systems
from lower-level members of the organization (Peffers and Gengler, 2003).

PORTFOLIO ANALYSIS

Once strategic analyses have determined the overall direction of systems devel-
opment, portfolio analysis can be used to evaluate alternative system
projects. Portfolio analysis inventories all of the organization’s information
systems projects and assets, including infrastructure, outsourcing contracts,

FIGURE 14-3 USING CSFs TO DEVELOP SYSTEMS

The CSF approach relies on interviews with key managers to identify their CSFs. Individual CSFs are
aggregated to develop CSFs for the entire firm. Systems can then be built to deliver information on
these CSFs.

Chapter 14 Managing Projects 535

and licenses. This portfolio of information systems investments can be
described as having a certain profile of risk and benefit to the firm (see
Figure 14-4) similar to a financial portfolio.

Each information systems project carries its own set of risks and benefits.
(Section 14-4 describes the factors that increase the risks of systems projects.)
Firms would try to improve the return on their portfolios of IT assets by
balancing the risk and return from their systems investments. Although there
is no ideal profile for all firms, information-intensive industries (e.g., finance)
should have a few high-risk, high-benefit projects to ensure that they stay
current with technology. Firms in non-information-intensive industries should
focus on high-benefit, low-risk projects.

Most desirable, of course, are systems with high benefit and low risk. These
promise early returns and low risks. Second, high-benefit, high-risk systems
should be examined; low-benefit, high-risk systems should be totally avoided; and
low-benefit, low-risk systems should be reexamined for the possibility of rebuild-
ing and replacing them with more desirable systems having higher benefits. By
using portfolio analysis, management can determine the optimal mix of invest-
ment risk and reward for their firms, balancing riskier high-reward projects with
safer lower-reward ones. Firms where portfolio analysis is aligned with business
strategy have been found to have a superior return on their IT assets, better align-
ment of IT investments with business objectives, and better organization-wide
coordination of IT investments (Jeffrey and Leliveld, 2004).

SCORING MODELS

A scoring model is useful for selecting projects where many criteria must be
considered. It assigns weights to various features of a system and then
calculates the weighted totals. Using Table 14-2, the firm must decide among
two alternative enterprise resource planning (ERP) systems. The first column
lists the criteria that decision makers will use to evaluate the systems. These
criteria are usually the result of lengthy discussions among the decision-
making group. Often the most important outcome of a scoring model is not the
score but agreement on the criteria used to judge a system.

Table 14-2 shows that this particular company attaches the most importance
to capabilities for sales order processing, inventory management, and
warehousing. The second column in Table 14-2 lists the weights that decision

FIGURE 14-4 A SYSTEM PORTFOLIO

Companies should examine their portfolio of projects in terms of potential benefits and likely risks.
Certain kinds of projects should be avoided altogether and others developed rapidly. There is no ideal
mix. Companies in different industries have different profiles.

536 Part Four Building and Managing Systems

TABLE 14-2 EXAMPLE OF A SCORING MODEL FOR AN ERP SYSTEM

CRITERIA WEIGHT ERP ERP ERP ERP
SYSTEM A SYSTEM A SYSTEM B SYSTEM B
% SCORE % SCORE

1.0 Order Processing 4 67 268 73 292
1.1 Online order entry 4 81 324 87 348
1.2 Online pricing 4 72 288 81 324
1.3 Inventory check 3 66 198 59 177
1.4 Customer credit check 4 73 292 82 328
1.5 Invoicing 1,370 1,469
Total Order Processing

2.0 Inventory Management 3 72 216 76 228
2.1 Production forecasting 4 79 316 81 324
2.2 Production planning 4 68 272 80 320
2.3 Inventory control 3 71 213 69 207
2.4 Reports 1,017 1,079
Total Inventory Management

3.0 Warehousing 2 71 142 75 150
3.1 Receiving 3 77 231 82 246
3.2 Picking/packing 4 92 368 89 356
3.3 Shipping 741 752
Total Warehousing
3,128 3,300
Grand Total

makers attached to the decision criteria. Columns 3 and 5 show the percentage
of requirements for each function that each alternative ERP system can
provide. Each vendor’s score can be calculated by multiplying the percentage of
requirements met for each function by the weight attached to that function.
ERP System B has the highest total score.

As with all “objective” techniques, there are many qualitative judgments
involved in using the scoring model. This model requires experts who under-
stand the issues and the technology. It is appropriate to cycle through the
scoring model several times, changing the criteria and weights, to see how
sensitive the outcome is to reasonable changes in criteria. Scoring models are
used most commonly to confirm, to rationalize, and to support decisions, rather
than as the final arbiters of system selection.

14.3 ESTABLISHING THE BUSINESS VALUE OF
INFORMATION SYSTEMS

Even if a system project supports a firm’s strategic goals and meets user
information requirements, it needs to be a good investment for the firm. The

Chapter 14 Managing Projects 537

value of systems from a financial perspective essentially revolves around the
issue of return on invested capital. Does a particular information system invest-
ment produce sufficient returns to justify its costs?

INFORMATION SYSTEM COSTS AND BENEFITS

Table 14-3 lists some of the more common costs and benefits of systems.
Tangible benefits can be quantified and assigned a monetary value.
Intangible benefits, such as more efficient customer service or enhanced
decision making, cannot be immediately quantified but may lead to quantifi-
able gains in the long run. Transaction and clerical systems that displace labor
and save space always produce more measurable, tangible benefits than
management information systems, decision-support systems, and computer-
supported collaborative work systems (see Chapters 2 and 11).

TABLE 14-3 COSTS AND BENEFITS OF INFORMATION SYSTEMS

COSTS
Hardware
Telecommunications
Software
Services
Personnel

TANGIBLE BENEFITS (COST SAVINGS)
Increased productivity
Lower operational costs
Reduced workforce
Lower computer expenses
Lower outside vendor costs
Lower clerical and professional costs
Reduced rate of growth in expenses
Reduced facility costs

INTANGIBLE BENEFITS
Improved asset utilization
Improved resource control
Improved organizational planning
Increased organizational flexibility
More timely information
More information
Increased organizational learning
Legal requirements attained
Enhanced employee goodwill
Increased job satisfaction
Improved decision making
Improved operations
Higher client satisfaction
Better corporate image

538 Part Four Building and Managing Systems

Chapter 5 introduced the concept of total cost of ownership (TCO), which is
designed to identify and measure the components of information technology
expenditures beyond the initial cost of purchasing and installing hardware and
software. However, TCO analysis provides only part of the information needed
to evaluate an information technology investment because it does not typically
deal with benefits, cost categories such as complexity costs, and “soft” and
strategic factors discussed later in this section.

Capital Budgeting for Information Systems

To determine the benefits of a particular project, you’ll need to calculate all of
its costs and all of its benefits. Obviously, a project where costs exceed benefits
should be rejected. But even if the benefits outweigh the costs, additional finan-
cial analysis is required to determine whether the project represents a good
return on the firm’s invested capital. Capital budgeting models are one of
several techniques used to measure the value of investing in long-term capital
investment projects.

Capital budgeting methods rely on measures of cash flows into and out of the
firm; capital projects generate those cash flows. The investment cost for informa-
tion systems projects is an immediate cash outflow caused by expenditures for
hardware, software, and labor. In subsequent years, the investment may cause
additional cash outflows that will be balanced by cash inflows resulting from the
investment. Cash inflows take the form of increased sales of more products (for
reasons such as new products, higher quality, or increasing market share) or
reduced costs in production and operations. The difference between cash out-
flows and cash inflows is used for calculating the financial worth of an invest-
ment. Once the cash flows have been established, several alternative methods
are available for comparing different projects and deciding about the investment.

The principal capital budgeting models for evaluating IT projects are: the
payback method, the accounting rate of return on investment (ROI), net pre-
sent value, and the internal rate of return (IRR). You can find out more about
how these capital budgeting models are used to justify information system
investments in the Learning Tracks for this chapter.

REAL OPTIONS PRICING MODELS

Some information systems projects are highly uncertain, especially invest-
ments in IT infrastructure. Their future revenue streams are unclear and their
up-front costs are high. Suppose, for instance, that a firm is considering a $20
million investment to upgrade its IT infrastructure—its hardware, software,
data management tools, and networking technology. If this upgraded infra-
structure were available, the organization would have the technology capabili-
ties to respond more easily to future problems and opportunities. Although the
costs of this investment can be calculated, not all of the benefits of making this
investment can be established in advance. But if the firm waits a few years until
the revenue potential becomes more obvious, it might be too late to make the
infrastructure investment. In such cases, managers might benefit from using
real options pricing models to evaluate information technology investments.

Real options pricing models (ROPMs) use the concept of options
valuation borrowed from the financial industry. An option is essentially the
right, but not the obligation, to act at some future date. A typical call option, for
instance, is a financial option in which a person buys the right (but not the
obligation) to purchase an underlying asset (usually a stock) at a fixed price
(strike price) on or before a given date.

Chapter 14 Managing Projects 539

For instance, let’s assume that on October 15, 2010, you could purchase a
call option for $14.25 that would give you the right to buy a share of P&G com-
mon stock for $50 per share on a certain date. Options expire over time, and
this call option has a maturity date in December. If the price of P&G stock
does not rise above $50 per share by the end of December, you would not
exercise the option, and the value of the option would fall to zero on the strike
date. If, however, the price of P&G common stock rose to, say, $100 per share,
you could purchase the stock for the strike price of $50 and retain the profit of
$50 per share minus the cost of the option. (Because the option is sold as a
100-share contract, the cost of the contract would be 100 × $14.25 before com-
missions, or $1,425, and you would be purchasing and obtaining a profit from
100 shares of Procter & Gamble.) The stock option enables the owner to ben-
efit from the upside potential of an opportunity while limiting the downside
risk.

ROPMs value information systems projects similar to stock options, where an
initial expenditure on technology creates the right, but not the obligation, to
obtain the benefits associated with further development and deployment of the
technology as long as management has the freedom to cancel, defer, restart, or
expand the project. ROPMs give managers the flexibility to stage their IT invest-
ment or test the waters with small pilot projects or prototypes to gain more
knowledge about the risks of a project before investing in the entire implemen-
tation. The disadvantages of this model are primarily in estimating all the key
variables affecting option value, including anticipated cash flows from the
underlying asset and changes in the cost of implementation. Models for
determining option value of information technology platforms are being devel-
oped (Fichman, 2004; McGrath and MacMillan, 2000).

LIMITATIONS OF FINANCIAL MODELS

The traditional focus on the financial and technical aspects of an information
system tends to overlook the social and organizational dimensions of
information systems that may affect the true costs and benefits of the invest-
ment. Many companies’ information systems investment decisions do not
adequately consider costs from organizational disruptions created by a new
system, such as the cost to train end users, the impact that users’ learning
curves for a new system have on productivity, or the time managers need to
spend overseeing new system-related changes. Benefits, such as more timely
decisions from a new system or enhanced employee learning and expertise,
may also be overlooked in a traditional financial analysis (Ryan, Harrison, and
Schkade, 2002).

14.4 MANAGING PROJECT RISK

We have already introduced the topic of information system risks and risk
assessment in Chapter 8. In this chapter, we describe the specific risks to
information systems projects and show what can be done to manage them
effectively.

DIMENSIONS OF PROJECT RISK

Systems differ dramatically in their size, scope, level of complexity, and organi-
zational and technical components. Some systems development projects are

540 Part Four Building and Managing Systems

more likely to create the problems we have described earlier or to suffer delays
because they carry a much higher level of risk than others. The level of project
risk is influenced by project size, project structure, and the level of technical
expertise of the information systems staff and project team.

• Project size. The larger the project—as indicated by the dollars spent, the size
of the implementation staff, the time allocated for implementation, and the
number of organizational units affected—the greater the risk. Very large-scale
systems projects have a failure rate that is 50 to 75 percent higher than that
for other projects because such projects are complex and difficult to control.
The organizational complexity of the system—how many units and groups
use it and how much it influences business processes—contribute to the
complexity of large-scale systems projects just as much as technical
characteristics, such as the number of lines of program code, length of project,
and budget (Xia and Lee, 2004; Concours Group, 2000; Laudon, 1989). In addi-
tion, there are few reliable techniques for estimating the time and cost to
develop large-scale information systems.

• Project structure. Some projects are more highly structured than others. Their
requirements are clear and straightforward so outputs and processes can be
easily defined. Users know exactly what they want and what the system
should do; there is almost no possibility of the users changing their minds.
Such projects run a much lower risk than those with relatively undefined,
fluid, and constantly changing requirements; with outputs that cannot be
fixed easily because they are subject to users’ changing ideas; or with users
who cannot agree on what they want.

• Experience with technology. The project risk rises if the project team and the
information system staff lack the required technical expertise. If the team is
unfamiliar with the hardware, system software, application software, or
database management system proposed for the project, it is highly likely that
the project will experience technical problems or take more time to complete
because of the need to master new skills.

Although the difficulty of the technology is one risk factor in information
systems projects, the other factors are primarily organizational, dealing with
the complexity of information requirements, the scope of the project, and how
many parts of the organization will be affected by a new information system.

CHANGE MANAGEMENT AND THE CONCEPT OF
IMPLEMENTATION

The introduction or alteration of an information system has a powerful
behavioral and organizational impact. Changes in the way that information is
defined, accessed, and used to manage the organization’s resources often lead
to new distributions of authority and power. This internal organizational
change breeds resistance and opposition and can lead to the demise of an
otherwise good system.

A very large percentage of information systems projects stumble because the
process of organizational change surrounding system building was not properly
addressed. Successful system building requires careful change management.

The Concept of Implementation

To manage the organizational change surrounding the introduction of a new
information system effectively, you must examine the process of implementa-
tion. Implementation refers to all organizational activities working toward the
adoption, management, and routinization of an innovation, such as a new

Chapter 14 Managing Projects 541

information system. In the implementation process, the systems analyst is a
change agent. The analyst not only develops technical solutions but also
redefines the configurations, interactions, job activities, and power relation-
ships of various organizational groups. The analyst is the catalyst for the entire
change process and is responsible for ensuring that all parties involved accept
the changes created by a new system. The change agent communicates with
users, mediates between competing interest groups, and ensures that the
organizational adjustment to such changes is complete.

The Role of End Users

System implementation generally benefits from high levels of user involve-
ment and management support. User participation in the design and operation
of information systems has several positive results. First, if users are heavily
involved in systems design, they have more opportunities to mold the system
according to their priorities and business requirements, and more opportunities
to control the outcome. Second, they are more likely to react positively to the
completed system because they have been active participants in the change
process. Incorporating user knowledge and expertise leads to better solutions.

The relationship between users and information systems specialists has
traditionally been a problem area for information systems implementation
efforts. Users and information systems specialists tend to have different back-
grounds, interests, and priorities. This is referred to as the user-designer com-
munications gap. These differences lead to divergent organizational loyalties,
approaches to problem solving, and vocabularies.

Information systems specialists, for example, often have a highly technical,
or machine, orientation to problem solving. They look for elegant and sophisti-
cated technical solutions in which hardware and software efficiency is
optimized at the expense of ease of use or organizational effectiveness. Users
prefer systems that are oriented toward solving business problems or facilitat-
ing organizational tasks. Often the orientations of both groups are so at odds
that they appear to speak in different tongues.

These differences are illustrated in Table 14-4, which depicts the typical
concerns of end users and technical specialists (information systems designers)
regarding the development of a new information system. Communication
problems between end users and designers are a major reason why user
requirements are not properly incorporated into information systems and why
users are driven out of the implementation process.

Systems development projects run a very high risk of failure when there is a
pronounced gap between users and technical specialists and when these groups
continue to pursue different goals. Under such conditions, users are often

TABLE 14-4 THE USER-DESIGNER COMMUNICATIONS GAP

USER CONCERNS DESIGNER CONCERNS
Will the system deliver the information I need for my work?
How quickly can I access the data? How much disk storage space will the master file consume?
How many lines of program code will it take to perform this
How easily can I retrieve the data? function?
How much clerical support will I need to enter data into the system? How can we cut down on CPU time when we run the system?
How will the operation of the system fit into my daily business schedule? What is the most efficient way of storing these data?
What database management system should we use?

542 Part Four Building and Managing Systems

driven away from the project. Because they cannot comprehend what the tech-
nicians are saying, users conclude that the entire project is best left in the
hands of the information specialists alone.

Management Support and Commitment

If an information systems project has the backing and commitment of manage-
ment at various levels, it is more likely to be perceived positively by both users
and the technical information services staff. Both groups will believe that their
participation in the development process will receive higher-level attention and
priority. They will be recognized and rewarded for the time and effort they
devote to implementation. Management backing also ensures that a systems
project receives sufficient funding and resources to be successful. Furthermore,
to be enforced effectively, all the changes in work habits and procedures and
any organizational realignments associated with a new system depend on man-
agement backing. If a manager considers a new system a priority, the system
will more likely be treated that way by his or her subordinates.

Change Management Challenges for Business Process
Reengineering, Enterprise Applications, and Mergers
and Acquisitions

Given the challenges of innovation and implementation, it is not surprising to
find a very high failure rate among enterprise application and business process
reengineering (BPR) projects, which typically require extensive organizational
change and which may require replacing old technologies and legacy systems
that are deeply rooted in many interrelated business processes. A number of
studies have indicated that 70 percent of all business process reengineering
projects fail to deliver promised benefits. Likewise, a high percentage of
enterprise applications fail to be fully implemented or to meet the goals of their
users even after three years of work.

Many enterprise application and reengineering projects have been under-
mined by poor implementation and change management practices that failed
to address employees’ concerns about change. Dealing with fear and anxiety
throughout the organization, overcoming resistance by key managers, changing
job functions, career paths, and recruitment practices have posed greater
threats to reengineering than the difficulties companies faced visualizing and
designing breakthrough changes to business processes. All of the enterprise
applications require tighter coordination among different functional groups as
well as extensive business process change (see Chapter 9).

Projects related to mergers and acquisitions have a similar failure rate.
Mergers and acquisitions are deeply affected by the organizational characteris-
tics of the merging companies as well as by their IT infrastructures. Combining
the information systems of two different companies usually requires consider-
able organizational change and complex systems projects to manage. If the inte-
gration is not properly managed, firms can emerge with a tangled hodgepodge
of inherited legacy systems built by aggregating the systems of one firm after
another. Without a successful systems integration, the benefits anticipated from
the merger cannot be realized, or, worse, the merged entity cannot execute its
business processes effectively.

CONTROLLING RISK FACTORS

Various project management, requirements gathering, and planning method-
ologies have been developed for specific categories of implementation

Chapter 14 Managing Projects 543

problems. Strategies have also been devised for ensuring that users play appro-
priate roles throughout the implementation period and for managing the
organizational change process. Not all aspects of the implementation process
can be easily controlled or planned. However, anticipating potential implemen-
tation problems and applying appropriate corrective strategies can increase the
chances for system success.

The first step in managing project risk involves identifying the nature and
level of risk confronting the project (Schmidt et al., 2001). Implementers can
then handle each project with the tools and risk-management approaches
geared to its level of risk (Iversen, Mathiassen, and Nielsen, 2004; Barki, Rivard,
and Talbot, 2001; McFarlan, 1981).

Managing Technical Complexity

Projects with challenging and complex technology for users to master benefit
from internal integration tools. The success of such projects depends on how
well their technical complexity can be managed. Project leaders need both
heavy technical and administrative experience. They must be able to anticipate
problems and develop smooth working relationships among a predominantly
technical team. The team should be under the leadership of a manager with a
strong technical and project management background, and team members
should be highly experienced. Team meetings should take place frequently.
Essential technical skills or expertise not available internally should be secured
from outside the organization.

Formal Planning and Control Tools

Large projects benefit from appropriate use of formal planning tools and
formal control tools for documenting and monitoring project plans. The two
most commonly used methods for documenting project plans are Gantt charts
and PERT charts. A Gantt chart lists project activities and their corresponding
start and completion dates. The Gantt chart visually represents the timing and
duration of different tasks in a development project as well as their human
resource requirements (see Figure 14-5). It shows each task as a horizontal bar
whose length is proportional to the time required to complete it.

Although Gantt charts show when project activities begin and end, they don’t
depict task dependencies, how one task is affected if another is behind sched-
ule, or how tasks should be ordered. That is where PERT charts are useful.
PERT stands for Program Evaluation and Review Technique, a methodology
developed by the U.S. Navy during the 1950s to manage the Polaris submarine
missile program. A PERT chart graphically depicts project tasks and their
interrelationships. The PERT chart lists the specific activities that make up a
project and the activities that must be completed before a specific activity can
start, as illustrated in Figure 14-6.

The PERT chart portrays a project as a network diagram consisting of num-
bered nodes (either circles or rectangles) representing project tasks. Each node
is numbered and shows the task, its duration, the starting date, and the comple-
tion date. The direction of the arrows on the lines indicates the sequence of
tasks and shows which activities must be completed before the commencement
of another activity. In Figure 14-6, the tasks in nodes 2, 3, and 4 are not depen-
dent on each other and can be undertaken simultaneously, but each is depen-
dent on completion of the first task. PERT charts for complex projects can be
difficult to interpret, and project managers often use both techniques.

These project management techniques can help managers identify bottle-
necks and determine the impact that problems will have on project comple-

544 Part Four Building and Managing Systems
FIGURE 14-5 A GANTT CHART

The Gantt chart in this figure shows the task, person-days, and initials of each responsible person, as well as the start and finish dates for
each task. The resource summary provides a good manager with the total person-days for each month and for each person working on the
project to manage the project successfully. The project described here is a data administration project.

Chapter 14 Managing Projects 545

FIGURE 14-6 A PERT CHART

This is a simplified PERT chart for creating a small Web site. It shows the ordering of project tasks and the relationship of a task with
preceding and succeeding tasks.

tion times. They can also help systems developers partition projects into
smaller, more manageable segments with defined, measurable business
results. Standard control techniques can successfully chart the progress of the
project against budgets and target dates, so deviations from the plan can be
spotted.

Increasing User Involvement and Overcoming User
Resistance

Projects with relatively little structure and many undefined requirements
must involve users fully at all stages. Users must be mobilized to support one
of many possible design options and to remain committed to a single design.
External integration tools consist of ways to link the work of the imple-
mentation team to users at all organizational levels. For instance, users can
become active members of the project team, take on leadership roles, and
take charge of installation and training. The implementation team can
demonstrate its responsiveness to users, promptly answering questions,
incorporating user feedback, and showing their willingness to help (Gefen
and Ridings, 2002).

Participation in implementation activities may not be enough to overcome
the problem of user resistance to organizational change. Different users may be
affected by the system in different ways. Whereas some users may welcome a
new system because it brings changes they perceive as beneficial to them,

546 Part Four Building and Managing Systems

others may resist these changes because they believe the shifts are detrimental
to their interests.

If the use of a system is voluntary, users may choose to avoid it; if use is
mandatory, resistance will take the form of increased error rates, disruptions,
turnover, and even sabotage. Therefore, the implementation strategy must not
only encourage user participation and involvement, but it must also address the
issue of counterimplementation (Keen, 1981). Counterimplementation is a
deliberate strategy to thwart the implementation of an information system or
an innovation in an organization.

Strategies to overcome user resistance include user participation (to elicit
commitment as well as to improve design), user education and training,
management edicts and policies, and better incentives for users who cooperate.
The new system can be made more user friendly by improving the end-user
interface. Users will be more cooperative if organizational problems are solved
prior to introducing the new system.

The Interactive Session on Organizations illustrates some of these issues at
work. Software firm DST Systems had trouble managing its projects because it
had a high level of technical complexity and needed more powerful tools for
planning and control. DST also needed buy-in from end users. As you read this
case, try to determine how DST’s selection of software development methods
addressed these problems.

DESIGNING FOR THE ORGANIZATION

Because the purpose of a new system is to improve the organization’s perfor-
mance, information systems projects must explicitly address the ways in which
the organization will change when the new system is installed, including
installation of intranets, extranets, and Web applications. In addition to proce-
dural changes, transformations in job functions, organizational structure, power
relationships, and the work environment should be carefully planned.

Areas where users interface with the system require special attention, with
sensitivity to ergonomics issues. Ergonomics refers to the interaction of people
and machines in the work environment. It considers the design of jobs, health
issues, and the end-user interface of information systems. Table 14-5 lists the
organizational dimensions that must be addressed when planning and imple-
menting information systems.

Although systems analysis and design activities are supposed to include an
organizational impact analysis, this area has traditionally been neglected.
An organizational impact analysis explains how a proposed system will

TABLE 14-5 ORGANIZATIONAL FACTORS IN SYSTEMS PLANNING AND
IMPLEMENTATION

Employee participation and involvement
Job design
Standards and performance monitoring
Ergonomics (including equipment, user interfaces, and the work environment)
Employee grievance resolution procedures
Health and safety
Government regulatory compliance

Chapter 14 Managing Projects 547

INTERACTIVE SESSION: ORGANIZATIONS

DST SYSTEMS SCORES WITH SCRUM AND APPLICATION LIFE CYCLE
MANAGEMENT

Companies like DST Systems have recognized the backlog. These features are supposed to be com-
value in Scrum development to their bottom lines, pleted by the end of the sprint—coded, tested, and
but making the transition from traditional develop- integrated into the evolving product or system. At
mental methods to Scrum development can be the end of the sprint, a sprint review allows the team
challenging. DST Systems is a software development to demonstrate the new functionality to the product
company whose flagship product, Automated Work owner and other interested stakeholders who
Distributor (AWD), increases back-office efficiency provide feedback that could influence the next
and helps offices become paperless. DST was sprint.
founded in 1969 and its headquarters are in Kansas
City, Missouri. The company has approximately Scrum relies on self-organizing, cross-functional
10,000 employees, 1,200 of whom are software devel- teams supported by a ScrumMaster and a product
opers. owner. The ScrumMaster acts as a coach for the
team, while the product owner represents the
This development group had used a mixture of business, customers, or users in guiding the team
tools, processes, and source code control systems toward building the right product.
without any unified repository for code or a stan-
dardized developer tool set. Different groups within DST tried Scrum with its existing software
the organization used very different tools for soft- development tools and experienced strong results.
ware development, like Serena PVCS, Eclipse, or The company accelerated its software development
other source code software packages. Processes were cycle from 24 to 6 months and developer productiv-
often manual and time-consuming. Managers were ity increased 20 percent, but Scrum didn’t work as
unable to easily determine how resources were well as DST had hoped with its existing tools.
being allocated, which of their employees were Processes broke down and the lack of standardiza-
working on certain projects, and the status of spe- tion among the tools and processes used by DST
cific assets. prevented Scrum from providing its maximum
benefit to the company. DST needed an application
All of this meant that DST struggled to update its life cycle management (ALM) product that would
most important product, AWD, in a timely fashion. unify its software development environment.
Its typical development schedule was to release a
new version once every two years, but competitors DST set up a project evaluation team to identify
were releasing versions faster. DST knew that it the right development environment for them. Key
needed a better method than the traditional “water- factors included cost-effectiveness, ease of adoption,
fall” method for designing, coding, testing, and and feature-effectiveness. DST wanted the ability to
integrating its products. In the waterfall model of use the new software without significant training
software development, progression flows sequen- and software they could quickly adopt without
tially from one step to the next like a waterfall, with jeopardizing AWD’s development cycle. After
each step unable to start until the previous step has considering several ALM products and running test
been completed. While DST had used this method projects with each one, DST settled on CollabNet’s
with great success previously, DST began searching offering, TeamForge, for its ALM platform.
for viable alternatives.
CollabNet specializes in software designed to
The development group started exploring Scrum, work well with agile software development methods
a framework for agile software development in such as Scrum. Its core product is TeamForge, an
which projects progress via a series of iterations integrated suite of Web-based development and
called sprints. Scrum projects make progress in a collaboration tools for agile software development
series of sprints, which are timeboxed iterations no that centralizes management of users, projects,
more than a month long. At the start of a sprint, processes, and assets. DST also adopted CollabNet’s
team members commit to delivering some number Subversion product to help with the management
of features that were listed on a project’s product and control of changes to project documents,
programs, and other information stored as computer

548 Part Four Building and Managing Systems that changes would be greeted enthusiastically. Last,
by allowing developers to adopt ALM software on
files. DST’s adoption of CollabNet’s products was fast, their own, DST avoided the resentment associated
requiring only 10 weeks, and DST developers now do with mandating unwelcome change. DST’s move
all of their work within this ALM platform. from waterfall to Scrum development was a success
TeamForge was not forced on developers, but the because the company selected the right development
ALM platform was so appealing compared to DST’s framework as well as the right software to make that
previous environment that developers adopted the change a reality and skillfully managed the change
product virally. process.

Jerry Tubbs, the systems development manager at Sources: Jerry Tubbs, “Team Building Goes Viral,” Information Week,
DST Systems, says that DST was successful in its February 22, 2010; www.collab.net, accessed August 2010; Mountain
attempts to revamp its software group because of a Goat Software, “Introduction to Scrum - An Agile Process,”
few factors. First, it looked for simplicity rather than www.mountaingoatsoftware.com/topics/scrum, accessed August
complicated, do-everything offerings. Simpler wasn’t 2010.
just better for DST—it was also less expensive than
some of the alternatives. DST also involved
developers in the decision-making process to ensure

CASE STUDY QUESTIONS MIS IN ACTION

1. What were some of the problems with DST Search the Internet for videos or Web sites explaining
Systems’ old software development environment? Scrum or agile development. Then answer the
following questions:
2. How did Scrum development help solve some of
those problems? 1. Describe some of the benefits and drawbacks of
Scrum development.
3. What other adjustments did DST make to be able
to use Scrum more effectively in its software pro- 2. How does Scrum differ from other software
jects? What management, organization, and tech- development methodologies?
nology issues had to be addressed?
3. What are the potential benefits to companies using
Scrum development?

affect organizational structure, attitudes, decision making, and operations.
To integrate information systems successfully with the organization, thorough
and fully documented organizational impact assessments must be given more
attention in the development effort.

Sociotechnical Design

One way of addressing human and organizational issues is to incorporate
sociotechnical design practices into information systems projects. Designers
set forth separate sets of technical and social design solutions. The social design
plans explore different workgroup structures, allocation of tasks, and the design
of individual jobs. The proposed technical solutions are compared with the
proposed social solutions. The solution that best meets both social and techni-
cal objectives is selected for the final design. The resulting sociotechnical
design is expected to produce an information system that blends technical
efficiency with sensitivity to organizational and human needs, leading to higher
job satisfaction and productivity.

Chapter 14 Managing Projects 549

PROJECT MANAGEMENT SOFTWARE TOOLS

Commercial software tools that automate many aspects of project management
facilitate the project management process. Project management software
typically features capabilities for defining and ordering tasks, assigning
resources to tasks, establishing starting and ending dates to tasks, tracking
progress, and facilitating modifications to tasks and resources. Many automate
the creation of Gantt and PERT charts.

Some of these tools are large sophisticated programs for managing very large
projects, dispersed work groups, and enterprise functions. These high-end tools
can manage very large numbers of tasks and activities and complex relation-
ships.

Microsoft Office Project 2010 has become the most widely used project
management software today. It is PC-based, with capabilities for producing
PERT and Gantt charts and for supporting critical path analysis, resource
allocation, project tracking, and status reporting. Project also tracks the way
changes in one aspect of a project affect others. Project Professional 2010
provides collaborative project management capabilities when used with
Microsoft Office Project Server 2010. Project Server stores project data in a
central SQL Server database, enabling authorized users to access and update the
data over the Internet. Project Server 2010 is tightly integrated with the
Microsoft Windows SharePoint Services collaborative workspace platform.
These features help large enterprises manage projects in many different
locations. Products such as EasyProjects .NET and Vertabase are also useful for
firms that want Web-based project management tools.

Going forward, delivery of project management software as a software
service (SaaS) will make this technology accessible to more organizations,
especially smaller ones. Open source versions of project management software
such as Project Workbench and OpenProj will further reduce the total cost of
ownership and attract new users. Thanks to the popularity of social media such
as Facebook and Twitter, project management software is also likely to become
more flexible, collaborative, and user-friendly.

While project management software helps organizations track individual
projects, the resources allocated to them, and their costs, project portfolio
management software helps organizations manage portfolios of projects and
dependencies among them. The Interactive Session on Management describes
how Hewlett-Packard’s project portfolio management software helped Motorola
Inc. coordinate projects and determine the right mix of projects and resources
to accomplish its strategic goals.

550 Part Four Building and Managing Systems

INTERACTIVE SESSION: MANAGEMENT

MOTOROLA TURNS TO PROJECT PORTFOLIO MANAGEMENT

Motorola Inc. is a large multinational technology scaled down. Processes that were critical to the
company based in Schaumburg, Illinois, specializing company but poorly funded were candidates for
in broadband communications infrastructure, better support. After performing this exercise,
enterprise mobility, public safety solutions, high- Motorola hoped to automate many of the manage-
definition video, mobile devices, and a wide variety ment tasks that it had classified as less complex, but
of other mobile technologies. Motorola earned $22 the sheer size of the company made automation
billion in revenue in 2009, with 53,000 employees challenging.
worldwide. Motorola has grown organically through
mergers and acquisitions, and consequently has Motorola has 1,800 information systems and 1,500
thousands of systems performing various functions information systems employees who are responsible
throughout the business. Motorola knew that if it for 1,000 projects per year. The company also
could better manage its systems and its projects, it outsources much of its IT work to outside contrac-
could drastically lower its operating costs. In today’s tors, further increasing the number of regular users
weakened economic climate, saving money and of its systems. Managing that many workers is
increasing efficiency have become more important difficult and often leads to inefficiency. Many of the
than ever. company’s employees were working on similar
projects or compiling the same data sets, unaware
Motorola is organized into three major segments. that other groups within the company were doing
The Mobile Devices segment of the business designs, the same work. Motorola hoped to identify and
manufactures, sells, and services wireless handsets, eliminate these groups, also known as “redundant
including smartphones. Motorola expects to face silos” of activity within the company, both to cut
increasingly intense competition in this segment costs and increase productivity. Management also
from a growing number of challengers hoping to hoped to prioritize resource usage so that projects
cash in on the smartphone craze. Motorola’s Home that were most valuable to the company received the
and Networks segment develops infrastructure and resources they needed to be successful first.
equipment used by cable television operators, wire-
less service providers, and other communications Motorola’s managers hoped to achieve their goals
providers, and its Enterprise Mobility Solutions seg- of automating processes and lowering operating
ment develops and markets voice and data commu- costs by adopting HP’s Project and Portfolio
nications products, wireless broadband systems, and Management Center software, or HP PPM. This soft-
a host of applications and devices to a variety of ware helps managers compare proposals, projects,
enterprise customers. and operational activities against budgets and
resource capacity levels. All of the information
Weak economic conditions had driven Motorola’s Motorola gathered from its process analysis is
numbers down across all major segments of the busi- located in a central location with HP PPM, which
ness. The company used the downturn to review its also serves as the centralized source of other critical
business in depth to locate areas where it could information such as the amount of investment
become more efficient. Motorola first analyzed each dollars used by a process and the priorities of
of its business functions in terms of its importance business requests coming through Motorola’s
and value to the business. Then, it analyzed the com- systems. HP PPM allows Motorola’s IT employees
plexity and cost of that function. For example, engi- and managers quick and easy access to any and all
neering at Motorola is very important to the com- data pertaining to the company’s business
pany’s success, and differentiates it from its processes.
competitors. Engineering is also one of Motorola’s
most complicated and costly business functions. HP PPM allows Motorola to govern its entire IT
portfolio using a broad array of tools, including
Motorola repeated this analysis for all of its busi- objective prioritization; multiple levels of input,
ness functions, and then determined which areas review, and approval; and. real-time visibility into all
required adjustment. Processes that were not as areas of the business. HP PPM users have up-to-the-
critical to the company’s success, but were still minute data on resources, budgets, forecasts, costs,
highly complex and costly became candidates to be programs, projects, and overall IT demand. HP PPM

can be accessed by Motorola employees on the Chapter 14 Managing Projects 551
premises or as software as a service (SaaS). Motorola
used the on-site version, but converted to SaaS with tools to predict the value and usefulness of new
no effect on usability. Motorola employees rave that projects.
HP has been responsive and reliable with its service
and customer support. Using SaaS reduces Motorola’s The results have been just what Motorola had
support costs by approximately 50 percent. hoped for. In two years, the company reduced its
cost structure by 40 percent, and on larger projects
HP PPM uses a series of graphical displays and using HP PPM, Motorola has achieved an average of
highly targeted data to effectively capture real-time 150 percent ROI. Motorola’s IT support costs
IT program and project status. It also features what-if decreased by 25 percent. The redundant silos of
scenario planning that automatically creates an workers performing the same tasks were all but elim-
optimal mix of projects, proposals, and assets. This inated, removing 25 percent of the company’s
means that users can use HP PPM to perform a “wasted work.” Motorola also hopes to use HP PPM
similar analysis of business processes that Motorola for resource management and application support.
initially made by hand to begin its IT overhaul and to
generate recommendations based on that analysis. Sources: HP, “Motorola: Excellence in Cost Optimization” (2010) and
Users can also use the what-if scenario planning “HP Project and Portfolio Management (PPM) Portfolio
Management Module Data Sheet, ”www.hp.com, accessed
November 9, 2010; Dana Gardner, “Motorola Shows Dramatic
Savings in IT Operations Costs with ‘ERP for IT’ Tools,” ZD Net, June
18, 2010; “Motorola Inc. Form 10-K”, for the fiscal year ended Dec 31,
2009, accessed via www.sec.gov.

CASE STUDY QUESTIONS MIS IN ACTION

1. What are some of the challenges Motorola faces as Use a search engine to search for “IT portfolio
a business? Why is project management so critical management software” or “IT project management
at this company? software” and find a competing offering to HP PPM.
Then answer the following questions:
2. What features of HP PPM were most useful to
Motorola? 1. What makes this solution different from HP PPM?

3. What management, organization, and technology 2. What types of companies is this solution best
factors had to be addressed before Motorola could geared towards?
implement and successfully use HP PPM?
3. Find a case study of this solution in action. Did
4. Evaluate the business impact of adopting HP PPM the company described in the case realize similar
at Motorola. benefits to Motorola?

552 Part Four Building and Managing Systems

14.5 HANDS-ON MIS PROJECTS

The projects in this section give you hands-on experience evaluating informa-
tion systems projects, using spreadsheet software to perform capital budgeting
analyses for new information systems investments, and using Web tools to
analyze the financing for a new home.

Management Decision Problems

1. In 2001, McDonald’s Restaurants undertook a project called Innovate to create
an intranet connecting headquarters with its 30,000 restaurants in 120 coun-
tries to provide detailed operational information in real time. The new system
would, for instance, inform a manager at the company’s Oak Brook, Illinois,
headquarters immediately if sales were slowing at a franchise in London, or if
the grill temperature in a Rochester, Minnesota, restaurant wasn’t hot enough.
The idea was to create a global ERP application touching the workings of every
McDonald’s restaurant. Some of these restaurants were in countries that lacked
network infrastructures. After spending over $1 billion over several years,
including $170 million on consultants and initial implementation planning,
McDonalds terminated the project. What should management have known or
done at the outset to prevent this outcome?

2. Caterpillar is the world’s leading maker of earthmoving machinery and supplier
of agricultural equipment. Caterpillar wants to end its support for its Dealer
Business System (DBS), which it licenses to its dealers to help them run their
businesses. The software in this system is becoming out of date, and senior
management wants to transfer support for the hosted version of the software to
Accenture Consultants so it can concentrate on its core business. Caterpillar
never required its dealers to use DBS, but the system had become a de facto
standard for doing business with the company. The majority of the 50 Cat
dealers in North America use some version of DBS, as do about half of the 200
or so Cat dealers in the rest of the world. Before Caterpillar turns the product
over to Accenture, what factors and issues should it consider? What questions
should it ask? What questions should its dealers ask?

Improving Decision Making: Using Spreadsheet
Software for Capital Budgeting for a New CAD System

Software skills: Spreadsheet formulas and functions
Business skills: Capital budgeting

This project provides you with an opportunity to use spreadsheet software to
use the capital budgeting models discussed in this chapter to analyze the return
on an investment for a new CAD system.

Your company would like to invest in a new CAD system that requires
purchasing hardware, software, and networking technology, as well as expendi-
tures for installation, training, and support. MyMISlab contains tables showing
each cost component for the new system as well as annual maintenance costs
over a five-year period. It also features a Learning Track on capital budgeting
models. You believe the new system will produce annual savings by reducing
the amount of labor required to generate designs and design specifications, thus
increasing your firm’s annual cash flow.

• Using the data provided in these tables, create a worksheet that calculates
the costs and benefits of the investment over a five-year period and analyzes

Chapter 14 Managing Projects 553

the investment using the capital budgeting models presented in this chap-
ter’s Learning Track.
• Is this investment worthwhile? Why or why not?

Improving Decision Making: Using Web Tools for
Buying and Financing a Home

Software skills: Internet-based software
Business skills: Financial planning

This project will develop your skills using Web-based software for searching for
a home and calculating mortgage financing for that home.

You have found a new job in Denver, Colorado, and would like to purchase a
home in that area. Ideally, you would like to find a single-family house with at
least three bedrooms and one bathroom that costs between $150,000 and
$225,000 and finance it with a 30-year fixed-rate mortgage. You can afford a
down payment that is 20 percent of the value of the house. Before you purchase
a house, you would like to find out what homes are available in your price
range, find a mortgage, and determine the amount of your monthly payment.
You would also like to see how much of your mortgage payment represents
principal and how much represents interest. Use the Yahoo! Real Estate Web
site to help you with the following tasks:

• Locate homes in your price range in Denver, Colorado. Find out as much
information as you can about the houses, including the real estate listing agent,
condition of the house, number of rooms, and school district.

• Find a mortgage for 80 percent of the list price of the home. Compare rates
from at least three sites (use search engines to find sites other than Yahoo!).

• After selecting a mortgage, calculate your closing costs.
• Calculate the monthly payment for the mortgage you select.
• Calculate how much of your monthly mortgage payment represents principal

and how much represents interest, assuming you do not plan to make any extra
payments on the mortgage.

When you are finished, evaluate the whole process. For example, assess the
ease of use of the site and your ability to find information about houses and
mortgages, the accuracy of the information you found, the breadth of choice of
homes and mortgages, and how helpful the whole process would have been for
you if you were actually in the situation described in this project.

LEARNING TRACK MODULES

The following Learning Tracks provide content relevant to topics covered in
this chapter:

1. Capital Budgeting Methods for Information System Investments
2. Information Technology Investments and Productivity
3. Enterprise Analysis (Business Systems Planning)

554 Part Four Building and Managing Systems

Review Summary

1. What are the objectives of project management and why is it so essential in developing infor-
mation systems?
Good project management is essential for ensuring that systems are delivered on time, on budget,
and provide genuine business benefits. Project management activities include planning the work,
assessing the risk, estimating and acquiring resources required to accomplish the work, organizing
the work, directing execution, and analyzing the results. Project management must deal with five
major variables: scope, time, cost, quality, and risk.

2. What methods can be used for selecting and evaluating information systems projects and
aligning them with the firm’s business goals?
Organizations need an information systems plan that describes how information technology supports
the attainment of their business goals and documents all their system applications and IT infrastructure
components. Large corporations will have a management structure to ensure the most important sys-
tems projects receive priority. Critical success factors, portfolio analysis, and scoring models can be used
to identify and evaluate alternative information systems projects.

3. How can firms assess the business value of information systems projects?
To determine whether an information systems project is a good investment, one must calculate its

costs and benefits. Tangible benefits are quantifiable, and intangible benefits that cannot be immedi-
ately quantified may provide quantifiable benefits in the future. Benefits that exceed costs should be
analyzed using capital budgeting methods to make sure a project represents a good return on the
firm’s invested capital. Real options pricing models, which apply the same techniques for valuing
financial options to systems investments, can be useful when considering highly uncertain IT invest-
ments.

4. What are the principal risk factors in information systems projects?
The level of risk in a systems development project is determined by (1) project size, (2) project

structure, and (3) experience with technology. IS projects are more likely to fail when there is insuffi-
cient or improper user participation in the systems development process, lack of management sup-
port, and poor management of the implementation process. There is a very high failure rate among
projects involving business process reengineering, enterprise applications, and mergers and acquisi-
tions because they require extensive organizational change.

5. What strategies are useful for managing project risk and system implementation?
Implementation refers to the entire process of organizational change surrounding the introduc-

tion of a new information system. User support and involvement and management support and con-
trol of the implementation process are essential, as are mechanisms for dealing with the level of risk
in each new systems project. Project risk factors can be brought under some control by a contin-
gency approach to project management. The risk level of each project determines the appropriate
mix of external integration tools, internal integration tools, formal planning tools, and formal control
tools to be applied.

Key Terms Intangible benefits, 537
Internal integration tools, 543
Capital budgeting, 538 Organizational impact analysis, 546
Change agent, 541 PERT chart, 543
Change management, 540 Portfolio analysis, 534
Counterimplementation, 546 Project, 530
Critical success factors (CSFs), 533 Project management, 530
Ergonomics, 546 Real options pricing models (ROPMs), 538
External integration tools, 545 Scope, 530
Formal control tools, 543 Scoring model, 535
Formal planning tools, 543 Sociotechnical design, 548
Gantt chart, 543 Tangible benefits, 537
Implementation, 540 User-designer communications gap, 541
Information systems plan, 532 User interface, 530

Review Questions Chapter 14 Managing Projects 555

1. What are the objectives of project management • Explain how real options pricing models can
and why is it so essential in developing informa- help manages evaluate information technol-
tion systems? ogy investments.

• Describe information system problems 4. What are the principal risk factors in information
resulting from poor project management. systems projects?
• Identify and describe each of the principal
• Define project management. List and describe risk factors in information systems projects.
the project management activities and • Explain why builders of new information
variables addressed by project management. systems need to address implementation and
change management.
2. What methods can be used for selecting and • Explain why eliciting support of management
evaluating information systems projects and and end users is so essential for successful
aligning them with the firm’s business goals? implementation of information systems
• Name and describe the groups responsible for projects.
the management of information systems • Explain why there is such a high failure rate
projects. for implementations involving enterprise
• Describe the purpose of an information applications, business process reengineering,
systems plan and list the major categories in and mergers and acquisitions.
the plan.
• Explain how critical success factors, portfolio 5. What strategies are useful for managing project
analysis, and scoring models can be used to risk and system implementation?
select information systems projects. • Identify and describe the strategies for
controlling project risk.
3. How can firms assess the business value of • Identify the organizational considerations
information systems projects? that should be addressed by project planning
and implementation.
• List and describe the major costs and benefits • Explain how project management software
of information systems. tools contribute to successful project
management.
• Distinguish between tangible and intangible
benefits. Video Cases

Discussion Questions Video Cases and Instructional Videos illustrating
some of the concepts in this chapter are available.
1. How much does project management impact the Contact your instructor to access these videos.
success of a new information system?

2. It has been said that most systems fail because
systems builders ignore organizational behavior
problems. Why might this be so?

3. What is the role of end users in information
systems project management?

Collaboration and Teamwork: Identifying Implementation Problems

Form a group with two or three other students. Write problems. If possible, use Google Sites to post links to
a description of the implementation problems you Web pages, team communication announcements,
might expect to encounter in one of the systems and work assignments; to brainstorm; and to work
described in the Interactive Sessions or chapter- collaboratively on project documents. Try to use
ending cases in this text. Write an analysis of the Google Docs to develop a presentation of your
steps you would take to solve or prevent these findings for the class.

556 Part Four Building and Managing Systems

JetBlue and WestJet: A Tale of Two IS Projects

CASE STUDY

I n recent years, the airline industry has seen sev- Upgrading a reservation system carries special
eral low-cost, high-efficiency carriers rise to risks. From a customer perspective, only one of two
prominence using a recipe of extremely things can happen: Either the airline successfully
competitive fares and outstanding customer ser- completes its overhaul and the customer notices no
vice. Two examples of this business model in action difference in the ability to book flights, or the
are JetBlue and WestJet. Both companies were implementation is botched, angering customers and
founded within the past two decades and have quickly damaging the airline’s brand.
grown into industry powerhouses. But when these
companies need to make sweeping IT upgrades, their The time had come for both JetBlue and WestJet
relationships with customers and their brands can be to upgrade their reservation systems. Each carrier
tarnished if things go awry. In 2009, both airlines had started out using a system designed for smaller
upgraded their airline reservation systems, and one of start-up airlines, and both needed more processing
the two learned this lesson the hard way. power to deal with a far greater volume of customers.
They also needed features like the ability to link
JetBlue was incorporated in 1998 and founded in prices and seat inventories to other airlines with
1999 by David Neeleman. The company is headquar- whom they cooperated.
tered in Queens, New York. Its goal is to provide low-
cost travel along with unique amenities like TV in Both JetBlue and WestJet contracted with Sabre
every seat, and its development of state-of-the-art IT Holdings, one of the most widely used airline IT
throughout the business was a critical factor in achiev- providers, to upgrade their airline reservation
ing that goal. JetBlue met with early success, and the systems. The difference between WestJet and
airline was one of the few that remained profitable in JetBlue’s implementation of Sabre’s SabreSonic CSS
the wake of the 9/11 attacks. JetBlue continued to reservation system illustrates the dangers inherent in
grow at a rapid pace, remaining profitable throughout, any large-scale IT overhaul. It also serves as yet
until 2005, when the company lost money in a quar- another reminder of how successfully planning for
ter for the first time since going public. Undaunted, and implementing new technology is just as valuable
the airline quickly returned to profitability in the next as the technology itself.
year after implementing its “Return to Profitability”
plan, and consistently ranks at the top of customer SabreSonic CSS performs a broad array of services
satisfaction surveys and rankings for U.S. airlines. for any airline. It sells seats, collects payments,
allows customers to shop for flights on the airline’s
Headquartered in Calgary, Canada, WestJet was Web site, and provides an interface for communica-
founded by a group of airline industry veterans in tion with reservation agents. Customers can use it to
1996, including Neeleman, who left to start JetBlue access airport kiosks, select specific seats, check
shortly thereafter. The company began with approxi- their bags, board, rebook, and receive refunds for
mately 40 employees and three aircraft. Today, the flight cancellations. All of the data generated by
company has 7,700 employees and operates 380 these transactions are stored centrally within the sys-
flights per day. Earlier in this decade, WestJet under- tem. JetBlue selected SabreSonic CSS over its legacy
went rapid expansion spurred by its early success system developed by Sabre rival Navitaire, and
and began adding more Canadian destinations and WestJet was upgrading from an older Sabre reserva-
then U.S. cities to its flight schedule. By 2010, WestJet tion system of its own.
held nearly 40 percent of the Canadian airline mar-
ket, with Air Canada dropping to 55 percent. The first of the two airlines to implement
SabreSonic CSS was WestJet. When WestJet went
JetBlue is slightly bigger, with 151 aircraft in use live with the new system in October 2009, cus-
compared to WestJet’s 88, but both have used the tomers struggled to place reservations, and the
same low-cost, good-service formula to achieve prof- WestJet Web site crashed repeatedly. WestJet’s call
itability in the notoriously treacherous airline mar- centers were also overwhelmed, and customers
ketplace. The rapid growth of each airline rendered experienced slowdowns at airports. For a company
their existing information systems obsolete, includ- that built its business on the strength of good
ing their airline reservation systems. customer service, this was a nightmare. How did
WestJet allow this to happen?

The critical issue was the transfer of WestJet’s Chapter 14 Managing Projects 557
840,000 files containing data on transactions for past
WestJet customers who had already purchased files over to Sabre’s servers on a Friday night,
flights, from WestJet’s old reservation system servers because Saturday flight traffic is typically very low.
in Calgary to Sabre servers in Oklahoma. The migra- JetBlue also sold smaller numbers of seats on the
tion required WestJet agents to go through complex flights that did take off that day.
steps to process the data. WestJet had not anticipated
the transfer time required to move the files and JetBlue experienced a few glitches—call wait
failed to reduce its passenger loads on flights operat- times increased, and not all airport kiosks and
ing immediately after the changeover. Hundreds of ticket printers came online right away. In addition,
thousands of bookings for future flights that were JetBlue needed to add some booking functions. But
made before the changeover were inaccessible compared to what WestJet endured, the company
during the file transfer and for a period of time was extremely well prepared to handle these
thereafter, because Sabre had to adjust the flights problems. JetBlue ended up using its backup site
using the new system. several times.

This delay provoked a deluge of customer dissatis- However, JetBlue had also experienced its own
faction, a rarity for WestJet. In addition to the customer service debacles in the past. In February
increase in customer complaint calls, customers also 2007, JetBlue tried to operate flights during a bliz-
took to the Internet to express their displeasure. zard when all other major airlines had already can-
Angry flyers expressed outrage on Facebook and celed their flights. This turned out to be a poor deci-
flooded WestJet’s site, causing the repeated crashes. sion, as the weather conditions prevented the flights
WestJet quickly offered an apology to customers on from taking off and passengers were stranded for as
its site once it went back up, explaining why the long as 10 hours. JetBlue had to continue canceling
errors had occurred. WestJet employees had trained flights for days afterwards, reaching a total of 1,100
with the new system for a combined 150,000 hours flights canceled and a loss of $30 million. JetBlue
prior to the upgrade, but WestJet spokesman Robert management realized in the wake of the crisis that
Palmer explained that the company “encounter(ed) the airline’s IT infrastructure, although sufficient to
some problems in the live environment that simply deal with normal day-to-day conditions, was not
did not appear in the test environment,” foremost robust enough to handle a crisis of this magnitude.
among them the issues surrounding the massive file This experience, coupled with the observation of
transfer. WestJet’s struggles when implementing its new
system, motivated JetBlue’s cautious approach to its
WestJet’s latest earnings reports show that the own IT implementation.
company weathered the storm successfully and
remained profitable, but the incident forced the Sources: Susan Carey, “Two Paths to Software Upgrade,” The Wall
airline to scale back its growth plans. WestJet has put Street Journal, April 13, 2010; Aaron Karp, “WestJet Offers
its frequent flyer program and co-branded credit ‘Heartfelt Apologies’ on Res System Snafus; Posts C$31 Million
card, the RBC WestJet MasterCard, on hold, in addi- Profit,”Air Transport World, November 5, 2009; Ellen Roseman,
tion to code-sharing plans with other airlines includ- “WestJet Reservation Change Frustrates,” thestar.com, December
ing Southwest, KLM, and British Airways. These 2, 2009; Calgary Herald, “WestJet Reservation-System Problems
plans would allow one airline to sell flights under its Affecting Sales,” Kelowna.com; “JetBlue Selects SabreSonic CSS for
own name on aircraft operated by other airlines. For Revenue and Operational Systems,” Shepard.com, February 17,
the time being, WestJet is hoping to return to growth 2009; “Jilted by JetBlue for Sabre,” Tnooz.com, February 5, 2010.
before pursuing these measures.
CASE STUDY QUESTIONS
In contrast, JetBlue had the advantage of seeing
WestJet begin its implementation months before, so 1. How important is the reservation system at
it was able to avoid many of the pitfalls that WestJet airlines such as WestJet and JetBlue? How does it
endured. For example, they built a backup Web site impact operational activities and decision making?
to prepare for the worst-case scenario. The company
also hired 500 temporary call center workers to man- 2. Evaluate the key risk factors of the projects to
age potential spikes in customer service calls. upgrade the reservation systems of WestJet and
(WestJet also ended up hiring temporary offshore JetBlue.
call center workers, but only after the problem had
gotten out of hand.) JetBlue made sure to switch its 3. Classify and describe the problems each airline
faced in implementing its new reservation system.
What management, organization, and technology
factors caused those problems?

4. Describe the steps you would have taken to
control the risk in these projects.

Chapter 15

Managing Global Systems

LEARNING OBJECTIVESS CHAPTER OUTLINE
After reading this chapter,
you will be able to answer 15.1 THE GROWTH OF INTERNATIONAL
the following questions: INFORMATION SYSTEMS
Developing an International Information Systems
1. What major factors are driving the Architecture
internationalization of business? The Global Environment: Business Drivers and
Challenges
2. What are the alternative strategies State of the Art
for developing global businesses?
15.2 ORGANIZING INTERNATIONAL
3. How can information systems INFORMATION SYSTEMS
support different global business Global Strategies and Business Organization
strategies? Global Systems to Fit the Strategy
Reorganizing the Business
4. What are the challenges posed by
global information systems and 15.3 MANAGING GLOBAL SYSTEMS
management solutions for these A Typical Scenario: Disorganization on a Global
challenges? Scale
Global Systems Strategy
5. What are the issues and technical The Management Solution: Implementation
alternatives to be considered when
developing international informa- 15.4 TECHNOLOGY ISSUES AND OPPORTUNITIES
tion systems? FOR GLOBAL VALUE CHAINS
Computing Platforms and Systems Integration
Interactive Sessions: Connectivity
Software Localization
Fonterra: Managing the World’s
Milk Trade 15.5 HANDS-ON MIS PROJECTS
Management Decision Problems
How Cell Phones Support
Economic Development Achieving Operational Excellence: Building a Job
Database and Web Page for an International
Consulting Firm

Improving Decision Making: Conducting
International Marketing and Pricing Research

.3M: STICKY FILM AND SCRATCHY THINGS THAT SELL

AROUND THE WORLD

3 M is a diversified technology company with a global presence. Its products are available in
200 countries, it has operations in 62 counties, and it produces over 55,000 products. In
2009, the company generated $23.1 billion in revenue, down from $25.6 billion (8 percent)
in 2008 as the global recession slowed business activity. The company employs 76,000
people. 3M, headquartered in St. Paul, Minnesota, is the poster-child for global American firms: 63
percent of its revenue comes from offshore sales (14.6 billion), and 58 percent of its employees
are international.

3M’s core competencies historically have been sticky films and scratchy papers (sandpa-
per), and, since its founding in 1902, has continuously demonstrated through new products
just how much the world depends on these competencies. 3M is organized into six largely
independent divisions: Industrial and Transportation (tapes, abrasives, and adhesives); Health
Care (surgical tapes to dental inserts); Consumer and Office (furnace filters to Post-it notes
and Scotchbrite pads); Safety, Security, and Protection Services (respirators to Thinsulite insu-
lation and RFD equipment); Display and Graphics (LCD monitors to highway reflective tape) ;
and Electro and Communications (insulating materials to disk drive lubricants). 3M is among
the leading manufacturers of products for many of the markets it serves.

With such a large global presence, with many of its foreign operations the results of
purchases, the company was until recently a collection of legacy applications spread across the
globe. 3M inherited the hardware and software of acquired companies, from the shop floor, to
supply chain, sales, office, and reporting systems. Even where 3M expanded organically by
moving into new countries, each of the six divisions, and thousands of their smaller operations,
developed their own information and reporting systems with very little corporate, global
oversight. As one manager noted, if 3M continued to operate its business with an accumulation
of disaggregated solutions, the company would not be able to efficiently operate in the current
recession, or support future growth.

In 2008, 3M began a series of restructurings of its operations, including a review of its global
systems. In 2010, 3M adopted SAP’s Business Suite Applications to replace all of its legacy
software around the world. The intent is to transform its business processes on a global scale,
and force independent divisions to adopt common software tools and, more importantly, com-

mon business processes. The
price tag is also global: licens-
ing fees paid to SAP are
reported as somewhere
between $35 million to $75 mil-
lion.

Business Suite 7 is SAP’s
brand of enterprise systems. It
consists of five integrated mod-
ules that can be run on a wide
variety of hardware platforms,
and which work well with soft-
ware from other vendors. The
core business process and soft-
ware modules are customer
relationship management
(CRM), enterprise resource
planning (ERP), product lifecy-
cle management, supply chain

559

560 Part Four Building and Managing Systems

management (SCM), and supplier relationship management. Each module has
pre-defined business processes, and the software needed to support these
processes. Firms adapt their own business processes to these “industry best-
practice modules,” or make changes in the SAP software to fit their business
models. Business Suite is built on a service-oriented architecture (SOA), which
means it can work well with data from legacy database systems and offers lower
implementation costs.

In implementing SAP’s Business Suite, 3M is not following in the footsteps of
some ill-fated global system initiatives by other Fortune 500 companies. Rather
than do a “rip, burn, replace” of all its old software, 3M is rolling out the SAP
enterprise software in phased and modular stages. Following a piecemeal
approach, it is rolling out a demand forecasting and supply planning module in
Europe first, and then once the concept is validated, additional rollouts will
follow around the world. In Asia-Pacific, 3M is implementing its ERP system
over the next several years. In the past, executive managers in the United States
did not have timely, accurate, or consistent information on how all the firms
business units, regions, and products were performing. To a large extent, 3M was
not manageable or governable prior to the current effort to rationalize its sys-
tems. One solution will be SAP’s business intelligence (BI) software which will
enable 3M’s management to access accurate and timely data on business perfor-
mance across its divisions to support informed decision making. The SAP soft-
ware agreement enables 3M to integrate the best practices it has gained with its
existing BI deployments from the SAP BusinessObject portfolio in the United
States and in other regions into the global rollout template. One advantage of
having integrated global systems is the ability to transfer what you learn in one
region to another region. In a further sign that 3M management has a keen
understanding of corporate structure and strategy, the firm plans to maintain a
large measure of independence among the six divisions because their histories
and products are so different. It will not force the divisions to adopt a single
instance of the SAP products but instead will allow substantial variation among
divisions, what one wag called “virtual instances” of the software that reflect the
needs of customers served by the various divisions.

Sources: Chris Chiappinelli, “3M Selects SAP Business Suite in Effort to Unify Its Core
Processes,” Managing Automation, April 4, 2010; Doug Henschen, “SAP ERP Software Tapped
by 3M,” Information Week, March 1, 2010; “SAP Gains 3M as New Customer,” www.sap.com,
March 1, 2010; 3M, Form 10K For the Fiscal Year Ended December 31, 2009, filed with the
Securities and Exchange Commission February 16, 2010.

3M’s efforts to create a global IT infrastructure identifies some of the issues
that truly global organizations need to consider if they want to operate
across the globe. Like many large, multinational firms, 3M grew rapidly by pur-
chasing other businesses in foreign countries, as well as through expanding
domestic operations to foreign countries In the process, 3M inherited hundreds
of legacy software systems, and developed new systems, few of which could
share information with one another, or report consistent information to corpo-
rate headquarters. 3M’s legacy information systems simply could not support
timely management decision making on a global scale.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. To solve its global management and business
challenges, 3M adopted an integrated suite of software applications from SAP,
one of the world’s largest software firms. 3M had to devise a flexible, modular
implementation strategy that integrated both the existing legacy systems, and
preserved some measure of autonomy for the six divisions that are the basis of
the company. 3M is now able to respond to changes in business conditions
around the globe and around the clock.

Chapter 15 Managing Global Systems 561

15.1 THE GROWTH OF INTERNATIONAL INFORMATION
SYSTEMS

I n earlier chapters, we describe the emergence of a global economic sys-
tem and global world order driven by advanced networks and information
systems. The new world order is sweeping away many national corpora-
tions, national industries, and national economies controlled by domestic
politicians. Many localized firms will be replaced by fast-moving networked
corporations that transcend national boundaries. The growth of international
trade has radically altered domestic economies around the globe.

Today, the production and design of many electronic products are parceled
out to a number of different countries. Consider the path to market for a
Hewlett-Packard (HP) laptop computer, which is illustrated in Figure 15-1.

FIGURE 15-1 AN HP LAPTOP’S PATH TO MARKET

HP and other electronics companies assign distribution and production of their products to a number
of different countries.

562 Part Four Building and Managing Systems

The idea for the product and initial design came from HP’s Laptop Design Team
in the United States. HP headquarters in Houston approved the concept.
Graphics processors were designed in Canada and manufactured in Taiwan.
Taiwan and South Korea provided the liquid-crystal display (LCD) screens and
many of the memory chips. The laptop’s hard disk drive came from Japan.
Sources in China, Japan, Singapore, South Korea, and the United States sup-
plied other components. Laptop assembly took place in China. Contractors in
Taiwan did the machine’s engineering design and collaborated with the Chinese
manufacturers.

DEVELOPING AN INTERNATIONAL INFORMATION
SYSTEMS ARCHITECTURE

This chapter describes how to go about building an international information
systems architecture suitable for your international strategy. An interna-
tional information systems architecture consists of the basic information
systems required by organizations to coordinate worldwide trade and other
activities. Figure 15-2 illustrates the reasoning we follow throughout the
chapter and depicts the major dimensions of an international information
systems architecture.

The basic strategy to follow when building an international system is to
understand the global environment in which your firm is operating. This
means understanding the overall market forces, or business drivers, that are
pushing your industry toward global competition. A business driver is a force
in the environment to which businesses must respond and that influences the
direction of the business. Likewise, examine carefully the inhibitors or negative
factors that create management challenges—factors that could scuttle the devel-
opment of a global business. Once you have examined the global environment,
you will need to consider a corporate strategy for competing in that environ-

FIGURE 15-2 INTERNATIONAL INFORMATION SYSTEMS ARCHITECTURE

The major dimensions for developing an international information systems architecture are the global
environment, the corporate global strategies, the structure of the organization, the management and
business processes, and the technology platform.

Chapter 15 Managing Global Systems 563

ment. How will your firm respond? You could ignore the global market and
focus on domestic competition only, sell to the globe from a domestic base, or
organize production and distribution around the globe. There are many
in-between choices.

After you have developed a strategy, it is time to consider how to structure
your organization so it can pursue the strategy. How will you accomplish a
division of labor across a global environment? Where will production, adminis-
tration, accounting, marketing, and human resource functions be located?
Who will handle the systems function?

Next, you must consider the management issues in implementing your
strategy and making the organization design come alive. Key here will be the
design of business processes. How can you discover and manage user require-
ments? How can you induce change in local units to conform to international
requirements? How can you reengineer on a global scale, and how can you
coordinate systems development?

The last issue to consider is the technology platform. Although changing
technology is a key driving factor leading toward global markets, you need to
have a corporate strategy and structure before you can rationally choose the
right technology.

After you have completed this process of reasoning, you will be well on your
way toward an appropriate international information systems portfolio capable
of achieving your corporate goals. Let’s begin by looking at the overall global
environment.

THE GLOBAL ENVIRONMENT: BUSINESS DRIVERS AND
CHALLENGES

Table 15-1 lists the business drivers in the global environment that are leading
all industries toward global markets and competition.

The global business drivers can be divided into two groups: general cultural
factors and specific business factors. Easily recognized general cultural factors
have driven internationalization since World War II. Information, communica-
tion, and transportation technologies have created a global village in which
communication (by telephone, television, radio, or computer network) around
the globe is no more difficult and not much more expensive than communica-
tion down the block. The cost of moving goods and services to and from
geographically dispersed locations has fallen dramatically.

The development of global communications has created a global village in a
second sense: A global culture created by television, the Internet, and other

TABLE 15-1 THE GLOBAL ENVIRONMENT: BUSINESS DRIVERS AND
CHALLENGES

GENERAL CULTURAL FACTORS SPECIFIC BUSINESS FACTORS

Global communication and transportation technologies Global markets
Development of global culture Global production and operations
Emergence of global social norms Global coordination
Political stability Global workforce
Global knowledge base Global economies of scale