Components of the value added EAI

Contents

1 Introduction

2 Measuring IT Performance
2.1 Return on Investment (ROI) and Total Cost of Ownership (TCO)
2.2 Cost types and IT investment decisions

3 The Value added drivers of the EAI
3.1 Discretional vs. non-discretional costs
3.2 Non cost-based value added drivers

4 Conclusion

Literature

1 Introduction

The IT Technology is no m ore observed only as another tool to automate handlings and processes or as replacement of human resources. It is rather connected to contribution to the overall value continuum ^[1] according to the co mpany vision. However, the resu lted benefits of the enterprise appl ication integration come from the synergized efforts of all users and enablers rather then from the isolated technical solution. For exam ple, the success of a com plex application such as M anufacturing Executives System s or Customer Relationship Management largely depends on the value the users involved in processing infor mation, envisaging and unde rstanding the com pany vi sion, goals and their conf ormance and it’s in tegration a nd inte roperability with other business application. Following the m easures of th e IT Perfor mance of an I T System s an d solution in general, the following sem inar pa per attem pts to highligh t the dif ferences between the tangible and intangible contri butions and effects of the Enterprise Application Integration to the business organization and value.

2 Measuring IT Performance

2.1 Return on Investment (ROI) and Total Cost of Ownership (TCO)

Measuring of a IT Perform ance using cost ba sed financial ratios is wide spread m ethod to de termine the benef it of a IT Investm ent using Return on Investm ent (ROI), Total Cost of Ownership (TCO). Applying the general accepted accounting analyses, those measures are intuitionally used as cost sa ving f actors. The idea that a n IT Solution enables ongoing operations with less costs, time and hum an resources has a positive effect on cost based financial indicators and provide company global picture using projected financial data and th eir present values. But as unpredictable the financial data is, applying the cost based ratios can lead to m isinterpretation of the IT Benefits to present business and to determ ine the contri bution to the future business values. A s a result, such m easurements do not point at the key perform ance dr ivers and the key to creating a future business value is missing.

The cost-based m easures of an IT Perfor mance often indicate th e productivity of a overall organization perfor mance and the user s. To def ine to which extend the IT Solution contributes to the com pany, a reallocation of costs, budgets and revenues between different sources of productivity needs to be made.

Accounting for Reengineering and Company Transformation Benefits. Most of the times, a company reengineering and transformation efforts are complemented enterprise application integration project, aim ing to maximize its benefits. The change processes are costly and tim e consuming and m any times added to the costs of the developm ent and implementation of the integrated system . As a result, the IT perform ance indicators are overwhelmed with c osts/benefits that belong to the company reorganization efforts misinterpreting the real outcome of the IT Solution.

Valuation of multiple Investment Projects. In cases of com peting and valuating different Investm ent Projects within a one company, the decisions are usually made upon ROI, IRR (Internal Rate of Return) and present values. Most of the tim es, investments are g ranted to pro jects with bett er ratios, delivering faster results. Such valuation of different projects, not consideri ng the intangible benefits and potential for future benefits, can lead to m isinterpretation about the project value and confus ing because of the following:

- An investment on a production line for a certain product or other investm ent in tangible assets can not be evalu ated with the same principles as an IT System that would become a company business support platform.
- The ROI, IRR and present values often are no t adjus ted f or future intangible benefits, which are reflected forecasted incom e from other operations enabled from the IT Solution.

Innovations. Apart f rom increas ing the “m easurable p roductivity” a s a resu lt f rom more efficient use of time and costs, enterprise application integration creates a platform for further developm ent and integration wi th new business m odels and create ne w Enterprise capabilities (exp. creating m aintain collaboration between business and business networks). The advanced hum an be haviour and aspirations to com pile and follow the standards directed from IT Solutio n procedures should be also added to the list of intangible factors.

The above m entioned benefits syn ergize and result in increased com petitive advantage and quantified increm ental company value. How ever, it is s till difficult to m easure the benefits of the Innovative contribution and to present in the scope of indicators based indicators.

2.2 Cost types and IT investment decisions

“… There is strong evidence that managers are not simply making IT investments to cut costs. When managers are asked "Why do they invest in IT?" surveys suggest that customer service and quality consistently rank above cost savings as the prime motivation for making investments.”^[2]

When analysing the investm ents opportuni ties and deriving inve stment choices, the investment decis ion are effected form interp retation of the used financial indicators. Limited according company cost-reducing polic ies, during the negotiation process with several system suppliers (acco rding to the co mpany investm ent policy) the sy stem requirements and future tasks are b eing changed. By spending an IT Budget that will just decrease the cost o f doing the business, it is difficult to expect that a futu re value will be generated. The consulting company Accenture industry experiences and research focusing on IT governance “disclosed that companies with high profit margin growth allocate a significantly larger portion of their IT budget to innovation rather than IT operations, compared to companies with lower profit margin growth”^[3]. This suggests that it is ne cessary to tr eat the dif ferent components of the IT I nvestment differently, distinguishing between investing in IT operations and IT Innovation.

When analysing the investm ents opportuni ties and deriving inve stment choices, the investment decision are effected form interpretation of the used financial indicators.

Limited according com pany cost-reducing policie s, torn in a negotiation process w ith several system suppliers (acco rding to the co mpany investm ent policy), the sy stem requirements and future tasks are being cha nged. The IT budgets are being reduced and spending an IT Budget that will just decrease the cost of doing the business, it is difficult to expect that a f uture value from the implemented solution will be generated. The consulting com pany Accenture industry experiences and research focusing on IT governance “disclosed that companies with high profit margin growth allocate a significantly larger portion of their IT budget to innovation rather than IT operations, compared to companies with lower profit margin growth”^[4]. This suggests that it is necessary to treat the different com ponents of the IT Investm ent differently, distinguishing between investing in IT operations and IT Innovation.

3 The Value added drivers of the EAI

The focus of the Enterprise Application Inte gration (EAI) is to provide exchange of information between different organizational units. Existing business applications needs to be integ rated within the scop e of an enterpr ise o r within other ente rprises participating in the value chain of the bus iness. The req uirements focus has been extended and involving different stakeholders, which m akes the enterprise application integration a process which challenges both technical and organizational capabilities. The techn ical challeng es arise from differe nt data m anagements and legacy system s, developed for certain tasks and not desi gned to answer to the requirem ents for interoperability, secu rity, f unctional perf ormance and usability ⁵ of diffe rent business applications. The organizational issues result from the requirement to converge different business process reaching a consen sus in o rder to support th e system functionalities as well the need to secure a financial support for the project.

As the business organisation are reorganized, merged, acquired and split over the years, the enterprise applicat ion integration becom es more “a co ntinuous process” rather that timely defined project, consuming large investments in both cases.

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^[1] Vgl. Rau et all (2004) s.3

^[2] Brynjolfsson E. et all. (1998)

^[3] Vgl. Hall et all. (2004)

^[4] Hall et all (2004)

^[5] Vgl. Smith et all. (2002) s. 1