Library of Congress Cataloging-in-Publication Data

Library of Congress Cataloging-in-Publication Data

IT STraTegy: ISSueS and PracTIceS

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IT STraTegy: ISSueS and PracTIceS

T h i r d E d i t i o n

James D. McKeen Queen’s University

Heather A. Smith Queen’s University

Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto

Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

Editor in Chief: Stephanie Wall Acquisitions Editor: Nicole Sam Program Manager Team Lead: Ashley Santora Program Manager: Denise Vaughn Editorial Assistant: Kaylee Rotella Executive Marketing Manager: Anne K. Fahlgren Project Manager Team Lead: Judy Leale Project Manager: Thomas Benfatti Procurement Specialist: Diane Peirano Cover Designer: Lumina Datamantics Full Service Project Management: Abinaya Rajendran at Integra Software Services, Pvt. Ltd. Cover Printer: Courier/Westford Composition: Integra Software Services, Pvt. Ltd. Printer/Binder: Courier/Westford Text Font: 10/12 Palatino LT Std

Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text.

Copyright © 2015, 2012 and 2009 by Pearson Education, Inc., Upper Saddle River, New Jersey, 07458. Pearson Prentice Hall. All rights reserved. Printed in the United States of America. This publication is protected by Copyright and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department.

Library of Congress Cataloging-in-Publication Data

McKeen, James D. IT strategy: issues and practices/James D. McKeen, Queen’s University, Heather A. Smith, Queen’s University.—Third edition. pages cm ISBN 978-0-13-354424-4 (alk. paper) ISBN 0-13-354424-9 (alk. paper) 1. Information technology—Management. I. Smith, Heather A. II. Title. HD30.2.M3987 2015 004.068—dc23 2014017950

ISBN–10: 0-13-354424-9 ISBN–13: 978-0-13-354424-4

10 9 8 7 6 5 4 3 2 1


Preface xiii

About the Authors xxi

Acknowledgments xxii

Section I Delivering Value with IT 1

Chapter 1 DeVelopIng anD DelIVerIng on The IT Value propoSITIon 2 Peeling the Onion: Understanding IT Value 3

What Is IT Value? 3

Where Is IT Value? 4

Who Delivers IT Value? 5

When Is IT Value Realized? 5

The Three Components of the IT Value Proposition 6 Identification of Potential Value 7 Effective Conversion 8 Realizing Value 9

Five Principles for Delivering Value 10 Principle 1. Have a Clearly Defined Portfolio Value Management

Process 11

Principle 2. Aim for Chunks of Value 11

Principle 3. Adopt a Holistic Orientation to Technology Value 11

Principle 4. Aim for Joint Ownership of Technology Initiatives 12

Principle 5. Experiment More Often 12 Conclusion 12  •  References 13

Chapter 2 DeVelopIng IT STraTegy for BuSIneSS Value 15 Business and IT Strategies: Past, Present, and Future 16

Four Critical Success Factors 18

The Many Dimensions of IT Strategy 20

Toward an IT Strategy-Development Process 22

Challenges for CIOs 23 Conclusion 25  •  References 25

Chapter 3 lInkIng IT To BuSIneSS MeTrICS 27 Business Measurement: An Overview 28

Key Business Metrics for IT 30


vi Contents

Designing Business Metrics for IT 31

Advice to Managers 35 Conclusion 36  •  References 36

Chapter 4 BuIlDIng a STrong relaTIonShIp wITh The BuSIneSS 38 The Nature of the Business–IT Relationship 39

The Foundation of a Strong Business–IT Relationship 41

Building Block #1: Competence 42

Building Block #2: Credibility 43

Building Block #3: Interpersonal Interaction 44

Building Block #4: Trust 46 Conclusion 48  •  References 48

Appendix A The Five IT Value Profiles 50

Appendix B Guidelines for Building a Strong Business–IT Relationship 51

Chapter 5 CoMMunICaTIng wITh BuSIneSS ManagerS 52 Communication in the Business–IT Relationship 53

What Is “Good” Communication? 54

Obstacles to Effective Communication 56

“T-Level” Communication Skills for IT Staff 58

Improving Business–IT Communication 60 Conclusion 61  •  References 61

Appendix A IT Communication Competencies 63

Chapter 6 BuIlDIng BeTTer IT leaDerS froM The BoTToM up 64 The Changing Role of the IT Leader 65

What Makes a Good IT Leader? 67

How to Build Better IT Leaders 70

Investing in Leadership Development: Articulating the Value Proposition 73

Conclusion 74  •  References 75

MInI CaSeS Delivering Business Value with IT at Hefty Hardware 76

Investing in TUFS 80

IT Planning at ModMeters 82

Contents vii

Section II IT governance 87

Chapter 7 CreaTIng IT ShareD SerVICeS 88 IT Shared Services: An Overview 89

IT Shared Services: Pros and Cons 92

IT Shared Services: Key Organizational Success Factors 93

Identifying Candidate Services 94

An Integrated Model of IT Shared Services 95

Recommmendations for Creating Effective IT Shared Services 96

Conclusion 99  •  References 99

Chapter 8 a ManageMenT fraMework for IT SourCIng 100 A Maturity Model for IT Functions 101

IT Sourcing Options: Theory Versus Practice 105

The “Real” Decision Criteria 109

Decision Criterion #1: Flexibility 109

Decision Criterion #2: Control 109

Decision Criterion #3: Knowledge Enhancement 110

Decision Criterion #4: Business Exigency 110

A Decision Framework for Sourcing IT Functions 111

Identify Your Core IT Functions 111

Create a “Function Sourcing” Profile 111

Evolve Full-Time IT Personnel 113

Encourage Exploration of the Whole Range of Sourcing Options 114

Combine Sourcing Options Strategically 114

A Management Framework for Successful Sourcing 115

Develop a Sourcing Strategy 115

Develop a Risk Mitigation Strategy 115

Develop a Governance Strategy 116

Understand the Cost Structures 116 Conclusion 117  •  References 117

Chapter 9 The IT BuDgeTIng proCeSS 118 Key Concepts in IT Budgeting 119

The Importance of Budgets 121

The IT Planning and Budget Process 123

viii Contents

Corporate Processes 123

IT Processes 125

Assess Actual IT Spending 126

IT Budgeting Practices That Deliver Value 127 Conclusion 128  •  References 129

Chapter 10 ManagIng IT- BaSeD rISk 130 A Holistic View of IT-Based Risk 131

Holistic Risk Management: A Portrait 134

Developing a Risk Management Framework 135

Improving Risk Management Capabilities 138

Conclusion 139  •  References 140

Appendix A A Selection of Risk Classification Schemes 141

Chapter 11 InforMaTIon ManageMenT: The nexuS of BuSIneSS anD IT 142 Information Management: How Does IT Fit? 143

A Framework For IM 145

Stage One: Develop an IM Policy 145

Stage Two: Articulate the Operational Components 145

Stage Three: Establish Information Stewardship 146

Stage Four: Build Information Standards 147

Issues In IM 148

Culture and Behavior 148

Information Risk Management 149

Information Value 150

Privacy 150

Knowledge Management 151

The Knowing–Doing Gap 151

Getting Started in IM 151 Conclusion 153  •  References 154

Appendix A Elements of IM Operations 155

MInI CaSeS Building Shared Services at RR Communications 156

Enterprise Architecture at Nationstate Insurance 160

IT Investment at North American Financial 165

Contents ix

Section III IT-enabled Innovation 169

Chapter 12 InnoVaTIon wITh IT 170 The Need for Innovation: An Historical

Perspective 171

The Need for Innovation Now 171

Understanding Innovation 172

The Value of Innovation 174

Innovation Essentials: Motivation, Support, and Direction 175

Challenges for IT leaders 177

Facilitating Innovation 179 Conclusion 180  •  References 181

Chapter 13 BIg DaTa anD SoCIal CoMpuTIng 182 The Social Media/Big Data Opportunity 183

Delivering Business Value with Big Data 185

Innovating with Big Data 189

Pulling in Two Different Directions: The Challenge for IT Managers 190

First Steps for IT Leaders 192 Conclusion 193  •  References 194

Chapter 14 IMproVIng The CuSToMer experIenCe: an IT perSpeCTIVe 195 Customer Experience and Business value 196

Many Dimensions of Customer Experience 197

The Role of Technology in Customer Experience 199

Customer Experience Essentials for IT 200

First Steps to Improving Customer Experience 203 Conclusion 204  •  References 204

Chapter 15 BuIlDIng BuSIneSS InTellIgenCe 206 Understanding Business Intelligence 207

The Need for Business Intelligence 208

The Challenge of Business Intelligence 209

The Role of IT in Business Intelligence 211

Improving Business Intelligence 213 Conclusion 216  •  References 216

x Contents

Chapter 16 enaBlIng CollaBoraTIon wITh IT 218 Why Collaborate? 219

Characteristics of Collaboration 222

Components of Successful Collaboration 225

The Role of IT in Collaboration 227

First Steps for Facilitating Effective Collaboration 229 Conclusion 231  •  References 232

MInI CaSeS Innovation at International Foods 234

Consumerization of Technology at IFG 239

CRM at Minitrex 243

Customer Service at Datatronics 246

Section IV IT portfolio Development and Management 251

Chapter 17 applICaTIon porTfolIo ManageMenT 252 The Applications Quagmire 253

The Benefits of a Portfolio Perspective 254

Making APM Happen 256

Capability 1: Strategy and Governance 258

Capability 2: Inventory Management 262

Capability 3: Reporting and Rationalization 263

Key Lessons Learned 264 Conclusion 265  •  References 265

Appendix A Application Information 266

Chapter 18 ManagIng IT DeManD 270 Understanding IT Demand 271

The Economics of Demand Management 273

Three Tools for Demand management 273

Key Organizational Enablers for Effective Demand Management 274

Strategic Initiative Management 275

Application Portfolio Management 276

Enterprise Architecture 276

Business–IT Partnership 277

Governance and Transparency 279 Conclusion 281  •  References 281

Contents xi

Chapter 19 CreaTIng anD eVolVIng a TeChnology roaDMap 283 What is a Technology Roadmap? 284

The Benefits of a Technology Roadmap 285

External Benefits (Effectiveness) 285

Internal Benefits (Efficiency) 286

Elements of the Technology Roadmap 286

Activity #1: Guiding Principles 287

Activity #2: Assess Current Technology 288

Activity #3: Analyze Gaps 289

Activity #4: Evaluate Technology Landscape 290

Activity #5: Describe Future Technology 291

Activity #6: Outline Migration Strategy 292

Activity #7: Establish Governance 292

Practical Steps for Developing a Technology Roadmap 294

Conclusion 295  •  References 295

Appendix A Principles to Guide a Migration Strategy 296

Chapter 20 enhanCIng DeVelopMenT proDuCTIVITy 297 The Problem with System Development 298

Trends in System Development 299

Obstacles to Improving System Development Productivity 302

Improving System Development Productivity: What we know that Works 304

Next Steps to Improving System Development Productivity 306

Conclusion 308  •  References 308

Chapter 21 InforMaTIon DelIVery: IT’S eVolVIng role 310 Information and IT: Why Now? 311

Delivering Value Through Information 312

Effective Information Delivery 316

New Information Skills 316 New Information Roles 317

New Information Practices 317

xii Contents

New Information Strategies 318

The Future of Information Delivery 319 Conclusion 321  •  References 322

MInI CaSeS Project Management at MM 324

Working Smarter at Continental Furniture International 328

Managing Technology at Genex Fuels 333 Index 336


Today, with information technology (IT) driving constant business transformation, overwhelming organizations with information, enabling 24/7 global operations, and undermining traditional business models, the challenge for business leaders is not simply to manage IT, it is to use IT to deliver business value. Whereas until fairly recently, decisions about IT could be safely delegated to technology specialists after a business strategy had been developed, IT is now so closely integrated with business that, as one CIO explained to us, “We can no longer deliver business solutions in our company without using technology so IT and business strategy must constantly interact with each other.”

What’s New in This Third Edition?

• Six new chapters focusing on current critical issues in IT management, including IT shared services; big data and social computing; business intelligence; manag- ing IT demand; improving the customer experience; and enhancing development productivity.

• Two significantly revised chapters: on delivering IT functions through different resourcing options; and innovating with IT.

• Two new mini cases based on real companies and real IT management situations: Working Smarter at Continental Furniture and Enterprise Architecture at Nationstate Insurance.

• A revised structure based on reader feedback with six chapters and two mini cases from the second edition being moved to the Web site.

All too often, in our efforts to prepare future executives to deal effectively with the issues of IT strategy and management, we lead them into a foreign country where they encounter a different language, different culture, and different customs. Acronyms (e.g., SOA, FTP/IP, SDLC, ITIL, ERP), buzzwords (e.g., asymmetric encryption, proxy servers, agile, enterprise service bus), and the widely adopted practice of abstraction (e.g., Is a software monitor a person, place, or thing?) present formidable “barriers to entry” to the technologically uninitiated, but more important, they obscure the impor- tance of teaching students how to make business decisions about a key organizational resource. By taking a critical issues perspective, IT Strategy: Issues and Practices treats IT as a tool to be leveraged to save and/or make money or transform an organization—not as a study by itself.

As in the first two editions of this book, this third edition combines the experi- ences and insights of many senior IT managers from leading-edge organizations with thorough academic research to bring important issues in IT management to life and demonstrate how IT strategy is put into action in contemporary businesses. This new edition has been designed around an enhanced set of critical real-world issues in IT management today, such as innovating with IT, working with big data and social media,


xiv Preface

enhancing customer experience, and designing for business intelligence and introduces students to the challenges of making IT decisions that will have significant impacts on how businesses function and deliver value to stakeholders.

IT Strategy: Issues and Practices focuses on how IT is changing and will continue to change organizations as we now know them. However, rather than learning concepts “free of context,” students are introduced to the complex decisions facing real organi- zations by means of a number of mini cases. These provide an opportunity to apply the models/theories/frameworks presented and help students integrate and assimilate this material. By the end of the book, students will have the confidence and ability to tackle the tough issues regarding IT management and strategy and a clear understand- ing of their importance in delivering business value.

Key Features of This Book

• A focus on IT management issues as opposed to technology issues • Critical IT issues explored within their organizational contexts • Readily applicable models and frameworks for implementing IT strategies • Mini cases to animate issues and focus classroom discussions on real-world deci-

sions, enabling problem-based learning • Proven strategies and best practices from leading-edge organizations • Useful and practical advice and guidelines for delivering value with IT • Extensive teaching notes for all mini cases

A Different ApproAch to teAching it StrAtegy

The real world of IT is one of issues—critical issues—such as the following:

• How do we know if we are getting value from our IT investment? • How can we innovate with IT? • What specific IT functions should we seek from external providers? • How do we build an IT leadership team that is a trusted partner with the business? • How do we enhance IT capabilities? • What is IT’s role in creating an intelligent business? • How can we best take advantage of new technologies, such as big data and social

media, in our business? • How can we manage IT risk?

However, the majority of management information systems (MIS) textbooks are orga- nized by system category (e.g., supply chain, customer relationship management, enterprise resource planning), by system component (e.g., hardware, software, networks), by system function (e.g., marketing, financial, human resources), by system type (e.g., transactional, decisional, strategic), or by a combination of these. Unfortunately, such an organization does not promote an understanding of IT management in practice.

IT Strategy: Issues and Practices tackles the real-world challenges of IT manage- ment. First, it explores a set of the most important issues facing IT managers today, and second, it provides a series of mini cases that present these critical IT issues within the context of real organizations. By focusing the text as well as the mini cases on today’s critical issues, the book naturally reinforces problem-based learning.

Preface xv

IT Strategy: Issues and Practices includes thirteen mini cases—each based on a real company presented anonymously.1 Mini cases are not simply abbreviated versions of standard, full-length business cases. They differ in two significant ways:

  1. A horizontal perspective. Unlike standard cases that develop a single issue within an organizational setting (i.e., a “vertical” slice of organizational life), mini cases take a “horizontal” slice through a number of coexistent issues. Rather than looking for a solution to a specific problem, as in a standard case, students analyzing a mini case must first identify and prioritize the issues embedded within the case. This mim- ics real life in organizations where the challenge lies in “knowing where to start” as opposed to “solving a predefined problem.”
  2. Highly relevant information. Mini cases are densely written. Unlike standard cases, which intermix irrelevant information, in a mini case, each sentence exists for a reason and reflects relevant information. As a result, students must analyze each case very carefully so as not to miss critical aspects of the situation.

Teaching with mini cases is, thus, very different than teaching with standard cases. With mini cases, students must determine what is really going on within the organiza- tion. What first appears as a straightforward “technology” problem may in fact be a political problem or one of five other “technology” problems. Detective work is, there- fore, required. The problem identification and prioritization skills needed are essential skills for future managers to learn for the simple reason that it is not possible for organi- zations to tackle all of their problems concurrently. Mini cases help teach these skills to students and can balance the problem-solving skills learned in other classes. Best of all, detective work is fun and promotes lively classroom discussion.

To assist instructors, extensive teaching notes are available for all mini cases. Developed by the authors and based on “tried and true” in-class experience, these notes include case summaries, identify the key issues within each case, present ancillary information about the company/industry represented in the case, and offer guidelines for organizing the class- room discussion. Because of the structure of these mini cases and their embedded issues, it is common for teaching notes to exceed the length of the actual mini case!

This book is most appropriate for MIS courses where the goal is to understand how IT delivers organizational value. These courses are frequently labeled “IT Strategy” or “IT Management” and are offered within undergraduate as well as MBA programs. For undergraduate juniors and seniors in business and commerce programs, this is usually the “capstone” MIS course. For MBA students, this course may be the compulsory core course in MIS, or it may be an elective course.

Each chapter and mini case in this book has been thoroughly tested in a variety of undergraduate, graduate, and executive programs at Queen’s School of Business.2

1 We are unable to identify these leading-edge companies by agreements established as part of our overall research program (described later). 2 Queen’s School of Business is one of the world’s premier business schools, with a faculty team renowned for its business experience and academic credentials. The School has earned international recognition for its innovative approaches to team-based and experiential learning. In addition to its highly acclaimed MBA programs, Queen’s School of Business is also home to Canada’s most prestigious undergraduate business program and several outstanding graduate programs. As well, the School is one of the world’s largest and most respected providers of executive education.

xvi Preface

These materials have proven highly successful within all programs because we adapt how the material is presented according to the level of the students. Whereas under- graduate students “learn” about critical business issues from the book and mini cases for the first time, graduate students are able to “relate” to these same critical issues based on their previous business experience. As a result, graduate students are able to introduce personal experiences into the discussion of these critical IT issues.

orgAnizAtion of thiS Book

One of the advantages of an issues-focused structure is that chapters can be approached in any order because they do not build on one another. Chapter order is immaterial; that is, one does not need to read the first three chapters to understand the fourth. This pro- vides an instructor with maximum flexibility to organize a course as he or she sees fit. Thus, within different courses/programs, the order of topics can be changed to focus on different IT concepts.

Furthermore, because each mini case includes multiple issues, they, too, can be used to serve different purposes. For example, the mini case “Building Shared Services at RR Communications” can be used to focus on issues of governance, organizational structure, and/or change management just as easily as shared services. The result is a rich set of instructional materials that lends itself well to a variety of pedagogical appli- cations, particularly problem-based learning, and that clearly illustrates the reality of IT strategy in action.

The book is organized into four sections, each emphasizing a key component of developing and delivering effective IT strategy:

• Section I: Delivering Value with IT is designed to examine the complex ways that IT and business value are related. Over the past twenty years, researchers and prac- titioners have come to understand that “business value” can mean many different things when applied to IT. Chapter 1 (Developing and Delivering on the IT Value Proposition) explores these concepts in depth. Unlike the simplistic value propo- sitions often used when implementing IT in organizations, this chapter presents “value” as a multilayered business construct that must be effectively managed at several levels if technology is to achieve the benefits expected. Chapter 2 (Developing IT Strategy for Business Value) examines the dynamic interrelationship between business and IT strategy and looks at the processes and critical success factors used by organizations to ensure that both are well aligned. Chapter 3 (Linking IT to Business Metrics) discusses new ways of measuring IT’s effectiveness that pro- mote closer business–IT alignment and help drive greater business value. Chapter 4 (Building a Strong Relationship with the Business) examines the nature of the business–IT relationship and the characteristics of an effective relationship that delivers real value to the enterprise. Chapter 5 (Communicating with Business Managers) explores the business and interpersonal competencies that IT staff will need in order to do their jobs effectively over the next five to seven years and what companies should be doing to develop them. Finally, Chapter 6 (Building Better IT Leaders from the Bottom Up) tackles the increasing need for improved leadership skills in all IT staff and examines the expectations of the business for strategic and innovative guidance from IT.

Preface xvii

In the mini cases associated with this section, the concepts of delivering value with IT are explored in a number of different ways. We see business and IT executives at Hefty Hardware grappling with conflicting priorities and per- spectives and how best to work together to achieve the company’s strategy. In “Investing in TUFS,” CIO Martin Drysdale watches as all of the work his IT depart- ment has put into a major new system fails to deliver value. And the “IT Planning at ModMeters” mini case follows CIO Brian Smith’s efforts to create a strategic IT plan that will align with business strategy, keep IT running, and not increase IT’s budget.

• Section II: IT Governance explores key concepts in how the IT organization is structured and managed to effectively deliver IT products and services to the orga- nization. Chapter 7 (IT Shared Services) discusses how IT shared services should be selected, organized, managed, and governed to achieve improved organizational performance. Chapter 8 (A Management Framework for IT Sourcing) examines how organizations are choosing to source and deliver different types of IT functions and presents a framework to guide sourcing decisions. Chapter 9 (The IT Budgeting Process) describes the “evil twin” of IT strategy, discussing how budgeting mecha- nisms can significantly undermine effective business strategies and suggesting practices for addressing this problem while maintaining traditional fiscal account- ability. Chapter 10 (Managing IT-based Risk) describes how many IT organizations have been given the responsibility of not only managing risk in their own activities (i.e., project development, operations, and delivering business strategy) but also of managing IT-based risk in all company activities (e.g., mobile computing, file sharing, and online access to information and software) and the need for a holistic framework to understand and deal with risk effectively. Chapter 11 (Information Management: The Nexus of Business and IT) describes how new organizational needs for more useful and integrated information are driving the development of business-oriented functions within IT that focus s

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