This chapter introduces the Firm-Level Value Creation Model as a means of planning Information Systems projects based on their potential for generating business value. It presents a review of economic literature on firm-level value creation based on the premise that ex-ante economic inefficiencies embedded in the firm processes are the key enabler of effectiveness in IT project implementations. After presenting a detailed case study in the banking industry to discuss the argument, the chapter describes how to implement a practical assessment of the potential effectiveness of any IT project. By presenting the underlying theoretical foundations of the business value generation mechanism, the author intends to contribute to the academy by bringing the economic theories to the center of the analysis of IT value generation. On the other hand, the chapter also assists practitioners by presenting a tool that can identify projects more likely to deliver value.
The consequences of a bad business case are certainly disastrous. Two business cases, one presented to the upper management of FoxMeyer (United States) and the other one to that of Fonterra (New Zealand), are good examples. The former company went bankrupt. The latter incurred a huge sunk cost of about NZ$ 260 million. The Diffusion of Innovations (DOI) theory enhances the understanding of the business case development (process), the business case document (product), and the message conveyed (diffusion) to the upper management by the executive sponsor (adopters and social networks). Business case matters in walking the innovation. It is a form of diffusion that comes with consequences.
A business case is generally ambitious. It has to be and it should be. Radical innovation with regards to replacing enterprise systems poses big risks to big organizations like FoxMeyer (USA) and Fonterra (NZ). Without great expectations, the projects of FoxMeyer and Fonterra would not have started in the first place. FoxMeyer did not succeed in its Project Delta III which bundled with the SAP R/3 and the Pinnacle warehouse-automation. In Chapter 11 (of the Bankruptcy Code), its gatekeepers claimed that their implementation of the enterprise systems drove them to bankruptcy (Caldwell, 6 July 1998; O’Leary, 2000; Stein, 31 Aug 1998; SAP and Deloitte Sued by FoxMeyer, 27 Aug 1998). They sued SAP and Andersen Consulting for a total of US$1 billion dollars. The dairy giant Fonterra put on hold its global SAP ERP project called Project Jedi (Foreman, 2007). Project Jedi is supposed to standardise its disparate manufacturing systems in line with its new business model of “One Team, One Way of Working” (Jackson, 2006; Ministry of Economic Development, Feb 2004). Fonterra justified the suspension of the project: first to reduce further capital spending and second to provide its farmer-shareholders slightly higher dividends (Jackson, 2006). It did not escalate Project Jedi despite of the huge sunk costs of about NZ$ 260 million from 2004 to 2006.
The Fonterra experience is a good example of conflict between shorter-term stability and longer-term change to sustain and manage growth (Burrell & Morgan, 2005; Dettmer, 2003; Trompenaars & Prud’homme, 2004). Fonterra attempted to simplify the business processes, shrink the distance of its “food” chain, and deliver the value proposition of “quality and reliability at the right price” (Ministry of Economic Development, Feb 2004). Because this vision has the capacity to sustain growth, it outweighs the risks of Project Jedi and the substantial cash flows required to finance it. Fonterra managed its longer-term change through Project Jedi, which constituted a radical innovation. However, it suspended that project to manage its shorter-term stability in the form of dividends (cash flows) to its shareholders. There could be other actual behind-the-scene reasons for the suspension.
The undesirable unexpected consequences experienced by FoxMeyer and Fonterra highlight a concern in the business case. In large organizations, upper management generally makes accept-reject decision on the basis of a business case. It is a matter of corporate governance to impose a business case for capital expenditures. The innovation could be strategic to a vision or reactive to a crisis. Their executive sponsor explores all options that best fit the strategic or reactive intentions and then develops a business case for submission to the upper management for approval and funding. The business case “sells” the innovation. It attempts to diffuse that innovation to the upper management to make favorable accept-reject decision (aka, adoption decision). Project Delta III and Project Jedi would not have started if their business cases were not convincing. Good business cases sell. The spectacular ones make the upper management over-commit. This is a reality. A business case influences upper management to be cautious, positive, or overly positive. At one extreme of the continuum is upper management’s inability to commitment or under-commitment. At the other extreme is an over-commitment. Both extremes in the continuum result to undesirable unexpected consequences. A successful diffusion, that is a good business case, is not necessarily good.
Key Terms in this Chapter
Innovation: Represents a product, a service, or an idea that is perceived or should be perceived by the audience or the market in which this innovation is intended to be new and of value.
Diffusion: Essentially the communication of a new idea (aka, the innovation) within a social system (such as an organisation) with the intention of convincing the audience to adopt or use the innovation.
Total Cost of Ownership: Also known as TCO, is a rigorous and holistic methodology, which helps in estimating how much an investment will cost to operate over its lifetime. It takes into account all direct and indirect costs. The indirect costs are generally insignificant individually. However, they become very substantial when accumulated over time.
Business Case: Is used both to describe a process and a document. Corporate governance generally compels a business case document as a tool to justify a capital investment (a radical innovation). In this report, the exploitation of an agenda by an executive sponsor is considered a form of diffusion. A completed business case document is a formal written document that argues a course of action, which contains a point-by-point analysis that leads to a decision after considering a set of alternative courses of action to accomplish a specific goal. A business case process walks through the initiation phase of the innovation.
Risk Assessment: An approach that measures the magnitude of the risk and the probability of its occurrence.
Initiation Phase: Consists of awareness stage and matchmaking stage, which ends with an accept-reject decision. This phase is the first phase of the innovation process. The second phase that follows is the implementation phase. Refer to innovation process.
Perceived Attributes of Using an Innovation: The Set 2 positive or negative biases that the users have. Similar to the perceived attributes of an innovation (Set 1), what matters is the perception regardless of whether the attributes (eg, perceived usefulness and perceived ease of use) are real or imaginary.
Perceived Attributes of an Innovation: The Set 1 positive or negative biases that the decision makers have. These attributes may be real or imaginary. However, it is the perception of their presence that matters.
Diffusion of Innovations (DOI) Theory: A theory of Everett M Rogers (1962) that concerns the study of communicating a new idea to individuals or organisations. It can be defined as the study of how, why, and at what rate the new idea (the innovation) diffuses and its adoption takes place.
Risk: Connotes a possible negative impact to something of value. It symbolises the probability of a loss.
Innovation Process: Starts with an initiation phase through which the individuals or decision-making units move from identifying and understanding the innovation, to forming an attitude toward that innovation. This subsequently leads to the decision to accept or reject it. The awareness stage is an agenda setting stage. The attitude formation stage is the matchmaking stage in which the executive sponsor attempts to match the attributes of the innovation to the requirement. The accept-reject decision terminates the initiation phase. An accept decision continues the innovation process toward the implementation phase, which consists of the pre-production, production, post-production, and confirmation stages.
Business Case Stream of Diffusion Research: Embraces a plurality view of visualising, mapping, and realising future consequences. It permits an attempt to understand the perceived needs (the current state), the solution (aka, the innovation), its alternatives (objects of innovation), the preferred choice, a view of the future (the future state), the desirable expected consequences to achieve, the undesirable expected consequences to avoid, and the perceived positive attributes required.
Implementation Phase: Proceeds after the initiation phase of “walking an innovation.” For enterprise systems, this phase consists of pre-production, production, and post-production (also known as upgrade and maintenance). Refer to innovation process.