On an individual basis, each organization learns how to change by taking action, encountering obstacles, and discovering over time how to overcome them. Each version of this cycle (taking action, confronting problems, and adjusting course) is an opportunity for learning. In this process, organizations -- at varying speeds and to differing degrees -- become more sophisticated in their ability to introduce strategic change. On a collective basis, organizations have also learned how to change over the past several decades. Planning, as traditionally practiced, reflected that assuming that if executives came up with excellent plans, the plans would be easily executed, and successful change would result (Gluck, 1986; Morrisey, 1996). This emphasized the creation of formal, fixed planning documents through a staff-driven, once-a-year event restricted to the most senior executives. Underlying conventional planning was a "predict and plan" premise, which presumed that incipient trends could be detected through the use of sophisticated environmental scanning methods. Based upon such advance warning signals, the organization could get a jump on the competition, formulating and implementing plans that would result in a competitive advantage when the predicted waves of change hit the shore.
1. Good Estimates
1.1. Hardware Purchase and Lease.
These costs have historically been estimated quite well. They are discrete events with a straightforward evaluation-bidding-ordering cycle. The industry trend of geometrically improving price/performance ratios has helped mask any underestimation of project costs in this area.
1.2. Vendor Software Licenses.
These costs, similar to hardware purchase and lease, have generally been understood before commitment to them has been made. They are typically covered by a contract or license agreement that has undergone scrutiny by both management and legal staff, and the terms and conditions are generally explicit. An exception to this observation of "good estimates" can be noted regarding the explosive growth in vendor-supplied software maintenance costs, often included in the purchase contract. These costs are frequently expressed as a percentage of current list prices of the software, and can thus be raised in coming years without limit or purchaser control.
1.3. Networks and Telecommunications.
These costs have traditionally been relatively well estimated. This is a result of a company or corporate-wide approach to architecture and configuration, relatively stable vendors for technology and services, and rapidly decreasing costs for commodity network bandwidth supply.
1.4. Internal Software Development.
Despite a widely perceived reputation to the contrary, design and development costs, per se, have often been well estimated. However, massive changes in scope, poorly defined expectations and deliverables, and many problems associated with distribution, installation, and testing (particularly in large projects) have often contributed to significant problems with project cost estimates in this category.
1.5. Personnel Reduction.
This is typically the only benefit that has been estimated at all well. It certainly is the only benefit category for which any credible effort has been made to audit claimed benefits. The reason was a fundamental lack of readiness for strategic change in the company. Rewards often reinforced the status quo. Management styles often clashed with the imperative to involve people in making change happen. People from throughout the company were often unaware of the need to change. And strong norms and culture prohibited change from taking form. In response to these problems, a new model of strategic change developed. This third version placed as much emphasis upon the creation of readiness for change in the organization as it did upon planning and implementation. This new model of strategic change recognized the importance of three elements -- readiness, planning, and implementation.
Any successful change was viewed as dependent on a certain degree of readiness for the change within the organization. As a result, it was proposed that any attempts to introduce significant organizational change should be prefaced by a series of steps to enhance readiness. One should building awareness of the need for and communicating a vision of the desired change. Similarly, it is imperative to create a climate that is supportive of the desired change by realigning organizational culture, rewards, policies, procedures, systems, and norms to support such change. Moreover, equipping people throughout the organization with the skills needed to participate meaningfully in planning and implementing strategic change (Barger & Kirby, 1995). Planning tended to be seen as a more open process, with an emphasis on establishing general goals and direction and using pilot programs to build commitment within the organization. During implementation, there tended to be more concern for engaging frontline employees, as well as suppliers, customers, and other key stakeholders, in working out how plans should be executed.
1.6. Buy-in to Intangible Costs.
The general skepticism toward project economic analyses is largely as a result of this aspect. There is a pervasive feeling in corporate management that IT projects have cost far more than either projected or accounted for. A growing inclination to disbelieve and mentally inflate any estimates of cost presented has probably been a significant factor in the industry-wide movement to outsourcing of IT functions on a turnkey contract basis.
2. Estimates of Hidden Costs
Hidden costs are those costs that have historically been either ignored or passed off as overhead. They often occur after a project has passed its official completion date. They can be generalized in the following categories.
2.1. Installation and Conversion.
Most projects are proposed with the intent of taking advantage of an installed base of hardware, software, and/or data. Yet as technological and business changes occur during the life of the project, more and more requirements for such things as additional memory and memory management software, enhanced graphics capabilities, more disk storage, or faster file servers are added, but labeled as "outside project scope." Nonetheless, they are required for product delivery, and frequently in themselves add up to more than the total original estimate of the project costs. In addition, costs for converting from obsolete databases to new ones, recreating old report formats in the new environment, and so forth, are frequently grossly underestimated.
2.2. Data Integration and Access.
As IT increasingly facilitates interdisciplinary access to business and technical data, projects require increasing scope of access to existing (and rapidly growing) databases (Love, 1993). In most large companies database infrastructures are extremely complex, spanning several generations of database technology, and they involve an intricate topology of many types of computers and networks. Development of robust access paths to these databases is difficult, slow, and costly. Unfortunately, after access path development is complete, availability of these access paths makes a much larger problem obvious and pressing: The databases contain large amounts of conflicting information. The resolution of these conflicts (after determining which are important enough to resolve) will be one of the greatest and most expensive IT challenges of the coming decade.
2.3. Maintenance and Adaptation.
Many companies have made a practice of purchasing many vendor products and modifying them to meet their needs more closely. While this may increase the usability of a package, it obligates the company to significant ongoing maintenance, in addition to the rapidly increasing vendor maintenance charges mentioned earlier. Industry analysts have estimated that as much as 80% of American software activity is devoted to maintenance and adaptation of existing software (Radding, 1991), rather than to the development of significant new capabilities.
2.4. Ongoing Support.
Projects are nearly always introduced with the assurance that they can be supported with the existing end-user support staff. This is frequently a prevarication. Admittedly, there may be no growth in the end-user support staff itself. However, many new innocuous-sounding "technical aide" and "clerk" positions are in reality computing support personnel added either to support the new technology or to maintain support of older systems. As a result of hidden costs, case studies have shown that actual costs typically exceed projected costs (i.e., those predicted in the project proposal) by factors ranging from 4 to 7 (Strassmann, 1990). Without far better estimates than these, further economic analysis is a wasted exercise.
3. Estimates of Intangible Benefits
Despite nearly universal management skepticism, intangible benefits are frequently claimed in economic analysis.
3.1. End-User Effectiveness.
End-user efficiency and effectiveness gains have been claimed for many technology projects, but these have had minimal credibility, largely because of a lack of post-implementation tracking of the projected gains. Much of this problem has stemmed from an attempt to assign productivity gains to products, which provide a better quality of analysis (clearly a benefit), but often at a cost (which also needs to be recognized) of more time spent doing the analysis. Care must be taken to assign these costs and benefits appropriately, rather than just considering the benefits.
A major focus is to build awareness of the critical importance of quality improvement and to convey top management's commitment to a radical new vision of the organization's future, a vision characterized by continuous improvement, employee involvement, and world-class leadership in quality. Another major target of readiness activities is to build a climate conductive to quality improvement by helping managers make a fundamental shift in their management practices, adopting more participative and facilitative styles that support employee involvement in the continuous improvement of quality. Still another target of preliminary readiness activities is the retooling of the workforce through intensive, up-front education and training in quality improvement philosophies and techniques.
3.2. Revenue Enhancement.
These factors comprise improvements in the overall business. As such, they embody the integral nature of IT in daily operations. While it is clearly an overstatement that IT is the major contributing factor in all operational success, it is probably true that most modern businesses could not survive without their IT infrastructure. Regardless of their clear importance, benefits from this category (calculated as some percentage of total company revenue) can at best be categorized as speculative in any economic analysis, and they must clearly identify as such.
3.3. Cost Avoidance.
This category deals with operating expenses that could be avoided only through use of the proposed technology. Care must be taken to provide a meaningful and accurate comparison of before and after costs. Historically there has been considerable difficulty in achieving this parity (Radding, 1991).
3.4. Programming Staff Effectiveness.
During the past 30 years, programmer productivity (as measured by lines of code per year) has increased by a factor of approximately 15. This increase is understated, because of the much greater power per line of code inherent in recent generations of computing languages and tools (Diebold, 1990). Yet, despite all of this, there remains a growing backlog of unanswered user needs and demands. The benefit of improved development staff productivity can only be meaningful in an IT project context if translated into specific deliverables or reduced cost for the end-user client. Projects aimed at increasing programming staff productivity have, in their own right, no direct impact on the end-user client, and as such must be considered only as a cost in economic analysis.
Research on change often indicates severe problems in bringing about actual, lasting, productive, and satisfactory change. These difficulties are consistently attributed to the human factor, typically in terms of prevalent employee resistance to change (Lawrence, 1969; Argyris, 1985; Blake and Mouton, 1985). Resistance does not seem to be limited to these more obvious occasions, but instead tends to be so widespread across different types of strategic change that it is viewed as a general pattern.
Change can be defined as the realignment between the organization and its environment that affects the achievement of the organizational goals (Gray and Ariss, 1985). Given that it is intended to improve the organization's ability to survive by better fulfilling its goals and satisfying its stakeholders, it would be strange indeed if employees in general tended to resist change. Different types of changes are likely to vary in terms of the extent to which they threaten corporate cultures and careers. Comparisons between these types could refine our knowledge of where, when, and why employees resist and thereby also how they can be better managed.
It is possible that the prevalence of employee resistance stems from the fact that managers and researchers may still retain theory X assumptions about employee reactions and these become self-fulfilling prophecies when implementing and studying strategic changes. McGregor's (1960) classic book The Human Side of Enterprise taught us thirty-five years ago that managerial behavior depends on our assumptions of people and if we view them as inherently disliking work, we will attempt to coerce them toward adequate performance. Translating these theory X assumptions to the dynamic situation of strategic change, people are viewed as stability-prone and therefore will fear and resist most changes.
Research shows that individuals differ in their preferences for more or less stability versus change (Derr, 1986; Driver, 1988). Consequently, the stability-proneness assumption needs to be balanced with dynamic theory Y assumptions, namely, that if provided with adequate responsibility, freedom to act, rewards, and other support, people will drive and be empowered by strategic change.
To the extent that more participative theory Y and cultural theory Z approaches have been used in relation to strategic change, they have tended to emphasize the human side at the expense of the business side (Beer, Eisenstat, and Spector, 1990). The answer to whether hard X or softer Y and Z approaches are more appropriate is "neither." While the hard implementation of a strategic change can be undermined by the resistance the approach generates, the sacrifice of business considerations in favor of soft people-oriented approaches is no more likely to produce positive results. The human challenge of strategic change therefore is to integrate the business and human sides toward strategic empowerment rather than coercion or mollification of employees. Empowerment has previously been largely an organization development concept for enabling employee motivation (Thomas and Velthouse, 1990). A strategic concept of empowerment is more than mere avoidance of powerlessness; instead, it is the competitive advantage that a company can gain through developing and being developed by its people.
3.5. Buy-in to Intangible Benefits.
It should be clear from the above discussions that management buy-in to intangible benefits is (and based on experience should be) at best minimal. This is in clear contrast to a strong, historically justified buy-in to hidden costs.
4. Summary of Costs and Benefits
Production costs are the opportunity costs of the resources--land, labor, and capital--actually used to produce the output. Production costs are likely to be lower with private sector contracting out for two reasons. (McFetridge and Smith, 1988; Prager, 1994). Profit-maximizing firms in a competitive market will be forced to price at the lowest possible marginal cost, thus eliminating inefficient practices. There is considerable evidence that contracting out does lower production costs (Pack, 1989; McDavid, 1985; Carrick, 1988). After reviewing the evidence, Poole and Fixler (1987; 615) conclude the empirical studies have found that contracting out tends to be less costly than government provision covering a number of distinct services and pertaining to a variety of geographic areas. British and Australian studies tend to find chat production cost savings are in the 20% to 30% range, especially if competitive bidding is used (Hensher, 1988; Morlock, 1987; Walsh, 1991; Szymanski and Wilkins, 1993). There is also evidence chat much of the cost reduction comes from productivity improvements, which implies that although nominal wages do not change, there are decreases in effective wage rates (Szymanski and Wilkins, 1993).
Studies that have examined the relative production costs of internal provision versus contracting out have not included bargaining and opportunism Costs, which a priori might be expected to be higher width contracting out. Additionally, not all forms of contracting out can be expected to lower production costs, particularly if cost-plus contracts are used (Schlesinger, Dorwart, and Pulice, 1986). This is confirmed by the empirical evidence on cost-plus contracting and on cost-plus regulation (Spann, 1974; Courville, 1974).
The fact that most of the value of IT projects lies in those intangible or difficult to-measure factors dealing with the overall success of the business creates an apparent paradox. Recent restructuring in many companies, however, makes possible a linking of perceived benefits and value assignment that has previously been unavailable. Operational management throughout industry has recently been made much more accountable for determining IT expenditures than ever before. As such, that management can now make go or no-go decisions on projects affecting their operations.
Based on an assumption of prudent management, those decisions can be taken as a reasonable proxy of the value of the proposed technology, even in the absence of significant tangible benefits. If a manager is willing to make a certain expenditure, directly affecting the unit's profitability, that constitutes as accurate an estimate of the long-term value of that technology as we are likely to get.
Thus, if we can produce credible estimates of full-life-cycle costs and contrast them with the estimates made by responsible management of their overall good to the business enterprise, we have the necessary ingredients for a useful cost-benefit analysis.
5. RISK ANALYSIS
Projects fail for many reasons. Even many supposedly successful projects fail to meet their projected capabilities or fail to realize their projected benefits. Accurate risk estimates are equally critical to evaluation of both projected costs and estimated benefits. Gottinger (1989), Shah (1984), and Strassman (1990) have elaborated in detail on many types of risk affecting the introduction of new technologies. They can be categorized as technical risk (e.g., technological, cost, project management uncertainties), management risk (e.g., staffing, budgeting), and client risk (e.g., client goals, funding, external support). Evaluation of each of these categories is critical to valid economic calculations.
Multiple scenarios, involving a variety of possible outcomes to the types of risk inherent in the proposed project must be constructed. These can then be chance-weighted and probabilistically combined to provide the expected value (using the statistical definition of expected).
The case described above is more the rule than the exception in implementing the IT project. Although it is sometimes embarrassing for information systems (IS) managers and consultants to admit, the problems of cost overruns, delayed implementations, and failed systems are very common. Despite more than three decades of experience with large-scale IT applications, these problems have not disappeared. By one estimate, 20% of all IT projects get scrapped before completion, and 80 percent of the ones that are completed are finished behind schedule, over budget, and with lower functionality than expected.
There are four serious deficiencies in practice that account for most of the implementation problems such as the failure to assess the risk of failure for the individual project at the time a project is funded. Another is the failure to determine whether the level of risk is counterbalanced by a commensurate benefit if implementation is successful. Concurrently, the failure to recognize that different projects require different managerial approaches is among the shortcomings of the organization. Lastly, failure to consider the aggregate implementation risk of the portfolio of projects under development by the IT group was recognized.
Numerous techniques, guidelines, and frameworks have been proposed by academics, consultants, and practitioners for managing project risk in the private sector. An approach that we have used with success consists of initially, evaluating whether or not the project that is being proposed is aligned with the mission and objectives of the organization. The more aligned the project is with the departmental objectives, the easier it is to justify the project, and the greater the political support for the project. This first assessment is basically an assessment of what can be expected if the project runs into trouble. Consequently, one should evaluate the benefits that the project will bring to the organization. These benefits can be tangible (greater efficiency and therefore reduced expenditures as in less overtime pay) and intangible (political good will with the state legislature because of faster response to their requests). It is important to do a formal evaluation of these benefits before deciding whether to implement a project and to review the list of benefits as the project evolves to confirm that it continues to be a good idea. Accordingly, the organization should also look into the risk inherent in the project by examining three dimensions of a project to assess its risk up-front (Cash et al, 1992). These dimensions are project size, experience with the technology, and project structure.
Experience with the technology is also an important consideration. Because of the greater likelihood of unexpected technical problems, project risk increases as the project team's and organization's familiarity with the hardware, communication channels, operating systems, database management systems, and application development language decreases. Project structure refers to how well the outputs of the systems project can be identified and defined at the outset. If all parties involved have complete agreement on the content, format, and timing of all systems outputs at the beginning of the project, then it is classified as "well defined." A project with low structure (poorly defined outputs) increases risk substantially because their will likely be disagreements over requirements of the system, necessitating frequent changes and delaying implementation.
Cross-reference the expected benefits from the project to its inherent level of difficulty or risk. Only projects considered to be blockbusters (go-for-it) or high-wire acts should be performed. Assuming that the decision has been made that the benefits to be accrued from implementing the project balance its risks, decide how to manage the project to maximize the probability of successfully implementing the project. The management strategy depends on the evaluations of the three project dimensions listed above. The basic idea is to match the appropriate project management strategies to the individual project. There are four generic tools to manage the risk of projects (Cash et al., 1992). External integration tools, which include organizational and other communication devices that link the project team's work to users at both the managerial and lower levels; internal integration tools, which are coordination controls that ensure the project team operates as an integrated unit; formal planning tools, such as project charting techniques, which help to structure the sequence of tasks in advance and estimate the resources the team will need; and the formal results-control mechanisms, such as periodic reports and reviews, which help managers to evaluate progress and to spot potential discrepancies.
The appropriate combination of tools is dependent on what sources of risk are present in the project. For example, a project that is highly structured, small, and for which the project team is familiar with the necessary technology, is defined as low risk (i.e., very doable). Because the outputs are well defined, there is less need for external integration tools (formal links with the users). Because the project is small, internal integration tools (links within the project team) are not that critical. With a large-size project, there would still be a need for formal planning tools and results-control mechanisms.
Moreover, an organization should also decide whether or not it has the necessary skills, and whether or not the environment is propitious to develop the project. The decision can range from developing internally to outsourcing the project to shelving the project for the time being.
6. Recommendation
Changing an in IT projects requires powerful motivators. Getting the entire organization to move in a new direction, and continue moving requires a carefully considered strategy. While every organization is and must be treated as a unique entity, the following five steps form a good starting point for building an effective and sustainable culture change strategy. The first step in changing an organization is to provide it with a compelling reason to change; establish the organizational imperative for inclusion. It is important that the people of the organization understand the interrelationship of an inclusion effort and the organization's ability to achieve its mission and future success. Moreover, an organization should also reinforce existing resources for change instead of attacking areas of resistance. Start by identifying leaders from all levels of the organization who already hold inclusive values - a diverse group of pioneers, top management and other members of the original culture. Help strengthen their commitment and competencies for supporting change throughout the organization through coaching, education, networking and mentoring efforts. Furthermore, establishing groups or teams that are committed to the change, equip them with the skills and resources that they need to work together and let them prove that the change works is also imperative. Their successes will then be the standard others will want to emulate, and they can become a core of internal change agents as well as role models. Offer examples of success. Don't try to fix or change people.
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