Lecture 6( February 22, 2003)

Designing and Organizing Information

Systems Resources

Case AnalysisBanking industry: American National Bank

strategic analysis• IS not only help to cut costs, but to gain competitive

advantage, e.g. control over distribution channels linked electronically to suppliers and customers

• On the other hand, strategic IS can be expensive, difficult to build and easily imitated. Government regulations can also impact strategic initiatives

• The application of strategic systems requires a thorough understanding of the organization, including its internal and external environment. The most difficult aspect is the decision to pursue ideas that will give the firm a competitive advantage, especially those with a reasonable cost

• Michael Porter’s five external forces model can help identify competitive advantages for the business

Michael Porter’s five competitive forces

potential entrants

competitors

rivalry among existing firms

bargaining power of suppliers

bargaining power of buyers

substitutes of products/services

some considerations

• Competitive advantage conferred by IS are generally short-term. However, the impact are normally very significant.

• Strategic applications of IS “lock-in” customers and suppliers by raising the cost of switching.

• Level of acceptance by users/customers is critical to the success.

• The various risks associated with new technology are always high.

• The decision whether and when to invest in new technology is critical

Systems Development

• Systems development are typically difficult, especially for large projects.

• Most projects that are deemed failures either cost too much or did not produce useful systems.

• Project overruns and huge backlogs are common in all industries.

• To deal with all these difficulties, various methodologies and approaches are used to provide some control over the process.

• One of the most formalized techniques used is SDLC (Systems Development Life Cycle)

• Other methods include prototyping, end-user development, joint application development and object-oriented development.

Systems Development Life Cycle

• Feasibility study:– Examine, analyze and evaluate the benefits, goals, costs,

problems and implications of the proposed system solution. – The objective is to determine whether a system is the right

procedure to solve the situation

• Planning:– Developing a schedule for the project– Appointing team leaders– Laying out a plan

• System analysis:– Determine the present system procedures and problems– Breaks the current system into smaller, more manageable

pieces.

SDLC (contd. 1)

• System design:– Describes the system on paper, including a detailed description

of its modules and inter-relationships.– Define program specifications

• Programming:– Coding of the program specifications into computer readable

language programs.– Testing of the individual programs.

• System testing:– Also known as string test or final test.– Testing to uncover interlink, multiple and concurrent access and

stress problems.

• Sign off:– Acceptance tests– All documentations completed– A common requirement by organizations such as audit

requirements– By regulatory requirement for some sensitive systems

SDLC (contd. 2)• System implementation:

– Installing the new system– Training end-users– Making work adjustments– Conversions (from old systems or from manual)– Temporary human resources requirement

• Maintenance:– Working systems must be maintained and modified as business

needs arise.– Fix problems not found during testing and implementation.– Address changes required due to changing hardware, software or

other operating environment such as keeping up with the industry and regulatory bodies.

• Evaluation:– Post-implementation reviews– Effectiveness, reliability, stability, speed, ease of use etc– Other criteria to judge the new system for future project reference

Systems not considered as successful

• Systems developed which did not support business strategies and objectives.

• Poor systems planning and inadequate project management.

• Failure to define or understand user requirements.• Negligence in estimating costs and benefits of the systems

project.• Creation of a myriad of design defects and errors.• Acquisition of computers and software that no one needs or

knows how to use.• Installation of incompatible or inadequate technology.• Negligence in implementing adequate controls.• Development of unstructured, unmaintainable software.• Inadequate implementation tasks.

Centralization vs Decentralization

• The never-ending struggle between centralization and decentralization has not bypassed MIS.

• Since the advancement of technology into PCs, the trend towards decentralization has been more pronounced. Distributed processing have been giving way and there were even talks on the dying of mainframes. However, mainframes are still here to stay with even more increasing usage.

• The client/server approach has bridge the gap between centralization and decentralization while capturing the benefits of both.

• Centralization or decentralization not only affects hardware and software, but areas such as data and human resources are also affected.

advantage comparison

centralization

• economies of scale• easier upgrades and

compatibility• increase control over

access and sharing• easier training and

hiring of specialists

decentralization

• lower prices of PCs• increased flexibility• easier access and

personal control• faster and more

personal response time for users

hardware

their advantages

centralized

Although PCs may cost substantially less than mainframes at about 1000 times less per processing second, economies of scale can still be achieved due to other associated peripherals, software and the total number required.

de-

centralized

Diminishes the chance for a total breakdown.

Equipment can be personalized and the hardware is usually cheaper.

client / server

The benefits of the extremes can be realized.

Centralized concurrency and security controls of data.

Peripherals can be more personalized by residing in the “client” or PC

software

their advantages

centralized

Lower cost on a per-user basis.

Fewer compatibility problems

de-

centralized

More flexibility for end-users in what software they use and faster access to software residing on the individual workstation.

Support and configuration software applications can still be integrated.

client / server

This arrangement can provide advantages by maintaining some software on the server and some on the individual “clients” or PCs

data

their advantages

centralized

Easier to share data with all users.

Easier to control access to the data.

Easier to do backup and recovery.

de-

centralized

Users have better and faster access to the data.

Users know where and how their data are organized.

Users control their own data, having more privacy than sharing.

client / server

Shared data resides on the server while more personalized or departmental data such as electronic mails and confidential documents can be sent to the “client” or PCs.

personnel

their advantages

centralized

Working together with other MIS workers can lead to team efforts and faster solutions to complicated problems.

More diversified career path opportunities.

de-

centralized

The MIS worker is closer to the end users and more familiar with users’ particular needs

client / server

MIS staff take care of the servers and the issues that surround them. Other IT personnel scattered throughout the organization to assist “client” end-users. Or using Help Desk approach.

Users call a central number and IT personnel dispatched to the location if the problem cannot be resolved over the phone.

Training and Education• Traditionally, IS and IT training and education has been

focused on training the IT professionals. As technology advances at a faster and faster speed, training and re-training become more prominent.

• However, IS and IT training and education has been more and more important for users. Anyone except aggressive risk takers will be nervous about a new system or new technology to be implemented if they know nothing about it.

• Training on new systems or tools to be used for the mass workers are vital to a successful implementation strategy.

• Companies nowadays not only provide IS training to all affected workers, they even subsidized general IS or IT related education.

• As an incentive, government has the Skills Development Fund for companies to tap on for a vast variety of courses.

End-user computing• Involving end-users in the design, education and training

is important because it programs system flexibility, recognizes the impact of the new system on the business and reduces the resistance to change from the end-users to the new system.

• The slow response to user requirements and the huge backlog of projects and maintenance in most corporate IT departments prompted for end-user development.

• End-users could use their own computing resources to support their job requirements instead of waiting for the indirect support of corporate IT departments.

• The other reason for end-user development is the proliferation of more powerful and user-friendly software tools coupled with the increased IT knowledge of users.

• One clear advantage of user development is less communication is required which in turn speeds up the process and avoids possible misunderstanding the requirements.

End-user computing (contd. 1)

• However, end-user development is not without its problems.

• Most of these problems arise from the fact that users generally lack the training and experience of MIS professionals.– Systems produced by end-users tend to be written for only one

person to use and hence oriented for working only on a stand-alone PC.

– Lack of documentation creating problems for others to use the product.

– Due to lack of training, users rarely perform as much testing as they should.

– Lack of security control and audit trails.– Poor maintenance.– Data integrity problems often occurs.

End-user computing (contd. 2)

• Duplication of resources as different people in different parts of an organization could be working on the same type of problem which the IT department could solve it once for all.

• Lack of standard generates incompatibilities making it difficult to combine systems created by different departments when the need arises.

• End-user development takes time away from the user’s job. Some users spend months creating and modifying systems that might have been created by MIS professionals in a fraction of the time.

outsourcing

• Outsourcing is a new term for an old concept in MIS. To outsource is nothing more than to contract or sub-contract part or all of an organization’s IS operations out.

• Typically companies outsource software development, procurement and support to application service providers (ASPs). These ASPs provide and support business application and other software directly or via internet and intranets to all of a company’s employee workstations.

• However, many companies choose to let a specialized firm run the entire computer operations for them. This could be anything from machine operation and maintenance to development of new systems and maintenance of existing systems to telecommunciation services.

outsourcing (contd. 1)

• Some companies outsource their whole IS operations by selling their entire computer installation and operations and transfer their existing staff to the service company.

• Some leading outsourcing companies include EDS and IBM.

• There are others who spin off their IS operations into IS subsidiaries that offer IS services back to their parent company as well as to external organizations. Typical of this are “.com” companies or business units of an organization taking care of the e-commerce and internet-related businesses.

outsourcing (contd. 2)• Outsourcing has primarily been used to decrease

operating costs or to get the initial money from the sale of the installation. There are other companies who outsource to focus on their core business and not to worry about other areas especially the technologies.

• However, on examining and studying those companies who outsource, the benefits and cost savings are not always clear.

• The debate is still continuing on the controversial subject of outsourcing:– Complex markets that benefit from strategic applications require

the experience and knowledge of employees who work for the company.

– Situations requiring tight security are easier to control if they remain in-house.

– The outsourcing firm have to pay the same costs that a company face plus an additional profit margin.

The trade-offs

• Outsourcing is not a simple decision. The scope of the outsource can make the issue more complex. It must be carefully and fully analyzed, both financially, managerially and strategically.

• If the focus is on development of strategic applications and leading-edge applications, it is usually better to use an internal development team and if necessary, get outside assistance as consultancy services for the latest technology.

• If the main job is still dealing with older technology used mostly for transaction processing, it may be cheaper to hire an outside firm to maintain the applications.

Case analysis: American National Bank

• In 1933, American National Bank (ANB) opened for business in Chicago with capital funds of $1,400,000 and deposits totaling approximately $13,000,000. ANB showed a consistent growth in deposits and capital funds at a time when the US was recovering from the great depression and the people were actively involved in the war raging in Western Europe.

• In 1945, deposits were already over $200 m. Post war conditions brought ANB to look bravely toward a future world where trade between nations would once again be possible. An International Banking Department was formed.

• During World War II, savings were high because few consumer goods were available. As individuals spent accumulated savings during the post war years, there was no growth for the next three years in accordance with the banking industry as a whole.

• Since then, ANB continued to grow tremendously in every area of operations. Along the growth in customers, employees, services offered, income and deposits, came the development of new departments and procedures to support the organizations.

The use of information technology

• The superb location helped ANB’s growth in its services to midsize corporations in a wide range of industries.

• In 1961, an electronic data processing center was developed and the entire cheque handling operations was converted to an automated electronic system the following year.

• The conversion was not without its problems. Although no staff were terminated because of this conversion, a number of individuals were transferred to other departments and still more were extensively retrained to operate effectively in the data processing field.

• In 1963, an additional computer was ordered to handle the increase in cheque volume.

• In 1966, ANB purchased Tel-A-Data Corpn, a data processing center providing modern online customer account service for correspondent banks and savings and loans associations.

• In 1968, ANB joined the growing network of bank credit card issuers through its entry into the MasterCharge system.

some technology stories

• ANB implemented Vector digitized systems to improve its ability to detect and address customer fraud:– Vector-Kite system: the hope was that the kite system would

enable the bank to pinpoint customers with the full intent to defraud the bank. However, the system shows that most customers of the bank are kiting suspects. This is because the system is limited in its ability to evaluate the float period.

– Vector-Signature system: intent to decrease the time required to verify cheques and detect fraudulent activity. However, the goal was not achieved completely. Staff no longer required to flip through signature cards as signatures are now captured as images in the system, much time and effort have been saved. The system was not stable and the application shuts down frequently when making the transition from one signature image to another.

• Other projects were initiated, such as CIS, intranet applications and Y2K compliance.

Into mergers and acquisitions• In the mid-1970s, ANB expanded with branches overseas including

Hongkong and Singapore.• The bank’s Trust Department commanded worldwide attention and

recognition, with its innovative investment strategy techniques, its pioneering concept of indexing and its practical use of modern investment portfolio theory.

• Critical to ANB’s success has been the knowledgeable personalized service. Offering most services customers need when and where they need them.

• The bank allocates certain officers for customers. The officers deal with customers on an individual basis to meet specific needs.

• First Chicago Corpn, the 12th largest bank holding company in the US acquired ANB in 1984. ANB has been able to distinguish itself by focusing on its customers better than its competitors which include Bank of America. Smaller banks do not have the capital resources to penetrate the market as easily as larger banks which have capital resources to spend on technology.

merger, acquisition and technology

• The acquisition by First Chicago gave ANB additional expertise to tap for technological solutions. New mainframe applications were adopted with information distribution across the bank through LAN.

• In 1996 after the merger of National Bank of Detroit, the new corporation (First Chicago NBD) studied the implementation of a customer information system (CIS) and a consolidated deposits application. They determined that a relationship-based CIS was critical to maximizing market penetration and customer profitability. Moreover, most of the existing deposit systems within the merged corporation were not Y2K compliance.

• Hogan DB2 CIS was selected for enterprise-wide use and Hogan Demand Deposit Accounting System for use in the Corporate and Institutional Banking Area and at ANB.

merger, acquisition and technology (contd.)

• Systems Application Products (SAP) were purchased for used in general ledger reconciliation processes.

• Windows-based standard were established to obtain the most benefit from its applications.

• The merger has resulted in increase of staff rather than decreases in the Information Systems Department due mainly to two reasons:– Working on program integration to facilitate lines of

communications across the merged corporation– To tackle the Y2K problem

• The sheer size of the systems has resulted in outsourcing not being embraced by either ANB or the parent corporation. However, in order to ease the manpower resources shortage, some projects were still outsourced.

Performance after merger

• In a ranking of 37 Midwest banks in 1995, First Chicago ranks highest in revenues, deposits and assets. It also ranks very high in net income and net loans. However, it does not rank high in return on assets, profit margin and price-to-earnings ratio.

• First Chicago’s high ranking in revenue, deposits and assets is due to the mergers, including ANB and National Bank of Detroit. The low ranking in return on assets and profit margin indicates that while the corporation has substantial assets at its disposal, it is not utilizing its resources to their fullest potential to generate income. Compare to other banks in the same region, the corporation is not profiting from its operations.

Into the future• Financial services industry is further limited when it

comes to making investments in technology. Technology investments need to be supported by high margin products. However, for the most part, the products from financial institutions have low margin returns compared to other industries.

• Based on the changing nature of the banking industry, the driving force in the near future will be the convenience that a particular bank offers.

• Through acquisition and merger, integration of operations must focus on cutting costs and efficiently serving the customers in all core and noncore functions.

• Choosing the technologies that will allow the bank to cut costs is the way to go.

• Consider to outsource more of its information systems functions.

www.bankone.com after mergers

American National Bank

First Chicago Corporation National Bank of Detroit

First Chicago NBD Banc One

Bank One

resources & reading materials

Chapters 11, 12 and 13 of textbooks

Michael Porter, Competitive Advantage

www.bankone.com

www.mas.gov.sg

www.sdf.gov.sg