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Rational Decision Making Framework for Implementing Information System

Ahmed Latif Shahriar1, Mahady Hasan1, Nuzhat Nahar1, Sayem Siddiqui1, Md. Monzur Morshed1, 2

1 Independent University, Bangladesh

  2 TigerHATS

[email protected]

[email protected]

[email protected]

[email protected]

[email protected],2

Abstract— Adopting Information system is one of the key drivers for increasing efficiency of business processes. In some cases sponsors are agreed that automation of work processes can really improve the efficiency of business processes with the help of IT but they need some sort of supportive measurement for making investment decision. In many cases it has been identified that the sponsors are able to arrange funds for the automation but due to lack of visibly on the outcome of the investment, they feel risky to take strategic decision of investing a large amount. To ensure some degree of safeguarding the investment and increasing decision making flexibility, real option based exercise can be practiced as a proactive approach for making investment decision for introducing IT solution. A framework is proposed to practice the process improvement using real option approach. From this study, a guideline is derived that covers identification of improvement scopes as well as proposed envisioned system and decision making steps for moving forward. This approach can be used by local software firms for planning their deliverables so that investors can easily make investment decision with some degree of visibility and flexibility. This will help the local software industry to grow as more investors will be interested to make positive decision on information system development projects. A short demonstration of this framework is done in the context of health care example.  

Keywords- Decision tree, KPI, Process modeling, BPMN, Investment, BPR

I. INTRODUCTION

A. Context and Background

Amount of IT investment is comparatively larger than other investment areas. Generally, IT project need is created as outcome of Enterprise Analysis and purpose of the project is to increase the productivity and profitability of the organization. Then the investment decision need to be taken at strategic level of the organization. One of the major challenges of IT investment decision is, in most cases, it is not easy to visualize the outcome of an IT project at the very early stage. The investors expect that the solution provider will help them with some realistic forecast on the outcome of the proposed solution. In the context of Bangladesh, one of the weaknesses of local software firms’ is not being able to create enough   visibility for the investors in project feasibility stage. Thus, in many cases IT projects are not even initiated as the investors are not interested making investment decision without enough visibility. As a consequence- enough opportunity of new work orders are note being created for the local software firms. This is not helpful at all for the growth of local software industry.

Moreover, the projects that are initiated, it has been observed that outcome of those cannot satisfy the investors’ expectation, as result varies by a distance with the forecast that was made at early stage. This is an indication of serious deviation as far as predictability is concern and as a result, bad references are created for new investors.

As a result,

i. Overall delivery cost is increased

ii. Chances of reusability decreases

iii. Quality of work is decreased

iv. Predictability is decreased

B. Problem statement

Introducing Information system for any organization is not straight forward. Although it helps to increase the service delivery efficiency, it requires considerable amount of investment. Thus, decision need to be taken for initiating IT project. Decision makers need some guidelines to go for such automation. Otherwise there is high risk of project being failed or project is not being initiated due to lack of proper visibility.

II. REAL OPTION & PROPOSED FRAMEWORK

A. Proposed approach

Incremental approach such as real option can be an appropriate way forward for IT investment with a decision framework. This decision framework will help the decision makers to decide on IT investment step by step with options called ‘Real Option’. This framework is expected to help for measuring the risk factor and if risk factor is higher, will also help the investors to mitigate the investment risk by identifying the stage of:

I. Rollback point or

II. Redirect the project goal.

This approach is also expected to encourage the entrepreneurs of different industry to feel safer for investing on information systems for increasing the productivity of their business. This will directly help the local software firms to get more opportunity of getting local work order which should actually help the industry eventually be growing.

B. What is real option

Real option is the idea to evaluate an asset and to help the investors what kind of investments they have to make in order to do business and what could be the possible outcome in future based on the current investments. It is being accepted as a conceptual and analytical tool to support strategic decision making under uncertainty by extending existing techniques of Net Present Value (NPV) valuation [1]. In short, it is a decision making tool that empowers the financial and strategic decision makers in big financial investments and such.

Although real option is mostly know for financial sector, it is also well practiced in Information Systems e.g. decision masking whether an Enterprise Resource Planning (ERP) system should be upgraded or not [2]. In a paper [3], it has also been discussed how flexibility of real option can be used for software design decision.

C. Routes in Real option

In real option, flexibility can be enjoyed by choosing different routes depending on the situation. The routes/options are [4]:

• Stage investments.

• To abandon investment.

• Defer initiation of investment

• To create growth opportunities based on an initial investment

• To change the scale of investment

• To switch assets created by the investment to another use

D. Proposed framework for adopting information system using Real option

Follow steps at “Fig.1” are proposed as guideline for adopting new information system:

Figure1. Proposed framework

E. Short description & demonestration of proposed framework

To demonstrate the implementation of this framework, a Non-Government Organization (NGO) is taken as example who works to control child malnutrition in health sector.

1) Defining problem of client: At first problem of the client need to be identified. Interview, document going through etc will help to capture the problem of the client. In this case, The NGO need to bring efficiency at their work process.

2) Capturing current process of client: At this step, ‘As-is’ process need be translated into process modeling using Business Process Modeling Notation (BPMN) [5]. Example of BPMN is shown in “Fig. 3”. There can be several digrams to capture the ‘As-is’ model.

3) Identifying gaps and pain points at current process: At step three, gaps and pain points of current system need to be identified covering following:

• Identifying struggling points at current work process

• Identifying limitation of current system

• Identifying Stakeholders’ expectations

• Identifying domain specific requirements

• Identifying improvement areas at ‘To-Be’ process

4) Implication Assessment: At step four, gaps and pain points of current system need to be identified implication assessment need to be done:

• Defining key performance indicators (KPIs)

• Measuring and Benchmarking KPIs

• Defining Current roles of system elements

• Identifying contribution of System elements’ roles and Implications on KPIs

Here, the system elements are:

1) People

2) Software

3) Database

4) Hardware

5) Communication network

5) Process modeling for ‘To-be’ process: Process modeling need to done for ‘To-be’ process using BPMN. At “Fig. 3”, example of a process model is demonstrated using BPMN. There can be several number of diagrams to represent ‘To-be’ process depending on the complexity of the systems.

6) Overview of Proposed automation: In this stage, proposed autmoation system should be drawn in an abstract way to make the stakeholder understand and it must not be highly technical. This diagram is like a context diagram of the proposed system. A diagram is shown at “Fig. 2” in the context of the NGO example.

Figure2. Overview of Proposed automation

7) Process identification for automation: At step seven, processes would be listed down that are required to be automated in proposed system. This should be done from technical point of view.

8) Proposed role of System Elements: Proposed roles of system elements need to be defined. Table1 shows the example considering the NGO.

9) Steps of Real options: Real option steps to be folloed  for moving forward:

1) Plan for pilot Run

2) Decide what to do in next phase

3) Evaluation of Pilot Run

4) Options after Pilot Run

5) Decision after pilot run

10) Plan for Pilot run: The scope of pilot run are defined at this step. Pilot run is one of the risk mitigation steps of real option.

11) Premium purchase for future expansion: Premium means the extra return that an investor expects to make from a position in exchange for accepting extra risk and it should be defined in this stage [6]. That is, for a particular solution following need to be noted as premium purchase:

a) That are the future scope that are considered now

b) What is the cost for this scope and flexibility

12) Drawing decision tree: A decision tree [7] need to be drawn with the options. In decision tree, P1 and P2 are the probabilities of two options and C1 and C2 are the benefits of each options respectively as in “Fig.4”. In the figure, t1 and t2 refers to time.

13) Using formula for real option:Any of the real option formula/s need to be used to evaluate the options. According to result of  mathematical calculate of the formula, a decision need to be taken. As example- In pilot stage, decision should be taken if future expansion should be done or project need to limited to pilot level. The calculated value should be guiding if decision should be positive or negative. There are several mathemetical formulas and it is encouraged to avoid formulas that contain complex equation/s.

TABLE I. PROPOSED ROLE OF SYSTEM ELELEMENTS

System Element Role

People Filed worker:

• Makes field visit

• Share knowledge with child and mothers

• Growth monitoring

• Collects data using Table device

• Identify malnutrition child

• Request for expert advice for sever child

• Follow up a reported child

• Follow up a child who is already cured

Child:

• Meets health worker for growth monitoring

• Visits health complex if required

• Visit clinic if required

• Follow advice

Doctor:

• Remote doctors checks request for field support

• Remote doctors provide advice to field worker

• Doctor provide treatment to child who visits clinic/hospital

Health Analyst:

• Generate report

• Analyze reports

• Provide plan for controlling malnutrition

IT personnel:

• Maintains the system

• Commissions tablet devices for field worker

Software Mobile Application:

• Registers data entered by fieldworker

• Notify a doctor if any support request is come

• Calculates malnutrition level for field worker during field visit

• Notify health worker when any response comes from expert/doctor

• Viewing health tips for knowledge sharing

Web based Application:

• Availability of child information from rural health complexes

• Availability of child information from hospitals

• Generating reports for health analyst

Database • Storing information from field

• Storing information from hospital

• Storing information from health complex

• Storing request of field worker

• Storing advice of doctor/expert

• Storing decision of health analyst/management

Hardware • Server hosting the web application/service

• Server for hosting database

• Tablet device

• Desktop

• Laptops

Communication network • Mobile Internet for tablet devices

• Hospital LAN

• LAN of health complexes

III. LITERATURE REVIEW

The topic Real option based framework has been an issue to many research works in the past. There has been some research done on investment decision on ERP based on real option approach. In their paper [9] Lihui, proposed a framework, to solve and focus the three stage investment problems. In another paper [2] by Wu, researched and analyzed the risk and uncertainties of multistage ERP projects. By applying multistage stochastic integer programming model they proposed a framework which can give solution for decision making for ERP projects.

Investment in information systems and IT divisions has been topic for poplar researches too. Mustafa in his paper [10] presented that even an investment that is not justified using traditional valuation methods, can be valuable for a firm and its shareholders considering the strategic and managerial flexibilities inherent in the investments with the effect of favorable market conditions in the future. And they proposed a flexible evaluation framework for making investment decisions for IT system Implementations. And a paper [11] by Narges proposes a combination of system dynamics and real options into a creative model for analyzing the return on investments in IT. Their study showed a model to assess the benefits of RFID to retailers’ operation management.   Similar research [12] has been done by Ullrich on this matter where they analyzed option pricing models to the valuation of IT investments. Their analysis of the articles evaluating IT investments with Real Option Theory, shows that a lots of papers do not take the critical assumption in count even when it’s known that the assumptions are not full filled.

The real option approach has been used in a lot more research works, in the journal [13] Alcaraz explained how most company uses a mix approach to evaluate completing projects. In these times manager needs extended flexibilities in decisions making that other approaches can’t offer. So they proposed a real option-enabled Decision support system for the analysis of real option in various industrial investment situations. Real option framework was also used in solving the issues related to designing and managing projects and system. The paper [14] discusses the improvement which the proposed methodology boasts over conventional traditional fixed design approach of framework. In a paper [15] deals with a similar concept of developing a real option framework which sets rules for investment decision in sustainable transport projects under both demand and costs uncertainties. It also discusses abut calculated waiting times before investing and study the impacts of different scenarios that deal with investment decisions.  Also the paper [16] proposes a real option model which would help delay mobile telecommunication network invests decisions. It also proposes a method for calculating the real option impacts on mobile service costs.

Figure3. Process modeling using BPMN

Figure 4. Decision tree

14) Apply real option for taking next decision: Real option approch need to be applied for rest of the phases of the plan. It would be iteration of previous step if there are multiple stages for expansions.

IV. SUMMARY & CONCLUSION

A. Benefits

The framework is prepared with an objective of helping investors to make IT investment decision easily. People can use it as a guideline following step by step, without having much technical knowledge. Business Process Model and Notation (BPMN) has been used to represent the ‘as-is’ and ‘to-be’ process so that stakeholders can easily understand and share their opinion. On the other hand, to make the real option adaptable- simple formulas are encouraged to use in this approach, avoiding many complex formulas of real option. In summary, it should be easily adoptable to all related stakeholders.

As real option based approach has the flexibility for managerial decision, it will create some comfort zone for the investors and will reduce investment risk. If some area on the delivery roadmap is found gray, the investor can take ‘no-go’ decision which will ensure the least expense. Such approach can be used at the feasibility stage, for getting better visibility at the very early stage of project. This framework will be very useful for Business Process Reengineering (BPR).

B. Limitations

Main limitation of the work is, the framework has not been compared with similar type of frameworks. Another limitation of the work is not validating in terms of real option formulas. Demonstration part is continued till ‘pilot phase only.

C. Propositio for Future Work

There are few parameters in real options that are generic in financial term. To make effective use of real option in the IT investment context, these parameters may need to be appropriately derived in respect to IT domain. This can be a researchable issue if those parameters are similarly effective for IT industry or the values need to be separately derived as standard for IT industry.

D. Conclusion

From one of the MIT CISR survey of IT and business leaders, it is found that the quality of a company’s IT investment portfolio depends on executive understanding of IT issues. In developed countries, it seem companies are changing conversations about IT investment [8]. It is assumed that proposed frame work will help leaders to understand the big picture of the project. Such framework can be very helpful for creating many opportunities of IT development projects in the under developed countries. This approach can be very useful to local software firms for preparing delivery roadmap. It can help the investors making investment decision with some degree of visibility and flexibility. Ultimately, this will help the local software industry to grow as investors will be influenced positively for making investment with better visibility on the risks, options and outcome of the investment. As there are scope for adopting information system almost in every sector, it can be an opportunity to create the foundation of a strong local Software Industry.

References

[1] Creating and Valuing Flexibility in Systems Architecting: Transforming Uncertainties into Opportunities Using Real Options Analysis. URL: http://www.dsta.gov.sg/docs/publications-documents/creating-and-valuing-flexibility-in-systems-architecting-transforming-uncertainties-into-opportunities-using-real-options-analysis-nbsp-.pdf

[2] F.wu,H. Z.Li, L.K. Chu, D. Sculli, K.Gao:An approach to the valuation and decision of ERP investment projects based on real options, Springer US(2009) 3887-3891.

[3] K. SULLIVAN and P. CHALASANI (1997) Software Design Decisions as Real Options. University of Virginia Department of Computer Science Technical Report 97-14, Submitted to IEEE Transactions on Software Engineering

[4] R. G. Fichman, M. Keil and A. Tiwana, (2004) Beyond Valuation: 'Options Thinking' in IT Project Management [Online]. Available: https://www2.bc.edu/~fichman/Fichman_Options_Thinking.doc

[5] BPMN [Online]. Available: http://www.bpmn.org/

[6] Defination of Premium [Online]. Available: http://financial-dictionary.thefreedictionary.com/premium

[7] Decision tree [Online]. Available: https://en.wikipedia.org/wiki/Decision_tree

[8] Ross, Jeanne W. Beath, Cynthia M. Wixom and Barbara H., 2014, Demand Shaping: Changing the Conversation About IT, Center for Information Systems Research, MIT

[9] LiHui,Zhong Qiuyan: Research on Enterprise Information System Implementation Decision Based On Real Options Approach,Systems, Man and cybernetics,ISIC,IEEE international Conference(2007).

[10] C.Okan Özogul, E. Ertugrul Karsak, Ethem Tolga: A real option approach for evaluation and justification of a hospital information system, Volume 82, Issue 12, Journal of Systems and Software, Elsevier Science INC. New York, NY, USA (2009) 2091-2102.

[11] Narges Kasiri,Ramesh Sharda: Real option and System Dynamics for Information Technology Investment Decisions: Application to RFID Adoption in Retail, Volume 4 issue 3,ACM Transaction on Management Information Systems, ACM New York, NY,USA( 2013)

[12] Christian Ullrich: Valuation of IT Investments Using Real Options Theory, Volume 5 issue 5, Springer Fachmedien Wiesbaden (2013) 331-341.

[13] Francisco Augusto Alcaraz Garcia & markku Heikkila: Improving Investment Decision Making by Expanding Key Knowledge with Real Option Tools, Journal of Decision Systems, volume 12: 3-4 (2012), 345-368.

[14] Stephen X. Zhang, Vladan Babovic: An evolutionary real options framework for the design and management of projects and systems with complex real options and exercising conditions, Decision Support Systems, Volume 51, Issue 1, Elsevier Science Publishers B. V. Amsterdam, The Netherlands( 2011).

[15] L. SALAHALDIN and T.GRANGER: A real option framework for dealing with uncertainty in sustainable transport investments, Asia-Pacific Journal of Operational Research, Volume 30, Issue 04, World Scientific Publishing Co. & Operational Research Society of Singapore (2013).

[16] Sergio Luis Franklin Jr.: Investment decision in mobile telecommunications network applying real option, Annals of Operations Research, Volume 226, Issue 1, Springer US,(2014), 201-220.

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