CSA 8:Information Systems R Us, Inc.

You have recently been assigned as the Deputy for Portfolio Management in the Program Management Office of your company, Information Systems R Us, Inc. (ISRU).In discussing this new assignment with your senior manager, you learn that the Chief Executive Officer (CEO) has approved a budget for new investments of $10,000,000 for the next Fiscal Year.In the past, the Chief Financial Officer (CFO) has allocated the investment budget to each Department and allowed them to allocate their budget as they see fit.The CEO is uncomfortable with this approach and has directed the PMO to work with the CFO and come up with an integrated approach to investment selection.

You decide that your first action in your new position is to analyze the potential investments for the next FY.Before you review these investments, though, you decide it would be a good idea to review the CEO’s latest strategic plan for ISRU.The Executive Summary reads, in part:

ISRU has reached a crossroads in its growth as a specialty provider of information technology products.We have established an enviable reputation as an innovator of quality products in our corner of the information technology arena.However, more and more of our traditional customer base has opted to select products from foreign companies offering lower priced products that have lower quality and fewer features.Revenue has declined over recent years and our profits have dropped dramatically as we have been forced to lower prices in an attempt to maintain volume.One area of my concern is to reduce the turnover of key personnel, particularly within our engineering workforce.

I foresee four strategic objectives over the next five years and, in order of priority:

  • First and foremost, we must continue to develop new products that can maintain our reputation as an innovator.
  • Second, we must reduce the cost of these products to discourage our competition from underselling our products.This may require off-shore production in countries with lower labor costs.
  • Third, we must enter new fields, including the provision of information management services for products other than our own.
  • Finally, it is important that we maintain the quality and skills of our workforce.I would like to reduce turnover from the current rate of 25% a year to a rate of 10% or less.

Regardless of the priorities I have outlined above, I expect each initiative to achieve a positive cash flow and meet our internal rate of return.Our stockholders expect nothing less.

After reviewing the Executive Summary, your next step is to visit the Chief Financial Officer of ISRU.In discussions, you learn that the internal rate of return for ISRU will remain at 15% for the next five years and that, for planning purposes, the CFO foresees an inflation rate of 2%.In addition, the CFO indicates that ISRU investment policy requires that for budgetary analysis all investment costs will be assumed to occur at the beginning of the year and all recurring costs and revenues at the end of the year.He also indicates that while all investments must have a payback period of less than five years, and that while a payback period less than that is important, it is not nearly as important as NPV in comparing investments.Finally, the CFO reminds you that policy requires that if you use a weighted factor scoring table, the weighted factors should add up to 100%.

The CFO has asked the Program Management Office to develop a prioritized list of proposed investments, and your senior manager, the Director of Program Planning and Management, has turned this over to you.Her only guidance is to be sure to consider all of the CEO’s strategic objectives and that you comply the all CFO guidelines.She wishes you good luck.

Finally, you feel prepared to tackle the proposed investments submitted by the ISRU Departments and major staff positions.These are:

  • Investment 1:Advanced Security Router
  • Investment 2:Multi-Frequency Modem
  • Investment 3:Service Organization
  • Investment 4:State of the Art Manufacturing
  • Investment 3:HR Initiative

Extract from Product Development justification:This product will offer features until recently only available on military systems, meeting an expanding market demand.While the investment is significant, the anticipated revenue should be significant, particularly in the first two years.There will be additional benefits in retaining technical personnel due to the challenge associated with the application of new cyber-security technologies.

Extract from Business Development justification:This initiative includes the purchase of patent and production rights for a product developed by a small business that is currently in bankruptcy.The product will fill a hole in a key marketing area that ISRU has been unable to penetrate to date.While the market for this product is limited, it tends to be very stable.We anticipate significant revenue for the next four years with only limited sustainment costs.

Extract from the Product Services Division justification:At the present, ISRU contracts out first level system maintenance to various small businesses.This initiative will bring that support in-house, improving customer satisfaction and reducing system life cycle costs.It will have the ancillary benefit of improving retention of the lower grade technical workforce, from which many of our senior engineering personnel are drawn.

Extract from the Manufacturing Division justification:ISRU manufacturing costs are a significant part of its overall cost structure.By the use of state of the art 3-D Printing, ISRU can realize significant cost savings.This will also enhance retention of key technical personnel.One of the major factors influencing the decision to leave ISRU, per employee departure interviews, has been the amount of time from design to production and the lack of support for prototyping new products.

Extract from the Human Resources Department:This initiative provides a training and mentoring program designed to reduce new employee turnover.While the cost of developing this program would normally be included in our HR budget, treating these costs as an investment will significantly speed the implementation of this critical program.

Leaning on your experience as a Graduate Student at UMUC, you next tackle the quantitative aspects of these investments.The anticipated cash flow for each of these initiatives is attached[1].


[1] CSA-8 Rev A Investment Financials