Ch14

Chapter 14

Chapter 141

Information Technology Economics

 Moore’s Law

Chapter 142

Introduction

Chapter 143

Assuming the current rate of growth in computing power, organizations will have the opportunity to buy, for the same price, twice the processing power in 112 years, four times the power in 3 years, eight times the power in 412 years, and so forth.

price-to-performance ratio will continue to decline exponentially.

Productivity paradox

Chapter 144

The discrepancy between measures of investment in information technology and measures of output at the national level has been called the productivity paradox.

Productivity

Chapter 145

Economists define productivity as outputs divided by inputs.

Outputs are calculated by multiplying units produced (for example, number of automobiles)by their average value.

The resulting figure needs to be adjusted for price inflation and also for any changes in quality (such as increased safety or better gas mileage).

-cont…

Chapter 146

If inputs are measured simply as hours of work, the resulting ratio of outputs to inputs is labor productivity.

If other inputs—investments and materials—are included, the ratio is known as multifactor productivity.

Explaining the Productivity Paradox

Chapter 147

Explanations can be grouped into several categories:

(1) problems with data or analyses hide productivity gains from IT,

(2) gains from IT are offset by losses in other areas, and

(3) IT productivity gains are offset by IT costs or losses.

Does the Productivity Paradox Matter?

Chapter 148

The productivity-offsetting factors largely reflect problems with the administration of IT, rather than with the technologies themselves

the critical issue is how it improves organization’s own productivity.

Process approach to IT organizationalinvestment and impact.

Chapter 149

-cont….

Chapter 1410

The relationships are basically

indirect, via IT assets and IT impacts.

The figure shows that the

relationship between IT investment

and performance are not direct;

other factors exist in between.

-cont…

Chapter 1411

This is exactly why the productivity paradox exists, since these intermediary factors (in the middle of the figure) can moderate and influence the relationship.

 Value of Information - Evaluating

Chapter 1412

One measurement of the benefit of an investment is the value of the information provided. The value of information is the difference between the net benefits (benefits adjusted for costs) of decisions made using information and the net benefits of decisions made without information.

EVALUATING IT INVESTMENT: BENEFITS, COSTS, AND ISSUES

Chapter 1413

One basic way to segregate IT investment is to distinguish between investment in infrastructure and investment in specific applications.

IT Infrastructure

Chapter 1414

IT infrastructure, provides the foundations for IT applications in the enterprise.Examples are a data center,

networks, date warehouse, and knowledge base.

Infrastructure investments are made for a long time, and the infrastructure is shared by many applications throughout the enterprise.

IT Applications

Chapter 1415

IT applications, are specific systems and programs for achieving certain objectivefor example, providing a payroll or

taking a customer order. The number of IT applications is large.

Applications can be in one functional department or they can be shared by several departments, which makes evaluation of their costs and benefits more complex.

The Value of Informationin Decision Making

Chapter 1416

People in organizations use information to help them make decisions that are better than they would have been if they did not have the information.

Value of information = Net benefits with information - Net benefits without information

Evaluating IT Investment byTraditional Cost- Benefit Analysis

Chapter 1417

USING NPV IN COST-BENEFIT ANALYSIS. Capital investment decisions can be analyzed by cost-benefit analyses, which compare the total value of the benefits with the associated costs.

Organizations often use net present value (NPV) calculations for cost-benefit analyses.

Return On Investment

Chapter 1418

Another traditional tool for evaluating capital investments is return on investment (ROI), which measures the effectiveness of management in generating profits with its available assets.

The ROI measure is a percentage, and the higher this percentage return, the better.

It is calculated essentially by dividing net income attributable to a project by the average assets invested in the project

Cost-Benefits Analyses - Evaluating

Chapter 1419

“Costing” IT Investments - Evaluating

Chapter 1420

Placing a dollar value on the cost of IT investments is not a simple task.

One of the major issues is to allocate fixed costs among different IT projects.

Fixed costs are those costs that remain the same in total regardless of change in the activity level.

Chapter 1421

Another area of concern is the Life Cycle Cost; costs for keeping it running, dealing with bugs, and for improving and changing the system.

Such costs can accumulate over many years, and sometimes they are not even anticipated when the investment is made.

-cont…

Chapter 1422

There are multiple kinds of values (tangible and intangible)improved efficiencyimproved customer relationsthe return of a capital investment measured in dollars or percentage

many more … Probability of obtaining a return

depends on probability of implementation success

Opportunities & Revenues by IT

Chapter 1423

SalesTransaction feesSubscription feesAdvertising feesAffiliate feesOther revenue sources

Reduction in transaction costs

Chapter 1424

Transaction Costs: covers a wide range of costs that are associated with the distribution and/or exchange of products and services.

Search costsInformation costsNegotiation costsDecision costsMonitoring costs

Intangible Benefits Sawhney’s Method of Handling

Chapter 1425

Think broadly and softly.Supplement hard financial metrics with

soft onesPay your freight first.

Think carefully about short-term benefits that can “pay the freight” for the initial investment in the project.

Follow the unanticipated.Keep an open mind about where the

payoff from IT and e-business projects may come from

Business Case approach

Chapter 1426

It is a written document that is used by managers to garner funding for one or more specific applications or projects.

Emphasis is on the justification for a specific required investment.

Bridges the gap between the initial plan and its execution.

Specific Evaluation Methods (Continued)

Chapter 14 27

Methods for evaluating IT

Chapter 1428

Financial approachMulticriteria approachRatio approachPortfolio approach

“Costing” IT – Economic Strategies

Chapter 14 29

Outsourcing

Chapter 1430

IT Metric

Chapter 1431

It is a specific, measurable standard against which actual performance is compared.