Chapter Extension 21 Financing and Accounting for IT Projects © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke.

Chapter Extension 21

Financing and Accounting for IT Projects

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

CE21-2 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

Study Questions

What are the costs in a typical IT budget? Who pays IT costs? What are tangible and intangible costs and benefits? How are IT projects evaluated? How is total cost of ownership used to compare

alternatives? What cost/benefit techniques are used to evaluate IT

projects? What factors complicate the financing and

accounting for IT projects?

CE21-3 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

What Are the Costs in a Typical IT Budget?

Operations costs Direct labor costs Indirect labor costs Deployment costs

– Cost of setting up systems with little custom development

Systems development costs– Costs of creating new information systems that require

substantial work in the five components

CE21-4 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

Costs in a Typical IT Budget

Figure CE 21-1

CE21-5 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

Who Pays IT Costs?

Small organizations– IT costs accumulated

Costs may not be assigned to departments or users Treated as overhead expense

Large organizations– Chargeback expense

Costs allocated to users– By department, number of users, number of computers in

department

CE21-6 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

Chargebacks

Detailed allocation– Costs allocated by number of IP packets sent

across network– Trade-off between accuracy of allocation and cost

of administration

CE21-7 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

What Are Tangible and Intangible Costs and Benefits?

Tangible costs and benefits– Directly measurable in dollars– Examples: Labor, material, and service cost

savings

Intangible costs and benefits– Difficult to determine in dollars– Example: cost of lost user time, missed

opportunities, bad will

CE21-8 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

Examples of Tangible and Intangible Costs and Benefits

Figure CE 21-3

CE21-9 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

How Are IT Proposals Evaluated?

Dependent upon size and nature of project Total cost of ownership

– Considered over system’s lifetime Consider apparent costs Small systems

– Commitments made using back-of-the-envelope assessment

– Benefits tend to be intangible Large systems

– More formal analysis

CE21-10 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

IT Project Evaluation Techniques

Figure CE 21-4

CE21-11 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

How Is Total Cost of Ownership Used to Compare Alternatives?

TCO– Sum of all costs of systems for life of systems

Example: comparison of server operating systems– License fees– Training– Maintenance costs– Documentation– Advice on best practices– Service and support

CE21-12 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

What Cost/Benefit Techniques Are Used to Evaluate IT Projects?

Payback analysis– Examine costs and benefits– Determine how long it will take for benefits to pay off costs– Doesn’t tell you if good investment– Assumes benefit in future has same value as today

Net present value– Takes into account time value of money

Value of future costs and benefits discounted Adds discounted benefits and costs and compares to

investment

CE21-13 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

Cost/Benefit Techniques, continued

Return on investment (ROI)– Divide net gains by investment

Uses discounted costs and benefits

All three techniques consider only tangible costs and benefits

CE21-14 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

Complicating Factors

Technology changes fast– New technology may make system obsolete

Cost overruns common Uncertainty is high Intangibles have overwhelming impact on

costs and benefits– May overturn decisions based upon cost/benefit

analysis

CE21-15 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

What If You Just Don’t Know?

Paper analysis Consider intangibles Independent consultant can make

recommendation Problems

– No time– No money– Study may cloud issues

CE21-16 © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

Active Review

What are the costs in a typical IT budget? Who pays IT costs? What are tangible and intangible costs and benefits? How are IT projects evaluated? How is total cost of ownership used to compare

alternatives? What cost/benefit techniques are used to evaluate IT

projects? What factors complicate the financing and

accounting for IT projects?