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Information Technology
Economics
Chapter 13 2
Computing Power vs. Benefits
Evaluate
the productivity
the benefits
the costs
other economic aspects of information technology
Chapter 13 3
Moores Law
Chapter 13 4
Productivity - One measure
Chapter 13 5
Benefits and Costs - Other measures
Evaluating IT Investments
Value of Information in Decision Making
Traditional Cost-Benefit Analysis (tangibles)
Scoring Matrix or Scorecard (intangibles)
Chapter 13 6
Value of Information - evaluating
Value of information = Net benefits with information - Net benefits without information
Chapter 13 7
Cost-Benefits Analyses - evaluating
Chapter 13 8
Cost-Benefits Analyses - evaluating
Chapter 13 9
Costing IT Investments - evaluating
Chapter 13 10
Intangible Benefits-evaluating
Chapter 13 12
Business Case Approach - evaluating
Chapter 13 13
Investment Justification - evaluating
Chapter 13 14
Evaluating and Justifying IT Investment
Chapter 13 15
Specific Evaluation Methods
Chapter 13 16
Specific Evaluation Methods - continued
Chapter 13 17
Specific Evaluation Methods - continued
Two methods:
Benchmarks - objective measures of performance. These measures are often
available from trade associations or annual statement analyses.
Metric benchmarks provide numeric measures of performance, for example:
IT expenses as percent of total revenues
percent of downtime (time when the computer is unavailable)
CPU usage as a percentage of total capacity
percentage of IS projects completed on time and within budget.
Best-practice benchmarks emphasis is on how information system activities are
actually performed rather than on numeric measures of performance.
Management by Maxim - brings together corporate executives, business-unit managers,
and IT executives in planning sessions to determine appropriate infrastructure
investments for the corporation.
Chapter 13 18
Specific Evaluation Methods - continued
Management by Maxim
Chapter 13 19
Specific Evaluation Methods - continued
Chapter 13 21
Specific Evaluation Methods - continued
Chapter 13 22
Costing IT Economic Strategies
Chapter 13 23
Costing IT Economic Strategies
Outsourcing - continued
Offshore outsourcing of software development
ASPs and Utility Computing. Application service provider (ASP) manages and distributes
software-based services and solutions from a central, off-site data center, via the Internet.
Management service provider (MSP) is a vendor that remotely manages and monitors
enterprise applications.
Chapter 13 24
Web-based Systems Economic Strategies
Chapter 13 25
Failures
Constant growth and change. The power of the microprocessor chip doubles every two
years, while the cost remains constant. This ever-increasing power creates both major opportunities
and large threats as its impacts ripple across almost every aspect of the organization and its
environment. Managers need to continuously monitor developments in this area to identify new
technologies relevant to their organizations, and to keep themselves up-to-date on their potential
impacts.
Shift from tangible to intangible benefits. Few opportunities remain for automation
projects that simply replace manual labor with IT on a one-for-one basis. The economic justification
of IT applications will increasingly depend on intangible benefits, such as increased quality or better
customer service. In contrast to calculating cost savings, it is much more difficult to accurately
estimate the value of intangible benefits prior to the actual implementation. Managers need to
understand and use tools that bring intangible benefits into the decision-making processes for IT
investments.
Not a sure thing. Although IT offers opportunities for significant improvements in organizational
performance, these benefits are not automatic. Managers need to very actively plan and control
implementations to increase the return on their IT investments.
Chapter 13 27
MANAGERIAL ISSUES Continued
Chargeback. Users have little incentive to control IT costs if they do not have to pay for them
at all. On the other hand, an accounting system may allocate costs fairly accurately to users but
discourage exploration of promising new technologies. The solution is to have a chargeback
system that has the primary objective of encouraging user behaviors that correspond to
organizational objectives.
Risk. Investments in IT are inherently more risky than investments in other areas. Managers
need to evaluate the level of risk before committing to IT projects. The general level of
management involvement as well as specific management techniques and tools need to be
appropriate for the risk of individual projects.
Outsourcing. The complexities of managing IT, and the inherent risks, may require more
management skills than some organizations possess. If this is the case, the organization may
want to outsource some or all of its IT functions. However, if it does outsource, the organization
needs to make sure that the terms of the outsourcing contract are in its best interests both
immediately and throughout the duration of the agreement.
Increasing returns. Industries whose primary focus is IT, or that include large amounts of IT
in their products, often operate under a paradigm of increasing returns. In contrast, industries
that primarily produce physical outputs are subject to diminishing returns. Managers need to
understand which paradigm applies to the products for which they are responsible and apply
management strategies that are most appropriate.
Chapter 13 28
Chapter 13
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Chapter 13 29