1、Chapter 131Chapter 13Economics of ITEconomics of IT Chapter 132Learning ObjectivesIdentify the major aspects of the economics of information technology.Explain and evaluate the productivity paradox.”Describe approaches for evaluating IT investment and explain why is it difficult to do it.Explain the
2、 nature of intangible benefits and the approaches to deal with it.List and briefly describe the traditional and modern methods of justifying IT investment.Identify the advantages and disadvantages of approaches to charging end users for IT services(chargeback).Identify the advantages and disadvantag
3、es of outsourcing.Describe the economic impact of EC.Describe economic issues related to Web-based technologies including e-commerce.Describe causes of systems development failures,the theory of increasing returns,and market transformation through new technologies.Chapter 133 Computing Power vs.Bene
4、fitsEvaluate the productivity the benefits the costs other economic aspects of information technologyWhat does growth in computing power mean in economic terms?First,most organizations will perform existing functions at decreasing costs over time and thus become more efficient.Second,creative organi
5、zations will find new uses for information technologybased on the improving price-to-performance ratio and thus become more effective.Chapter 134 Moores LawChapter 135 Productivity -One measurePossible explanations of the paradox 1.problems with data or analyses hide productivity gains from IT2.gain
6、s from IT are offset by losses in other areas3.IT productivity gains are offset by IT costs or losses.Productivity is a ratio than measures outputs versus inputs.It is calculated by dividing outputs by inputs.On a company by company basis major benefits from information technology investments have b
7、een shown.However,it is very hard to demonstrate,at the level of a national economy,that the IT investments really have increased outputs or decreased inputs.The discrepancy between measures of investment in information technology and measures of output at the national level has been called the prod
8、uctivity paradox.Chapter 136 Benefits and Costs -Other measuresEvaluating IT InvestmentsValue of Information in Decision MakingTraditional Cost-Benefit Analysis(tangibles)Scoring Matrix or Scorecard(intangibles)Distinguishing between investments in infrastructure and investments in specific applicat
9、ions will assist the analysis.IT infrastructure,provides the foundations for IT applications in the enterprise(data center,networks,date warehouse,and knowledge base)and are long-term investments shared by many applications throughout the enterprise.IT applications,are specific systems and programs
10、for achieving certain(payroll,inventory control,order taking)objectives and can be shared by several departments,which makes evaluation of their costs and benefits complex.Chapter 137 Value of Information-evaluatingOne measurement of the benefit of an investment is the value of the information provi
11、ded.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.Value of information=Net benefits with information-Net benefits without informationIt is generally assume
12、d that systems that provide relevant information to support decision making will result in better decisions,and therefore they will contribute toward the return on investment.However,this may not always be the case.Chapter 138Cost-Benefits Analyses -evaluatingIn Net present value(NPV)calculations an
13、alysts convert future values of benefits to their present-value equivalent by discounting them at the organizations cost of funds.They then compare the present value of the future benefits to the cost required to achieve those benefits.Return on investment(ROI)measures the effectiveness of managemen
14、t in generating profits with its available assets(the higher the better).It is calculated by dividing net income attributable to a project by the average assets invested in the project.Capital investment decisions can also be analyzed by cost-benefit analyses,which compare the total value of the ben
15、efits with the associated costs.Traditional tools used to evaluate capital investment decisions are net present value and return on investment.Chapter 139Cost-Benefits Analyses -evaluatingChapter 1310“Costing”IT Investments -evaluatingPlacing a dollar value on the cost of IT investments is not a sim
16、ple 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.Another area of concern is the Life Cycle Cost;costs for keeping it running,dealing with bugs,and for improving
17、 and changing the system.Such costs can accumulate over many years,and sometimes they are not even anticipated when the investment is made.There are multiple kinds of values(tangible and intangible)improved efficiencyimproved customer relationsthe return of a capital investment measured in dollars o
18、r percentagemany more Probability of obtaining a return depends on probability of implementation successChapter 1311Intangible Benefits-evaluatingEvaluating Intangible BenefitsMake rough estimates of monetary values for all intangible benefits,and then conduct a NVP or similar financial analysis.Sco
19、ring Matrix or ScorecardIT projects generate intangible benefits such as increased quality,faster product development,greater design flexibility,better customer service,or improved working conditions for employees.These are very desirable benefits,but it is difficult to quantify them with a monetary
20、 value.Intangible benefits can be very complex and substantial.Chapter 1312Intangible Benefits Sawhneys Method of HandlingThink 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
21、 investment in the project.Follow the unanticipated.Keep an open mind about where the payoff from IT and e-business projects may come fromChapter 1313Business Case Approach-evaluatingThe business case helps:to clarify how the organization will use its resourcesjustifying the investmentto manage the
22、riskdetermine the fit of an IT project with the organizations missionOne method used to justify investments in projects is referred to as the business case approach.A business case is a written document used by managers to garner funding for specific applications or projects.Its major emphasis is th
23、e justification for the required investment.It also provides the bridge between the initial plan and its execution by incorporating the foundation for tactical decision making and technology risk management.Chapter 1314Investment Justification-evaluatingChapter 1315Evaluating and Justifying IT Inves
24、tment Appraisal methods are categorized into the following four types.Financial(NPV&ROI)methods consider only impacts that can be monetary-valued.They focus on incoming and outgoing cash flows.Multicriteria(Information economics and Value analysis)appraisal methods consider both financial impacts an
25、d non-financial impacts that cannot be expressed in monetary terms.These methods employ quantitative and qualitative decision-making techniques.Ratio(IT expenditures vs.total turnover)methods use several ratios to assist in IT investment evaluation.Portfolio methods apply portfolios(or grids)to plot
26、 several investment proposals against decision-making criteria.IT investment pose different problems from traditional capital investment decisions.However,even though the relationship between intangible IT benefits and performance is not clear,some investments should be better than others.Chapter 13
27、16Specific Evaluation Methods Total cost of ownership(TCO is a formula for calculating the cost of owning,operating,and controlling an IT system.The cost includes:acquisition cost(hardware and software)operations cost(maintenance,training,operations,)control cost (standardization,security,central se
28、rvices)Value analysis method evaluates intangible benefits on a low-cost,trial basis before deciding whether to commit to a larger investment in a complete system.The following evaluation methods that are particularly useful in evaluating IT investments.Chapter 1317Specific Evaluation Methods-contin
29、ued Information economics is an approach that focuses on key organizational objectives,including intangible benefits.Information economics incorporates the familiar technique of scoring methodologies,which are used in many evaluation situations.A scoring methodology evaluates alternatives by assigni
30、ng weights and scores to various aspects and then calculating the weighted totals.The analyst 1.identifies all the key performance issues 2.assigns a weight to each one3.Each alternative in the evaluation receives a score on each factor,usually between zero and 100 points,or between zero and 10.4.Th
31、ese scores are multiplied by the weighting factors and then totaled.The alternative with the highest score is judged the best.Chapter 1318Specific Evaluation Methods-continued Two methods:Benchmarks-objective measures of performance.These measures are often available from trade associations or annua
32、l statement analyses.Metric benchmarks provide numeric measures of performance,for example:IT expenses as percent of total revenuespercent of downtime(time when the computer is unavailable)CPU usage as a percentage of total capacitypercentage of IS projects completed on time and within budget.Best-p
33、ractice 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 inv
34、estments for the corporation.It is much more difficult to evaluate infrastructure investment decisions than investments in specific IS application projects.Since many of the infrastructure benefits are intangible and are applicable to different present and future applications.Chapter 1319Specific Ev
35、aluation Methods-continuedChapter 1320Specific Evaluation Methods-continued Common types of real options include:the option to expand a project(so as to capture additional cash flows from such growth)the option to terminate a project that is doing poorly(in order to minimize loss on the project)the
36、option to accelerate or delay a project.A new approach for evaluating IT investments is to recognize that they can increase an organizations performance in the future.Instead of using only traditional measures like NPV to make capital decisions,financial managers look for opportunities that may be e
37、mbedded in capital projects.These opportunities,if taken,will enable the organization to alter future cash flows in a way that will increase profitability.These opportunities are called real options.Chapter 1321 The balanced scorecard method evaluates the overall health of organizations and projects
38、.It advocates that managers focus not only on short-term financial results,but also on four other areas:1.finance,including both short-and long-term measures2.customers(how customers view the organization)3.internal business processes(finding areas in which to excel)4.learning and growth(the ability
39、 to change and expand)Activity-based costing(ABC)views the value chain and assigns costs and benefits based on the activities.Expected value(EV)of possible future benefits by multiplying the size of the benefit by the probability of its occurrence.Specific Evaluation Methods-continuedChapter 1322Spe
40、cific Evaluation Methods-continuedChapter 1323“Costing”IT Economic StrategiesTwo strategies for costing of IT services:Chargeback 1.All expenses go into an overhead account.With this approach IT is“free”and has no explicit cost,so there are no incentives to control usage or avoid waste.2.Cost recove
41、ry is an approach where all IT costs are allocated to users as accurately as possible,based on actual costs and usage levels.3.Behavior-oriented chargeback system sets IT service costs in a way that meets organizational objectives,even though the charges may not correspond to actual costs.Outsourcin
42、gstrategy for obtaining the economic benefits of IT and controlling its costs by obtaining IT services from outside vendors rather than from internal IS units within the organization.In addition to identifying and evaluating the benefits of IT,firms need to account(track)for its costs.Accounting sys
43、tems should provide an accurate measure of total IT costs for management control.Second,users should be charged for shared IT investments and services in a manner that is consistent with the achievement of organizational goals.Chapter 1324“Costing”IT Economic StrategiesOutsourcing-continuedOffshore
44、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
45、 applications.Chapter 1325Web-based Systems Economic StrategiesWeb-based systems can considerably increase productivity and profitability.However,the justification of EC applications can be difficult.Usually one needs to prepare a business case that develops the baseline of desired results,against w
46、hich actual performance can and should be measured.The business case should also cover both the financial and non-financial performance metrics against which to measure the e-business implementation and success.Chapter 1326FailuresInformation technology is difficult to manage and can be costly when
47、things do not go as planned.A high proportion of IS development projects either fail completely or fail to meet some of the original targets for features,development time,or cost.Many of these are related to economic issues,such as an incorrect cost-benefit analysis.Chapter 1327MANAGERIAL ISSUES Con
48、stant 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
49、 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
50、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
