13-1

Information Technology Economics

13-2

Information Technology: Economic and Financial Trends

• Internal IT versus outsourcing

• Expanding power / declining costs

• Moore’s law - price to performance ratio

• Technically versus economically feasible

• Intangible benefits - difficult to access

13-3

Explaining the Productivity Paradox

• Data and analysis problems hide productivity gains

• IT productivity offset by losses in other areas

• IT productivity offset by IT costs or losses

• Wasted time

13-4

Explaining the Productivity Paradox

• Software development problems

• Software maintenance

• Incompatible systems

13-5

Evaluating IT: Benefits and Costs

• Value of information in decision making

• Evaluating automation by cost-benefit analysis

• Evaluating IT infrastructure

• Evaluating IT performance: service level agreements

13-6

Evaluation of Intangible Benefits

• Use concrete indicators

• Solve for an unknown

• Prevent competitive disadvantage

13-7

Evaluating IT Infrastructure Through Benchmarks

• Metric benchmarks

• Best practices benchmarks

13-8

Metric Benchmarks

• IT expenses as percent of total revenues

• Percent of “down-time”

• CPU usage as percent of total capacity

• Percent of IS projects completed on time and within budget

13-9

Evaluating IT Performance:Service Level Agreements

• Meet with the client to determine IT service

• IS and client jointly determine measures

• Schedule of measurements

• Jointly determine action should service fail

• Written document

13-10

Evaluation IT: Perspectives on Intangible Benefits

• Value analysis

• Information economics

• Management by maxim for IT infrastructure

• Option valuation of IT investments

13-11

Value Analysis

13-12

Information Economics

• Key organizational objectives

• Scoring methodology

13-13

13-14

Management by Maxim for IT Infrastructure

• Consider strategic context

• Articulate business maxims

• Identify IT maxims

• Clarify the firm’s view of its IT infrastructure

• Specify infrastructure services

13-15

Option Valuation of IT Investments

• Future returns

• Expected value

• Future decisions

13-16

Evaluating IT: Accounting for Costs

• Accurate measure of IT costs

• Charge users for IT investments - organizational goals

• Chargeout

• Outsourcing as an economic strategy

13-17

13-18

Behavior-Oriented Chargeout System: Implementation

• Determine objectives

• Determine appropriate measures

• Implement and maintain the system

13-19

Outsourcing As an Economic Strategy

• Core competencies

• Which sources are less expensive

• How much control is needed

13-20

Outsourcing Advantages and Disadvantages

• Hardware economies of scale

• Staffing economies of scale

• Specialization

• Tax benefits

13-21

13-22

Outsourcing Disadvantages

• Limited economies of scale

• Staffing

• Lack of business expertise

• Contract problems

• Internal cost reduction opportunities

13-23

Outsourcing Recommendations

• Write shorter contracts - less than 5 years

• Subcontract control

• Selective outsourcing

13-24

13-25

Negative Impacts of Failures and “Runaways”

• Outright failure

• Abandoned

• Scaled down

• Runaway

13-26

The New Economics of IT

• IT as a product

• World Wide Web (WWW)

• Increasing returns

13-27

The New Economics of IT World Wide Web (WWW)

• At least 33% of US population

• Foreign markets

• Universal connectivity

13-28

Increasing Returns

Increasing returns occurs where profitability rises more rapidly than production increases.

13-29

Increasing Returns:Advantages

• Higher profitability

• Network effects

• Lock-in effect

13-30

Management StrategiesUnder Increasing Returns

• Build a large customer base through low prices

• Encourage development of complementary products

• Use linking and leveraging

13-31

Managerial Issues

• Constant growth and change

• Shift from tangible to intangible benefits

• Not a sure thing

• Chargeout

• Risk

• Outsourcing

• Increasing returns

13-32

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