Information technology economics
Chapter 14
Information Technology
E
Economics
i
I f
Information
ti Technology
T h l
For
F Management
M
t 6th Edition
Editi
Turban, Leidner, McLean, Wetherbe
Lecture Slides by L. Beaubien, Providence College
John Wiley & Sons, Inc.
Chapter 14
1
Learning
g Objectives
j
z Identifyy the major
j aspects
p
of the economics of
information technology.
z Explain and evaluate the productivity paradox.
z Describe approaches for evaluating IT
investment and explain why is it difficult to do it.
z Explain
E l i th
the nature
t
off intangible
i t
ibl b
benefits
fit and
d th
the
approaches to deal with it.
z List and briefly describe the traditional and
modern methods of justifying IT investment.
Chapter 14
2
Learning
g Objectives
j
(Continued)
z Identifyy the advantages
g and disadvantages
g of
approaches to charging end users for IT services
(chargeback).
z Identify the advantages and disadvantages of
outsourcing.
z Describe the economic impact of EC.
EC
z Describe economic issues related to Web-based
technologies including e-commerce.
z Describe causes of systems development failures,
the theory of increasing returns, and market
transformation through new technologies
technologies.
Chapter 14
3
Moore’s Law
Chapter 14
4
Value of Information - Evaluatingg
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
itho t information
information.
Value of information = Net benefits with information - Net benefits without information
Chapter 14
5
Cost-Benefits Analyses - Evaluating
Chapter 14
6
“Costing”
Costing IT Investments - Evaluating
z 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
task.
different IT projects. Fixed costs are those costs that remain the
same in total regardless of change in the activity level.
z Another area of concern is the Life Cycle Cost; costs for keeping it
running,
i
d
dealing
li with
ith b
bugs, and
d ffor iimproving
i and
d changing
h
i th
the
system. Such costs can accumulate over many years, and
sometimes they are not even anticipated when the investment is
made.
z There are multiple kinds of values (tangible and intangible)
{ improved efficiency
{ improved customer relations
{ the
th return
t
off a capital
it l investment
i
t
t measured
d in
i dollars
d ll
or
percentage
{ many more …
z Probability of obtaining a return depends on probability of
implementation success
Chapter 14
7
Intangible Benefits
S h
Sawhney’s
’ M
Method
th d off H
Handling
dli
z Think broadly
y and softly.
y
{Supplement hard financial metrics with soft
ones
z Pay your freight first.
{Think carefully about short-term benefits that
can “pay
“
the
th freight”
f i ht” ffor the
th initial
i iti l iinvestment
t
t
in the project.
z Follow the unanticipated.
unanticipated
{Keep an open mind about where the payoff
projects
j
may
y come
from IT and e-business p
from
Chapter 14
8
Chapter 14
Specific
p
Evaluation Methods
9
Specific Evaluation Methods (Continued)
Chapter 14
10
“Costing”
Costing IT – Economic Strategies
Chapter 14
11
Outsourcing
Chapter 14
12
Economic Potential of IT
Chapter 14
13
Web-based
Web
based Systems – Economic Strategies
Web-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 which actual performance can and should be
measured. The business case should also cover both the financial and
non-financial p
performance metrics against
g
which to measure the ebusiness implementation and success.
M ost de cision s t o in ve st in W e bb - ba se d syst e m s a r e ba se d on
t h e a ssu m ptt ion
i
t h a t t h e in
i ve stt m e n t s a r e n e e de
d d for
f
st r a t e gic r e a son s a n d t h a t t h e e x pe ct e d r e t u r n s ca n n ot be
m e a su r e d in m on e t a r y va lu e s.
Chapter 14
14
Failures
I nform at ion t echnology is difficult t o m anage and can be cost ly
when t hings do not go as planned. A high proport ion of I S
developm ent proj ect s eit her fail com plet ely or fail t o m eet som e of
t he original t arget s for feat ures,
ures developm ent t im e,
e or cost . Many
of t hese are relat ed t o econom ic issues, such as an incorrect costbenefit analysis.
Th e e con om ics of soft w a r e pr odu ct ion su gge st t h a t , for
r e la t ive ly st a n da r dize d syst e m s, pu r ch a sin g or le a sin g ca n
r e su lt in bot h cost sa vin gs a n d in cr e a se d fu n ct ion a lit y.
Pu r ch a sin g or le a sin g ca n a lso be t h e sa fe st st r a t e gy for
ve r y la r ge a n d com ple x syst e m s.
Chapter 14
15
Managerial
g
Issues
zConstant growth and change.
change
zShift from tangible to intangible benefits.
zNot a sure
s re thing.
thing
zChargeback.
zRi k
zRisk.
zOutsourcing.
zIncreasing returns.
Chapter 14
16
Chapter 14
Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or
translation of this work beyond that permitted in Section 117 of the 1976 United
States Copyright Act without the express written permission of the copyright
owner is unlawful. Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may make
back-up copies for his/her own use only and not for distribution or resale
resale. The
Publisher assumes no responsibility for errors, omissions, or damages, caused
by the use of these programs or from the use of the information contained
herein.
Chapter 14
17
Information Technology
E
Economics
i
I f
Information
ti Technology
T h l
For
F Management
M
t 6th Edition
Editi
Turban, Leidner, McLean, Wetherbe
Lecture Slides by L. Beaubien, Providence College
John Wiley & Sons, Inc.
Chapter 14
1
Learning
g Objectives
j
z Identifyy the major
j aspects
p
of the economics of
information technology.
z Explain and evaluate the productivity paradox.
z Describe approaches for evaluating IT
investment and explain why is it difficult to do it.
z Explain
E l i th
the nature
t
off intangible
i t
ibl b
benefits
fit and
d th
the
approaches to deal with it.
z List and briefly describe the traditional and
modern methods of justifying IT investment.
Chapter 14
2
Learning
g Objectives
j
(Continued)
z Identifyy the advantages
g and disadvantages
g of
approaches to charging end users for IT services
(chargeback).
z Identify the advantages and disadvantages of
outsourcing.
z Describe the economic impact of EC.
EC
z Describe economic issues related to Web-based
technologies including e-commerce.
z Describe causes of systems development failures,
the theory of increasing returns, and market
transformation through new technologies
technologies.
Chapter 14
3
Moore’s Law
Chapter 14
4
Value of Information - Evaluatingg
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
itho t information
information.
Value of information = Net benefits with information - Net benefits without information
Chapter 14
5
Cost-Benefits Analyses - Evaluating
Chapter 14
6
“Costing”
Costing IT Investments - Evaluating
z 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
task.
different IT projects. Fixed costs are those costs that remain the
same in total regardless of change in the activity level.
z Another area of concern is the Life Cycle Cost; costs for keeping it
running,
i
d
dealing
li with
ith b
bugs, and
d ffor iimproving
i and
d changing
h
i th
the
system. Such costs can accumulate over many years, and
sometimes they are not even anticipated when the investment is
made.
z There are multiple kinds of values (tangible and intangible)
{ improved efficiency
{ improved customer relations
{ the
th return
t
off a capital
it l investment
i
t
t measured
d in
i dollars
d ll
or
percentage
{ many more …
z Probability of obtaining a return depends on probability of
implementation success
Chapter 14
7
Intangible Benefits
S h
Sawhney’s
’ M
Method
th d off H
Handling
dli
z Think broadly
y and softly.
y
{Supplement hard financial metrics with soft
ones
z Pay your freight first.
{Think carefully about short-term benefits that
can “pay
“
the
th freight”
f i ht” ffor the
th initial
i iti l iinvestment
t
t
in the project.
z Follow the unanticipated.
unanticipated
{Keep an open mind about where the payoff
projects
j
may
y come
from IT and e-business p
from
Chapter 14
8
Chapter 14
Specific
p
Evaluation Methods
9
Specific Evaluation Methods (Continued)
Chapter 14
10
“Costing”
Costing IT – Economic Strategies
Chapter 14
11
Outsourcing
Chapter 14
12
Economic Potential of IT
Chapter 14
13
Web-based
Web
based Systems – Economic Strategies
Web-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 which actual performance can and should be
measured. The business case should also cover both the financial and
non-financial p
performance metrics against
g
which to measure the ebusiness implementation and success.
M ost de cision s t o in ve st in W e bb - ba se d syst e m s a r e ba se d on
t h e a ssu m ptt ion
i
t h a t t h e in
i ve stt m e n t s a r e n e e de
d d for
f
st r a t e gic r e a son s a n d t h a t t h e e x pe ct e d r e t u r n s ca n n ot be
m e a su r e d in m on e t a r y va lu e s.
Chapter 14
14
Failures
I nform at ion t echnology is difficult t o m anage and can be cost ly
when t hings do not go as planned. A high proport ion of I S
developm ent proj ect s eit her fail com plet ely or fail t o m eet som e of
t he original t arget s for feat ures,
ures developm ent t im e,
e or cost . Many
of t hese are relat ed t o econom ic issues, such as an incorrect costbenefit analysis.
Th e e con om ics of soft w a r e pr odu ct ion su gge st t h a t , for
r e la t ive ly st a n da r dize d syst e m s, pu r ch a sin g or le a sin g ca n
r e su lt in bot h cost sa vin gs a n d in cr e a se d fu n ct ion a lit y.
Pu r ch a sin g or le a sin g ca n a lso be t h e sa fe st st r a t e gy for
ve r y la r ge a n d com ple x syst e m s.
Chapter 14
15
Managerial
g
Issues
zConstant growth and change.
change
zShift from tangible to intangible benefits.
zNot a sure
s re thing.
thing
zChargeback.
zRi k
zRisk.
zOutsourcing.
zIncreasing returns.
Chapter 14
16
Chapter 14
Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or
translation of this work beyond that permitted in Section 117 of the 1976 United
States Copyright Act without the express written permission of the copyright
owner is unlawful. Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may make
back-up copies for his/her own use only and not for distribution or resale
resale. The
Publisher assumes no responsibility for errors, omissions, or damages, caused
by the use of these programs or from the use of the information contained
herein.
Chapter 14
17