Session 5

Information Technology Economics

Productivity Paradox

= the contradiction between the advances in computer power and the slow growth of productivity at the level of the whole economy, individual firms and many specific applications

Why Justify IT Investments?

•      Increased pressure for financial justification

•      IT is not necessarily the solution to all problems.

•      Heavy competition for limited funding requires sound analysis for justification.

•      Stock prices typically increase when IT investment is announced.

•      Companies need to assess the success of IT projects after completion, and later on a periodic basis.

•      The success of IT projects may be assessed in order to pay bonuses to those involved with the project.

Difficulties in Measuring Productivity & Performance Gains

•      Incorrectly defining what is measured

•      Time lags

•      Relationship between IT investment & organizational performance difficult to find.

Handling Intangible Benefits

•      Rough estimates

•      Think broadly and softly

•      Pay your freight first

•      Follow the unanticipated

Costing IT Investment

•      fixed costs

•      Transaction costs

o   search

o   information

o   negotiation

o   decision

o   monitoring

Revenue Models Generated by IT & Web

•      Sales

•      Transaction fees

•      Subscription fees

•      Advertising fees

•      Affiliate fees

Cost-Benefit Analysis

1.    Identifying & estimating all the costs & benefits of carrying out the project & operating the system.

2.    Expressing these costs & benefits in common units.

Costs:

•      Development costs

•      Setup costs

•      Operational costs

Benefits:

•      Direct benefits

•      Assessable indirect benefits

•      Intangible benefits

Intangible benefits

•      Increased levels of service

•      Customer satisfaction

•      Survival

•      Need to develop in-house expertise

Intangible costs

•      Reduced employee morale

•      Lost productivity

•      Lost customers or sales

Cost-Benefit Evaluation Techniques

•      Net profit

•      Payback period

•      Return on investment (ROI)

•      Net present value (NPV)

•      Interest rate of return (IRR)

Advanced Methods for Justifying IT Investment

•      Financial

•      Multicriteria

•      Ratio

•      Portfolio

TCO (Total Cost of Ownership)

•      acquisition cost (hardware and software)

•      operations cost (maintenance, training, operations, evaluation, technical support, installation, downtime, auditing, virus damage, and power consumption)

•      control cost (standardization, security, and central services)

By Pornpitra Sithiprasasana 5302115224