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1 Copyright 2010 John Wiley & Sons, Inc. Turban and VoloninoChapter 17 Information Technology Economics Information Technology for Management Improving Performance in the Digital Economy 7th edition John Wiley & Sons, Inc. Slides contributed by Dr. Sandra Reid Chair, Graduate School of Business & Professor, Technology Dallas Baptist UniversityCopyright 2010 John Wiley & Sons, Inc.
2 Copyright 2010 John Wiley & Sons, Inc. Chapter Outline17.1 Technology and Economic Trends and the Productivity Paradox.17.2 Evaluating IT Investments: Needs, Benefits, Issues, and Traditional Methods.17.3 Advanced Methods for Justifying IT Investment and Using IT Metrics.17.4 Examples of IT Project Justification.Copyright 2010 John Wiley & Sons, Inc.
3 Chapter Outline – cont’d 17.5 Economic Aspects of IT and Web-Based Systems.17.6 Managerial Issues.Copyright 2010 John Wiley & Sons, Inc.
4 Copyright 2010 John Wiley & Sons, Inc. Learning ObjectivesIdentify the major aspects of the economics of information technology.Explain and discuss the productivity paradox.Describe approaches for evaluating IT investment and explain why it is difficult to do it.Understand the nature of intangible benefits and the approaches to deal with such benefits.Copyright 2010 John Wiley & Sons, Inc.
5 Learning Objectives – cont’d 5. 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).Understand and describe the IT justification process via examples.Understand some major economic impacts of IT and EC.Describe economic issues related to Web-based technologies including e-commerce.Copyright 2010 John Wiley & Sons, Inc.
6 Copyright 2010 John Wiley & Sons, Inc. Figure IT 7eU provides opportunity to discuss overview of IT’s role in corporate strategy setting and its intricate importance to performance as business solutions and the resulting profitability. Throughout the “semester” student learning will be evolving surrounding this chart making it good to begin by going back to it to integrate learning.Figure IT7eUCopyright 2010 John Wiley & Sons, Inc.
7 Copyright 2010 John Wiley & Sons, Inc. (Formerly California State Automobile Association)Problem – IT infrastructures nearing end of life. Vendors no longer supported OS, security patches & outages, disk failures, crashes common. Improvements impossible to implement.Solution – Replace servers allowing reduction 600 to 136. Implement innovations such as Web farms. $7.5M, 5-year ROI.Results - $7.5M payback in 12 months; net benefits 9% NPV; 493% ROI. Can deliver faster, better, cheaper service; reduce total cost of ownership of IT infrastructure while supporting growth. Security & privacy increased dramatically. Much happier members.CSAA served California, Nevada & Utah. Focused on membership of 5 million, travel & insurance. Processes 3 billion documents & scans 1.6 million images.Servers were 4.5 years old. Unable to implement improvements, no e-commerce projects such as self-service capabilities & enterprise-level customer service.Fewer servers meant less maintenance & better utilization. Latest security patches received easily & antivirus updates for 8,500 PCs.EDS won bid for implementation.Business case used both for conducting a bid among competing vendors & for getting top management approval. Both are extremely important.Used traditional tools of justification: ROI, NPV, & payback period. Justification included only measurable tangible benefits, analysisrecognized significant intangible benefits such as improved customer service.Intangible benefits were not quantified because the tangible benefits provided such a strong case with 493% ROI. Also not includedwere things such as improved response time & total cost of operation.Project was outsourced so they could continue to concentrate on their core competency.These are the main concepts for this chapter. Also will be discussion of advanced justification tools & handling intangible benefits & cost.Copyright 2010 John Wiley & Sons, Inc.
8 Copyright 2010 John Wiley & Sons, Inc. 17.1 Technology and Economic Trends and the Productivity ParadoxCopyright 2010 John Wiley & Sons, Inc.
9 Copyright 2010 John Wiley & Sons, Inc. Moore’s LawClick for webcast..Power of computer chip to double every 18 to 24 months while cost stay flat.Organizations have opportunity to buy, for the same price, twice the processing power in 1 ½ years; 4 times the power in 3 years; 8 times the power in 4 ½ years, etc.Price-to-performance ratio will continue to decline exponentially.Limitations with current technologies could end trend for silicon-based chips in 10 to 20 years.New technologies will likely allow phenomenal growth to continue.Advances in network technologies & storage, compared to those in chip technology, even more profound.Click picture for webcast & more about Moore’s Law to expand discussion opportunities. Some predictions were made in 1965 makingMoore quite a visionary by any standards.Copyright 2010 John Wiley & Sons, Inc.
10 Copyright 2010 John Wiley & Sons, Inc. Figure 17.1What does this graph show us pictorially?Organizations will perform existing functions at decreasing cost over time & become more efficient.Creativity will abound for most organizations as they find new uses for information technology, based on improving price-to-performance ratio,becoming more effective.Some functions may be feasible but not cost effective; as cost reduce, this situation changes.IT will continue to be a competitive advantage or disadvantage for organizations with heavier influence & component in almost every product& service.Consumers benefit, of course, by improved products/services; increased offerings at cheaper prices.Does the increase in productivity mean increased unemployment? Not necessarily. As with anything, employees will need to be continuallyre-tooling & gaining new skills as they progress as does the technology capabilities. New jobs will be created but employees will need tobe prepared with the right skills. Increased integration & improvements in IT can mean more who could not be employable before maynow be employable.Is there an ethical dilemma here for organizations? Yes. It is management’s responsibility to set a climate for continued employee development.Moore’s Law as it relates to Intel microprocessors. (Source: Modified from Intel Corporation, intel.com.research/silicon/mooreslaw.htm. Reprinted by permission of Intel Corporation.)Copyright 2010 John Wiley & Sons, Inc.
11 Copyright 2010 John Wiley & Sons, Inc. Productivity ParadoxDiscrepancy between measures of investment in information technology & measures of output at the national level.Productivity is outputs divided by inputs.Inputs measured simply in hours of work, resulting ratio of outputs to inputs is labor productivity.Other inputs (investments & materials) included-ratio is known as multifactor productivity.Outputs calculated by multiplying units produced by their average value. Adjust result for price inflation & changes in quality (i.e.: increased safety).Go to wikipedia.org for expansion of background surrounding productivity paradox as referenced in the text:Copyright 2010 John Wiley & Sons, Inc.
12 Explaining Productivity Paradox Problems with data or analyses hide productivity gains from IT.Gains in IT are offset by losses in other areas.IT productivity gains are offset by IT costs or losses.Check out this article for more:Explaining The Productivity ParadoxNext slide has possible explanations.Copyright 2010 John Wiley & Sons, Inc.
13 Copyright 2010 John Wiley & Sons, Inc. Table 17.1Discuss now:What may be missing from this table, while implied, management & leaders in IT specifically may be focused more on the operational changes rather thanthe actual changes themselves making measurement of change directly related to the changes in IT almost impossible to quantify. A solution may befor more involvement by IT in the strategic plan development within the organization. Another is to clearly establish baselines for measurement beforeany plans for change are implemented.Students may have others. Encourage discussions promoting critical thinking skill development.Copyright 2010 John Wiley & Sons, Inc.
14 Does Productivity Paradox Still Matter? It depends. IT may have failed to lift productivity growth throughout economy; possibly at firm level only.Caution is important in measuring economic contribution on all 3 levels: firms, industries, & national economies.Benefits & costs must be properly assessed.Remainder of the chapter covers ways organizations can evaluate IT benefits & costs & thus target their IT development & acquisition towardsystems that will best contribute to achievement of organizational goals.Copyright 2010 John Wiley & Sons, Inc.
15 Copyright 2010 John Wiley & Sons, Inc. 17.2 Evaluating IT Investments: Needs, Benefits, Issues, and Traditional MethodsCopyright 2010 John Wiley & Sons, Inc.
16 Why Justify IT Investments? Increased pressure for financial justification – early EC projects had no traditional financial analyses resulting in huge losses after substantial investments.65% of companies lack knowledge or tools to do ROI calculations.75% have no formal processes or budgets in place for measuring ROI.68% do not measure how projects coincide with promised benefits 6 months after completion.Discuss & engage students with providing examples:Result of the rush to invest in electronic commerce during 1995 thru 2000 was the dot.com bust during Heavy stock market losses & crashesoccurred. Losses could have been easily avoided, or at least minimized, had there been review through traditional financial analyses such as ROI,NPV, cost-benefit analysis. Positive of the dot.com bust was the return to basics-return to justifying requests for IT & EC investments. The dot-com bust is also partially responsible for the move to outsource IT that has changed the field as a career; this move dramaticallyreshaped business in the U.S. & as a result, dramatically in many countries such as India, Singapore, and the Philippines. Corecompetency maintained as the focus, outsource the rest.Demand for expanding or initiating IT & e-business projects remains strong. CIOs need to effectively communicate value of proposed IT projectsin order to gain approval.Copyright 2010 John Wiley & Sons, Inc.
17 Why Justify IT Investments? – cont’d IT may not be the “end all” business solution as previously thought.Heavy competition for limited funding requires sound analysis for justification.Stock prices typically increase when IT investment is announced.Must assess success after completion & periodically.Employee bonuses may be tied to outcome.Discuss:Justification forces better alignment with corporate business strategy. This should not be a new concept; it is no different thanjustifying capital expenditures, expanding business into new markets, etc.Justification increases credibility of IT projects. Success may be justification for similar projects in the future. It is also a reminderthat what can’t be measure probably should not be done in terms of business processes & activities.Copyright 2010 John Wiley & Sons, Inc.
18 Copyright 2010 John Wiley & Sons, Inc. Figure 17.2Note to students:Justification varies depending on situation & methods used, can be very complex.5 areas in figure must be considered making it very difficult to conduct such a process.Not only need to select methods, but also how to execute it.A model for investment justification in IT projects. (Source: Gunasekaran et al. (2001), Misra (2006), & author’s experiences.Copyright 2010 John Wiley & Sons, Inc.
19 Difficulties in Measuring Productivity & Performance Gains Incorrectly defining what is measured - results depend upon what is actually measured. Changes in one are may cause changes in another making total impact difficult, if not impossible, to measure.Time lags may throw off productivity measurements.Relationship between IT investment & organizational performance difficult to find.Problem of definition can be overcome by using appropriate metrics & key performance indicators.Investments such as e-CRM may take 5 to 6 years to show significant positive results, but many justification studies do not wait that longto measure productivity changes.Copyright 2010 John Wiley & Sons, Inc.
20 Copyright 2010 John Wiley & Sons, Inc. Figure 17.3Figure shows that relationship between investment & performance is frequently indirect; factors such as shared IT assets & how they are usedcan impact organizational performance & make it difficult to assess the value of an IT investment.Major difficulty in justifying IT investment is existence of substantial intangible benefits in addition to tangible ones.Process approach to IT organizational investment and impact. (Source: Soh and Markus, 1995.)Copyright 2010 John Wiley & Sons, Inc.
21 Copyright 2010 John Wiley & Sons, Inc. Intangible BenefitsDifficult to place monetary value on benefits such as faster time to market; employee, user, customer satisfaction; greater organization agility.Desirable benefits may be intuitive yet impossible to quantify such as employee productivity/communication increases associated with using .There are other examples of intangible benefits that are very difficult to measure such as change in employee morale with improved system reliability.Task students to bring others for discussion to promote critical thinking skill development around this topic of IT economics.Discuss: ignoring intangible benefits assumes the value is zero. This assumption may lead an organization to reject IT investments that couldsubstantially increase revenues & profitability. Analysts must include both tangible & intangible benefits so that the decision reflectstheir potential impact.How to include both in the analysis begins with the next slide.Copyright 2010 John Wiley & Sons, Inc.
22 Handling Intangible Benefits Estimate monetary values & conduct financial analysis. Accuracy is suspect.Supplement hard financial metrics with soft ones that may be strategic in nature such as customer & partner satisfaction, customer loyalty, response time to competitive actions.Pay attention to benefits that may surface over time not previously recognized.Benefit, cost, opportunities & risks are all important considerations.Discuss the importance of such qualitative data & how they can be converted to quantitative data over time:Subjective measures can be objective if used consistently over time. For instance, customer satisfaction measured consistently on a 5-point scalecan be objective basis for measuring the performance of customer-facing initiatives..Copyright 2010 John Wiley & Sons, Inc.
23 Copyright 2010 John Wiley & Sons, Inc. Costing IT InvestmentMajor issue is to allocate fixed costs (ones that remain constant regardless activity level).Transaction costs: search – buyers & sellers locating specific products & services. information – learning about products & services (buyers); costs related to learning about buyers’ condition. negotiation – both need to agree on terms. decision – buyers to buy & sellers to sell. monitoring – quality control.Expand for students here:Fixed costs include infrastructure, IT services & management costs. Adding a unit does not add costs such as a manager’s salary, building, etc.Some costs surface only after installation such as those associated with required Y2K updates.Transaction costs cover a wide range of costs that are associated with the distribution (sale) and/or exchange of products & services.Using IT may reduce transaction costs, but it may be difficult to assess these costs.CRM ROI: How to Justify Your InvestmentTake a look at an example..Copyright 2010 John Wiley & Sons, Inc.
24 Revenue Models Generated by IT & Web Sales – merchandise or service on websites such as Wal-Mart or Godiva.Transaction fees – commission on volume of transactions made.Subscription fees – fixed amount such as AOL or Verizon.Advertising fees – such as banners.Affiliate fees – customer referrals.Risk reduction for companies & customers.Click images for homepage hot links.Task students to come up with others. Here are others from the text:Others such as to play games or watch sports in real time for a fee.Larger global markets because of more effective product marketing on the Web.Increased margins attained by using processes with lower internal costs & higher prices because of value-added services to customers.Consequence of becoming an online portal.Value-added content sold from selling searches, access to data & electronic documents.Copyright 2010 John Wiley & Sons, Inc.
25 Copyright 2010 John Wiley & Sons, Inc. Table 17.2Reinforce here that no one method for project evaluation is best in all decisions. Some are best for some decision; none for everything.Multiple models may be wise depending upon the complexity & magnitude of the project & its impact upon the organization.Several traditional methods can be used to assess value of IT information & IT investment such as ROI, ROA, NPV.Copyright 2010 John Wiley & Sons, Inc.
26 Copyright 2010 John Wiley & Sons, Inc. 17.3 Advanced Methods for Justifying IT Investment and Using IT MetricsCopyright 2010 John Wiley & Sons, Inc.
27 Advanced Methods for Justifying IT Investment Financial – consider only monetary-valued. i.e. NPV & ROI.Multicriteria – consider financial & non-financial impacts; qualitative & quantitative. i.e. information economics & value analysis.Ratio – i.e. IT expenditures vs. total turnover.Portfolio – plot several investment proposals against decision-making criteria.These approaches may be needed when traditional methods are not enough or simply aren’t useful for assessing newest IT technologies.Copyright 2010 John Wiley & Sons, Inc.
28 Copyright 2010 John Wiley & Sons, Inc. Table 17.3These methods are particularly useful in evaluating IT investment. No method is perfect nor universal in nature. One needs to lookat advantages & disadvantages of each, which vary according to specific situation.Copyright 2010 John Wiley & Sons, Inc.
29 Copyright 2010 John Wiley & Sons, Inc. Table 17.4Mention here that when a cost is not known, and/or difficult to quantify, it is best to overestimate costs & underestimate revenues.Copyright 2010 John Wiley & Sons, Inc.
30 Copyright 2010 John Wiley & Sons, Inc. 17.4 Examples of IT Project JustificationCopyright 2010 John Wiley & Sons, Inc.
31 Copyright 2010 John Wiley & Sons, Inc. Table 17.5Discuss possible methods to measure intangible items such as customer satisfaction. Develop a scale of what customers tell theorganization they want & then measure it such as on-time performance, competitive pricing, product options, etc.Copyright 2010 John Wiley & Sons, Inc.
32 Copyright 2010 John Wiley & Sons, Inc. Table 17.6Discuss:Tangible & intangible benefits must be evaluated before a decision regarding e-training can be made. Financial factors are very important to considerversus traditional training methods.Many times it is not feasible to train people “in person” especially in organizations with diverse workgroups that may be spread acrossthe globe, and in 24/7 operations. Airlines are a good example of e-training applications within all operational groups in the air & onthe ground. The cost to the organization would be prohibitive.Copyright 2010 John Wiley & Sons, Inc.
33 Copyright 2010 John Wiley & Sons, Inc. Figure 17.4Stress the importance of compliance with Sarbanes-Oxley. Organizations must document every internal process & external effect that will have animpact on its financial health in order to be in compliance. To be out of compliance can be financially disastrous for a company.Calculating the cost of Sarbanes-Oxley.Article for more:Sarbanes-Oxley: Dragon or white knight?Copyright 2010 John Wiley & Sons, Inc.
34 Copyright 2010 John Wiley & Sons, Inc. 17.5 Economic Aspects of IT and Web-Based SystemsCopyright 2010 John Wiley & Sons, Inc.
35 Copyright 2010 John Wiley & Sons, Inc. Figure 17.5In the regular products curve, average cost per unit declines up to a certain quantity, but due to necessary increased overhead such as adding a managerand marketing costs, the cost will start to increase.For digital products, the costs will continue to decline with increased quantity. Variable costs is very little, once fixed cost is covered, increase in quantityproduces a continuous decrease in average cost.Cost curves of regular and digital products.Copyright 2010 John Wiley & Sons, Inc.
36 Copyright 2010 John Wiley & Sons, Inc. Figure 17.6Production function will decline (L1 to L2 in part a) since you can get the same quantity with less labor & IT cost.Transaction cost for the same quantity will be lower due to computerization (part b).Administrative cost will be lower for the same quantity (part c).Economic effects of IT and e-commerce.Copyright 2010 John Wiley & Sons, Inc.
37 Copyright 2010 John Wiley & Sons, Inc. Figure 17.7There is a tradeoff between reach & richness. The more customers a company wants to reach, the fewer services it can provide to them.Reach versus richness.Copyright 2010 John Wiley & Sons, Inc.
38 Failures & Runaway Projects Projects may be difficult to manage & costly when things don’t go as planned.High percentage fail completely or fail to meet some of the original targets for features, development time, or cost.May be related to economic issues, such as incorrect cost-benefit analysis or lack of funding.Many may remain corporate secrets being of smaller magnitude.Projects seldom fail because of the technology. Rather, it is more often management of the project, lack of senior level support, improper funding.This is a good time to reinforce the high percentage (85%) of IT projects fail.Why IT Projects Fail for interesting whitepaper & more insight.Copyright 2010 John Wiley & Sons, Inc.
39 Copyright 2010 John Wiley & Sons, Inc. 17.6 Managerial IssuesCopyright 2010 John Wiley & Sons, Inc.
40 Major Managerial Issues Constant growth & change.Shift from tangible to intangible benefits.Not a sure thing.Chargeback.Risk.How to measure the value of IT investment?Who should conduct a justification?Reinforce the importance of objective, non-biased analysis of all projects, not just IT specific. If it is too good to be true, it probably is.Copyright 2010 John Wiley & Sons, Inc.
41 Copyright 2010 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 express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or 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 herein.Copyright 2010 John Wiley & Sons, Inc.