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Chapter 17 Information Technology Economics Information Technology for Management Improving Performance in the Digital Economy 7 th edition John Wiley.

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Presentation on theme: "Chapter 17 Information Technology Economics Information Technology for Management Improving Performance in the Digital Economy 7 th edition John Wiley."— Presentation transcript:

1 Chapter 17 Information Technology Economics Information Technology for Management Improving Performance in the Digital Economy 7 th edition John Wiley & Sons, Inc. Slides contributed by Dr. Sandra Reid Chair, Graduate School of Business & Professor, Technology Dallas Baptist University Turban and Volonino 17-1Copyright 2010 John Wiley & Sons, Inc.

2 Chapter Outline 17.1 Technology and Economic Trends and the Productivity Paradox Evaluating IT Investments: Needs, Benefits, Issues, and Traditional Methods Advanced Methods for Justifying IT Investment and Using IT Metrics Examples of IT Project Justification. 17-2Copyright 2010 John Wiley & Sons, Inc.

3 Chapter Outline – contd 17.5 Economic Aspects of IT and Web-Based Systems Managerial Issues. Copyright 2010 John Wiley & Sons, Inc.17-3

4 Learning Objectives 1.Identify the major aspects of the economics of information technology. 2.Explain and discuss the productivity paradox. 3.Describe approaches for evaluating IT investment and explain why it is difficult to do it. 4.Understand the nature of intangible benefits and the approaches to deal with such benefits. 17-4Copyright 2010 John Wiley & Sons, Inc.

5 Learning Objectives – contd 5. List and briefly describe the traditional and modern methods of justifying IT investment. 6.Identify the advantages and disadvantages of approaches to charging end users for IT services (chargeback). 7.Understand and describe the IT justification process via examples. 8.Understand some major economic impacts of IT and EC. 9.Describe economic issues related to Web-based technologies including e-commerce. Copyright 2010 John Wiley & Sons, Inc.17-5

6 Copyright 2010 John Wiley & Sons, Inc.17-6 Figure IT7eU

7 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. Copyright 2010 John Wiley & Sons, Inc.17-7 (Formerly California State Automobile Association)California State Automobile Association

8 Copyright 2010 John Wiley & Sons, Inc Technology and Economic Trends and the Productivity Paradox

9 Moores Law 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. Copyright 2010 John Wiley & Sons, Inc.17-9 Click for webcast..

10 Figure 17.1 Copyright 2010 John Wiley & Sons, Inc Moores Law as it relates to Intel microprocessors. (Source: Modified from Intel Corporation, intel.com.research/silicon/mooreslaw.htm. Reprinted by permission of Intel Corporation.)

11 Productivity Paradox Discrepancy 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). 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. Copyright 2010 John Wiley & Sons, Inc Check out this article for more: Explaining The Productivity Paradox

13 Table 17.1 Copyright 2010 John Wiley & Sons, Inc.17-13

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. Copyright 2010 John Wiley & Sons, Inc.17-14

15 Copyright 2010 John Wiley & Sons, Inc Evaluating IT Investments: Needs, Benefits, Issues, and Traditional Methods

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. Copyright 2010 John Wiley & Sons, Inc.17-16

17 Why Justify IT Investments? – contd 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. Copyright 2010 John Wiley & Sons, Inc.17-17

18 Figure 17.2 Copyright 2010 John Wiley & Sons, Inc A model for investment justification in IT projects. (Source: Gunasekaran et al. (2001), Misra (2006), & authors experiences.

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. Copyright 2010 John Wiley & Sons, Inc.17-19

20 Figure 17.3 Copyright 2010 John Wiley & Sons, Inc Process approach to IT organizational investment and impact. (Source: Soh and Markus, 1995.)

21 Intangible Benefits Difficult 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 . Copyright 2010 John Wiley & Sons, Inc.17-21

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. Copyright 2010 John Wiley & Sons, Inc.17-22

23 Costing IT Investment Major 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. Copyright 2010 John Wiley & Sons, Inc CRM ROI: How to Justify Your Investment Take a look at an example..

24 Revenue Models Generated by IT & Web Sales – merchandise or service on websites such as Wal-Mart or Godiva.Wal-MartGodiva 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. Copyright 2010 John Wiley & Sons, Inc.17-24

25 Table 17.2 Copyright 2010 John Wiley & Sons, Inc.17-25

26 Copyright 2010 John Wiley & Sons, Inc Advanced Methods for Justifying IT Investment and Using IT Metrics

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. Copyright 2010 John Wiley & Sons, Inc.17-27

28 Table 17.3 Copyright 2010 John Wiley & Sons, Inc.17-28

29 Table 17.4 Copyright 2010 John Wiley & Sons, Inc.17-29

30 Copyright 2010 John Wiley & Sons, Inc Examples of IT Project Justification

31 Table 17.5 Copyright 2010 John Wiley & Sons, Inc.17-31

32 Table 17.6 Copyright 2010 John Wiley & Sons, Inc.17-32

33 Figure 17.4 Copyright 2010 John Wiley & Sons, Inc Calculating the cost of Sarbanes-Oxley. Sarbanes-Oxley: Dragon or white knight? Article for more:

34 Copyright 2010 John Wiley & Sons, Inc Economic Aspects of IT and Web- Based Systems

35 Figure 17.5 Copyright 2010 John Wiley & Sons, Inc Cost curves of regular and digital products.

36 Figure 17.6 Copyright 2010 John Wiley & Sons, Inc Economic effects of IT and e-commerce.

37 Figure 17.7 Copyright 2010 John Wiley & Sons, Inc Reach versus richness.

38 Failures & Runaway Projects Projects may be difficult to manage & costly when things dont 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. Copyright 2010 John Wiley & Sons, Inc Why IT Projects FailWhy IT Projects Fail for interesting whitepaper & more insight.

39 Copyright 2010 John Wiley & Sons, Inc Managerial Issues

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? Copyright 2010 John Wiley & Sons, Inc.16-40

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.17-41


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