Chapter Extension 21 Financing and Accounting for IT Projects © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

CE21-2 Study Questions What are the costs in a typical IT budget? Who pays IT costs? What are tangible and intangible costs and benefits? How are IT projects evaluated? How is total cost of ownership used to compare alternatives? What cost/benefit techniques are used to evaluate IT projects? What factors complicate the financing and accounting for IT projects?

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-3 What Are the Costs in a Typical IT Budget? Operations costs Direct labor costs Indirect labor costs Deployment costs – Cost of setting up systems with little custom development Systems development costs – Costs of creating new information systems that require substantial work in the five components

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-4 Costs in a Typical IT Budget Figure CE 21-1

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-5 Who Pays IT Costs? Small organizations – IT costs accumulated Costs may not be assigned to departments or users Treated as overhead expense Large organizations – Chargeback expense Costs allocated to users – By department, number of users, number of computers in department

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-6 Chargebacks Detailed allocation – Costs allocated by number of IP packets sent across network – Trade-off between accuracy of allocation and cost of administration

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-7 What Are Tangible and Intangible Costs and Benefits? Tangible costs and benefits – Directly measurable in dollars – Examples: Labor, material, and service cost savings Intangible costs and benefits – Difficult to determine in dollars – Example: cost of lost user time, missed opportunities, bad will

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-8 Examples of Tangible and Intangible Costs and Benefits Figure CE 21-3

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-9 How Are IT Proposals Evaluated? Dependent upon size and nature of project Total cost of ownership – Considered over system’s lifetime Consider apparent costs Small systems – Commitments made using back-of-the-envelope assessment – Benefits tend to be intangible Large systems – More formal analysis

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-10 IT Project Evaluation Techniques Figure CE 21-4

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-11 How Is Total Cost of Ownership Used to Compare Alternatives? TCO – Sum of all costs of systems for life of systems Example: comparison of server operating systems – License fees – Training – Maintenance costs – Documentation – Advice on best practices – Service and support

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-12 What Cost/Benefit Techniques Are Used to Evaluate IT Projects? Payback analysis – Examine costs and benefits – Determine how long it will take for benefits to pay off costs – Doesn’t tell you if good investment – Assumes benefit in future has same value as today Net present value – Takes into account time value of money Value of future costs and benefits discounted Adds discounted benefits and costs and compares to investment

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-13 Cost/Benefit Techniques, continued Return on investment (ROI) – Divide net gains by investment Uses discounted costs and benefits All three techniques consider only tangible costs and benefits

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-14 Complicating Factors Technology changes fast – New technology may make system obsolete Cost overruns common Uncertainty is high Intangibles have overwhelming impact on costs and benefits – May overturn decisions based upon cost/benefit analysis

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-15 What If You Just Don’t Know? Paper analysis Consider intangibles Independent consultant can make recommendation Problems – No time – No money – Study may cloud issues

© 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE21-16 Active Review What are the costs in a typical IT budget? Who pays IT costs? What are tangible and intangible costs and benefits? How are IT projects evaluated? How is total cost of ownership used to compare alternatives? What cost/benefit techniques are used to evaluate IT projects? What factors complicate the financing and accounting for IT projects?