Chapter 6 IT Cost Control Management of Computer System Performance

2 Agenda Chapter 6 Understanding Projects and alternatives. Analytical approaches to Cost Benefit Analysis. Objective: Students should be able: to develop a strategy related to IT Cost control. IT Cost Control

3 Cost Control and Accounting Cost Control and Accounting within an organization should be optimally based on accumulated data based on actual costs as they relate to a fixed environment. These use two different approaches. The forward pricing model based upon historical data (used in proposals and estimating future costs) and Actual cost or earned value model

4 Estimates are created using the following three variables. Effort or Labor - This ensures that appropriate resources are provided to the project. Time - Establishes an expectation to allow team members to budget their time. This is also used to calculate cost elements such as cost of capital and carrying costs. Cost - Enables benefits to be weighed against costs. This is used as one of the key components of project valuation. Cost Control and Accounting

5 IT Cost Accounting consists of several elements. These include: the costs of performing the Requirements definition phase, System planning, system build out and The subsequent operation of the system. Each use certain methodologies to assess cost and that cost to the corporation. The first step in this process is the costs of the scope definition phase the estimation of the system costs. Cost Control and Accounting

6 For System planning costs, use the following techniques: Experience (or actuals. The time it took you to do it last time) Activity or deliverable Function point Consider Time estimates are a function of effort estimates. Do not assume that just because you through more engineers at it, it will get done quicker. Cost Control and Accounting

7 Supportive data in the form of time and cost standards. The Basis of Estimate is a useful tool. Reasonability based on experience Definition of resource requirements for each activity Influencing factors other than time and cost Contingency plan estimates Cost Control and Accounting

8 For each labor element, identify specific skills that are needed to build out the system. Ex.: The task is to install and configure a new Firewall. Labor would include: 1 Network Technician to rack the device, hook up power and network cables. = 1 hour 1 Firewall engineer to install the standard firewall rule set and set up the base configuration. =.25 hours Cost Control and Accounting

9 1 Firewall engineer to optimize the firewall rule set based on incomplete directions for the S/W and H/W engineers. This include the initial setup and 6 subsequent changes. = 3 hours Hardware would include: 1 Nokia 660 Firewall with RAM kit, patch cable and Power cord 1 Checkpoint License with 25 IP addresses. What other elements should be included? Cost Control and Accounting

10 Cover all of the details of the system build. Use the appropriate escalation rates for inflation, both for labor rates and for the cost of capital. Match the costs of the period of performance where each element is used or consumed in the build process, Compare these estimates with existing data if possible to validate the estimates. Cost Control and Accounting

11 These factors affect project estimating: Project scope Activity requirements Resource skill levels Resource availability Resource expense These elements will form the basis for Forward costing of an IT investment and project build out. To validate these estimates, a historical costs basis should be used. This will be address in the next lecture. Cost Control and Accounting

12 Financial Concepts Reviewed Future value (FV) - refers to the amount of money to which an investment will grow over a finite period of time at a given interest rate. Future value is the cash value of an investment at a particular time in the future dependent on interest or other methods of return. Present Value (PV) - The current value of one or more future cash payments, discounted at some appropriate interest rate.

13 Financial Concepts Reviewed Net Present Value (NPV) - The present value of an investment's future net cash flows minus the initial investment. If positive, the investment should be made (unless an even better investment exists), otherwise it should not. Cash Flow - A measure of a company's financial health. Equals cash receipts minus cash payments over a given period of time; or equivalently, net profit plus amounts charged off for depreciation, depletion, and amortization.

14 Financial Concepts Reviewed Rate of Return - The annual return on an investment, expressed as a percentage of the total amount invested. Internal Rate of Return (IRR) - The rate of return that would make the present value of future cash flows plus the final market value of an investment or business opportunity equal the current market price of the investment or opportunity. Review

15 Homework Homework Financial methodologies