Finance for IT Decision Makers Michael Blackstaff Hugh Pike

Topics Michael Blackstaff –IT depreciation –IT financial cases –IT investment evaluation methods –IT leasing Hugh Pike –IT outsourcing – financial aspects

Straight line depreciation Loss on disposal

Reducing balance depreciation Loss on disposal

Depreciation of upgrades (1) Rectangles indicate expected life at acquisition of each element

Depreciation of upgrades (2) Rectangles indicate expected life at acquisition of each element

Depreciation of upgrades (3) Rectangles indicate expected life at acquisition of each element Recommended

IT Financial Cases

Financial cases Cash flow financial case –a statement of incremental future cash inflows and outflows –exclude depreciation and losses Profit and loss financial case –a statement of incremental future revenues and expenses –include depreciation and losses

Example

Investment Evaluation Methods

Investment evaluation methods For cash flow cases: –Net present value (NPV) –Internal rate of return (IRR) –Shareholder value added (SVA) –Payback For profit and loss cases: –Return on investment (ROI)

Exchange rates

Discount factors

Car example

IRR Example - a miniature 'project'

IT Leasing

Why lease IT? Tailored payments Conserve cash Preserve lines of credit Reduce product risk Off balance sheet Enhance ratios Match expenditure to benefits Operating leases only * * * *

Residual value

Kinds of lease RV Residual Value (RV)

Leasing considerations Options priced? Upgrades? Extension? Early termination? Conversion? Rolled debt?

IT Outsourcing – financial aspects Hugh Pike

IT Outsourcing Involves –external provision of IT services –transfer of assets and / or people (usually) Business perspective –focus on core business –enhanced services –increased accountability / enforceability Financial reasons

Financial cases Comparative cases –in-house versus out-house –competitive external providers Factors for consideration –outsourcing charges & inflation –infrastructure & overheads –service enhancements –personnel (TUPE & retained management) –third party contracts

Financial characteristics Cost reduction Assets off balance sheet (usually) Cash injection if assets transferred Reduced in-house headcount (usually) Smoothing to provide tailored cash flows Simpler admin and accounting

Evaluation Decision criteria –investment decision? –cost reduction techniques Benefits versus risks –financial case –other factors Business decision –strategic fit –market perception

Top financial tips DON'T confuse cash flow and profit DO use appropriate evaluation methods DON'T overestimate IT asset life DO use appropriate depreciation method DON'T assume the cheapest lease is necessarily the best DO consult available financial and outsourcing expertise when appropriate

Summary Michael Blackstaff –IT depreciation –IT financial cases –IT investment evaluation methods –IT leasing Hugh Pike –IT outsourcing – financial aspects

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