Information Technology Economics

Information Technology: Economic and Financial Trends Internal IT versus outsourcing Expanding power / declining costs Moore’s law - price to performance ratio Technically versus economically feasible Intangible benefits - difficult to access

Explaining the Productivity Paradox Data and analysis problems hide productivity gains IT productivity offset by losses in other areas IT productivity offset by IT costs or losses Wasted time

Explaining the Productivity Paradox Software development problems Software maintenance Incompatible systems

Evaluating IT: Benefits and Costs Value of information in decision making Evaluating automation by cost-benefit analysis Evaluating IT infrastructure Evaluating IT performance: service level agreements

Evaluation of Intangible Benefits Use concrete indicators Solve for an unknown Prevent competitive disadvantage

Evaluating IT Infrastructure Through Benchmarks Metric benchmarks Best practices benchmarks

Metric Benchmarks IT expenses as percent of total revenues Percent of “down-time” CPU usage as percent of total capacity Percent of IS projects completed on time and within budget

Evaluating IT Performance: Service Level Agreements Meet with the client to determine IT service IS and client jointly determine measures Schedule of measurements Jointly determine action should service fail Written document

Evaluation IT: Perspectives on Intangible Benefits Value analysis Information economics Management by maxim for IT infrastructure Option valuation of IT investments

Value Analysis

Information Economics Key organizational objectives Scoring methodology

Management by Maxim for IT Infrastructure Consider strategic context Articulate business maxims Identify IT maxims Clarify the firm’s view of its IT infrastructure Specify infrastructure services

Option Valuation of IT Investments Future returns Expected value Future decisions

Evaluating IT: Accounting for Costs Accurate measure of IT costs Charge users for IT investments - organizational goals Chargeout Outsourcing as an economic strategy

Behavior-Oriented Chargeout System: Implementation Determine objectives Determine appropriate measures Implement and maintain the system

Outsourcing As an Economic Strategy Core competencies Which sources are less expensive How much control is needed

Outsourcing Advantages and Disadvantages Hardware economies of scale Staffing economies of scale Specialization Tax benefits

Outsourcing Disadvantages Limited economies of scale Staffing Lack of business expertise Contract problems Internal cost reduction opportunities

Outsourcing Recommendations Write shorter contracts - less than 5 years Subcontract control Selective outsourcing

Negative Impacts of Failures and “Runaways” Outright failure Abandoned Scaled down Runaway

The New Economics of IT IT as a product World Wide Web (WWW) Increasing returns

The New Economics of IT World Wide Web (WWW) At least 33% of US population Foreign markets Universal connectivity

Increasing Returns Increasing returns occurs where profitability rises more rapidly than production increases.

Increasing Returns: Advantages Higher profitability Network effects Lock-in effect

Management Strategies Under Increasing Returns Build a large customer base through low prices Encourage development of complementary products Use linking and leveraging

Managerial Issues Constant growth and change Shift from tangible to intangible benefits Not a sure thing Chargeout Risk Outsourcing Increasing returns

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