13-1 Information Technology Economics

13-2 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

13-3 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

13-4 Explaining the Productivity Paradox Software development problems Software maintenance Incompatible systems

13-5 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

13-6 Evaluation of Intangible Benefits Use concrete indicators Solve for an unknown Prevent competitive disadvantage

13-7 Evaluating IT Infrastructure Through Benchmarks Metric benchmarks Best practices benchmarks

13-8 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

13-9 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

13-10 Evaluation IT: Perspectives on Intangible Benefits Value analysis Information economics Management by maxim for IT infrastructure Option valuation of IT investments

13-11 Value Analysis

13-12 Information Economics Key organizational objectives Scoring methodology

13-13

13-14 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

13-15 Option Valuation of IT Investments Future returns Expected value Future decisions

13-16 Evaluating IT: Accounting for Costs Accurate measure of IT costs Charge users for IT investments - organizational goals Chargeout Outsourcing as an economic strategy

13-17

13-18 Behavior-Oriented Chargeout System: Implementation Determine objectives Determine appropriate measures Implement and maintain the system

13-19 Outsourcing As an Economic Strategy Core competencies Which sources are less expensive How much control is needed

13-20 Outsourcing Advantages and Disadvantages Hardware economies of scale Staffing economies of scale Specialization Tax benefits

13-21

13-22 Outsourcing Disadvantages Limited economies of scale Staffing Lack of business expertise Contract problems Internal cost reduction opportunities

13-23 Outsourcing Recommendations Write shorter contracts - less than 5 years Subcontract control Selective outsourcing

13-24

13-25 Negative Impacts of Failures and “Runaways” Outright failure Abandoned Scaled down Runaway

13-26 The New Economics of IT IT as a product World Wide Web (WWW) Increasing returns

13-27 The New Economics of IT World Wide Web (WWW) At least 33% of US population Foreign markets Universal connectivity

13-28 Increasing Returns Increasing returns occurs where profitability rises more rapidly than production increases.

13-29 Increasing Returns: Advantages Higher profitability Network effects Lock-in effect

13-30 Management Strategies Under Increasing Returns Build a large customer base through low prices Encourage development of complementary products Use linking and leveraging

13-31 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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