Chapter 14
Information Technology
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Economics
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Information Technology For Management 6
thEdition
Turban, Leidner, McLean, Wetherbe
Lecture Slides by L. Beaubien, Providence College
Chapter 14 1
Learning Objectives
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Identify the major aspects of the economics of
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p
information technology.
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Explain and evaluate the productivity paradox.
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Describe approaches for evaluating IT
investment and explain why is it difficult to do it.
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fit
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Explain the nature of intangible benefits and the
approaches to deal with it.
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List and briefly describe the traditional and
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List and briefly describe the traditional and
modern methods of justifying IT investment.
Learning Objectives
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(Continued)
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Identify the advantages and disadvantages of
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approaches to charging end users for IT services
(chargeback).
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Identify the advantages and disadvantages of
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Identify the advantages and disadvantages of
outsourcing.
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Describe the economic impact of EC
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Describe the economic impact of EC.
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Describe economic issues related to Web-based
technologies including e-commerce.
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Describe causes of systems development failures,
the theory of increasing returns, and market
transformation through new technologies
Chapter 14 3
Moore’s Law
Chap
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r 14
Value of Information -
Evaluating
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One measurement of the benefit of an investment is
the value of the information provided. The
value of
information
is the difference between the
net benefits
information
is the difference between the
net benefits
(benefits adjusted for costs) of decisions made using
information and the net benefits of decisions made
itho t information
without information.
Value of information = Net benefits with information - Net benefits without information
Cost-Benefits Analyses
Evaluating
Cost-Benefits Analyses
- Evaluating
“Costing” IT Investments
Costing IT Investments
- Evaluating
Evaluating
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Placing a dollar value on the cost of IT investments is not a simple
task One of the major issues is to allocate fixed costs among
task. One of the major issues is to allocate fixed costs among
different IT projects. Fixed costs are those costs that remain the
same in total regardless of change in the activity level.
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Another area of concern is the Life Cycle Cost; costs for keeping it
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ith b
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running, dealing with bugs, and for improving and changing the
system. Such costs can accumulate over many years, and
sometimes they are not even anticipated when the investment is
made.
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There are multiple kinds of values (tangible and intangible)
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improved efficiency
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improved customer relations
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the return of a capital investment measured in dollars or
percentage
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many more …
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Probability of obtaining a return depends on probability of
Chapter 14 7
Intangible Benefits
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Sawhney’s Method of Handling
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Think broadly and softly.
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Supplement hard financial metrics with soft
ones
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Pay your freight first.
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Think carefully about short-term benefits that
“
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can “pay the freight” for the initial investment
in the project.
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Follow the unanticipated
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Follow the unanticipated.
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Keep an open mind about where the payoff
from IT and e-business projects may come
Chapter 14 8
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p
ecific Evaluation Methods
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Chap
te
r 14
Specific Evaluation Methods
(Continued)
Specific Evaluation Methods
(Continued)
“Costing” IT
Costing IT
– Economic Strategies
Economic Strategies
OutsourcingOutsourcing
Chap
te
r 14
Economic Potential of IT
Economic Potential of IT
Web-based Systems
– Economic Strategies
Web based Systems
Economic Strategies
Web-based systems can considerably increase productivity and
profitability. However, the justification of EC applications can be difficult.
Usually one needs to prepare a business case that develops the baseline
Usually one needs to prepare a business case that develops the baseline
of desired results, against which actual performance can and should be
measured. The business case should also cover both the financial and
non-financial performance metrics against which to measure the e-
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business implementation and success.
M ost de cision s t o in ve st in W e b
M ost de cision s t o in ve st in W e b-- ba se d syst e m s a r e ba se d on ba se d syst e m s a r e ba se d on t h t i t h t t h i t t d d f
t h t i t h t t h i t t d d f t h e a ssu m pt ion t h a t t h e in ve st m e n t s a r e n e e de d for
t h e a ssu m pt ion t h a t t h e in ve st m e n t s a r e n e e de d for
st r a t e gic r e a son s a n d t h a t t h e e x pe ct e d r e t u r n s ca n n ot be st r a t e gic r e a son s a n d t h a t t h e e x pe ct e d r e t u r n s ca n n ot be m e a su r e d in m on e t a r y va lu e s.
m e a su r e d in m on e t a r y va lu e s.
Failures
Failures
I nform at ion t echnology is difficult t o m anage and can be cost ly when t hings do not go as planned. A high proport ion of I S
developm ent proj ect s eit her fail com plet ely or fail t o m eet som e of t he original t arget s for feat ures developm ent t im e or cost Many t he original t arget s for feat ures, developm ent t im e, or cost . Many of t hese are relat ed t o econom ic issues, such as an incorrect cost-benefit analysis.
Th e e con om ics of soft w a r e pr odu ct ion su gge st t h a t , for Th e e con om ics of soft w a r e pr odu ct ion su gge st t h a t , for r e la t ive ly st a n da r diz e d syst e m s, pu r ch a sin g or le a sin g ca n r e la t ive ly st a n da r diz e d syst e m s, pu r ch a sin g or le a sin g ca n r e su lt in bot h cost sa vin gs a n d in cr e a se d fu n ct ion a lit y.
r e su lt in bot h cost sa vin gs a n d in cr e a se d fu n ct ion a lit y. Pu r ch a sin g or le a sin g ca n a lso be t h e sa fe st st r a t e gy for Pu r ch a sin g or le a sin g ca n a lso be t h e sa fe st st r a t e gy for Pu r ch a sin g or le a sin g ca n a lso be t h e sa fe st st r a t e gy for Pu r ch a sin g or le a sin g ca n a lso be t h e sa fe st st r a t e gy for ve r y la r ge a n d com ple x syst e m s.
ve r y la r ge a n d com ple x syst e m s.
Managerial Issues
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Constant growth and change
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Constant growth and change.
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Shift from tangible to intangible benefits.
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Not a s re thing
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Not a sure thing.
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Chargeback.
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Ri k
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Risk.
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Outsourcing.
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Increasing returns.
Chapter 14
Chapter 14
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