Nature of IT spending

1
Nature of IT spending

• IT investment composition
• capital (1.00)
• hardware/software
• revenue (0.6 pa)
• operations
• maintenance
• Rate of growth of IT budgets (1980s) - 15 pa
• hardware / software / telecommunications
• Unsustainable
• greater than business growth rate

2
IT spending - the problems

• Is IT expenditure out of control?
• Does the existing investment produce adequate
  benefits?
• How do you measure the business value of IT?
• How do you decide how much to spend on IT?
• competitive necessity?
• how do you monitor competitive IT expenditure?
• alternatives?
• top class people
• Can existing accounting ratios help?
• cost? overhead? capital investment?

3
Managing IT costs - the first step, creating an
IT balance sheet

• may show senior management
• that IT assets are large undermanaged
• small no of IT mgt staff cf IT expenditure?
• little time spent discussing IT
• that IT investment presents opportunities
• information bank
• integration of processes
• new products/services
• E-Business

4
Counting all the costs (1)
40 of IT costs are not part of the IS dept
budget (datamation, 1987)

• identification
• central, enduser PC, office automation
• different budgets
• organisation costs
• not tracked
• IS supply costs
• systems development information mgt
• charged back to users by allocation method?

• IS supply costs (contd)
• ongoing operations/ maintenance costs
• to ensure reliability, availability, security
• gt50 of total IS staff time
• annual PC User support 1.6x capital cost
  (Gartner Group)
• maintenance costs 1-3x development costs

5
Counting all the costs (2)

• user costs - direct acquisition usage
• unexpected growth of usage-gtescalation of costs
• supply creates demand
• clutch at straw-gtdemand the haystack
• hidden costs
• education, support, learning
• rarely budgeted
• often very high
• organisational costs are rarely budgeted can
  make official development costs look like
  pennies (Keen)

6
Perspectives on IT costs

• Users
• expense, not value added service
• IS dept
• how to allocate infrastructure costs fairly
• telecomms corporate database -
• should 1st users bear all costs?
• outside services - take up reduces base of users
  to allocate internal IS costs over

• senior management
• IT costs are determinable annually
• a function of business fortunes
• infrastructure costs add to costs without
  providing fixed benefits
• global telecomms system, corporate databases,
  networks
• reducible by consolidation, adoption of standards

benefits come indirectly from applications they
enable (American Airlines)
7
Strategies for managing costs

• do not provide a free resource
• need for fair rationing, elimination of waste,
  cost control
• comprehensive rational approach
• identify ALL costs (inc HIDDEN)
• understand the DYNAMICS of the costs
• Don't fall for the HYPE eg CASE, 4GLs (8020
  rule)

• develop an ASSET (not budget) view of the costs
• fund corporate infrastructure separately from
  business applications
• infrastructure - telecomms, security, networks,
  corporate dbms
• long range capital investment linked to corporate
  policy
• IS dept as quasi profit centre
• charge innovations below cost
• fix prices relative to outside suppliers
• reuse existing resources
• program code, data

8
Cost dynamics of IT

• (Keen p150/ 151 strategies)

9
Assessing the business value of IT (1)

• value added benefits do not show up in the
  accounting system
• better service, managerial effectiveness,
  customer image, productivity, etc
• IT may INCREASE costs but AVOID costs too
• by substituting fixed cost capital for variable
  cost labour enabling greater volumes to be
  processed with proportionately less labour
• benefits are attributed to products, costs to IT
  infrastructure
• accounts systems can't relate original costs to
  future cash flows

10
Assessing the business value of IT (2)

• concentration on IT spending sends WRONG signals
  (eg for a firm where revenue growth and/or
  increased market share are corporate objectives)
• "IT spending UP, profits DOWN - so IT spending
  POOR"
• concentration on key value added indicators sends
  RIGHT signals
• "IT spending UP, profits per employee UP, so IT
  spending GOOD"
• (with increased sales/market share NOT attainable
  without IT)

11
Evaluating and comparing individual applications
(a highly rigorous methodology)
12
(No Transcript)
13
Information economics - Parker, Benson, Trainor,
P-H, 1988

• identify information project candidates
• enhanced value chain analysis
• bottom-up calls for help
• maintenance projects
• replace benefit with value
• effect on business performance
• eg cost reduction, revenue production
• AND competitive advantage, market share

• replace financial cost with organisational cost
• incl. training, learning curve, project
  management
• new decision making process based on business
  impact, as well as technology

14
Information economics - Parker, Benson, Trainor,
P-H, 1988

• framework of tools to enhance/replace traditional
  ROI evaluation methods
• limitations of ROI CBA methods (Norton, 1986)
• strongly favours cost reduction as the primary
  criterion
• encourage low risk investments with low returns
• labour is treated as an expense
• analysis is static and short term in nature
• ie competitive strategic factors are ignored
• information economics considers both strategic
  values and return based value assessment plus
  technological factors

15
Information economics - Parker, Benson, Trainor,
P-H, 1988
requires a consensus of business/technical people
on decision making criteria These are

• Business Domain variables
• Return on Investment
• Strategic Match
• Competitive Advantage
• Management Information
• Competitive Response
• Organisational Risk

• Technology Domain variables
• SIS Architecture
• Definitional Uncertainty
• Technical Uncertainty
• IS Infrastructure Risk

16
Information economics - a formula for measuring
IT investment potential
17
The Information Economics scorecard

• (Parker p145 fig 13.1)

18
Information economics - a project raw score

• (Parker p171 fig 14.7 - 7 BEAM Parcels capacity
  project)

19
Information Economics - weighting factors

• (Parker p225 fig 17.9 - Project evaluation
  criteria and weighted values)

20
Information economics - example of assessing
several potential applications

• (Parker p226 fig 17.10 - BEAM Project scoring
  results)
• elaborate on parcels capacity project by relating
  raw score weighting slides
• stress that the weighting scoring process is by
  consensus, is organisation focused not absolute,
  may be very complex in reality