Chapter 10 - week 12
What are some problems associated with assessing the costs of IT?
Placing a dollar value on the cost of IT investment may not be as simple as it sounds. One of the major challenges that companies face is to allocate fixed costs among different IT projects. Fixed costs are those costs that remain the same regardless of any change in the activity level. For IT, fixed costs include infrastructure cost, cost of IT services, and IT management cost. For example, the salary of the director is fixed, and adding one more application will not change it. Another complication is that the cost of a system does not end when the system is installed. Costs for maintaining, debugging, and improving the system can accumulate over many years. In some cases the company does not even anticipate them when it makes the investment.
What difficulties accompany the intangible benefits from IT?
Evaluating the benefits of IT projects is more complex than calculating their costs. Benefits may be hard to quantify, especially because many of them are intangible (for example, improved customer or partner relations or improved decision making). Also, the fact that organizations use IT for a variety of purposes further complicates benefit analysis. In addition to obtain a return from an IT investment, the company must implement the technology successfully.
Define NPV and ROI, and business case approaches.
Net present value (NPV) calculation are used for cost-benefits analyses. Using the NPV method, analysts convert future values of benefits to their present-value equivalent by “discounting” them at the organization’s cost of funds. They then can compare the present value of the future benefits to the cost required to achieve those benefits and determine whether the benefits exceed the costs.
Return on investment (ROI) measures management’s effectiveness in generating profits with its available assets. The ROI measure is a percentage, and the higher the percentage return, the better. ROI is calculated by dividing net income attributable to a project by the average assets invested in the project. In the case of IT the company would divide the income generated by an IT investment by the costs of that investment.
Finally a different method used to justify investment projects is the business case approach. A business case is a written document that managers use to justify funding one or more specific applications or projects. The business case approach is usually employed in existing organisations that want to embark on new IT projects. A business case provides the bridge between the initial plan and its execution. Its purpose is not only to get approval and funding but also to provide the foundation for tactical decision making and technology risk management.
What type of companies provide outsourcing service?
Small or medium sized companies with a few IT staff and limited budgets are best served by outside contractors. Acquiring IT applications from outside contractors or external organization is referred to as outsourcing. Large companies may also choose this strategy in certain circumstances, for example, they might want to experiment with new IT technologies without making a substantial up-front investment. They may also use outsourcing to protect their internal networks and to gain access to outside experts.
Define ASPs and list their advantages to companies using them.
An Application service provider (ASP) is an agent or a vendor who assembles the software needed by enterprise and packages the software with services such as development, operations, and maintenance. The customer then accesses these applications via the Internet or VANs through a standard Web browser interface. For companies using ASP the adavantages are:
-It saves various expenses (such as labour costs) in the initial development stage.
-Helps reduce the costs of software maintenance and upgrading and user training over the long run.
-The company is able to select another software product from the vendor to meet changing needs.
-Saves the company the costs of upgrading the existing software.
-Makes the company more competitive by enhancing the company’s ability to adapt to changing market conditions.
List some disadvantages of ASPs.
- May produce excessive documentation.
-Users may be unwilling or unable to study the specifications they approve.
-Takes too long to go from the original idea to a working system.
-Users have trouble describing requirements for a proposed system.
-Not practical with large number of users.
List the major steps of selection of a vendor and a software package.
-Identify Potential Vendors.
-Determine the Evaluation Criteria.
-Evaluate Vendors and Packages.
-Choose the Vendor and Package.
-Negotiate a Contract.
-Establish a Service Level Agreement.
Describe a request for proposal (RFP).
A Request for proposal (RFP) is a document that is sent to potential vendors inviting them to submit a proposal that describes their software package and explains how it would meet the company’s needs. The RFP provides vendors with information about the objectives and requirements of the system.
Service level agreements (SLAs) are formal agreements that specify how work is to be divided between the company and its vendors. These divisions are based on a set of agreed upon milestones, quality checks, and what-if situations. They describe how quality checks will be made and what is to be done in case of disputes. They accomplish these goals by defining responsibility of both partners, providing a framework for designing support services, and allowing the company to retain as much control as possible over its own systems.