1. Chapter 14
Information Technology
Economics
1 Chapter 14

2. Moore’s Law
2 Chapter 14

3. Introduction
 Assuming the current rate of growth in
computing power, organizations will
have the opportunity to buy, for the
same price, twice the processing power
in 112 years, four times the power in 3
years, eight times the power in 412
years, and so forth.
 price-to-performance ratio will
continue to decline exponentially.
3 Chapter 14

4. Productivity paradox
 The discrepancy between measures of
investment in information technology
and measures of output at the national
level has been called the productivity
paradox.
4 Chapter 14

5. Productivity
 Economists define productivity as outputs
divided by inputs.
 Outputs are calculated by multiplying
units produced (for example, number of
automobiles)by their average value.
 The resulting figure needs to be
adjusted for price inflation and also for
any changes in quality (such as
increased safety or better gas mileage).
5 Chapter 14

6. -cont…
 If inputs are measured simply as hours of work, the resulting
ratio of outputs to inputs is labor productivity.
 If other inputs—investments and materials—are included, the
ratio is known as multifactor productivity.
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7. Explaining the Productivity
Paradox
 Explanations can be grouped into
several categories:
 (1) problems with data or analyses hide
productivity gains from IT,
 (2) gains from IT are offset by losses in
other areas, and
 (3) IT productivity gains are offset by IT
costs or losses.
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8. Does the Productivity Paradox
Matter?
 The productivity-offsetting factors
largely reflect problems with the
administration of IT, rather than with
the technologies themselves
 the critical issue is how it improves
organization’s own productivity.
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9. Process approach to IT organizational
investment and impact.
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10. -cont….
 The relationships are basically indirect,
via IT assets and IT impacts.
 The figure shows that the relationship
between IT investment and performance
are not direct; other factors exist in
between.
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11. -cont…
 This is exactly why the productivity
paradox exists, since these intermediary
factors (in the middle of the figure) can
moderate and influence the relationship.
11 Chapter 14

12. Value of Information - Evaluating
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 (benefits adjusted for
costs) of decisions made using
information and the net benefits of
decisions made without information.
12 Chapter 14

13. EVALUATING IT INVESTMENT:
BENEFITS, COSTS, AND ISSUES
 One basic way to segregate IT
investment is to distinguish between
investment in infrastructure and
investment in specific applications.
13 Chapter 14

14. IT Infrastructure
 IT infrastructure, provides the foundations
for IT applications in the enterprise.
 Examples are a data center, networks,
date warehouse, and knowledge base.
 Infrastructure investments are made for
a long time, and the infrastructure is
shared by many applications
throughout the enterprise.
14 Chapter 14

15. IT Applications
 IT applications, are specific systems and
programs for achieving certain objective
 for example, providing a payroll or taking a
customer order.
 The number of IT applications is large.
Applications can be in one functional
department or they can be shared by several
departments, which makes evaluation of
their costs and benefits more complex.
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16. The Value of Information
in Decision Making
 People in organizations use information
to help them make decisions that are
better than they would have been if they
did not have the information.
 Value of information = Net benefits
with information - Net benefits without
information
16 Chapter 14

17. Evaluating IT Investment by
Traditional Cost- Benefit
Analysis
 USING NPV IN COST-BENEFIT
ANALYSIS.
 Capital investment decisions can be
analyzed by cost-benefit analyses,
which compare the total value of the
benefits with the associated costs.
 Organizations often use net present
value (NPV) calculations for cost-
benefit analyses.
17 Chapter 14

18. Return On Investment
 Another traditional tool for evaluating capital
investments is return on investment (ROI), which measures the
effectiveness of management in generating profits with its available
assets.
 The ROI measure is a percentage, and the higher this
percentage return, the better.
 It is calculated essentially by dividing net income attributable to
a project by the average assets invested in the project
18 Chapter 14

19. Cost-Benefits Analyses - Evaluating
19 Chapter 14

20. “Costing” IT Investments - Evaluating
 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 different
IT projects.
 Fixed costs are those costs that remain the same in total
regardless of change in the activity level.
20 Chapter 14

21.  Another area of concern is the Life Cycle Cost; costs for
keeping it 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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22. -cont…
 There are multiple kinds of values
(tangible and intangible)
 improved efficiency
 improved customer relations
 the return of a capital investment
measured in dollars or percentage
 many more …
 Probability of obtaining a return
depends on probability of
implementation success
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23. Opportunities & Revenues by IT
 Sales
 Transaction fees
 Subscription fees
 Advertising fees
 Affiliate fees
 Other revenue sources
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24. Reduction in transaction costs
 Transaction Costs: covers a wide range
of costs that are associated with the
distribution and/or exchange of
products and services.
 Search costs
 Information costs
 Negotiation costs
 Decision costs
 Monitoring costs
24 Chapter 14

25. Intangible Benefits
Sawhney’s Method of Handling
 Think broadly and softly.
 Supplement hard financial metrics with soft
ones
 Pay your freight first.
 Think carefully about short-term benefits that
can “pay the freight” for the initial investment
in the project.
 Follow the unanticipated.
 Keep an open mind about where the payoff
from IT and e-business projects may come from
25 Chapter 14

26. Business Case approach
 It is a written document that is used by
managers to garner funding for one or
more specific applications or projects.
 Emphasis is on the justification for a
specific required investment.
 Bridges the gap between the initial plan
and its execution.
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27. Specific Evaluation Methods (Continued)
Chapter 14 27

28. Methods for evaluating IT
 Financial approach
 Multicriteria approach
 Ratio approach
 Portfolio approach
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29. “Costing” IT – Economic Strategies
Chapter 14 29

30. Outsourcing
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31. IT Metric
 It is a specific, measurable standard
against which actual performance is
compared.
31 Chapter 14