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.
6 Chapter 14
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.
7 Chapter 14
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.
8 Chapter 14
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.
10 Chapter 14
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.
15 Chapter 14
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
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.
21 Chapter 14
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
22 Chapter 14
23. Opportunities & Revenues by IT
Sales
Transaction fees
Subscription fees
Advertising fees
Affiliate fees
Other revenue sources
23 Chapter 14
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.
26 Chapter 14