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Role of the IT Function: Costs, Analysis, Development

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Role of the IT Function: Costs, Analysis, Development

Based on materials by David Schuff

- Two things:Reduce costs Increase profitIncrease revenue
- Everything else relates to one of these two things.
- Agree? Try it…

- How does a company pay for technology initiatives?
- Where does the money come from?
- So how do you know if it is worth it?

- For the corporate network?
- For an application needed by a single department?
- For a new server intended to support that application?
- What if the department only needs 10% of that server’s capacity?

What is the role of the “chargeback” in all of this?

- Operations
- Technical support
- Network planning and administration

- Application Development
- Software implementation

- What about “managing contracts”?

- Analysis/Design
- Development

The business analysts

The development team

Analysis

Design

Development

Business Requirements

Feasibility and Planning

Technical Requirements

Systems Analysis

Technical Design

Systems Design

Problems andImprovements

Systems Implementation

- What are its strengths?
- What are its weaknesses?
- When it is appropriate?
- What is the role of alternative development strategies?
- Rapid prototyping
- Joint application development

- Why is it important in the context of the SDLC (and software development in general)?
- How does it affect testing?
- From where do you get the requirements?
- What are the difficulties?

- What is the difference?
- Which one is more important?
- Does it depend on who’s asking the question?

- Should the business unit review the technical specifications?

- In reality, how are requirements used by vendors? By clients?
- What is the right level of detail?
- Can you have too much detail?
- Which party benefits from greater detail?

- Why do requirements change?
- Is this a bad thing?
- How should the client deal with these changes? The vendor?
- How do you build a set of requirements that “last?”

- What is “throwing requirements over the wall”?
- What is the implication of thisin practice?
- Why do companies do it?

- Cost justification
- Measures of cost and benefits
- Intangible costs versus tangible costs

- Techniques
- Net present value
- Expected value

- Consider a development project:
- Year 1: $20,000 expenditure
- Year 2: $5,000 savings
- Year 3: $7,500 savings
- Year 4: $7,500 savings

- Is it worth it?
- Do you break even: $20000 in spending versus $20000 in income?

- Consider a 5% discount rate (cost of capital):
NPV = (-20000)(1.05)-0 + (5000)(1.05)-1 + (7500)(1.05)-2 + (7500)(1.05)-3 = -20000 + 4761.91 + 6802.72 + 6478.78 = -1956.59So you would lose $1956.59on this project!

Formula for NPV: SFV(1+i)-n

- E(X) = xP(x)where x is the outcome andP(x) is the probability of that outcome
- Why raffles are bad deals (for players)
- Suppose there are 100 tickets at $1 and the prize is $50
- E(X) = -1(1) + 50(.01) = -1 + .50 = -$.50
- So on average you lose $.50 on every ticket

- Is a security system worth the money?
- The system costs $10,000 and prevents all downtime

- If I do not have a backup system there is a
- 5% chance we’ll have 10 days of downtime
- 10% chance we’ll have 5 days of downtime
- 30% chance we’ll have 1 day of downtime

- Each day of downtime costs $10000
- So…

- E(X) = -10000 + (100000)(0.05) + (50000)(.10) + (10000)(0.30) =-10000 + 5000 + 5000 + 3000 = $3000
- So the expected value of investing in the system is $3,000
- We save $3,000 by implementing the security system
- Another way of looking at it:
- The expected loss from not having the system is $13,000, which is more than the cost of the system

- There is a .01% chance you’ll have 10,000 hours of downtime
- That’s (0.0001)(10000)(10000) = $10,000

- $10,000 is not a lot, but can you afford the $100,000,000 loss if it occurs?
- So what do you do to protect against that loss?

- NPV is discounted value of future cash flows
- But those cash flows might be uncertain
- So you could look at discounted values of expected future returns
- So now, given a 5% cost of capital:
NPV = (E(Xyear1))(1.05)-0 + (E(Xyear2))(1.05)-1 + (E(Xyear3))(1.05)-2 + … =

- How do you compute E(Xyeary)??

- Back to our security system example
- We claim there is a $3000 benefit in the second year
- This assumes 100% certainty in the outcome
- What should we use for the expected cash flow for year two if we are:
- 80% certain there will be a $3000 benefit
- 20% certain there will be a $1000 benefit

- Beyond Valuation: Options Thinking in Project Management
- Should IT projects include people from the business unit in the development process?
- In an business that uses technology (for example, a bank), is it more important to have
- People in IT with knowledge of the business…or
- People in the business units with knowledge of technology?

- Imagine you are a project manager for a technology initiative
- What skills are important to have in your team members (technical and otherwise)?