Case 3:TOTAL COST OF

OWNERSHIPPresented by

(Epi, Gas, She and Yel)

CASE BACKGROUND• For decades, companies have been investing

millions of dollars in information systems in an attempt to increase revenues, reduce costs, or both.

• When companies make decisions about their IT investments, one of the most common problems they encounter is the seemingly simple issue of how much does it cost.

CASE BACKGROUND

• Most firms agree that measuring the impact of any investment is important.

PROBLEM STATEMENTHow can we

evaluate the effectiveness of information system investments?

KEY OBJECTIVES• To determine what information system

investment impact and effectiveness measuring tools are available today

• To evaluate how these tools applicable for use by organizations

• To know how to have a clear and better understanding of organizations’ plan to invest in information systems with the use of the existing measurement tools

ANALYSIS1. Issues

• The measurement of IS value has troubled some economists who expected to see dramatic productivity gains during the late 80’s to the early 90’s

• There had been several attempts to determine the impact of IS to their individual profitability.

• Speculative insights about the use of new measurement tools for acquiring and implementing IS.

• Accuracy and reliability of the measurement models are being scrutinized by some organizations since it provides unrealistic expenditures.

ANALYSIS2. Challenges

• Information system investments must be made with an objective in mind. Are these objectives being met? How can we further evaluate once these have been expended?

• Traditional financial measures failed to measure the impact of information system investments on profitability.

• There are several factors affecting increased profitability including general economic conditions, competitors’ activities and organization’s marketing programs

• Doctoral students doing research failed to correlate the impact of information systems investment to it’s results.

• Some companies successfully used modern tools to their advantage.

Alternative Courses of Action

ACA 1 – Use the TCO ModelACA 2 – Use Traditional Cost-Benefit

Analysis ToolsACA 3 – Use Simple Analysis of

Outright Costs

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Alternative Courses of Action

ACA 1 – Use the TCO Model

TOTAL COST OF OWNERSHIP Model• TCO was originally developed in the late 1980s

by the research firm Gartner to determine the cost of owning and deploying personal computers.

Focus on TCO• can be used to make sure that all

associated costs over a given time period are considered when you are acquiring an asset.

• can be described as the cost of owning and operating an asset over time.

• consists of the costs, direct and indirect, incurred throughout the life cycle of an asset, including acquisition, deployment, operation, support and retirement.

ACA 1- Use the TCO ModelPro’s• All costs in acquiring hardware and

software is considered• Long-term measure; reduces total cost

over time• TCO provides a framework for good

financial analysis of IT investments • TCO sets a baseline for IT costs TCO

generates a widespread understanding that first cost is not total cost.

ACA 1- Use the TCO ModelCon’s• TCO does not offer help for the valuation of

intangible assets. • Sometimes it can be difficult to determine

whether, and to what extent, certain costs must be allocated to an asset.

• Because TCO is a long-term measure, it reduces costs over time. If you have to cut cost immediately, TCO is not very useful.

• TCO is not very helpful to align investments with strategic goals.

Alternative Courses of Action

ACA 2 – Use Cost-Benefit Analysis (CBA)

Cost-Benefit Analysis (CBA)• the weighing-scale approach for decision-making.

All the positive elements (cash-flows and other intangible benefits) are put on one side of the balance and all the negative elements (the costs and disadvantages) are put on the other.

Focus on CBAThe term covers several varieties of

business case analysis, such as: • Return on investment• Net present value• Internal rate of return• Earnings Growth• Market Share• Customer Awareness and Satisfaction• Payback Period• Financial justification

ACA 2 - Use the CBAPro’s• Simple and easy to use• Can be performed in-house, without the

incurring additional expenses for new software and consultancy works.

• Generally accepted method across all investment planning

• Takes only a certain amount of time to accomplish

• Takes into consideration intangible and other benefits not only cost savings.

ACA 2 - Use the CBACon’s• Typically the costs are tangible, hard and

financial, while the benefits are hard and tangible, but also soft and intangible.

• Risk must often be considered as a factor in making the decision.

• Some CBA tools ignore the time value of money.

ACA 3 - Use Simple Analysis of Outright Cost

Pro’s        Simple and easy to use.        No additional costs for new

software and consultants.        No need to invest on training of

personnel.

ACA 3 - Use Simple Analysis of Outright Cost

Con’s• Does not take into account hidden

costs. • Does not take into account subsequent

and other indirect costs.• Lacks concrete objective

RECOMMENDATIONWe recommend that a combination of both TCO

and traditional CBA be used to evaluate the impacts and effectiveness of our information systems investments. However, the extent by which each method would be used depends on the objectives of each company.

Based on professional judgment, companies must use the combinations of tools when distinct pattern of results is seen from analyses made using such tools. Companies can corroborate findings from one method of evaluation with the use of the other methods.

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