ROLE OF THE IT FUNCTION: COSTS, ANALYSIS, DEVELOPMENT

Based on materials by David Schuff

IT’s impact on the bottom line

Two things:

Reduce costs Increase profit

Increase revenue

Everything else relates to one of these two things. Agree? Try it…

Paying for 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?

Who pays?

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?

The Major “Functions” of the IT Function

Operations Technical support Network planning and administration

Application Development Software implementation

What about “managing contracts”?

Looking at the application development function

Analysis/Design Development

The development team

Analysis Design Development

The business analysts

The Systems Development Life Cycle (SDLC)

Business Requirements

Technical Requirements

Technical Design

Problems andImprovement

s

Feasibility and Planning

Systems Analysis

Systems Design

Systems Implementation

The SDLC

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

Requirements Gathering

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?

Business Requirements versus Technical Requirements

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?

The requirements “game”

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?”

The Wall

What is “throwing requirements over the wall”?

What is the implication of thisin practice?

Why do companies do it?

How do you know if it is worth it?

Cost justification

Measures of cost and benefits Intangible costs versus tangible costs

Techniques Net present value Expected value

Net present 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 = -1956.59

So you would lose $1956.59 on this project!

Formula for NPV:

SFV(1+i)-n

Expected value

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

Applying this to an IT project

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…

The computation…

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

But what if you have this scenario?

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?

Combining NPV and expected value

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)??

Computing expected future cash flows

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

benefit20% certain there will be a $1000

benefit

Discussion

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?

More discussion

Imagine you are a project manager for a technology initiative What skills are important to have in your

team members (technical and otherwise)?