Software Economics. Funding IT and TCO

Transcription

1 Software Economics Funding IT and TCO

2 Today Total Cost of Ownership Funding IT Recap of Metrics Lets check Assignment 2

3 Total Cost of Ownership (TCO) Definition: Total of direct capital investment in hardware and software plus indirect costs of installation, training, repairs, downtime, technical support, and upgrading. Also called cost of ownership or ownership cost. ( 3

4 Why TCO? Other measures focuses on limited time periods. They usually do not consider indirect costs. TCO looks at more than just the capital investment by including costs such as technical support, administration, training etc. Gives a more complete picture of the costs. TCO is good for understanding the structure of costs associated with an investment (during its life-time) Can help in making better comparisons with other systems (benchmarks) Example: A used car can have a very good price but considering repairs, insurances, fuel consumption, accessories, etc. it might turn out to be more expensive than a fairly new car. 4

5 Iceberg metaphor From 5

6 Funding IT How can a company fund its IT costs? Three main ways: Chargeback Cost Allocation IT budget 6

7 Chargeback IT costs are funded by charging those (departments, units, individuals) who are using the systems. Can either charge the exact cost or budgeted cost. Development and needed investments not in the hands of the IT but rather in the hands of those paying. A fair way of distributing the costs. Could be costly to manage such a system. 7

8 Allocation IT costs are allocated based on a general principle (not usage) such as number of employees, revenues etc. Simpler to manage. Might have issues with free riders and not always easy to choose the basis for the allocation. 8

9 Budget A budget is set and that is the space given for IT investments. Very simple More difficult to follow up, how to ensure the most profitable projects are chosen, are the investments really needed for the business etc. IT competes with other budget posts 9

10 Summary of Funding Method What is it? Advantages Disadvantages When? Chargeback Based on usage Fairest way Can be costly and tricky to mange Specific systems used by few Allocation Based on nonusage basis Simpler for IT Need good basis, otherwise its not fair General systems Budget Annual allocation of funds Encourages use of new IT technologies Fight for the budget Infrastructure 10

11 Task III. Software purchasing decision [10 points] The business development team of a company is about to purchase a modeling tool. After an initial market assessment, two tools have been shortlisted. Both tools have rather equivalent functionality given the company s requirements. However, they come with very different pricing models: Option A: Requires purchasing (at EUR 1500) a perpetual license without usage restrictions (i.e. any number of users). The tool would run on an in-house server with an upfront cost of EUR 2500 plus an annual operation cost of EUR Option B: Is offered as a SaaS tool at EUR 290 per user per year. In the first year, 5 people in the company will use the tool in question. From years 2 onwards, there will be 8 users. Compare the above options based on their NPV over a 5-years timeframe using discounted cash flow analysis. Assume a discount rate of 15%. Note that the NPVs will be negative as we only consider costs, not benefits. 11

12 A. 1 Sales, 2 Gross Loss and 3 Net Profit B. 1 Revenues, 2 Gross Margin and 3 Net Profit C. 1 Revenue, 2 Gross Margin and 3 Net Loss D. 1 Goods Sold, 2 Gross Margin, and 3 Operating Income 12

13 You received an analysis in which you found some numbers. Some of them had some errors and have to be redone. Which of the below alternative/alternatives are reasonable? A. NPV: 45%, IRR: 18%, ROI: 123%, Payback period: 2,4 years B. NPV: 4,3M, IRR: 19%, ROI: 6,2M, Payback period: 3 years C. NPV: 2,9M, IRR: 19%, ROI: 83%, Payback period: 25 months D. NPV: 5,7M, IRR: $3,9M, ROI: 124%, Payback period: 2,1 years 13

14 will tell you how much value in terms of amounts the investment will yield whereas will show at what rate, your investment will yield a return that is the same as you invested (assuming you can reinvest the annual gains at the same rate of return). A. ROI / IRR B. Rate of Return / ROI C. NPV / IRR D. IRR / ROI 14

15 Payback periods are meaningful to calculate only when the calculated do eventually outweigh. A. ROI / IRR B. Cash Outflows / Cash Inflows C. Project Benefits / Initial Investments D. Cash Inflows / Cash Outflows 15

16 The presentation A few suggestions 1. Get your storyline in order. 2. Think of who you are presenting for. 3. Think of presenting meaningful content, what is relevant for you story? 4. Prepare yourself, run the presentation at least a few times as practice. 5. Body language, posture, eye contact and presence. 6. Simple slides remember that slides support your presentation, its not the presentation. 7. Be prepared to answer questions. 16

17 Minimum for the Presentation Your names clearly stated on the first slide Brief Introduction The issue / problem at hand that you have analyzed The Baseline and Upside Scenario Your recommendation based on The numbers (NPV, IRR, Payback, Discounted Payback and ROI) Other issues if applicable (such as strategic issues) Comments (if applicable) on the risks. 17

18 Course Objectives Do you know what a Business Case is? Can you do a basic Business Case Analysis? Can you calculate, use, understand and reason about 1. NPV 2. ROI 3. IRR and 4. Payback Period? 18