Chapter Ten: Acquiring Information Systems and Applications

Section 10.1 - Before You Go On

1. What are some problems associated with assessing the costs of IT?

Major challenges that companies face in association with the assessment of IT costs include:

• Fixed Costs: those costs that remain regardless of any change in the activity level; for IT fixed costs include infrastructure cost, cost of IT services, and IT management cost.
• Continuing costs: cost of a system does not end when the system is installed; costs for maintaining, debugging, and improving the system can accumulate over many years; in some cases the company does not even anticipate them when it makes the investment.

2. What difficulties accompany the intangible benefits from IT?

Intangible benefits, such as improved customer or partner relations or improved decision making, are hard quantify. The fact the organisations use IT for several different purposes further complicates benefit analysis. In addition, to obtain a return from an IT investment, the company must implement the technology successfully. In reality, many systems are not implemented on time, within budget, or with all the features originally envisioned for them. Finally, the proposed system may be 'cutting edge'; in these cases there may be no previous evidence of what sort of financial payback the company may expect.

3. Define NPV and ROI, and business case approaches.

Net present value (NPV): calculations for cost-benefit analyses; using this method, analysts convert future values of benefits to their present-value equivalent by 'discounting' them as the organisation's cost of funds; they then can compare the present value of the future benefits to the cost required to achieve those benefits and determine whether the benefits exceed the costs; used when the costs and benefits are well defined and tangible enough to be converted into monetary values.

Return on investment (ROI): measures the management's effectiveness in generating profits with its available assets; measure is a percentage and the higher the percentage return, the better; calculated by dividing net income attributable to a project by the average assets invested in the project (in the case of IT, the company would divide the income generated by an IT investment by the costs of that investment); the greater the value of the ROI, the more likely the company is to approve the investment

Business case approach: written document that managers use to justify funding one or more specific applications or projects; these cases describe what and how you do it and how a new system could better the company; it is a bridge between the initial plan and its execution; purpose is to get approval, funding and provide foundation for tactical decision making and technology risk management; used when company wants to embark on new IT projects; helps clarify how the company can best use its resources to accomplish its IT strategy; concentrates on justifying the investment, focuses on risk management, and on how an IT project corresponds with the company's mission

Section 10.5 - Before You Go On

1. What type of companies provide outsourcing service?

Many software companies, from IBM to Oracle, offer a range of outsourcing services for developing, operating, and maintaining IT applications. IT outsourcers, such as EDS, offer a variety of services and the large CPA companies and management consultants offer some outsourcing services.

2. Define ASPs and list their advantages to companies using them.

Application service provider (ASP): agent or a vendor who assembles the software needed by enterprises and packages the software with services such as development, operations, and maintenance. The customer then accesses these applications via the Internet or VANs through a standard web browser interface.

Advantages of ASPs:

• save costs
• reduce software maintenance and upgrades
• reduce user training
• make the company more competitive by reducing time-to-market and enhance the company's ability to adapt to changing market conditions

3. List some disadvantages of ASPs.

Disadvantages of ASPs:

• ASPs might not offer adequate security protection
• software might not be a perfect fit for the desired application
• company must make certain that the speed of the Internet connection between the customer and the ASP is adequate to handle the requirements of the application

Section 10.6 - Before You Go On

1. List the major steps of selection of a vendor and a software package.

Step 1: Identify potential vendors

Companies can identify potential software application vendors through various sources:

• software catalogs
• lists provided by hardware vendors
• technical and trade journals
• consultants and industry analysts experienced in the application area
• peers in other companies
• web searches

Step 2: Determine the evaluation criteria

Areas in which a customer should developed detailed criteria are:

• characteristics of the vendor
• functional requirements of the system
• technical requirements that the software must satisfy
• amount and quality of documentation provided
• vendor support of the package

Step 3: Evaluate vendors and packages

Often, the company gives the vendors and packages an overall score by:

1. assigning an importance weight to each of the criteria
2. ranking the vendors on each of the weighted criteria
3. multiplying the ranks by the associated weights

Step 4: Choose the vendor and the package

Once a vendor and package have been chosen, the company can begin negotiations with these vendors to determine how their packages might be modified to remove any discrepancies with the company's IT needs.

Step 5: Negotiate a contract

The contract specifies price of the software and the type and amount of the support that the vendor agrees to provide

Step 6: Establish a service level of agreement

2. Describe a request for proposal (RFP).

RFP is a document that is sent to potential vendors inviting them to submit a proposal that describes their software package and explains how it would meet the company's needs; it provides the vendors with information about the objective and requirements of the system; it describes the environment in which the system will be used, the general criteria that the company will use to evaluate the proposals, and the conditions for submitting proposals; RFP may also request a list of current users of the package whom the company may contact; it can require the vendors to demonstrate the package at the company's facilities using specified inputs and data files

3. Describe SLAs.

Service level agreements (SLAs) are formal agreements that specify how work is to be divided between the company and its vendors; these divisions are based on a set of agreed-upon milestones, quality checks, and what-if situations; SLAs describe how quality checks will be made and what is to be done in the case of disputes; goals are accomplished by :

1. defining the responsibilities of both partners
2. providing framework for designing support systems
3. allowing the company to retain as much control as possible over its own systems