What is IT budgeting?
the proces of allocating monetary resources to various IT programs
What is a chargeback system?
The managament practice of billing business departments for services provided by an in-house information technology
What are the seven objectives of a chargeback system? and what do they mean?
1: Cost recovery (recovering all IT costs in a year and each product/service must recover its own cost)
2: Resource allocation (scarce resources can be allocated where really needed)
3: Efficient utilization of IT resources (ensure that a BU doesn’t waste money on unnecessary IT services)
4: IT performance evaluation (internal prices can be benchmarked)
5: IT planning assistance (BU can predicts future requirements)
6: Increase user awareness (BU are more aware of service usage)
7: Increase IT staff awareness (Motivates IT departments to perform their work more cost-effective)
What are the two types of NON-Chargeback systems? describe them and name a advantage/disadvantage
- Unallocated cost
- costs are not allocated to BU’s
- advantage: used in organisations with little experience in the use of IT
- disadvantage: all issues with not having a chargeback system - Simple cost allocation
- not based on BU’s actual usage, but based on revenue
- advantage: easily calculated
- disadvantage: unfair to large BU’s that do not heavily use IT
What are the five types of Chargeback systems and describe them
- Cost recovery - average cost pricing
- average unit costs calculated at the end of an accounting period - Cost recovery - standard pricing
- Determined in advance of use - Cost recovery - flexible pricing
- charges high rates for services in higher demand - Profit center - Fixed pricing
- IT negotiates a detailed contract with each BU - Profit center - Market based pricing
- A market price is suggested by IT
How can we categorize every form of chargeback systems? (Fixed/Flexible and Recovering cost/Profit making)
Fixed: cost recovery - standard cost (recovering cost), Profit center - fixed pricing (profit making)
Flexible: Cost recovery- average cost (recovering cost), cost recovery - flexible cost (recovering cost), profit center- market based pricing (profit making)
What are chargeback systems used for?
- IT cost control
- IT demand control
- IT resource allocation
How can we increase the effectiveness of a chargeback systems?
- Involvement of BU’s in budget preperation
- Accountability of BU’s for meeting the IT budget
- Cost variability of the changes
Why is it difficult to measure IT value?
- IT doesn’t bring revenue
- only creates value for internal customers
How can we measure IT value?
- Find capabilites that competiters could not match (VRAINN)
- Measure how much capability there would be without IT (total of orders taken per day)
What are the pitfalls of measuring IT?
- Only measuring IT investments based on competitive advantage
- Calculating the ROI to early
Name the difference between compete and qualifier investments
Compete investments give you a potential edge over other companies, and qualifier investments keep you in business
Name the two components of McFlaran’s strategic grid
- Strategic dependence (how long can the business continue without the system)
- Strategic impact (how important is the system for value creation and competitive advantage)
What is IT value?
Refers to the organizational performance impact of IT
Organizational performance can be divided into efficiency (internal) and effectiveness (external)
E.g. Productivity, profitability, cost reduction, competitive advantage, inventory reduction, market share
What is the IT value creation model?
Combination of IT resources and complementary organizational resources –> improve business processes –> improve organizational processes
What are the three different options for firms to create value for customers?
- Operational excellence
- Customer intimacy
- Product leadership
What are the five business performance measures?
- Supplier relations (operational excellence)
- Production & operations (operational excellence)
- Product & service enhancement (product leadership)
- Sales & marketing support (customer intimacy)
- Customer relations (customer intimacy)
What are the advantages/ disadvantages of the Cost recovery - Average cost pricing?
advantage: recovers 100% of the costs
disadvantage: significant price fluctuation, difficult for BU’s to budget
What are the advantages/ disadvantages of the Cost recovery - Standard cost pricing?
advantage: no periodic fluctuation, BU’s budget more accurate
disadvantage: must have reliable forecast of total cost and demand
What are the advantages/ disadvantages of the Cost recovery - Flexible cost pricing?
advantage: control the demand for scarce resources
disadvantage: complex to administer
What are the advantages/ disadvantages of a profit center - Fixed pricing?
advantage: IS department is operated as a profit center
disadvantage: handling changes to the requirements for system development and maintenance
What are the advantages/ disadvantages of a profit center - market-based pricing?
advantage: IS department is operated as a profit center
disadvantage: Market price is difficult to ascertain
What factors are also an influence to a company’s performance
- Industry characteristics
- Trading partners and business processes
- Country characteristics
