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three main funding methods (for IT) chargeback, allocation, corporate budget both chargeback and allocation methods... distribute the costs back to the users distinguishing feature of corporate budgeting doesn't link IT costs with any specific user chargeback funding method recovers IT costs by charging individuals, departments, or business units based on actual usage and cost why chargeback systems are popular fairest method; users can see exactly how much usage costs problems with charging systems hard (and expensive) to build them, hard to decide on pricing when chargeback methods are most appropriate when there is a wide variation in usage among users or when actual costs need to be accounted for by the business units allocation funding method recovers IT costs by charging based on criteria other than usage (e.g. revenues, number of employees) two main advantages of the allocation funding method simpler (and cheaper) to implement because usage does not need to be captured; predictable monthly costs two main complaints about allocation funding method free-rider problem (heavy users pay same as light users), difficult to determine how to allocate costs true-up process when IT managers using an allocation process balance expenses with payments to figure out the actual cost of IS for the year corporate budget funding method corporate allocates funds to IT at annual budget session advantages of corporate budget method simple, gives IT managers more control over budget, encourages exploration of new technologies disadvantages of corporate budget method competes with all other budged items for funds ABC (acronym) activity-based costing activity-based costing counts the actual activities that go into making a specific product or service activity-based costing is an alternative to traditional accounting methods which account for... ... direct and indirect (overhead) costs example of activity based costing If an accountant divided up the cost of an ERP over the activities it supports by calculating how much of the system is used by each activity. A product that took up 1/12 of the system's capacity to control manufacturing would be allocated 1/12 of the system's costs. in traditional accounting, costs reflect the organization structure or the processes of a given department in activity-based costing, costs reflect the products and services of the business TCO (acronym) total cost of ownership total cost of ownership costing model that includes costs associated with technical support, administration, training, and system retirement. TCO component framework framework to assess cost of IT infrastructure components categories in the TCO component framework hardware, software, network, data components of total hardware cost desktops, servers, mobile platforms, printers, storage, tech support, admin, training, informal support, retirement components of total software cost OS, office suite, database, proprietary, tech support, admin, training, informal support components of total network cost LAN, WAN, modems, tech support, admin components of total data cost removable media, onsite backup storage, offsite backup storage categories of soft costs tech support, administration, training reasons to analyze cost of informal tech support costs of it may be higher (e.g. capable manager spending time helping with email), can be indirect measure of efficiency of IT support advantages of using TCO gives full picture of where IT dollars go; results can be evaluated over time against industry standards; helpful for decision making disadvantage of ABC and TCO difficult to implement business case structured document that gives all information needed to make a decision on an IT investment types of benefits that can be identified in a business case innovation (do new things), improvement (do things better), cessation (stop doing things) categories of benefits in business case observable, measurable, quantifiable, financial observable benefits can only be measured by opinion or judgment measurable benefits have an existing way to measure it quantifiable benefits have a way to measure size or magnitude of the benefit financial have a way to express benefit in financial terms types of risk in risk analysis technical, financial, organizational IT portfolio management process of evaluating and approving IT investments overall goal of IT portfolio management company funds and invests in most valuable initiatives and gets maximum benefits four asset classes that make up IT portfolio transactional systems, informational systems, strategic systems, infrastructure systems transactional systems streamline or cut costs on the way business is done informational systems provide information used to control, manage, communicate, analyze, or collaborate strategic systems used to gain competitive advantage infrastructure systems servers, networks, databases, laptops, etc. typical IT portfolio investments (descending order) infrastructure, transactional, informational, strategic cost focused firm spends more on this category of IT portfolio transactional (automate processes, lower operational costs) agility focused firm spends more on this category of IT portfolio infrastructure (solid foundation for fast, new changes) ROI (acronym) return on investment NPV (acronym) net present value EVA (acronym) economic value added IRR (acronym) internal rate of return four perspectives in the balanced scorecard customer, internal business, innovation/learning, financial balanced scorecard measures organizational performance based on value drivers scorecards vs. dashboards scorecards give summary information, dashboards give snapshots dashboard summarizes key metrics at any given point in time dashboards help to determine where to focus attention options pricing risk-hedging strategy to minimize negative impact of risk when you can wait to see what happens why ROI is hard do for IT investments because benefits aren't that tangible, difficult to quantify, observe, or long-term