Mindsets

Benefits of IT

Example Usage

non-ongoing: solution delivery

Costs (Ongoing Activities)

Operations

Infrastructure provisioning: installing hardware, network & infrastructure software

Software deployment: installing, configuring & distributing software

Systems management: monitoring application, identifying issues

User Support: handle user questions & reports, user access rights, …

Maintenance

Categories of Maintenance

Activities in Maintenance

Costs in Software Development for IT Department

• typically, only half of software dev. can be used for solution delivery

• ~80% of costs depend on prior decisions (ops & maintenance)
  • largely fixed

  ◼️ Software Development Capacity

Rule of Thumb for Projects:

expected maintenance cost per year is 10-15% of original investment added

• as technology improves, it gets cheaper to maintain, but you likely need more

Cutting Costs

Solution Delivery largely reduced, as Maintenance & Operations be kept with huge risks

Lifecycle Costs of Applications (over 10 years)

• Estimated Average: 2.7

• actual average: 7.2

Effective Costs are underestimated by a factor of 2.7 !

Business Case

• evaluate if project is beneficial for the company

• comparison and prioritization of projects

• describe costs, risks, … of a project

Best Practices

• quantify all aspects of benefits, costs, and risks

• ensure all benefits, costs, and risks are included

• Put different benefits & costs on a timeline, distinguishing when they will be incurred

• With large risks or uncertainties: use ranges, include best-case, worst-case & expected scenarios

Why?

Nearly half of projects fail

• very frustrating

Components of Business Case

Benefits

Costs

Risks

Use of Business Cases

• establishment of approval thresholds

• use in project / investment portfolio management

Plot: Economic Attractiveness VS Strategic Importance

Measure Economic Attractiveness

Benefit / Cost - Ratio (higher better)

$= \dfrac{ \sum \text { Benefits}}{\sum \text {Costs }}$

+ easy to understand & calculate

- does not distinguish between size & time

Net Present Value (NPV) (higher better)

$= \sum_{y=\text { years }} \dfrac{1}{(1+i)^y} \times \text {Net Benefit} { }_y$

here: $i$ stands for Discount Rate

+ captures many aspects of project

- complex, favors large projects

Net Present Value Calculator

Calculate the NPV (Net Present Value) of an investment with an unlimited number of cash flows.

https://www.calculatestuff.com/financial/npv-calculator

basically Sum of Discounted Net Benefit

Payback - Time (lower better)

$\phantom {\biggl (}= \dfrac{\text {Project Costs }}{\text { Annual Net Benefits}}$

+ easy to understand & calculate

- does not distinguish between size & time

Internal Rate of Return (IRR) (higher better)

$\phantom {\biggl (} i$ solved for NPV $=0$

here: $i$ stands for Discount Rate

+ similar to NPV, result relative to size

- complex

Internal Rate of Return Calculator

Calculate the IRR (Internal Rate of Return) of an investment with an unlimited number of cash flows.

https://www.calculatestuff.com/financial/irr-calculator

basically tells you annual growth rate

Discounting Net Benefits / Cash Flows

• 1 CHF is worth more today than tomorrow

• owner giving company capital expects a return: Return on Equity (RoE)

• value of CHF $1$ capital today in one year: $\text{CHF }1 \cdot (1 + \text{RoE})$
  • compared to CHF $1$ uninvested being still CHF $1$

• value of CHF $1$ in one year as seen today: $\text {CHF } \frac 1 {1 + \text{RoE}}$
  • compared to CHF $1$ invested being CHF $1$ in a year

Discount rate can be decreased by going in debt and paying back slowly, as rate of payback is lower

Example

large business with 15-20% RoE

$\sum_{x=0}^{\infty} 0.9^x$