Yale Braunstein
School of Information
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How does this course differ from all other project-related courses at the i-School?
• We explicitly look at alternatives.
• We care about economic feasibility.
• [others ?]
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• We need to measure and understand costs
– To help the organization
• Operate efficiently & effectively
• Allocate scarce resources
• Choose between competing projects
– To meet legal & organizational requirements
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• Identify opportunities & alternatives for meeting them
• Agree on selection/evaluation criteria
• Apply the criteria
• Make choices/decisions and monitor results
A nine-step, more detailed approach is on the web and in the handout. A complete manual is available in the computer lab.
4

• New technologies, in general, and IT, in particular, often cause problems
– Exact costs are unknown/unknowable
– Only some benefits are quantifiable
– New technology projects can change the organization, its outputs, etc.
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• Costs vary with level of output
– Therefore, we focus on fixed and variable costs
• Costs vary over time
– Therefore, we “discount” future costs back to the present
• Costs can vary with technology and market conditions
– Therefore, we distinguish between the shortand long-run
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• Costs are misleadingly concrete. It is important to understand:
– Fixed, variable & total costs
– Opportunity costs (what really matters)
– Sunk costs (what is past is past)
– Marginal or incremental costs (the “true” cost of producing the next unit of output)
– Joint costs (with multiple outputs)
– Allocated vs. out-of-pocket costs (accountants & economists view costs very differently)
• Consistency is VERY important
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• Department costs vs. project costs
• Current costs vs. future costs; upfront costs vs. continuing costs; etc.
– (More on this later)
• For public projects: CTA, CTG, CTN
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• We need to distinguish between costs and prices
– Proposed fees for “extra” units at UC, CSU
– DSL (component-by-component)
• “Fully distributed costs” or “allocated costs” are very popular and can easily mislead
– The leased-line anecdote…a true story of faulty economic logic in a major university
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• Statistical studies
• Engineering studies
– Simulations
– Bills of Materials
• Comparables
– Case studies
– Previous experience (at your organization & elsewhere)
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• We do a sensitivity analysis to identify those factors that have the major impacts on costs
• Try to understand the issues relating to economies of scale and scope.
– Computer automation in publishing example
– See Morton * :
• IT potentially increases productivity by lowering transaction costs… if you reorganize work.
* Michael Scott Morton, “How Information Technologies can
Transform Organizations,” in Rob Kling, Editor,
Computerization and Controversy (San Diego: Academic Press
1996) 148-160.
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• We distinguish between cost-benefit analysis and cost-effectiveness analysis
– In CBA, both costs and benefits are measured in dollars
– In CEA, only the costs are measured in dollars; we use non-monetary measures for the benefits
• Examples: increased reliability, reduced lag times
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• General rules:
– Dollars spent at different times have different costs to the organization
– Dollars received at different times have different values to the organization
– Therefore, we need to explicitly account for timing of cash flows (in & out)
• We “discount” future flows to the present to obtain their “present value”
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PV

CF
0

(1
CF
1
 r)

(1
CF
2
 r)
2

...

(1
CF n
 r) n
• Take each year’s cash flow and “discount” it back to the present using the “discount rate”
• See spreadsheet with examples
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• Payback period – NEVER use this
• Internal rate of return – very common, but has problems
– One: assumption about re-investment
– Two: multiple solutions possible
– Three: ( most important ) can lead to incorrect choices with MX projects
• Net present value – the preferred approach
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1. Focus on total costs OR incremental costs, whichever is appropriate
•
Are we introducing something entirely new or a change in an existing system?
2. Comparability of data is important
• Timing matters
•
Have similar start & end points
3. Know what is in and what is out
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• Sunk costs are sunk – ignore them
• You need to know the purpose of the analysis
– Planning for the future vs. benchmarking current operations
• Forecasting & Projections
– Know what is changing
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