535Lect2 - IS/PM 535 IT Investment Financial Analysis...

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1 IS/PM 535 IT Investment Financial Analysis Lecture 2 IT Department and Service Cost Management S. Chan IS/PM 535 IT Investment Financial Analysis 1 S. Chan IS/PM 535 IT Investment Financial Analysis 2 Agenda IT Responsibility Centers Key concepts in management accounting Cost classification and behavior Cost-volume-profit (CVP) analysis (break- even analysis), and Contribution Margin Handout #1 Worksheet #1
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2 S. Chan IS/PM 535 IT Investment Financial Analysis 3 Responsibility Centers A division of the enterprise for which a manager is responsible for its performance. IT Cost Center An IT manager will have control over costs but not over revenues or investment funds. Responsibility: reduce costs subject to quality constraint; meet standard cost targets. IT Profit Center IT manager has control over revenues and expenses. Responsibility: increase income or reduce loss. IT Investment Center IT manager has control over investment in assets. Responsibility: increase return on investment. S. Chan IS/PM 535 IT Investment Financial Analysis 4 Organization of IT Services and Resources: An Example
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3 IT Cost Allocation Infrastructure costs allocation: Unallocated infrastructure: Costs for the baseline IT budget are considered a corporate expense. Allocated cost center: Allocate baseline IT budget to business units based on some factor as a proxy for usage. Chargeback methods S. Chan IS/PM 535 IT Investment Financial Analysis 5 Chargebacks Budget methods that charge the business units and functional departments for their use of IT by allocating IT costs to each unit to justify the use and have more direct accountability. Disadvantages: Costly to implement May lead to shadow IT departments Architectural standards can be bypassed Rising IT spending may be hidden May promote an adversarial culture and interfere with IT/business alignment S. Chan IS/PM 535 IT Investment Financial Analysis 6
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4 Other Charging Mechanisms Charging out IT systems development, package implementation and integration, and application maintenance by contracts, hours, and service level agreement. Business units actually own the budgets for IT projects and the IT department is used to support and execute the projects in those budgets. Need a mechanism that is fair and easy to track. S. Chan IS/PM 535 IT Investment Financial Analysis 7 S. Chan IS/PM 535 IT Investment Financial Analysis 8 Gartner’s IT Service Delivery Maturation Framework (2005) (supply) (demand) (profit)
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5 S. Chan IS/PM 535 IT Investment Financial Analysis 9 Shared Services Conceptual Framework * S. Chan IS/PM 535 IT Investment Financial Analysis 10 IT Department & Service Cost Management Different cost concepts for different purposes Purposes of finding costs Pricing products/services (“cost +” contract) Financial analysis and planning (operating budgets) Cost management and reduction Improving decision making
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This note was uploaded on 10/11/2011 for the course ECT ect535 taught by Professor Susichan during the Fall '11 term at DePaul.

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535Lect2 - IS/PM 535 IT Investment Financial Analysis...

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