Copying or distributing in print or electronic forms without written permission of Idea Group Inc.. Total.Cost.of.Ownership In case the consolidation of the payments was done on the basi
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applied (Grob, 1993) Using VOFI, the financial consequences of long-term decisions are structured and calculated by means of spreadsheets that serve as a database for further analyses Compared to formulae applied by conventional methods (Seitz & Ellison, 2004; Shapiro, 2004) of capital budgeting (e.g., present value or the annuity
of an investment project), VOFI mainly has the following advantages for evaluating the financial consequences of out-tasking decisions
• Transparency: The description of the financial consequences of decision
making by using spreadsheets helps to show the various underlying impacts on the efficiency measures By means of VOFI, all payments driven by a decision can be taken into account comprehensively, including various conditions for funding and loaning as well as taxes
• Adaptability:.VOFI serves as a reference model for long-term decision
mak-ing Due to the explicit description of the financial consequences, it can easily
be adapted to special decisions that have to be evaluated On top of individual rates for loaning and funding, dynamically changing conditions like tax rates can also be calculated Due to clearly defined interfaces for the in- and outflow
of data, also extensions of the framework can be built
Both the transparency and the adaptability eventually may contribute to the actual use
of efficiency calculations in service-portfolio management in practice
Customising VOFI-specific parameters that are relevant in a certain capital situation (e.g., funding conditions) can be considered Typical parameters that may serve as a reference are summed up in the VOFI given in Figure 6
In order to consolidate the various influences on the effectiveness of the decision over time, a periodic update of the capital stock has to be calculated Starting in Period 0, each period has to be calculated in a way in which there is a balance between in- and out-payments The following example may illustrate the essential procedure In the first period, usually an out-payment has to be financed If the internal funds available are insufficient, a loan has to be taken out As usual, various conditions for loaning can be agreed upon, and also a combination of various loans can be calculated in the VOFI Correspondingly, multiple forms of funding can be included
When calculating the adequate amount of loaning or funding, tax payments have to be considered In order to calculate tax payments, an auxiliary calculation has to be carried out Depending on tax laws, relevant parameters are, for example, individual depreciations that are chargeable to the investment, as well as tax rates In each period, these periodical in- and out-payments have to be balanced As a checkup, the net funding value, which
is defined as the accounting balance of all out- and in-payments, should be zero
On the basis of these flow figures mentioned above, the capital stock can be updated periodically For this purpose, the balances of all loans and funds have to be recorded
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The accounting balance of both finally results in the net balance of the total ment By this algorithm, the value of an investment in a service-oriented architecture can be monitored during the whole life cycle of the information system simply by observing the net balance in each relevant period For special-interest investiga-tions, additional efficiency measures can be calculated on the basis of VOFI These measures are calculated on the corporate level of the decision-support system, which
invest-is illustrated in the following
Measurement.on.the.Corporate.Level
In order to facilitate the design of a company’s service portfolio properly, the various evaluation results have to be aggregated for decision purposes On the basis of the calculations on the budgeting and process levels described above, a wide range of efficiency measures can be applied from accounting science For service-portfolio measurement, particularly the TCO and ROI are significant They are well spread
in practice and serve as a means to illustrate the relevant parameters for decision making at the same time
Total.Cost.of.Ownership
In case the consolidation of the payments was done on the basis of a total tion, the total costs of ownership brought about by a certain information-system architecture and service portfolio can be calculated The TCO originally aims at summing up all relevant costs chargeable to an information system throughout its
calcula-Figure 7 Service-portfolio measurement on the corporate level using TCO
+ Adjustment of Tax Payments
= Toal Calculatory Profit
Total Profit of Ownership
Total Surplus of Payments for Service Portfolio
= Total Cost of Ownership
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life cycle (Ferrin & Plank, 2002) At this stage of calculation, the total payments chargeable to a company’s service portfolio during its life cycle can be analysed Apart from out-payments, in-payments can also be included in the calculation That way, the total profit of the layout can be computed The calculation is carried out
by summing up payments of each row on the spreadsheet and balancing them like
in Figure 7
The total profit of the investment can be calculated gradually Starting from the surplus of in- and out-payments, the relevant decrease of assets used has to be com-puted Therefore, the sum depreciation rates of all periods are calculated together with irregular in-payments, like in-payments for the liquidation of assets That way, the so-called total monetary profit (I) is measured Considering in-payments by further investments made during the life cycle as well as interest expenses, the total monetary profit (II) can be calculated By charging tax payments on profit, the total monetary profit (III) can be reported While these measures all show the monetary profit realised by the investment, alternative allocations of the capital also have to
be taken into account for consistent decision making For this purpose, calculatory interest has to be charged quantifying the profit that is assumed to be made by the alternative investment (the so-called opportunity) This total calculatory profit finally represents the total profit (or costs) of ownership calculated on the basis of VOFI
In a number of cases, no in-payments of the service portfolio are to be charged This can, for example, be the case when in-payments are hard to identify In other cases, the in-payments might be invariant so that the out-payments are driving the financial efficiency of alternative layouts In the computation presented in Figure
7, the in-payments are zero Hence, the resulting value quantifies the TCO that will mostly be negative as, apart from the liquidation of resources, only out-payments are charged For reporting the total costs of ownership, the value should consequently
be transformed into a positive value
Using the total cost of ownership, out-tasking is profitable if it serves to reduce the TCO Moreover, the measure supports designing the appropriate corporate service portfolio Accordingly, the portfolio should be designed with the aim of minimis-ing the TCO
Return.on.Investment
The efficiency of out-tasking decisions can also be evaluated by a measurement of profitability A widespread measure of this kind in practice is the return on invest-ment (Friedlob & Plewa, 1996) By applying this measure, a ratio is calculated that sets the total profit in relation to the stock of capital provided for the investment Consequently, the ROI indicates the interest payment made by an investment While the ROI seems to be suitable for comparing investments of different kinds, it is a
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static measure and, therefore, is inappropriate to support long-term decisions This point can be considered by calculating the ROI on the basis of VOFI In doing so, the ROI is not only a dynamic measure, but it also considers various conditions of loaning and funding as well as taxes For evaluating the efficiency of an investment, the ROI has to be compared to the average capital cost within planning periods Figure
8 shows the definition of this ROI as well as the criteria for decision support
In particular, the ROI can be used for decision support on the design of the tion-system architecture, providing the series of payments are partially calculated The relevant data for the calculation can be taken directly from the VOFI database
informa-In case distributions of funds are planned, these payments have to be considered in the fraction’s numerator That way, the ROI is appropriate for evaluating whether the payments necessary for the migration to a service-oriented architecture are justified
by future savings due to the performance of the company’s service portfolio
Up to this stage, the decision-support system has been described from a ological perspective In the next section, the system is applied to a concrete situation
IF Internal Funds Used
EF 0 External Funds Used in t=0
pt Tax Rate on Profit
CI Total Creditor Interest
OI Total Interest of the Opportunity
c Average Capital Cost
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Application.of.the.Measurement.System
for.Financial.Performance.of Service-Oriented.Information.Systems
In this passage, the decision-support system for the management of service-oriented information systems will be illustrated by means of an application The case of the
travel agency TravelSmart Ltd may serve as an example The situation is invented
following a practical case
Introduction
TravelSmart is a travel-management service provider that predominantly offers
holiday travels for private and business customers Round trips only form a small part of its product portfolio The core competence of the business is the individual configuration of holidays according to the specific needs and wishes of its custom-ers Therefore, the company’s tourism market is limited to the high-end segment
TravelSmart uses both digital chains of distribution and classic travel-agency sales
Excellent customer service is the trademark of the company, which differentiates itself clearly from other businesses and competitors
However, especially in recent years, TravelSmart has been exposed to increased
pressure by more and more competitors who have been pushing both reduced costs and an amelioration of the service Until now, IT tasks have only been accomplished
by the IT department of the company itself The company’s IT development has achieved excellent tasks, yet the costs for individual IT services have been partly too high compared to the market value
The business processes of TravelSmart are substantially based on information
sys-tems for e-commerce as well as travel-agency sales The goal from management’s perspective of the business is now to use, despite the high cohesion, service-oriented architectures That way, parts of the information-system environment could be given away to external service providers The focus of the evaluation is whether the supply
of a service-oriented architecture would be worthwhile Furthermore, the service portfolio has to be determined
The funds needed are covered by internal funds, an installment loan, and a loan in the current account Figure 9 gives an overview of the financial conditions
The management of TravelSmart has grasped the long-term character of the decision
that needs to be taken It determined a planning horizon of five periods Thus, the decision-support system described in this chapter was applied
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Identification of Services
At the kick-off meeting, the following services were identified for further sis
analy-• Service.travel.records: In this business process, extensive and informative
records for individual tours are being collected and set for the customer on the basis of data warehouses and internal work flows This extensive and high-qual-ity processing, and its quick delivery to the customer via e-mail right after the booking of the travel or within a maximum of 2 days in the mail, is a strategic characteristic for differentiation from the competition This core competence
is constantly being extended and ameliorated by means of software solutions
in the internal IT department The question that comes up concerns sourcing
as greater adaptations are planned in the near future
•. Service.credit.assessment: The service provides TravelSmart with a digital
assessment of the solvency of its customers from accredited rating agencies
On the basis of assessment, customers receive generous or restricted payment and financing conditions for the individual travel package The process is of high operative importance as it gives both the customer and company a higher degree of flexibility
• Service.order.processing: This business process is conducted by a
work-flow-management system that connects numerous application systems in order to support individual steps in the processing for a booking order, and to possibly coordinate the interaction of the responsible employee and the applications
Figure 9 Financial conditions for the investment in the service portfolio at elSmart
Trav-Financial Conditions of TravelSmart
Loan in Current Account
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As a starting point, the sourcing strategy for the services has to be agreed upon Figure
10 gives the classification of the services in the model from Lacity et al (1996) The travel-records service as one result of the analysis should be carried out internally
in the future The strategic impact and the internal further developmental potentials can possibly balance the possible advantages of the outsourcing The service of credit assessment demonstrates a service that can be supported by the best practices
of external service providers, leading to a cost reduction for the company Also, for the order processing, an appropriate out-tasking alternative should be provided.Due to experiences gained during the project, the management defines the demands
of the services as follows
• For credit assessment and order processing, a medium availability of 99.5% according to the ITIL standard is required The error ratio should not exceed 0.01%
• For the service of providing travel records, quick, high-quality, and highly available functionality is required The requirement concerning availability
is around 99.9%; the maximum error ratio is around 0.001%
In order to ground the decision on the service portfolios, a calculation of the monetary consequences was carried out according to the decision-support system introduced in this chapter Hence, an assessment of the payments on the process level was conducted first
Figure 10 Deriving sourcing strategies at TravelSmart
Commodty
Crtcal
Dfferentator
Useful Commodity
Outsource
Useful
Contribution of IT Acitivty to Business Positioning
Useful Differentiator
Eliminate or Migrate
Critical Commodity Best Source
Critical Differentiator
Insource Contribution
of IT Acitivty
to Business Operations
Credit Assess- ment
Travel Records
Order Processing
Mgrate
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In the company, 1,000€ have to be calculated for maintenance, 4,000€ for the tion, and 2,000€ for first- and second-level support A periodical increase of 10% can then be expected Further payments of 3,000€ are caused by license fees for both software and maintenance At the same time, in-payments of 6,000€ can be expected for the parallel use of the architecture with a partner enterprise Starting with the fourth period, an intensification is planned that increases in-payments to 9,000€
opera-Adaptations of the architecture were expected to be necessary As to the value, 10%
of the capital costs of the purchase per period were estimated In the phase of
dis-integration, TravelSmart can realise in-payments by aid of the further utilisation of
hardware (liquidation proceeds of 15,000€) as well as the decrease of idle time of resources due to an early cut of capacities (1,000€) Additional payments for ending contracts are not being calculated The results are summed up in Figure 11
The financial efficiency of the investment in SOA is essentially driven by the formance of the service portfolio that can be run on the architecture Consequently,
per-the payments related to per-the services available for TravelSmart were assessed in per-the
following
Payments.Related.to.the.Services.
For the process of credit assessment, two service offers were identified in an nouncement for external service providers The offers were assessed by aid of the payment categories provided in this study For one of the offers, SOA technology (B1) has been applied; for the other, it was not (B3) The conditions concerning the service offers are compared in Figure 12
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The values of these figures were grounded in the following considerations
• By applying standards for Web-service specification, implementations and adaptations of service interfaces can be carried out in an efficient manner In particular, out-payments for the removal of the service can be reduced because the complexity of the system is shifted toward the supplier Over and above that, no further architecture components that would have to be removed later
on are required
Figure 11 Estimated series of payments with SOA at TravelSmart
Estimated Series of Payments with SOA for TravelSmart
Phase of Development
Out-Payments
- for building up know-how 10,000
- for implementing SOA as a new
- for support (1 st / 2nd level) 2,000 2,200 2,420 2,662 2,928
- for conducting operation 4,000 4,400 4,840 5,324 5,856
- for licenses with service providers 3,000 3,000 3,000 3,000 3,000 In-Payments
+ for shared service 6,000 6,000 6,000 9,000 9,000 + by savings concerning lowering
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• The clearly defined and manageable out-tasking interfaces reduce the ditures connected to the know-how of the service provider
expen-• Using the best-sourcing strategy, service providers for B1 can be provided that are highly specialised Thus, scale effects lead to a reduction of production costs and an increase in the quality of the services
• Coordination costs are lower than before due to standardised interfaces plifying internal result control
sim-• Independent from SOA, B1 offers better availability and a lower error rate That way, out-payments for risks of failure and breakdown are lower
For the calculation of the series of payments for the investment of the service offer B1, the amount of in-payments caused by internal payments was calculated With respect to the quantity structure, 7,500 travel bookings (transactions) per period have been forecasted with a dynamic development rate of 10%
On the basis of this information, the series of payments have been calculated along the process described above The calculation is presented in Figure 13
By means of a market analysis, further service offers have been collected The results are described in the following For credit assessment, there are now three external service offers available Two have been implemented on a Web-service basis (B1 and B2), and one has been implemented on the basis of an alternative architecture (B3) According to the process of the travel records, the IT department made a sug-gestion to migrate toward SOA and to provide the service internally (A1) Apart from that, the service may well be carried out according to the current state of the
Figure 12 Conditions of services for SOA and non-SOA at TravelSmart
Conditions of Services B1 (SOA) B3 (Alt.)
Phase of Development
- for building up relations to services provider
- for implementing the interface for integrating
- for providing the software components 0 € 4,000 €
Phase of Operation
Out-payments
- for production of a service (per transaction) 0.70 € 0.85 €
- for co-ordination of service integration 3,000 € 8,000 €
Trang 11Series of Payments related to Service B1
- for production of a service 5,250 5,775 6,353 6,988 7,687
- for co-ordination of service
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For each service, monetary consequences have been assessed following the approach described above The results are summarised in Figure 14
These results set the basis for the further analysis of the payments on the budgeting level This part of the system’s application is presented in the next passage
Measurement.on.the.Budgeting.Level
For each potential combination of services, the financial consequences have been calculated on the budgeting level Comparing the net present value on the planning horizon in t = n, the most efficient combination was identified This is the combi-nation of A1, B1, and C2 As an example, the computation for this combination is displayed in Figure 15 It comprises the aggregation of the series of payments, the VOFI, and auxiliary calculations for computing tax payments
During the computation, further VOFI calculations have been carried out for each combination of services regarding their specific requirements on the architecture
As an example, the calculation for a service portfolio without SOA is given in Figure 16
As part of the various calculations of alternatives, the situation without any changes
to the sourcing strategy has to be included according to the measurement system This very calculation represents the so-called opportunity, which essentially assesses the yield of the internal funds as if they would have been allocated in a financial investment The calculations for this alternative are given in Figure 17
An instant comparison of the alternatives can be carried out by checking the net balance value in t = n = 5, which should reach a maximum level For a more detailed analysis, performance measures can be calculated on the database
Figure 15 Financial consequences of the investment in the service portfolio with SOA on the budgeting level at TravelSmart
VOFI for the Investment with SOA
– Depreciation Linear Rate 3,200 3,200 3,200 3,200 3,200
Book Value, End of the Year 12800 9,600 6,400 3,200
Trang 13– Depreciation Linear Rate 3,200 3,200 3,200 3,200 3,200
Book Value, End of the Year 12800 9,600 6,400 3,200
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of TravelSmart Figure 18 gives an excerpt from the entire report that was
gener-ated
In the TravelSmart case, the investment in SOA turned out to be profitable The
investment in the migration toward the new technology can be compensated by savings in later phases of the information system’s life cycle In particular, the benefits result from the opportunity of out-tasking services to specialised service providers according to common standards In addition, out of the various service
offers available, the most profitable sourcing strategy for TravelSmart could be
cal-culated By aid of the decision-support system, a combination of the service offers A1, B2, and C2 is suggested That way, an ROI of 36.43% of the entire investment
Trang 15Given the technological achievements in designing service-oriented information tems, the problem of assembling the right service portfolio according to a company’s needs becomes relevant Consequently, software engineering will increasingly evolve
sys-VOFI for the Investment with SOA
Service Portfolio Performance on the Corporate Level
Performance Measures With SOA Without SOA Opportunity
Final Value, NBI n 178,912 127,100 11,593
-Return on Investment, ROI 36.43% 31.87% 3.00%