Transcript Document
IS 483 Information Systems Management
James Nowotarski 29 May 2003
Today’s Objectives
• Recap IT outsourcing • Finish procurement • Understand Financial Analysis
Topic • Recap IT outsourcing • Quiz • Finish Procurement • *** Break • Financial Analysis • Assignment 2 reports • Assignment 3 free time
Today’s agenda
Duration 25 minutes 15 minutes 35 minutes 15 minutes 60 minutes 10 minutes 30 minutes
Topic • Recap IT outsourcing • Quiz • Finish Procurement • *** Break • Financial Analysis • Assignment 2 reports • Assignment 3 free time
Today’s agenda
Duration 25 minutes 15 minutes 35 minutes 15 minutes 60 minutes 10 minutes 30 minutes
IT Outsourcing
• • • • • •
Information technology (IT) outsourcing is the use of a third party to provide services rather than using those in-house.
Drivers Cost reduction -- Perception of IT as a cost burden coupled with availability of cheaper sources of services (e.g., near-shore and offshore) Cost predictability Require improved performance levels (e.g., speed of delivery, customer satisfaction, quality, etc.) Refocus on corporate core competencies Desire to have in-house IT resources focus on strategic systems and/or technology Lack of in-house skills and/or people
IT Outsourcing
A desire to focus on core competencies is frequently the strongest driver to outsource
“[g]et rid of context and focus on core” - Billy McCarter, former CIO of Fireman’s Fund, who reduced IT staff from 1,100 to 600 with much of the work outsourced to offshore workers “[a]llows me and my staff to focus on fun areas . . . be more productive, more visible to the business, understand what the business needs versus worrying about whether one of the servers needs additional RAM” - Daniel Sheehan, CIO at Advo, Inc. (InformationWeek, 4/14/03)
IT Outsourcing
What parts of IT to outsource?
• • • • • • •
Data center operations Network operations Application maintenance Desktop workstations Help desk/Support Application development Business process execution most common IT activities to outsource
IT Outsourcing
Consider business, economic, and technical factors in deciding whether to outsource
Business Considerations Strategic Importance Critical Useful Insource Outsource Commodity Differential Potential for Differentiation
IT Outsourcing
Consider business, economic, and technical factors in deciding whether to outsource (cont.)
Economic Considerations Managerial Practices Leading Lagging Outsource Insource Subcritical Critical In-House Economies of Scale
IT Outsourcing
Consider business, economic, and technical factors in deciding whether to outsource (cont.)
Technical Considerations High Degree of Technology Integration Low Insource Outsource Low High Degree of Technology Maturity
IT Outsourcing
Give examples of applications that would be good candidates for insourcing and outsourcing based on technical considerations
Technical Considerations High Degree of Technology Integration Low Insource Outsource Low High Degree of Technology Maturity
IT Outsourcing
To what extent should you outsource?
• • •
Transitional Outsourcing Selective Outsourcing Total Outsourcing most common approaches
IT Outsourcing
Transitional Outsourcing
• • •
What is it Outsource legacy systems Focus in house staff on development of “new world” Outsourced activity may return in house at some point
• •
Advantages Legacy systems are well-understood, facilitates specifying
•
outsourcing contract terms In-house organization moves on to next new thing (Tarzan grabbing the next rope in the IT jungle)
•
Contract may be shorter term
•
Disadvantages More vulnerable to vendor manipulation of pricing, maintenance costs Vulnerable to loss of vendor support if new system is delayed
IT Outsourcing
Selective Outsourcing
•
What is it Select the best-of-breed for an activity
• • •
Advantages Creates a competitive environment to overcome organizational impediments & motivates performance Provides flexibility to adapt to changes Less risky than total outsourcing
• •
Disadvantages Overhead cost associated with multiple evaluations, multiple contract negotiations, and multiple vendors to manage and coordinate Depth of relationship with vendors may not be as good as with total outsourcing
IT Outsourcing
Selective Outsourcing Example: AT&T Service Provider Deal Scope
Computer Sciences Application support • Billing • Credit and collections • Ordering • Provisioning IBM Global Services Data centers (incl. 2000 employees) Accenture Customer service Telemarketing
IT Outsourcing
Total Outsourcing
•
What is it Use one vendor for many activities
• • •
Advantages Consistency and stability with same vendor for many activities Lower transaction costs because there is only one vendor Creates a competitive environment
• •
Disadvantages More vulnerable to vendor manipulation of pricing, maintenance costs Vulnerable to loss of vendor support
IT Outsourcing
Survey Results Type of sourcing
Total outsourcing Selective outsourcing In house
Success Failure Mixed
38% 35% 27% 77% 76% 20% 24% 3% 0%
Source: Study of 116 companies by college professors Mary Lacity and Leslie Willcocks, Computerworld, 10 May 1999
IT Outsourcing
There are several risks to be managed
Risks
• Losing skills in functions/processes that are outsourced – Don’t give best work to outsiders • Culture clash between outsourcing firm and client – Ideally, can’t tell difference between employees of the two • Loss of control over quality and responsiveness • Overbilling/Underperforming (“shirking”) • Provider may sell or leak buyer’s solutions to competitors (“poaching”) • Overpricing on contract additions/extensions • Remote management by service provider, thus limiting face-to-face communication and jeopardizing coordination
IT Outsourcing
There are several risk mitigation strategies
Risk mitigation strategies
• Assign in-house manager to manage the relationship • Clearly specify terms of relationship and expected service levels in a contract and service level agreement (SLA) • Consider using an RFP to get competitive bids – Note that this can require substantial time
IT Outsourcing: Offshore
Cost and quality are the two main reasons for going offshore
• Reduce cost – 40-50% savings, according to Merrill Lynch CTO • Higher quality/capability – Approximately 50 out of 70 CMM Level 5 systems development organizations are in India
IT Outsourcing: Offshore
India is the leading location for offshore sourcing
Reasons
• Highly capable workforce • Focus on process and product quality • Low labor and infrastructure costs • Government commitment and support • English (and other) language skills
IT Outsourcing: Offshore
Need to manage risks of offshore outsourcing
Potential Risk Areas
• English or language difficulties • Time difference • Political • Lack of industry-specific knowledge • Distrust • Communication/Coordination – “Outsourcing is prone to failure because of breakdowns in communications between outsourcing providers and their clients, according to Gartner” (InformationWeek, 3/31/03)
Topic • Recap IT outsourcing • Quiz • Finish Procurement • *** Break • Financial Analysis • Assignment 2 reports • Assignment 3 free time
Today’s agenda
Duration 25 minutes 15 minutes 35 minutes 15 minutes 60 minutes 10 minutes 30 minutes
Topic • Recap IT outsourcing • Quiz • Finish Procurement • *** Break • Financial Analysis • Assignment 2 reports • Assignment 3 free time
Today’s agenda
Duration 25 minutes 15 minutes 35 minutes 15 minutes 60 minutes 10 minutes 30 minutes
Procurement - Process
RFP Process
1. Pre-RFP 2. RFP 3. Proposal Submissions 4. Proposal Evaluations 5. Vendor Selection 6. Procurement Method 7. ROI Analysis 8. Negotiate Contract
Objective
: Identify best solution to meet stated business need while minimizing cost and risk
5. Vendor Selection
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Vendor site visits
•
Weighted score method
•
Final cost, value, and risk analysis
–
Benefits -- one-time vs. recurring -- fixed vs. variable -- tangible vs. intangible
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Costs -- one-time vs. recurring -- fixed vs. variable -- tangible vs. intangible
6. Procurement Methods
•
Purchase
–
not that popular because of fear of obsolescence
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longest-term commitment of these 3 methods
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Rent
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usually less than 1 year in duration
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only need to give 30 days’ notice to cancel
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more expensive than purchase or leasing
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Lease
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usually 12-36 months in duration
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often done with an option to buy
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middle of the pack in terms of cost and ability to get out
7. ROI Analysis
ROI Earnings on investment Total investment •
Must be able to calculate the income stream in $
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Not usually able to calculate for:
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Strategic investments
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Informational investments
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Infrastructure investments
•
Usually able to calculate for:
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Transactional investments
8. Contract Negotiation
The way you interact at the negotiating table may foreshadow ongoing relationship dynamics
•
Do’s
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Include vendor responses to RFP in the contract
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Keep lawyers at bay until Statement of Work is complete
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Leverage outside expertise in negotiations
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Provide incentives/penalties
•
Don’ts
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Buy vaporware instead of proven solutions
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Purchase low bid unless the value is there
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Settle on final offer prematurely
8. Contract Negotiation
Statement of Work
•
Agreement between firm and vendor
•
Was outlined in the RFP, now it gets finalized
•
Includes
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Software characteristics
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Implementation plan Approach to quality Definition of quality metrics
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Technical architecture
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Training strategy
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Maintenance and support
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Service levels (SLA items)
–
Cost schedule
Statement of Work
Approach to Quality and Measurement
1. Identify quality standards and goals Plan 6. Eliminate causes of deficient performance Act - fix defects - fix root causes Do 2. Measure project performance Check 3. Compare metrics against goals 4. Conduct quality reviews, e.g., peer reviews 5. Test for defects
Statement of Work
Progress Quality Evaluation Effort
Quality Metrics
Measures the amount of work accomplished by the development team in each phase Measures the percentage of the development effort spent on internal quality evaluation efforts Test Coverage Defect Detection Efficiency Defect Removal Rate Measures the amount of the software system covered by the testing process Measure percentage of the actual defects originating in a stage of the project that were actually detected in that stage Requirements Traceability Measures the percentage of the requirements that have been addressed by the system Measures the number of defects detected and removed over time Defect Density Customer Satisfaction Identifies defect-prone components of the system Measures customer satisfaction using objective surveys.
Speaking of feedback and measurement
http://www.cs.depaul.edu/MyCTI
8. Contract Negotiation
The way you interact at the negotiating table may foreshadow ongoing relationship dynamics
•
Do’s
–
Include vendor responses to RFP in the contract
–
Keep lawyers at bay until Statement of Work is complete
–
Leverage outside expertise in negotiations
–
Provide incentives/penalties
•
Don’ts
–
Buy vaporware instead of proven solutions
–
Purchase low bid unless the value is there
–
Settle on final offer prematurely
8. Contract Negotiation
Co-sourcing arrangements share risks and rewards
• What is co-sourcing?
– Outsourcer shares risks and rewards with client – Example: AT&T wanted to reduce cost of customer service and telemarketing from $5B to $2.6B (2003-7) • If costs are > $2.6B, outsourcer pays penalty • If costs < $2.6B, outsourcer pockets the additional savings • Prescribed customer service levels must also be met • Why is this a good thing – It gives both firms a compelling interest in the initiative’s success
Procurement - Process
RFP Process
1. Pre-RFP 2. RFP 3. Proposal Submissions 4. Proposal Evaluations 5. Vendor Selection 6. Procurement Method 7. ROI Analysis 8. Negotiate Contract
Procurement Process
Consultants can help with procurement, particularly vendor selection and contract negotiation
•
Why use a consultant?
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Process/Methodology
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Experience
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Capacity
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Several firms specialize in procuring outsourcing services
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Technology Partners Inc. (TPI)
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Technology & Business Integrators
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Milbank, Tweed, Hadley and McCloy (law firm)
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Need to have experienced people on procurement team, regardless of whether consultants are used
RFP Software Products
1) APES with INFORequestor
TM Series
–
Completely integrated database system enabling pre-loaded or user-defined automated use requirements surveys. Business needs priority scoring, pre-loaded or user-defined RFQ, RFI, RFP preparation. Automatic generation of detail shortlist based on actual RFI responses. It is re-usable tool that will help over and over in the future.
Cost is $698.00
.
2)HyperRFP
TM Series
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Distribute RFPs by email or by Web, receive formatted vendor responses back to your designated E-Mail address & eliminate tedious copying, packaging, and mailing.
Cost is $229.00
.
3) On-Line Consultant -
Software tool to make the process more efficient and objective. Linkage vendors’ responses with RFP questions. Quickly and easily compare and score vendors. Cost is varying
RFP Software Products
“Wilmington Trust Co. uses collaboration technology to manage the request-for-proposal process with its vendors. Most recently it used software from eRoom technology to evaluate 20 competitors vying to be the company’s sole temporary-staffing vendor, posting a set of questions in a single format.”
- InformationWeek, 7 October 2002
RFP Software Products
Network Computing web site’s RFP Builder * http://www.networkcomputing.com/1202/1202sp3.html
RFP Software Products
For those preparing proposals (www.pragmatech.com):
The RFP Machine ®
The RFP Machine ® enables Knowledge Managers to build, edit, and maintain a central repository of company, product, and service information required for automated RFP and RFI creation. The software brings consistency and accuracy to the RFP response process by providing you with the tools to produce persuasive, professional documents in dramatically reduced time.
The RFP Tracking System™
The RFP Tracking System™ allows users to track proposal activity, including information pertaining to the issuer of the RFP or RFI, the person responsible for the response, document turnaround time, the win/loss status, and any other important information
Topic • Recap IT outsourcing • Quiz • Finish Procurement • *** Break • Financial Analysis • Assignment 2 reports • Assignment 3 free time
Today’s agenda
Duration 25 minutes 15 minutes 35 minutes 15 minutes 60 minutes 10 minutes 30 minutes
Topic • Recap IT outsourcing • Quiz • Finish Procurement • *** Break • Financial Analysis • Assignment 2 reports • Assignment 3 free time
Today’s agenda
Duration 25 minutes 15 minutes 35 minutes 15 minutes 60 minutes 10 minutes 30 minutes
Financial Analysis
Definition: Quantitative justification of an IT investment, typically looking at costs and benefits
Financial Analysis in the SDLC
The systems development life cycle (SDLC) is a description of the phases of an information system
Planning Analysis Design Implementation
Identify Business Value Approval
SDLC: Planning Phase
Approval Analyze Technical Feasibility Analyze Economic Feasibility Analyze Organizational Feasibility Project Management Project Initiation
Identify Business Value Approval
SDLC: Planning Phase
Approval Analyze Technical Feasibility Analyze Economic Feasibility Analyze Organizational Feasibility Project Management
Economic Feasibility Analysis
Deliverables System Request
Identify Business Value Approval
SDLC: Planning Phase
Approval Analyze Technical Feasibility Analyze Economic Feasibility Analyze Organizational Feasibility Project Management
Economic Feasibility Analysis
Deliverables System Request
Financial Analysis
Costs and Benefits Review
•
Costs
–
One-time vs. recurring
–
Fixed vs. variable
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Tangible vs. intangible
o
Tangible - Accurately projected
o
Intangible - Difficult to estimate or hidden
Financial Analysis
One-Time vs. Recurring Costs
Item
•
Hardware/Software purchase
•
Hardware/Software lease
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Hardware/Software rental
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Hardware support from vendor
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New application development
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Training
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Research
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Help desk support
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Application maintenance
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IT HR management
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Communication charges One-Time Recurring
Financial Analysis
Fixed vs. Variable Costs
Item
•
Hardware/Software purchase
•
Hardware/Software lease
•
Hardware/Software rental
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Hardware support from vendor
•
New application development
•
Training
•
Research
•
Help desk support
•
Application maintenance
•
IT HR management
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Communication charges Fixed Variable
Financial Analysis
Tangible vs. Intangible Costs
Item
•
Hardware/Software purchase
•
Hardware/Software lease
•
Hardware/Software rental
•
Hardware support from vendor
•
New application development
•
Training
•
Research
•
Help desk support
•
Application maintenance
•
IT HR management
•
Communication charges Tangible Intangible
Financial Analysis
Costs and Benefits Review (cont.)
•
Benefits
–
One-time vs. recurring
–
Fixed vs. variable
–
Tangible vs. intangible
o
Tangible - Measurable
o
Intangible - Important but difficult to measure or translate into $$$
Financial Analysis
One-Time vs. Recurring Benefits
Item
•
Increased sales
•
Improved customer service
•
Reduced inventory costs
•
Improved productivity
•
Improved time to market
•
Staff reductions
•
Offer services that competitors offer
• • • •
Better information for decision-making One-Time Recurring
Financial Analysis
Fixed vs. Variable Benefits
Item
•
Increased sales
•
Improved customer service
•
Reduced inventory costs
•
Improved productivity
•
Improved time to market
•
Staff reductions
•
Offer services that competitors offer
• • • •
Better information for decision-making Fixed Variable
Financial Analysis
Tangible vs. Intangible Benefits
Item
•
Increased sales
•
Improved customer service
•
Reduced inventory costs
•
Improved productivity
•
Improved time to market
•
Staff reductions
•
Offer services that competitors offer
• • • •
Better information for decision-making Tangible Intangible
Financial Analysis
There are four common methods of cost benefit analysis:
1. Break-even analysis 2. Payback analysis 3. Cash-flow analysis 4. Net present value analysis
Definition Example
Financial Analysis
1. Break-even analysis
Breakeven point is when total cost of current system and proposed system intersect Current payroll systems costs $1.25 per employee New system costs $20,000 to implement and $0.35 per employee Let
x =
number of employees .35
x
+ 20000 = 1.25
x x
= 22,222 employees If 1,000 employees processed per week, breakeven point is reached in the 23rd week of the system’s life
When to use Advantages
Financial Analysis
1. Break-even analysis
Project justified in terms of cost savings, not benefits Useful when business is growing, volume is key variable in cost
Disadvantages
Benefits are ignored
Definition Example
Financial Analysis
2. Payback analysis
Payback period is the amount of time it takes to recover an initial investment New B2B system costs $300,000 to develop.
System handles 1,000 sales per month.
Cash inflow is $50 per sale after paying variable costs.
Payback period = initial investment / annual cash inflow = 300,000 / (1,000 * 50) = 300,000 / 50,000 = 6 months
When to use Advantages
Financial Analysis
2. Payback analysis
Project justified in terms of tangible benefits Simple to use
Disadvantages
Ignores the time value of money Does not consider total return beyond the payback period
Definition Example
Financial Analysis
3. Cash Flow Analysis
Examines the direction, size, and pattern of cash flow associated with the proposed system
Revenue Costs Cashflow Cum Q1
5 (26) (21) (21)
Q2
20 (27) (7) (28)
Q3
25 (17) 8 (20)
Q4
50 (19) 31 11
Q5
75 (20) 55 66
When to use Advantages
Financial Analysis
3. Cash Flow analysis
Project is
expensive
relative to firm size Simple to use
Disadvantages
Ignores time value of money
Definition Example
Financial Analysis
4. Net present value analysis
Present value - $1 received today is more valuable than $1 a year from today, which is more valuable than $1 two years from today, etc.
NPV considers the time value of both the investments and cash flows Let p = current amount, r = interest rate Future amount in n periods (F n ) = p(1+r) n p = F n / (1+r) n
Revenue r = .01
NPV Q1
5 4.95
Q2
20 19.61
Q3
25 24.26
Q4
50 48.05
Q5
75 71.36
Financial Analysis
4. Net present value analysis When to use
Payback period is long or cost of borrowing money is high
Advantages
Can adjust interest rate to reflect greater risk in far future versus near future Relatively simple to explain
Disadvantages
Longer the time frame, more uncertain on what NPV is Slightly more complex than other methods
Financial Analysis
Describe a situation where a project may not meet minimum cost-benefit requirements and still be approved.
Capital Budgeting
•
Objective Determine if a depreciable asset will provide a return that will meet or exceed the original investment in the asset's acquisition
• •
Screening vs. Preference Decisions Screening - Look at one proposed project Preference - Select from among several alternatives
Capital Budgeting
• •
Total Cost Approach Frequently used in making preference decisions All inflows and outflows for the alternatives are considered Cash inflows
Incremental revenues Cost reductions Salvage value
Cash outflows
Initial investment Repairs & maintenance Incremental operating costs
Capital Budgeting
•
Question: When do you consider intangible benefits in capital budgeting decisions?
•
Answer: When tangible costs exceed tangible benefits, look at intangible benefits and decide if they are worth the deficit amount
Financial Analysis
When is cost-benefit analysis done during the procurement process? Why is this the most desirable time to do it?
1. Pre-RFP 2. RFP 3. Proposal Submissions 4. Proposal Evaluations 5. Vendor Selection 6. Procurement Method 7. ROI Analysis 8. Negotiate Contract
Financial Analysis
When is cost-benefit analysis done during the procurement process? Why is this the most desirable time to do it?
1. Pre-RFP range of potential costs/benefits 2. RFP 3. Proposal Submissions 4. Proposal Evaluations 5. Vendor Selection 6. Procurement Method 7. ROI Analysis preliminary cost/benefit analysis in-depth cost/benefit analysis update cost/benefit analysis update cost/benefit analysis 8. Negotiate Contract update cost/benefit analysis
Topic • Recap IT outsourcing • Quiz • Finish Procurement • *** Break • Financial Analysis • Assignment 2 reports • Assignment 3 free time
Today’s agenda
Duration 25 minutes 15 minutes 35 minutes 15 minutes 60 minutes 10 minutes 30 minutes
Topic • Recap IT outsourcing • Quiz • Finish Procurement • *** Break • Financial Analysis • Assignment 2 reports • Assignment 3 free time
Today’s agenda
Duration 25 minutes 15 minutes 35 minutes 15 minutes 60 minutes 10 minutes 30 minutes
End of slides