Composition Of Is Budgets

The cost of providing IS services to a business involves a wide range of items. These include not only hardware and software acquisitions, but also personnel and their associated costs, along with the costs of maintenance, telecommunications, facilities, supplies, and various other related items and outside services.

A 1993 survey of corporate IS budgets in the United States conducted by Computer Economics, Inc., of Carlsbad, California, found that the largest single IS cost item was personnel (42.1 percent), followed by hardware (28.9 percent), software (11.9 percent), and "other" (17.1 percent). The category of "other" included telecommunications, outside services, supplies, facilities, and miscellaneous items. IS managers should pay particular attention to this category because although the individual items in it may each represent only a fraction of total IS costs, their percentage is far from insignificant. Most of these costs remain the same or increase during major system changes.

Businesses often make the mistake of focusing solely on one-time investment outlays, primarily hardware acquisitions, rather than on longer-term operating costs. This approach inevitably misses the main components of the total IS costs of the company. Organizations that make this mistake are likely to experience a U-curve effect, as illustrated in Exhibit 1. Costs may follow original projections while a new system is in the start-up and test stages, but as soon as the system enters production and handles real workloads, IS spending escalates rapidly as new costs are incurred.

Exhibit 1. U-Curve Effect of a New System on Total IS Costs

Exhibit 1. U-Curve Effect of a New System on Total IS Costs

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