Costing (price models)
12 Sep 11

Determining the costs or price of options is an essential part of working out what is the best option. Cost benefit analysis is still the most common way of selecting between possible actions.

Tools and techniques

Determining price: Life cycle costing/total cost of ownership
The US Federal Aviation Administration has a detailed business process improvement handbook that covers, amongst other topics, activity based costing. The description is a useful support for building pricing models. [Ian Sherman, 28 Jun 01]

On the other hand, the issue of costing benefits is considered by Douglas Hubbard (1999). This CIO article considers the expected opportunity cost of loss of information, probability distributions around cost estimates, and other useful but overlooked elements in building cost models. [Jinge Ouyang, 17 Oct 01]

Although describing the process of ad adjustment in newspapers, the article by Tom Arnold in the Newspaper Financial Executives Quarterly gives a useful overview of activity based costing and cost of quality as the basis for building cost models. [Ye Ye, 17 Oct 01]

NASA publishes a handbook on parametric cost estimating. [Michael Spencer, 13 Nov 01]

Another government (US) site for cost estimation tools is maintained by the Automated Cost Estimating Tools. The site links to several tools for determining life cycle costing. [Norm Ferguson, 14 Nov 01]

Len Bainbridge, a business mentor for small businesses in New Zealand, has a personal web site that describes how to prepare a business plan (not a business case), a marketing plan, and a strategic plan. He describes in detail how to prepare the costings to support such plans. Good tips based upon strong financial experience. [Andrew O'Donnell, 19 Jun 01]

The guide to preparing a business plan provided by the US Small Business Association gives good suggestions about the costing of activities. Its description of how to prepare a marketing plan also helps in developing a pressures/stakeholder analysis. [Alison Guest, 19 Jun 01]

Costing IT
There are many attempts at building cost models for information systems. The most common involve estimating the effort of building software projects.

The International Society for Parametric Analysis has a handbook that covers the preparation of detailed hardware and software cost estimates (including COCOMO, for example). The cost estimates are for production and not for support, so they form only part of the total cost model. The estimates are useful primarily in managing a construction project but the approach could help in finding some of the costs for a business case for introducing new components into a system. [Jim Veino, 17 Oct 01]

The paper by Briand, Langley, and Wieczorek (1999) gives a technical description of several approaches for determining the extent to which various parameters determine the productivity—and hence the cost—of developing software. They compare ANOVA and other regression techniques for examining such parameters as team size, tools used, and experience.

MITRE give an example of an approach for costing Y2K projects in the US DOD. [Tim Pearson, 13 Nov 01]

Estimating Internet development using parametric cost models is covered in the article on the Cost Xperts commercial site. [Laurence Sparke, 13 Nov 01]

A slightly dated and brief example of the 'real cost of ownership' is given by Meta group in a 1997 CIO article. [Ge Yan, 13 Nov 01]

Costing intangibles
Most cost models ignore the intangibles, at considerable detriment to the quality of the evaluation. 'Intangibles' in costing can lead to two separate but related directions. One direction is determining the value of the benefits of using a system (such as IT) when direct dollar values cannot be assigned reliably. The other direction is seeing the increase in non-book assets, such as intelelctual capital/ knowledge management. Both are relevant to systems planning.

There is some acknowledgement of the importance of handling intangibles in preparing evaluations of educational technology in Marchionini (1995). [Rahul Joshi, 6 Nov 01]

The detailed description of cost benefit analysis in the US public sector available from the National Institutes of Health, 1999 does explicitly consider intangibles but as weighted scores. The manual shows various ways of combining scores with costs. [Ying Lui, 12 Oct 01; Qinghong Pu, 12 Oct 01]

Karl-Erik Sveiby ('Mr Intellectual Capital') provides an overview of methods for costing intangible assets. In this case intangibles refer to non-costable items such as corporate knowledge that form organizational non-book assets rather than costing benefits of using IT. However, the approach is worth knowing by every information manager because good information management can lead to improved use of such assets. [Alan Francia, 13 Nov 01]

Paul Lillrank, Sami Holopainen and Teemu Paavola from Helsinki University published a paper (Catching Intangible IT Benefits) in the Electronic Journal of Information Systems Evaluation that describes the Enabler-Effect map, which brings out the benefits such as saving time through the use of different IT systems. [Michael Spencer, 13 Nov 01]

Cem Kaner gives a detailed (but 1996) description of howto cost quality. [Parveze Kutar, 13 Nov 01]