Scenario a Retail Company Has Enjoyed Significant Growth in Profit

question 5

Multiple Choice

Scenario A retail company has enjoyed significant growth in profit over the past year due to negotiating lower buying costs from its suppliers. The organization wishes to reinvest some of this profit to fund a program of change to optimize the use of IT services. They hope this will support revenue growth in the next financial year whilst maintaining profitability. The program consists of two main initiatives: An expansion of the on-line retailing services to offer more functionality Enhancement of the marketing service to allow greater targeting of promotional offers. There are various options for providing these services that involve use of the current infrastructure or the new virtualization technology, which is slowly being deployed across the organization. The board of directors wishes to conduct a financial review over the next 3 months to compare the cost of providing each service. Projected business revenues will allow the return on investment (ROI) of each option to be calculated. This review will provide an input to the IT organization's service portfolio management process, allowing the various investment options to be considered and an informed decision to be made. The organization has a good appreciation of its IT costs along with a mature service catalogue and configuration management system (CMS) . Refer to the Scenario. Which one of the following options would be the BEST approach to providing the information for the financial review of the service options?

• A) Appoint an IT finance manager to implement budgeting and accounting for IT services. Create a cost model that takes into account direct and indirect costs, as well as fixed and variable costs. Use the cost model to calculate the cost of providing the IT services and provide the information to service portfolio management (SPM).
• B) Produce a summary of current costs, apportioning all costs directly to the appropriate service. Any investment in virtualization or new infrastructure should be shared equally between the two services. This creates a baseline for comparison with the anticipated business revenues and ROI that will enable a business case to be developed for each option.
• C) Produce a summary of current costs, recognizing that the resources are shared across services. Use service level agreements to understand how the services are used and create a model for the services, ensuring that both current and projected costs are shared appropriately. These costs can then be compared with the cost of outsourcing the service and with the anticipated business revenue.
• D) The various options for providing the service, including those requiring investment in new infrastructure, can then be costed. Using the projected revenues supplied, a calculation can establish the ROI for each option. These costs and ROI for each option can then be compared through the service portfolio management process and used as an input to develop a business case for the most advantageous options.

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Definitions:

Option Rho

A measure of how much the price of an option should change when the risk-free interest rate changes by one percentage point.

American Put Option

A type of option that allows the holder to sell an asset at a specified price at any time before the expiration date.

Call Option

An agreement in finance that grants the purchaser the option, without the mandate, to acquire a security, bond, commodity, or different asset at a pre-determined price during a defined timeframe.

Variance

The average squared deviation between the actual return and the average return.