LiFE2 – LiFE Model Economic Validation

This talk from Bo-Christer Bjork – Professor at the Swedish School of Economics and Business Administration.

Bo-Christer was asked to validate the econdomic modelling and methodology of the models developed in LiFE.

Bo-Christer is introducing the idea of life cycle costing – which is theoretically attractive, but not applied much in practice – probably because it takes a long view in terms of timescale, which many investors/owners of capital goods are not so interested in, having much shorter term horizons.

However National Libraries and Universities have longer term time horizons, so lifecycle costing method is more attractive to them.

Bo-Christer now talking about Facility management as an example where lifecycle costing can give valuable information – because buildings etc. are owned and operated for decades. A comment that he guesses the cost of the BL building was higher than estimated, but that over the lifecycle you can see this is worth it (some sounds of wry amusement from the audience at this!)

Now covering ‘Total Cost of Ownership’ – lifecycle costing as applied to IT hardware and software.

Bo-Christer applied IDEFO modelling to validate the LiFE model – a graphical process modelling tool originally developed for the US navy. Models processes with inputs and outputs.

Now some diagrams – unfortunately unreadable from where I’m sitting – but demonstrating the graphical model for inputs, outputs and processes associated with digital object management in libraries.

Bo-Christer was specifically asked to look at how the model should handle inflation. It is standard practice in lifecycle costings to do costings in real monetary terms, which is OK for future costs, but historic costs should be adjusted to take into account inflation. However, in the case of extremely long periods other methods should be used. In terms of LiFE, when they lookd at the Newspapers cast study (something that will be covered later today), then this was an issue.

Bo-Christer now covering the idea of ‘discounting’ – a technique used where costs and incomes occur in different years. For example, with a discount rate of 5% £100 cost or income in 10 years time is worht £32 today.

Although discounting applies well to large investments (e.g. building a factory), it isn’t well suited if there is a steady stream of costs over years, and there is no income to compare it with, so Bo-Christer recommended that it shouldn’t be used for LiFE.

Overall, I’m not sure I’m much the wiser at the end of this talk – I’m sure Bo-Christer knows what he is talking about, and I think it is great that they have been working at validating the economics.

A question from Chris Rusbridger – how does the lifecycle model apply to an open-ended ‘lifecycle’ – Bo-Christer acknowledges that it is an important issue, but not sure what the answer is.

A question/comment from Paul Courant suggesting not using discounting is a problem, because even very small costs become large (or even ‘infinite’) if you have an open ended lifecycle (i.e. if you commit to preserving something forever)

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