632598256894

Exhibit 13.3 E-commerce transaction detail.
The final step was to understand the costs associated with transaction processing to see if, in fact,
there was a viable business model. The network had to be running 24 hours 365 days a year, and to
staff it required nine technicians working in shifts of two at a total annual fully loaded cost of
approximately $750,000. The total costs of the IT infrastructure amounted to another $1.35 million
annually for depreciation and amortization, utilities, and facility expenses, yielding a total overall cost
of running the network of $2.1 million per year. At the time the eight customers that were on the
network were averaging in total 20,000 transactions per day or 7.3 million for a year. Given the costs
of $2.1 million, this resulted in a cost of about $0.29 per transaction.
It was costing Company Z far more to process a transaction than the customer‟s willingness to
pay—29 cents versus the 10 cents per transaction given earlier. Upon further analysis, it became
evident what the root cause of this problem was. As Exhibit 13.4 illustrates, the IT infrastructure was
poorly utilized. On one hand, approximately one-third was now idle—the difference between peak
demand and capacity—but this was only a short-term issue since the other two contracts that had been
signed but were not yet on the system would probably move the system toward full demand. Basically,
one-third of the network may be idle currently but this would soon be marketable. The key problem
was the volatility in the system—at the present time peak demand was 80,000 transactions per day, but
the average was only 20,000. In essence, 50% of the network (the difference between peak and current
average demand over total capacity) was not currently marketable due to the buffer needed to meet
peak demand when it occurred. The distribution of costs as a function of volatility is shown in Exhibit
13.5, highlighting that $1.05 million, half the network cost, was currently idle but marketable if
volatility could be solved.
Exhibit 13.4 Transaction processing demand.