Introduction to Information Systems Analysis Feasibility and Cost/Benefit Analysis

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Introduction to InformationSystems
AnalysisFeasibility and Cost/Benefit Analysis

• INFO 503
• Glenn Booker

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Feasibility Analysis

• Must consider using feasibility analysis to
  justify the expenditure of time and effort to
  develop and implement a new system, just like any
  other business function must do
• Feasibility is a measure to describe how
  beneficial something would be
• If it aint worth it, dont do it!

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Feasibility

• Feasibility analysis should be repeated
  throughout a systems life cycle to support
  creeping commitment
• Dont jump in with both feet to test how deep
  the pool is
• This validates your systems continued existence,
  and helps keep from going well out of the
  intended original project scope

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Specific Checkpoints

• The text discusses three major feasibility
  checkpoints in the FAST model at the end of the
  following life cycle phases
• 1. Scope Definition Phase
• 2. Problem Analysis Phase
• 5. Decision Analysis Phase
• Well briefly address the role of feasibility
  analysis in the other phases, too

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Specific Checkpoints
p. 402 (644)

• Scope Definition Phase assess urgency of the
  problem, and make first guess at development
  costs
• Do problems and opportunities warrant the cost
  of further study?
• Realize that actual costs will probably be
  50-100 above initial estimates

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Specific Checkpoints

• Problem Analysis Phase after the existing
  system is better understood, realize that a new
  or improved system must be worth more than the
  deficiencies of the existing system
• Watch for scope changes, especially if theres a
  big jump in cost from the previous phase

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Specific Checkpoints

• (Requirements Analysis Phase) once user
  requirements have been defined, see if the
  earlier projections of cost and scope are
  vaguely reasonable
• If you can show how scope and requirements have
  changed, you have a much better chance of getting
  more time and/or money from your customer

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Specific Checkpoints

• Decision Analysis Phase select a solution
  approach choose from
• Do nothing existing system is good enough
• Reengineer manual processes only
• Improve existing automated processes
• Buy an existing product to replace processes
• Design and build a new system to handle all
  processes

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Specific Checkpoints

• (Procurement Phase) the selection of hardware
  and/or software vendors needs proper analysis to
  ensure youre getting the best deal
• This may be combined with the Decision Analysis
  feasibility study to consider the system and its
  major components all at once

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Specific Checkpoints

• (Design Phase) this is the last major
  feasibility checkpoint
• Given detailed design specifications, determine
  if the system is really worth implementing
• This should have fairly accurate cost, size, and
  schedule estimates to work with

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Specific Checkpoints

• (Construction Phase) during actual coding and
  testing of the system, can use a scaled down form
  of feasibility analysis
• Determine whether it is good to add new features,
  or if certain bugs are worth fixing
• System usage modeling may help answer these
  questions
• Helps support project reviews and updates

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Specific Checkpoints

• (Implementation Phase) during delivery and
  installation of your system, feasibility analysis
  largely isnt needed
• Presumably each installation site was selected
  based on an earlier feasibility study

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Specific Checkpoints

• (Operation and Support phase) after system has
  been installed and is in use
• Feasibility analysis can help determine whether
  major new features are worth adding, or later in
  life
• Determine if a major update of the system is
  worth it, or if its better to start over again
  (feeding another projects start)

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Resulting Actions

• As a result of conducting a feasibility analysis,
  several decisions may be made
• Continue with project as planned
• Revise scope, and/or schedule, and/or budget
• Cancel project
• This helps keep from throwing good money after
  bad (had enough clichés yet?)

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Types of Feasibility

• Operational
• Technical
• Schedule
• Economic

Can we make the acronym TOES from this?
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Operational Feasibility

• Operational feasibility addresses the two main
  aspects of usefulness for the proposed system
• 1) Early in the life cycle this looks at the
  urgency of the problem - is it a problem worth
  solving?
• 2) Then determine how acceptable or usable the
  solution is (politically or socially)

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Operational Feasibility

• Apply the PIECES criteria to determine how
  beneficial a proposed solution will be
• What specific areas will it help?
• Performance, Information
• Economy, Control
• Efficiency, Services

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Operational Feasibility

• Look at solution for political acceptability by
  the users and managers affected
• Is there management support for the new system?
• Do users feel the need for a new system?
• Will people be happy using the new system?
• How will the solution affect the working
  environment for users and managers?

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Usability Analysis

• Later in the life cycle, usability analysis can
  help assess operational feasibility
• Have users try a prototype of the system, and
  determine
• Ease of learning the new system
• Ease of use for both frequent (power) and
  infrequent (casual) users
• User satisfaction with the interface

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Technical Feasibility

• Technical feasibility is most looked at during
  the Design Phase, since this is an
  implementation issue
• Look for
• Practicality of the solution can it be done?
• Availability of the needed technology here
• Availability of the needed expertise in that
  technology, and a reasonable amount of time

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Schedule Feasibility

• How reasonable is the proposed schedule?
• Especially given the projects expertise needs
• Schedule should be based on
• Ideally, experience with similar projects
• Models which are tailored for your industry and
  type of development (e.g. COCOMO)
• General models for software development (e.g.
  Connellys Rapid Development)

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Schedule Feasibility

• Schedule should take into account
• Your industry
• Your teams level of experience with the
  development environment, and the maturity level
  of that environment
• The severity of penalties for missed deadlines
• Never accept estimates more than 10-20 below
  industry norms

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Economic Feasibility

• Economic feasibility is determined by
  Cost-Benefit Analysis (CBA)
• Early cost analysis may easily be off by a
  factor of /- four, depending on how the system
  is eventually designed and implemented
• CBA after the design phase should be much more
  accurate than this!

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Cost-Benefit Analysis

• Cost-Benefit Analysis is based on three steps
• System Cost Analysis How much will the system
  cost?
• System Benefits What benefits will the system
  provide?
• Cost Effectiveness Is the proposed solution
  cost-effective?

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System Cost Analysis

• Costs are broken into two big categories
  development cost, and operational cost
• Development cost may be estimated and refined
  throughout the development effort
• Operational cost can only be estimated after some
  decisions have been made - after the decision
  analysis phase - and then refined

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Development Costs

• Development Costs consist of
• Personnel costs
• Computer usage costs
• Training costs
• Other equipment costs

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Personnel Costs

• How much does it cost to pay the designers,
  developers and testers of the system (plus other
  people involved)?
• Salaries alone arent enough personnel cost also
  includes overhead expenses, such as benefits,
  taxes, insurance, facilities, etc.
• Typical total personnel cost is at least 2-1/2
  times the salaries of all people involved

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Computer Usage Costs

• These are the costs associated with using an
  external computer resource such as costs
• For computer services outside of the project (CM,
  testing, QA, clerical, domain hosting,)
• Per second of CPU time used (obsolete)
• Per page printed
• For storage space used (per GB disk space)

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Training Costs

• Costs for custom-developed or vendor-supplied
  training
• Custom-developed training
• Development of materials
• Reproduction of materials
• Rental of training facilities
• Vendor-provided training
• Computer-based training (CBT)

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Other Equipment Costs

• Office supplies, equipment and reproduction costs
  (if not included in overhead)
• Leasing costs for the computers
• Maintenance contract fees
• Software license costs
• Special test equipment

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Operational Costs

• Operational costs include fixed costs and
  variable costs
• Fixed costs occur at regular intervals, but at
  fixed rates (property tax, by analogy)
• Variable costs occur based on usage of something
  (electric bill)

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Fixed Costs

• Facility lease costs
• Computer lease payments
• Internet access fees
• Software licenses and maintenance fees
• Salaries of personnel needed for operation of
  the system (computer operators, technicians)

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Variable Costs

• Computer usage (CPU time, storage usage)
• Office supplies (forms, paper, postage, magnetic
  media, etc.)
• (Possibly) part of the overhead expenses, like
  utilities, phone, facility cleaners,

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Direct, Overhead, Fixed, Variable

• Whether a particular cost is paid directly by a
  project overhead fixed costs or variable costs
  depends on the strategy determined by your
  organizations accounting department
• Managers and clerical staff might be paid from
  overhead, or directly charge individual projects
• Normal computer equipment might be an overhead
  expense, or a fixed cost

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Add up the Costs

• So to paint a summary picture of the system
  costs, describe the estimated development cost,
  and the fixed and typical variable operational
  costs
• System XYZ will cost 450,000 to develop
• Its annual maintenance cost is 120,000 (based
  on fixed costs of 85,000 and expected variable
  costs of 35,000 per year)

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System Benefits
p. 409 (650)

• Benefits can be tangible (easily measured) or
  intangible (the opposite)
• Tangible benefits are expressed in terms of the
  savings per year, or per item produced
• Intangible benefits can make or break the
  feasibility of a system, such as improved
  customer satisfaction, employee morale, etc.

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Tangible Benefits

• May estimate tangible benefits by finding
• The value of Work No Longer Performed (due to
  process redesign)
• Value of New Customers (new market share)
• Value of Existing Customers who wont run away
  (retaining market share)
• Value of Reduced Cost for Existing Work (due to
  increased efficiency)

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Work No Longer Performed

• Calculate the labor expense of work no longer
  needed
• If a form took 30 seconds to fill out, and you
  needed 1000 of them filled out each month by
  someone whose labor rate is 40/hour, the annual
  cost was(30/60/60 hours/form) 1000
  forms/month 12 months/year 40/hour
  4000/year

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Value of New Customers

• Calculate the value of obtaining 300 new
  customers per year, who spend an average of 500
  per purchase, on a product which yields 12
  profit after expenses
• Profit per year is 300 500 12 18,000
• Notice that these calculations often need much
  detailed information about your current business
  environment

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Value of Existing Customers

• Value of existing customers could be the value of
  their existing sales, plus the cost it would
  take to replace them
• If we lose 100 customers who spend 2500 per year
  each, and it would take 50,000 in advertising to
  replace them, the loss of those customers would
  be worth (assuming 12 profit margin again)100
  2500 12 50,000 80,000

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Reduced Cost for Existing Work

• If we reduce the work for a task from 5 minutes
  to 30 seconds, and the task is performed by
  someone with a labor rate of 50/hour
• The savings is (5 - 30/60)/60 hours/task times
  50/hour 3.75 per task
• Note that these examples do not include any
  hardware or materials costs (often nil)

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Tangible Benefits Summary

• So the approach for finding tangible benefits is
  to add up all the costs directly saved or newly
  found as a result of implementing the proposed
  system

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Intangible Benefits

• Even intangible benefits can often be
  quantified by making a few assumptions about
  their effect
• Unhappy customers place fewer, smaller orders
  quantified, this could result in a percentage of
  lost business
• Even wild guesses, carefully explained, can
  still form the basis for discussion

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Intangible Benefits Example

• Suppose a customer survey indicates that 30 of
  your customers are unhappy, and hence will not
  renew their licenses
• If an average customer spends 40,000 per year in
  licenses, and we only have 500 customers, the
  profit loss per year would be 30 500
  40,000 12 720,000
• Again assuming a 12 profit margin

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Intangible Benefits

• What possible benefits could result from fixing
  these problems?
• Low employee morale
• Poor physical work environment
• Web site confusing
• Outdated computer equipment

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Cost Effectiveness

• Now we have quantified cost, and benefits
• Cost effectiveness is the blending of them
• Three major ways to measure cost effectiveness
• Payback Analysis
• Return-on-Investment (ROI) Analysis
• Net Present Value

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Time Value of Money

• All cost effectiveness analyses assume that money
  is worth more over time, since it can be invested
• As a result, these analyses depend VERY STRONGLY
  on the rate of interest which could be obtained
  from saved money

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Present Value of Money
p. 412 (653)

• The present value of what will be 1.00 at some
  time n years in the future, given an assumed
  discount (interest) rate of I is
• PVn 1/(1 I)n (1 I)-n
• The discount rate is the amount of interest which
  could be earned with that money

Fourth edition of textbook Beware of the typo
on page 653! (they forgot the / twice)
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Present Value of Money
See handout Present Value Calculation
Spreadsheet

• Typical discount rates are from 8-14 (less
  during a recession )
• Notice that the present value of 1.00 is always
  less than or equal to 1.00
• If you have 50 cents now, at some point in the
  future it could be worth 1.00
• When that happens depends on how well that 50
  cents could be invested (discount rate)

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Present Value of Money

• Key observation for doing CBA is that the value
  of all project costs and benefits are first
  converted to their present value
• Development cost of 100,000 now has a present
  value of 100,000
• Benefit of 30,000 five years from now at an8
  discount rate has a present value of only30,000
  / (1 0.08)5 20,417

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Payback Analysis

• Development of a new system costs some amount of
  money, after which costs will be reduced in some
  way, offset somewhat by operating costs
• Adjusting these costs to their present value,
  then determine when the sum of benefits of the
  system equal its development expenses that time
  is the payback period (years)

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Payback Analysis

• Payback period is whenDevelopment costs Sum of
  benefits
• But only after all costs and benefits have been
  adjusted for present value
• Low payback period is desirable

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Return On Investment (ROI)

• Lifetime ROI is a percentage comparing the total
  costs and benefits from a project
• Lifetime ROI(total benefit-total cost)/(total
  cost)
• Lifetime ROI may be divided by project duration
  to get a ROI per year (annual ROI)
• Want high ROI (lifetime and annual)
• A low ROI ( under 10/yr) might indicate the
  benefits are too little to be worthwhile

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Net Present Value (NPV)

• Adjust all costs and benefits for the entire life
  of the system to their present values
• Net Present Value total benefits total costs
• NPV gt 0 is a plausible investment a bigger
  positive NPV number is better

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Presenting Candidate Systems

• Summarize candidate systems in a matrix,
  including the existing system
• Identify candidate system characteristics
• Extent of automation, hardware, software, and
  data processing methods, input, output, and
  storage devices, etc.
• Then show the results of feasibility analysis and
  CBA in a weighted matrix, p. 418 (659)

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Additional Resource

• http//www.firstgov.gov
• Search for cost benefit analysis