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MIS 2000 Information Systems for Management

Instructor: Bob Travica

Economic Aspects of
Information Systems

Updated 2014

Outline
Costs & Benefits from IS
Financial Assessments of Information Systems Economy
(size and timing of returns)
Combined Assessments of Information Systems
Economy
Software & Hardware Acquisition (develop, buy, rent)
Summary

Costs & Benefits from IS


Economic aspects of IS (or IS economy) is assessed in
planning of IS as well during IS production stage.
Cost/Benefit analysis is a necessary component in any
assessment of IS economy.
Cost-Benefit Analysis
Tangible Costs & Benefits ($)
Intangible Costs & Benefits
(no $)

Quantitative or
qualitative figures?

Quantitative

Capital Budgeting Methods ($)


Assessments of returns size
Assessments of returns timing

Qualitative &
Quantitative

Mixed Methods ($ and no $)


Portfolio Analysis (Risk control)
Balanced Scorecard (Org. goals
achievement)

Tangible Costs
- Direct investment in software & hardware (one time)
- IS installation & employee training (one time)
- Operating costs for an IS (recurring) expenditures on software
licences, labor costs of IS staff, IS maintenance, overhead for
facilities, expenses of communications carried out by computer
networks partaking in IS.
- Loss of money and time with new IS that does not perform as
expected (opportunity cost).
- Total Cost of Ownership sums up all the costs in a system life
cycle.

Intangible Costs
- Effort put in learning a new IS and associated process
- Employees loss of work motivation due to new processes/IS
- Employees resistance to new processes/IS
- Lower customer satisfaction due to improperly performing IS
- Limitations in decision making when a new IS cannot deliver
reports managers need to make decisions.
- Note that some intangible costs may result in tangible costs.*

Tangible Benefits 1/2


- Savings on many counts:
- savings on labor expenses
- savings due to reduced process time (e.g., reducing inventory
costs in supply chain process)
- savings due to avoiding to add more employees when improved
process/IS can carry a larger volume of operations

- Organizational performance gains (new IS/process


organizational productivity financial returns).

Tangible Benefits 2/2


- Better decision making resulting in income increase (e.g., moving
into new product and geographical markets)
- Cutting losses by improved management control (e.g., ERPS case
of detecting fraudulent purchases)
- Data error reduction eliminating the need to repeat the same
activity, that is, waste of business time & labour.

Intangible Benefits
- Customer value that does not translate directly into monetary gains
for a company
- Better control and decision making, which do not translate readily
into monetary gains
- Improvement in the appearance of reports and other business
documentation (better quality but no more money).
- Increased knowledge capabilities (note: these are a condition for
making more attractive products, but before this products are made
and sold no monetary gains accrue).

Financial Assessments of IS Economy


1. Returns size focus: Various ratios of how much an IS returns
in relation to its costs (Benefit/Cost Ratio, Net Present Value,
Return on Investment):
The higher the ratios, the more economically valuable the IS
Present value of money used (future returns as well as costs
discounted for some rate) as finances flow over years (NPV function
in Excel)

2. Returns timing focus: Assessment of when returns will occur


(e.g., Break-Even Analysis)
- The shorter the wait period,
the more economically
valuable the IS.

Time (years)

Mixed Methods of Assessing


IS Economy 1/2
1. Portfolio Analysis
The focus is on controlling risks that different systems can
bring
In planning IS, IS projects compared on risks they bear
(completion within budget & time, technology demands, size
of organizational change required)
Risk = probability the problem will happen x weight of
problem *
Risk can be thought of as a special and critical cost
Riskier projects: Expensive systems, new technologies, and
larger org. changes (e.g., enterprise systems)

Mixed Methods of Assessing


IS Economy 2/2
2. Balanced Scorecard
The focus is on achieving organizational goals
A combination of tangible and intangible benefits in select areas finances, customer
relations, key processes, growth potential, anything else important for a company.
IS contribution to these performance indicators is assessed periodically.

Balanced Scorecard
Tangibles

Tangibles &
Intangibles
- Process focus!

Intangibles

Software and Hardware Acquisition


Three options: Make, Buy, Rent
1. In-house Development (company's IS Department does
programming, hardware acquisition, and IS installation)
2. Buy:
Off-the-shelf software (e.g., Microsoft Office, SAP)
Buy custom-built software (a software vendor writes software
according to the client companys requirements).
Note: If there is a system development capability in the IS
Department, the buy options are called outsourcing (sourcing
outside of own company)

For pros & cons (benefits & costs) see the chapter.
More

3. Rent:
Annual licencing of software or hardware
Rent via the Cloud* (IS services that can be rented).

Cloud Advantages:
Reduce costs: the payment method is per use and there are no costs
for development & maintenance (full IS services options)
Client benefits from new IT as vendor keeps updating it to stay
competitive gains in clients business processes.

Cloud Disadvantages:
Synchronizing business processes between client and vendor
Risk of compromising confidentiality of business data
Vendor lock-in (it is hard to get out of Cloud as a company relies
more on a cloud vendor)
Unexpected changes in pricing services.

Summary

Costs of IS can be tangible (expressed in monetary terms) & intangible


(all other forms). Examples of tangible costs are investment in computer
software and hardware, and systems operating costs.

Benefits of Information Systems can be tangible & intangible. Examples


of tangible benefits are cost reduction and income gains.

Financial Assessments of IS economy focus on the size of returns (e.g.,


NPV) and on timing of returns (e.g., payback period).

Mixed Assessments of IS economy cover tangible and intangible C/B


(portfolio analysis, and balanced scorecard).

Software can be developed by the companys IS department, purchased,


or rented; hardware is usually purchased or rented. Each option has
pros and cons.

Cloud (cloud computing) is the trendy rental option.

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