Economic Aspects of Information Systems Updated 2018

1. MIS 2000 Information Systems for Management Instructor: Bob Travica Economic Aspects of Information Systems Updated 2018

2. 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

3. 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. Measurement Type? Cost-Benefit Analysis • Tangible Costs & Benefits ($) • Intangible Costs & Benefits (no $) Quantitative & Qualitative Quantitative Capital Budgeting Methods ($) • Assessments of returns’ size • Assessments of returns’ timing MixedMethods($ and no $) • Portfolio Analysis (Risk control) • Balanced Scorecard (Org. goals achievement)

4. 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.

5. 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 intangible costs may result in tangible costs. ?

6. Tangible Benefits 1/2 • Savings on financial expenses : • savings on labor expenses due to process automation (general principle) • savings due to reduced process time (e.g., reducing inventory costs in supply chain process; example: Walmart’s supply network) • cost avoidance: not adding more employees (expenses) when improved IS can carry a larger volume of operations (online stores in holiday season) • Organizational performance gains: • increased process performance ($, t) with new IS  organizational productivity gain (output value/input cost)  financial returns (profit figures). • Examples: Ford's parts accounting; Boeing-Rocketdyne development project completed under budget

7. Tangible Benefits 2/2 • Better decision making resulting in income increase (e.g., moving into new product and geographical markets). Examples of companies that created new products and markets (Amazon.com, Google, Facebook) • Cutting losses by improved management control (example: ERPS that helped detect fraudulent purchases) • Data error reduction eliminating waste of business time & labour for repeated tasks (office work).

8. Intangible Benefits • Customer value (process performance aspect) that does not translate directly into monetary gains for a company • Better control and decision making, which do not translate readily into monetary gains (e.g., exploring decision options with Big Data) • Improvement in the appearance of reports and other business documentation (e.g., formatting text documents) • Increased knowledge capabilities (although necessary for making more attractive products, first new products must be made and then they have to pass a market test).

9. 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 an IS is • Present value of money used (future returns as well as costs discounted for some rate) for financial models over a year (NPV function in Excel) • 2. Returns’ timing focus: Assessing when returns will occur (e.g., Break-Even Analysis) • The shorter the return wait period, the more economically valuable the IS. 0 1 2 3 4 Time (years)

10. Mixed Methods of AssessingIS Economy 1/2 • Portfolio Analysis • The focus is on controlling/managing risks that different systems can bring • Risks: potential known difficulties (complications, problems) • In planning IS, different IS projects compared on risks they bear (e.g., completion within budget & time, technology demands, size of organizational change required) • Risk = Weight (impact) of problem X Probability a problem will happen • 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)

11. Mixed Methods of AssessingIS 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. • Information systems’ contribution to these performance indicators is assessed in regular periods. Balanced Scorecard Tangibles & Intangibles • Process perf. ($, t, • internal customer) Tangibles ($) Information Systems Intangibles

12. Software and Hardware Acquisition • Three options: Make, Buy, Rent • 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 company’s requirements). • Note: If there is a system development capability in the IS Department, the buy options are called “outsourcing” (sourcing outside of one’s own company) • For pros & cons (benefits & costs) see the chapter. More…

13. 3. Rent: • Annual licencing of software or hardware • Rent via the Cloud (partial or total IS services). • Cloud Advantages: • Reduce costs: pay-per-use, avoiding development & maintenance costs • Client benefits from new IT as vendor keeps updating it to remain competitive  gains in client’s business processes. • Cloud Disadvantages: • Synchronizing business processes between client and vendor • Risk of compromising confidentiality of business data • Vendor lock-in (hard to leave IS vendor without damaging business) • Unexpected changes in pricing services.

14. 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 system’s 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 company’s 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 with significant pros & cons.