Chapter -10 Costs & Benefits of IS Projects

1. Chapter -10 Costs & Benefits of IS Projects Summary

3. Every IS project is an expensive investment for the organisation. IS project proposals such as Business process re-engineering, CRM, ERP will be attractive with marketing messages, but it is the responsibility of an organisation to evaluate the value of an IS project proposal prior to the investment. What are the costs and benefits of IS projects? To understand this chapter clearly, I would recommend you to read the first case study of BBC, which is simple to comprehend. – page 268. Now, follow the examples below, so that you have a clearer view of the chapter. • The U.K government started a project called – Libra to connect all the courts in the country, which cost £ 390 m, but still the courts are not having a working system. • The London Borough of Haringey council started another IT project called “ Tech Refresh”, it cost £ 24.6m, and was faced with many problems. Here, we find the costs involved in some IS projects, and their success or failure. Any IS project will have benefits and costs, so it is important for the managers to decide as what project proposal to be selected.

4. How to identify the factors that influence the evaluation of IS? There are different techniques for evaluating the IS, such as; • Formal – Rational methods • The cost factor of information systems. • The benefit factors of information systems. • Creating a balanced portfolio of projects • Wider-criteria for evaluating • Formal – Rational methods for evaluating IS proposals Formal-rational methods of project evaluation is a traditional method. According to this method, the evaluation( assessment, good or bad) is done based on the cost of investments(how much money needed?), and the benefits from the IS ( what are the benefits that we can achieve?). If an IS project is taking longer time to produce the benefits, the risks will be higher. The more the payback(benefits) from the investment in a project, the more likely managers would approve it.

5. In Formal-rational method of evaluating IS project proposals Laudon and Laudon introduced few techniques as follows; • Payback period According to this method, we can evaluate IS project proposals by calculating the number of years required for getting the investment back. For example, if a company invests $ 10m for an IS project and receives return of $2m every year, the payback period if 5 years. A shorter payback period is more attractive. b) Return of Investments According to this criteria, we evaluate an IS project proposed , by evaluating the annual benefits to be achieved over the life of a project and dividing it by that number, and by the amount invested.

6. c. Discounted cash flow Both payback and ROI do not explain as the timing of the costs and benefits. For example, a project that brings immediate benefits is good one ? To address this problem, we have a third technique called- Discounted cash flow. In this method costs and benefits are calculated over he whole life of a project. Here, we find that a project brings return sooner is better than the one brings later/ • The Costs of IS There are many costs involved in an IS project. a. Support and maintenance cost - new computers, new technologies, new devices, maintenance costs such as servicing costs, repairing costs e.t.c. b. Training costs c. Business process costs – operation costs in business

7. Here, still we can’t find out the true cost of IS projects. In order to find out the true cost of an IS project, we have to use a method called – Total Cost of Ownership or TCO. According to TCO, we find the true cost by using a holistic(total) view of all the costs on an IS project. TCO includes purchase costs, implementation costs, ownership costs, and change costs. • Cost of purchase – here we calculate the costs of purchasing hardware and software. • hardware costs There are three types of hardware costs such as; The front end – monitors, keyboards, control equipments, printers and scanners. The middleware – cables, routers The back end – servers, desktop PC • Software costs Software development costs , if built in-house, if bought-in licensing and packaging costs. Operating system software costs Application development costs Security system costs

8. b. Implementation costs, ownership costs, change costs Implementation costs - IS interact with different parts of an organisation, so that following implementation costs will occur; • re-engineering costs ( for re-designing the business process) • Costs for disposing old systems. • Staff training and communication costs • Customer training and communication costs Ownership costs – after purchase, implementation the next costs will be maintenance and supporting the system. It is known as ownership costs, it includes; • Support – help desk, user manual • Disaster recovery – duplication of systems to meet with the problems at main site. • Staff – recruitment costs, training costs • Maintenance cost – hardware, software maintenance costs • Obsolescence ( expiry)- cost of out of date systems • Upgrading cost

9. Change costs when technology changes, market changes, the changes also incur costs, and it is known as change costs. It includes; The cost that will incur, if interoperability( capability to work with other systems and networks) of hardware not enough. There will be costs, if software cant be modified to other systems. • The benefits of is This is another method of evaluating an IS project proposal. According to ‘ the benefit method’ of IS , we evaluate an IS project proposal based on the return that we receive. Mostly benefits we receive in future and costs will incur first. We have to consider two types of benefits here such as; Tangible benefits Intangible benefits

10. Tangible benefits (the benefits that you can see or measure) • Direct cost savings It happens by saving time. By replacing human with technology. By accurately and timely distributing the work( by telephone and e-mails) • Quality improvements It is by avoiding or reducing errors. Avoiding cost increases – a new system will avoid maintenance costs. Revenue increases – increased sales and making revenue. Staying in business – new IS are essential to be in business in the competitive world. Intangible benefits ( you cant measure) • Communication benefits • Staff morale improvements • Customer satisfaction • Reputation • Flexibility

11. Creating a balance portfolio(group of business or type of business) of project types Big organisations will have many projects at the same time, here to evaluate the IS project proposals, we have to use a balanced portfolio of projects. It means that some projects will appear to be having no benefits, still incur costs, but they are essential to other related projects. They are acting as infrastructure for other projects. For example building a new network will have costs, but benefits are intangible. Problems of Formal-rational evaluation or disadvantages and issues with Formal-rational evaluation The main problem with Formal-Rational evaluation is that it assumes both costs and benefits are accurate, and timing is correct. Another problem with Formal-rational evaluation is that, it overemphasises the cost and underemphasises the benefits. A third mistake in Formal-rational evaluation is that organisations will be interested in those projects, where benefits are easy to identify(tangible).

12. Why do the IS projects of an organisation fails to meet investment targets? • Over emphasising on purchase costs. • Over-ambitious rates of ROI • Underestimation of implementation time and cost • Poor communication with users and customers • Unrealistic prediction about the benefits • No learning from the past experiences • Not forecasting demand exactly • Wider-criteria for evaluating IS Due to the difficulties associated with Formal-rational methods, there are other methods emerged for evaluating an IS project proposal. 1.Doherly method – covers; systems quality, information quality, information use, user satisfaction, individual impact, organisational impact. 2. Saarinen method – a four-dimensional method including; development process – success of the development process, such as following the budget, time, use of resources e.t.c.

13. Use process – effectiveness and efficiency of service delivery. Quality of the IS product- reliability, accuracy, robustness, usability and flexibility. Impact of the IS on the organisation – such as how the system contributes to cost saving, productivity, improvements. • Strassman method - evaluating an IS project proposal based on it’s competitive advantage, strategic positioning and management style and quality • Balanced Scorecard technique – here performance of the system is evaluated against its strategic objectives. This technique is done by developing an organisation-wide view about the balance of four measures; • Financial measures • Internal effectiveness – productivity, error problems, staff skills. • Customers • Innovation and learning – continuous improvement (see diagram 10.3 on page 283)

14. Organising for IS evaluation How to evaluate an IS project proposal within an organisation? In order to evaluate an IS project proposal within an organisation, an organisational structure is necessary. The main idea is to develop a Central Project Evaluation Team or CPET. This team would include project managers with skills of marketing, economics, finance and IT. The main role of the team is to assess the value of each project. Another role is to do post- implementation review( after implementation of a system) But, there are some disadvantages for CPET as follows; • The lack of local awareness and knowledge will make it difficult for the team to understand the less tangible aspects of a project value. • The systematic approach is like ‘bureaucratic’ – slow and inflexible • Central team may not react quickly to the changes in the market place. • The budget for IS developments is with IS departments, and it can lead to lobbying the IS department for IS projects.

15. Assignments • Page 280 – activity 10.2 • Page 286&287 – 10.2 questions