CHAPTER 21

AIS DEVELOPMENT STRATEGIES

Learning Objectives:
1. Describe how organizations purchase application software, vendor
services, and hardware.
2. Explain how information system departments develop custom
software.
3. Explain how end users develop, use, and control computer-based
information systems.
4. Explain why organizations outsource their information systems, and
evaluate the benefits and risks of this strategy.
5. Explain the principles and challenges of business process
reengineering.
6. Describe how prototypes are used to develop an AIS, and discuss
the advantages and disadvantages of doing so.
7. Explain what computer-aided software engineering is and how it is
used in systems development.
Questions to be addressed in this chapter include:
1. Can Ann buy the software she needs? If so, how should she buy
hardware and software and select a vendor?
2. How do companies develop software in-house? Is this the best
approach for SM?
3. How extensively should SM use end-user-developed software?
4. Should SM improve its existing system or redesign its business
processes and develop a system to support them?
5. Is outsourcing the information system a viable alternative to
obtain a new system?
6. Do the benefits of outsourcing outweigh its risks?
7. If SM decides to develop the system in-house, should it use
prototyping or computer-assisted software engineering?

Introduction
Traditionally, companies have experienced the following difficulties in
developing an AIS:

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1. Demands for development resources are so numerous that AIS

projects can be backlogged for several years.
2. A newly designed AIS does not always meet user needs.
3. The development process can take so long that the system no
longer meets company needs.
4. Users are unable to specify their needs adequately.
5. Changes to the AIS are often difficult to make after
requirements have been frozen into specifications.

Purchasing Software
A Deloitte & Touche survey found that most chief information officers
expect to replace their current systems with commercially available
packages rather than use custom-developed software. Consider the
following examples:
1. Hard Rock Caf International wanted to get its customers to
visit its cafes and Web site more often. It purchased customer
relationship software from Epiphany, obtained 225,000 customer
names from its fan club, and mailed special promotional offers.
In less than a year, the profits from the increased traffic had
more than paid for the hardware and software it purchased to
run the promotions.
2. WellPoint
benefits,
to manage
system is

Health Networks installed PeopleSofts payroll,

and human resources software to allow its employees
their own benefit enrollments and changes. The new
saving the company $400,000 a year.

3. Pacific Gas & Electric had to respond to the deregulation of

Californias power industry. Rather than try and update its 37year-old customer information system, it spent three years and
invested $204 million in canned software. This project was the
largest installation of customer information system software in
the history of the utility industry.
Written by software development companies, canned software is sold on
the open market to a broad range of users with similar requirements.
Some companies combine software and hardware and sell them as a package.
These are called turnkey systems.
A major problem with canned software is that it often does not meet all
of a companys information or data processing needs.
The Internet has given companies a new way to acquire software.
Application service providers (ASPs) host Web-based software on their
computers and deliver the software to their clients over the Internet.

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Purchasing Software and the SDLIC

Companies that buy rather than develop AIS software still follow the
SDLC process as follows:
1. Systems analysis
2. Conceptual systems design
3. Physical design
4. Implementation and conversion
5. Operation and maintenance

Selecting a Vendor
Decisions to make or purchase software can be made independently of the
decision to acquire hardware, service, maintenance, and other AIS
resources.
Vendors can be found by looking in the phone book, obtaining referrals,
scanning computer or trade magazines, attending conferences, or using
search organizations.

Acquiring Hardware and Software

Once AIS requirements have been defined, an organization is ready to
purchase software and hardware.
Companies that are buying large or complex systems, however, send
vendors a request for proposal (RFP), which is an invitation to propose
a system that meets the companys needs by a specified date.
A formal approach to acquiring system resources, such as an FRP, is
important for the following reasons:
1. Saves time. The same information is provided to all vendors,
eliminating repetitive interviews and questions.
2. Simplifies the decision-making process. All responses are in the
same format and based on the same information.
3. Reduces errors. The chances of overlooking important factors are
reduced.
4. Avoids potential for disagreement. Both parties possess the same
expectations, and pertinent information is captured in writing.
When an RFP is solicited based on exact hardware and software
specifications, the total costs are usually lower and less time is
required for vendor preparation and company evaluation.
Generally speaking, the more information a company provides to a vendor,
the better the companys chances of receiving a system that meets its
requirements.

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Evaluating Proposals and Selecting a System

Proposals that are missing important information, fail to meet minimum
requirements, or are ambiguous should be eliminated.
Proposals that pass this preliminary screening should be carefully
compared with the proposed AIS requirements to determine:
1. If they meet all mandatory requirements
2. How many of the desirable requirements they meet
Table 21-1 presents criteria that can be used to evaluate hardware,
software, and vendors.
One way to compare system performance is to use a benchmark problema
data-processing task with input, processing, and output jobs typical of
those the new AIS will be required to perform.
Another approach is point scoring, which is illustrated in Table 21-2.
Requirements costing estimates the cost of purchasing or developing
features that are not present in a particular AIS.
Neither point scoring nor requirements costing is totally objective. In
points scoring, the weights and the points used are assigned
subjectively and dollar estimates of costs and benefits are not
included.
Once the best AIS has been identified, the software should be thoroughly
test-driven.
The lessons that Geophysical Systems Corporation (GSC) learned from its
vendor selection process highlight the importance of a thorough vendor
evaluation (see FOCUS 21-1 on page 711).
GSC developed a device that uses sonar to analyze the production
potential of oil and gas discoveries.
GSC hired and paid Seismograph Service Corporation $20 million to
write the software program to analyze the data.
However, the software program did not accurately process the data
and perform the computations.
When the software program failed, GSCs clients canceled their
contracts. The result was that GSC went from sales of $40 million
and profits of $6 million to filing for bankruptcy 2 years later.
GSC sued Seismograph and was awarded more than $48 million as
compensation for lost profits.
Despite the availability of good software packages, many organizations
meet their information needs by writing their own software.

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Development by In-House IS Departments

Developing custom software is difficult and error-prone and it consumes
a great deal of time and resources.
The U.S. Government Accountability Office (GAO) reported that 31 percent
of the information system projects of the federal government, costing
$12 billion (19 percent of its annual IT budget), are either poorly
planned or not living up to their intended objectives.
After end users define their requirements, analysts work with them to
determine the format of paper and screen outputs. The analysts then
identifies the data required for each input and the data to be retained
in the files.
Custom software is usually developed and written in-house. Chapter 20
discusses in more depth the process used to develop software.
The following guidelines are recommended:
1. Carefully select a developer. The outside developer should have
experience in the companys industry, a good understanding of
business in general, and an in-depth understanding of how the
company conducts its business.
2. Sign a contract. The contract should place responsibility for
meeting the companys requirements on the developer and should
allow the company to discontinue the project if certain key
conditions are not met.
3. Plan and monitor each step. All aspects of the project should be
designed in detail and there should be frequent checkpoints for
monitoring the project.
4. Maintain effective communication. The relationship between the
company and the developer should be rigorously defined. Frequent
communication is necessary.
5. Control all costs. Cost should be tightly controlled and cash
outflows minimized until the project has been completed and
accepted.
Arthur D. Little and other information systems consultants tell clients
to develop custom software only if it provides a significant competitive
advantage.
If a software application will not provide a competitive advantage,
Little advises its clients to buy software from an outside supplier.
There is no single right answer to the build-or-buy decision. Different
companies come to different conclusions.
For example, Gillette once developed its own software but then
decided to shift more from proprietary systems to off-the-shelf
software when possible.

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Pepsi, on the other hand, has moved in the opposite direction. It

once bought most of its mainframe software but, after moving to a
client/server architecture, it could not find software
sophisticated enough to meet its needs.

End-User-Developed Software
End-user computing (EUC) is the hands-on development, use, and control
of computer-based information systems by users.
For example, a savings and loan in California wanted a system to track
loan reserve requirements. Its information systems department said the
system would take 18 months to develop. Rather than wait, the loan
department used a PC and a database program to develop a functional
program in a single day.
Since the introduction of the computer, the demand for information
backlogs, almost everyone would have to become a programmer.
With the advent of inexpensive PCs and a wide variety of powerful and
inexpensive software, users began developing their own systems to create
and store data, access, and download company data, and share data and
computer resources in networks.
The growth in end-user computing has significantly altered the
information system staffs role. They continue to develop and maintain
the transaction processing systems and companywide databases on which
end users draw to meet their information needs.
If the end-user computing trend continues, it will represent 75 percent
to 95 percent of all information processing by the end of this decade.

Appropriate End-User Development and Use

End-user development (EUD) occurs when information users, such as
managers, accountants, and internal auditors develop their own
applications using computer specialists as advisors.
The following are examples of appropriate end-user developments:
1. Retrieving information from company databases to produce simple
reports or to answer one-time queries
2. Performing what-if, sensitivity, or statistical analysis
3. Developing applications using prewritten software, such as a
spreadsheet or a database system
4. Preparing schedules and lists, such as depreciation schedules,
accounts receivable aging, and loan amortizations

Benefits of End-User Computing

One reason end-user computing has increased so significantly is that it
offers the following advantages:

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1. User creation, control, and implementation

2. Systems that meet user needs
3. Timeliness
4. Freeing up systems resources
5. Versatility and ease of use

Risks of End-User Computing

There are some significant drawbacks to end-user computing and to
eliminating analyst/programmer involvement in the development process.
1. Logic and development errors. End users have little experience in
systems development and are more likely to make errors and less
likely to recognize when errors have occurred.
2. Inadequately tested applications. Users are not as likely to
rigorously test their applications, either because they do not
recognize the need to do so or because of the difficulty or time
involved.
Users have grossly inflated opinions of how error-free their
systems are.
For example, one study showed that users estimated only an
18 percent chance of there being errors in the spreadsheets
they had built.
In reality, 86 percent of them had errors.
Another example, one of the Big Four CPA firms found that 90
percent of the spreadsheet models it tested had at least one
calculation error.
3.

Inefficient systems. Most end users are not programmers

and have not been trained in systems development.

4.

Poorly controlled and documented systems. Many end users

do not implement controls to protect their systems.

5.

System incompatibilities. Some companies add end-user

equipment without considering the technological implications.
For example, Aetna Life & Casualty spent more than $1 billion a
year on IT in an attempt to gain a competitive advantage.
The result was 50,000 PCs, 2,000 minicomputers, and servers,
108 word processing systems, 19 incompatible
e-mail systems, and 36 different communications networks.
Aetna realized it needed to shift its emphasis from trying to own
the latest technology to the effective use of technology.

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Aetna now uses only a few different types of PCs, Microsoft

software products, two electronic mail systems, and one
network.
6. Duplication of systems and data and wasted resources. If end users
are unaware that other users have similar information needs,
duplicate systems occur.
7. Increase costs. A single PC purchase is inexpensive, but buying
PCs for hundreds or thousands of workers is costly.
Updating the hardware and software every few years is also
expensive.

Managing and Controlling End-User Computing

Organizations use several different approaches to manage and control
end-user computing.
A help desk can encourage, support, coordinate, and control end-user
activities.
Duties of the help desk include the following:
1. Providing hotline assistance to help resolve problems
2. Serving as a clearinghouse for information, coordination, and
assistance
3. Training end-users how to use specific hardware and software
and providing corresponding technical maintenance and support.
4. Evaluating new end-user hardware and software products
5. Assisting with application development
6. Developing and implementing standards for:

Hardware and software purchases to ensure compatibility

Documentation and application testing

Controlling security issues such as fraud, software

piracy, and viruses

8. Controlling corporate data so:

Authorized end users can access and share it

It is not duplicated

Access to confidential data is restricted

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Outsourcing the System

Outsourcing is hiring an outside company to handle all or part of an
organizations data processing activities.
In a mainframe outsourcing agreement, the outsourcers buy their clients
computers and hire all or most of the clients employees.
They then operate and manage the entire system on the clients
site, or they migrate the system to the outsourcers computers.
In a client/server or a PC outsourcing agreement, an organization
outsources a particular service, a segment of its business, a particular
function, or PC support.
Most Fortune 2000 companies outsource anywhere from 10 percent to 80
percent of their PC support functions.

The Growth in Outsourcing Applications

Outsourcing was initially used for standardized applications.
However, Eastman Kodak outsourced its data processing operation and sold
its mainframes to IBM. It also outsourced its telecommunications and its
PC operations.
As a result, capital expenditures for computers fell 90 percent
and operating expenses decreased between 10 percent and 20
percent. Kodak expected the annual AIS savings to reach
approximately $130 million over a 10-year period.
Several years ago, Xerox signed what was then the largest outsourcing
deal in history: a $3.2 billion, 10-year contract with EDS to outsource
its computing, telecommunications, and software management in 19
countries.
However, Xerox retained control over its systems functions.
Many Fortune 500 companies outsource some or all of their information
systems.
Most companies do not outsource the strategic management of their IT
environment, business process management, or IT architecture.
Outsourcing business processes is the fastest-growing information
technology trend, with outsourcing services valued at more than $1
trillion.
Outsourcing is no longer confined to large organizations. As prices have
come down, smaller companies are jumping on the outsourcing bandwagon.

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The Benefits of Outsourcing

There are a number of significant advantages to outsourcing:
1. A business solution. Outsourcing is a viable strategic and
economic business solution because it allows companies to
concentrate on their core competencies.
2. Asset utilization. Organizations with millions of dollars tied
up in IT can improve their cash position and reduce expenses by
selling those assets to an outsourcer.
3. Access to greater expertise and more advanced technology. Many
companies cannot afford to retain a staff to manage and develop
the increasingly complex networks required in todays business.
4. Lower costs. Many companies outsource because skilled overseas
providers can perform needed work at dramatically lower labor
rates, resulting in significant savings.
5. Improved development time. Experienced industry specialists
often can develop and implement a system faster and more
efficiently than can in-house staff.
6. Elimination of peaks-and-valleys usage. Many companies have
seasonal businesses that require heavy computer power during
part of the year, but very little the remainder of the year.
7. Facilitation of downsizing. Companies that downsize are often
left with an unnecessarily large AIS function.

Risks of Outsourcing
Although many outsourcing agreements are great success stories, studies
show that anywhere from 25 percent to 50 percent of outsourcing
agreements either fail or do not live up to significant agreement
objectives.
In one survey, 17 percent of outsourcing agreements were labeled as
disasters.
There are many reasons why outsourcing projects fail, including:
1.

Not preparing properly

2.

Lukewarm executive and company buy-in

3.

Thinking outsourcing will gloss over deeper problems

4.

Entering into agreements so large and ill-defined that

there is a great deal of room for disappointment and unmet
expectations

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Companies that outsource often experience one or more of the following

drawbacks:
1. Inflexibility. Many outsourcing contracts are for 10 years and
contracts are difficult or costly to break.
2. Loss of control. A company that outsources runs the risk of
losing control of its system and data, and of its confidential
data being shared with others.
3. Reduced competitive advantage. Companies can lose a
fundamental understanding of their information systems needs
and how the system can provide it with competitive advantages.
4. Locked-in system. It is expensive and difficult to reverse
outsourcing. If the company is unable to buy back the dataprocessing facilities, it will have to buy new equipment and
hire a new data-processing staff.
5. Unfulfilled goals. Critics point out that many outsourcing
goals and benefits are never realized.
6. Poor service. Some companies complain of receiving poor
service from their outsourcing company.
7. Increased risk. Outsourcing business processes can expose a
company to significant risks, including operations, financial,
technology, strategy, market position, human capital
(personnel), legal, regulatory, and reputation impairment
risks.

Business Process Reengineering

Business process reengineering (BPR) is the analysis and redesign of
business processes and information systems to achieve significant
performance improvements.
Business process management (BPM) software has been developed to help
organizations automate many BPR tasks.
Michael Hammer set forth several principles that help organizations
successfully reengineer business processes:
1. Organize around outcomes, not tasks. In a reengineered system,
each persons job is designed around an objective, outcome, or
process rather than a task necessary to complete the process.
2. Require those who use the output to perform the process. It is
often better to require those who use the output to perform
the process.
3. Require those who produce information to process it. Ford
Motor used to have 500 people matching 14 data items on
purchase orders, receiving reports and vendor invoices before
processing payments.

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In Fords reengineered system, a computer compares items

received with items purchased.
If they do not match, the goods are returned. If they match,
the goods are accepted and the computer prepares and sends
the vendors payment.
This saved reduced Fords accounts payable staff by 75 percent.
4. Centralize and disperse data. To achieve economies of scale
and eliminate redundant resources, companies centralize
operations.
5. Integrate parallel activities. Chrysler had separate
departments that worked on designing engines, transmissions,
frames, and so on.
Chrysler reengineered its product development to place at
least one person from each department on the team in charge of
a particular automobile. This reduced product development
times and costly redesigns significantly.
6. Empower workers, use built-in controls, and flatten the
organizational chart. Most organizations have a layer of
employees, who do the work and several layers that record,
manage, audit, or control processes. In a reengineered system,
the people who do the work have decision-making
responsibility.
7. Capture data once, at its source. Previously, functional areas
designed and built their own AIS. It is better to use
technology such as EDI and source data automation devices such
as bar codes to capture data electronically at the source and
enter it in the database.

Challenges Faced by Reengineering Efforts

To successfully complete the BPR process, a company must face and
overcome the following obstacles:
1.

Tradition

2.

Resistance

3.

Time and cost requirements

4.

Lack of management support

5.

Skepticism

6.

Retraining

7.

Controls

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Prototyping
Prototyping is an approach to systems design in which a simplified
working model of a system is developed.
A prototype, or first draft, is quickly and inexpensively built and
provided to users for testing.
UNUM Life Insurance used prototyping to show how a new system using
image processing would work.
Middle managers at first had a hard time envisioning how they wanted to
use image processing and understanding the issues involved in the
change.
After viewing a prototype, the managers caught on to the possibilities
and issues associated with image processing.

Steps in Developing a Prototype

As shown in Figure 19-1 on page 722, four steps are involved in
developing a prototype:
The first step is to identify basic system requirements.
The second step is to develop an initial prototype.
The third step is to use and experiment with a prototype in order
to determine whether the prototype meets needs.
The fourth step is to develop an initial prototype into a fully
functional system.

When to Use Prototyping

In most cases, prototyping supports rather than replaces the SDLC.
Prototyping is appropriate when 1) there is a high level of uncertainty
about the AIS, 2) it is unclear what questions to ask, 3) the final AIS
cannot be clearly visualized, or 4) there is a high likelihood of
failure.
A summary of the conditions that make prototyping an appropriate design
methodology is presented in Table 21-3.

Advantages of Prototyping
Prototyping has the following advantages:
1.

Better definition of user needs

2.

Higher user involvement and satisfaction

3.

Faster development time

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Mutual Life Insurance developed the prototype of an executive

information system is only one month, as described in FOCUS 21-2.
4. Fewer errors
5. More opportunity for changes
6. Less costly

Disadvantages of Prototyping
Prototyping has the following disadvantages:
1. Significant user time
2. Less efficient use of system resources
3. Incomplete system development
4. Inadequately tested and documented systems
5. Negative behavioral reactions
6. Never-ending development

Computer-Aided Software Engineering

The developers of software for others have failed to create software to
simplify their own work.
The development of powerful computer-aided software (or systems)
engineering (CASE) tool, an integrated package of computer-based tools
automate important aspects of the software development process, has
changed that.
CASE tools are used to plan, analyze, design, program, and maintain an
information system.
CASE tools do not replace skilled designers. Instead, they are a host of
well integrated tools that give developers effective support for all
phases of the SDLC.

Advantages and Disadvantages of CASE Technology

CASE tools provide the following important advantages:
1. Improved productivity. Sony reported that CASE tools increased
productivity by more than 600 percent.
2. Improved program quality.
3. Cost savings. Savings of 80 percent to 90 percent are possible.
4. Improved control procedures. CASE tools encourage the
development of system controls, security measures, and system

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auditability and error-handling procedures early in the design

process.
5. Simplified documentation.
Some of the more serious problems with CASE technology include the
following:
1. Incompatibility. Some CASE tools do not interact effectively
with other systems.
2. Unmet expectations. According to a Deloitte & Touche survey,
only 37 percent of the chief information officers using CASE
believe they achieved the expected benefits.

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