Lecture 12

The cost and benefits of

IS

Learning Objectives

Costs of IS
Benefits of IS
Organising for IS evaluation
Make or Buy decision

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Introduction
Traditional methods of project evaluation express
the idea that the costs of an investment need to
be related to the benefits the investment bring
The cost are mainly incurred now, while the
benefits (hopefully) come later
The longer the delay in receiving the benefits, the
greater the risk

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The costs of information systems

Organisations have great difficulty
establishing true costs of their information
systems
The complex and costly systems being
implemented today many of which
transcend organisational boundaries require a rigorous approach to cost
estimation
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The costs of information systems

One method is to calculate the total cost of ownership
(TCO) of an information system, rather than the more
obvious purchase price
TCO refers to the activity of taking a holistic view of
costs over the lifetime of an investment
Total cost of a computer asset throughout its life cycle,
from acquisition to disposal, including purchase price of
the asset, implementation fees, upgrades, maintenance
and training
Others may include administrative costs

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The costs of information systems

Hardware costs
The front end user interface and peripherals
The networking equipment (cabling, routers, switching devices,
encryption devices and other communication linkages)
The back end processing equipment (servers, maintenance,
desktop PC units, etc)

Software costs
Development costs if built in-house, package and license costs if
bought-in
Application development tool
Security and encryption packages
Networking and communication software
Systems management software
Database and database management software
Front-end software packages
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The costs of information systems

Cost of ownership will include the following;
Support: help desk functions; user manuals, retraining of staff
Disaster recovery: duplication of facilities at alternative sites to
ensure continuity of operation in the event of major problems at the
main site
Staff: recruiting development staff, training developers, maintainers
and users
Maintenance: Hardware and software incur costs of minor
enhancements, bug-fixes and requests for change. Is the product
high-quality/low-maintenance or low quality/high maintenance?
Availability and cost of spare parts? Availability and cost of suitability
skilled technician and help desk staff?
Obsolescence: Does the product comply with an industry standard
with an established history and a foreseeable life? If not, the product
may soon be impossible to maintain and upgrade
Upgrade: Both hardware and software are likely to need upgrading
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The costs of information systems

In times when markets, technologies and regulatory
requirements change rapidly, change itself become a
major cost category.
How rapidly will the IS department be able to adapt the
system to changed conditions
Some points to consider
Interoperability of hardware: Can the proposed hardware
platform operate with other platforms, operating systems,
networks, peripheral equipment?
Openness of software: Can the software be easily and cheaply
modified or linked to other systems?

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The benefits of information systems

When working out the benefits of an IS/IT
investment, the organisation needs to
consider what business benefits are
expected to achieve
While staff can estimate immediate costs
reasonably, benefits are a different matter
The benefits are for future, and sometimes
depends on factors beyond the control of
an organisation
TANGIBLE and INTANGIBLE benefits
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The benefits of information systems

Tangible benefits (directly quantifiable)
Direct cost savings: Cut costs by automating
processes and so replace people. More accurately and
timely distribution of work lead to efficiency-based cost
reductions. Fewer staff can mean lower property costs
Avoiding cost increases: IS can avoid costs such as
transportation expenses
Revenue increases: These advocating a new system
will emphasise the prospects of increased sales
through new services, delivery channels or market
penetration
Staying in business: Sometimes introducing a new
system is simply essential if the organisation is to
continue
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The benefits of information systems

Intangible benefits (can be quantified to some degree)
Improved communications : between staffs and suppliers, customers or
investors
Staff morale: staff may see improvements in their role or working environment
Customer satisfaction: brings repeat business and reduces the cost of sales
Reputation: new systems may send positive signals to the market about
commitment to innovation
Customer management: using customer data in advanced information systems
may improve reaction to customers need
Flexibility: IS often enable an organisation to react more quickly and easily to
changes in the marketplace
Value chain management: building direct system links between partners in the
value chain can improve responsiveness
Organisational learning: IS enable lessons from current practices to spread
more widely; able to take advantage of new developments
Differentiation: An important strategic use of IS is differentiation

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Information Systems evaluation

Measures of systems success
Systems quality: reliability, features and functions, response time
Information quality: clarity, completeness, usefulness and accuracy of
information provided
Information use: regularity of use, number of enquiries, duration of use,
frequency of report requests
User satisfaction: overall satisfaction, enjoyment, no difference between
information needed and received, software satisfaction
Individual impact: problem identification, correctness of decision, decision
effectiveness, time taken to make decision, improved individual
productivity
Organisational impact: contributing to achieving goals, cost-benefit ratio,
return on investment, service effectiveness

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In House Development , Buy or

Outsource
In house development: the company has
its own expertise and develops software
internally
Better security
Better control
Better knowledge

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In House Development , Buy or

Outsource
Buy packaged software: organisation
purchases off-the-shelf software
Less Financial Risk
Reduced Technical Risk
Flexibility in Technology
Maximises Benefits of Investment Resources
Focus

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In House Development , Buy or

Outsource
Outsource: a company hires a firm to
develop a custom application or modify
packaged software
Lower personnel cost
Flexibility in Technology
Greater attention to core business
Services will be provided to a legally binding
contract with financial penalties and legal
redress

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Costs of In House development

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Training
Capital
Technical Expertise
Start Up Costs

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Costs of Outsourcing or Buy

Specification Costs
Management
Loss of Added Value

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Q&A
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