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System Analysis: Planning the Approach
CSC 2202 Systems Analysis and Design
1
Introduction In systems analysis and design, poor initial planning leads to inadequate understanding of requirements which is a major cause of project failure.
CSC 2202 Systems Analysis and Design
2
Introduction (cont) The analyst needs to focus on the project objectives and ponder the following: What type of information is required? What are the constraints on the investigation? What are the potential problems that may make the task more difficult? CSC 2202 Systems Analysis and Design
3
Introduction (cont) Systems planning tasks Examine the systems request Conduct a preliminary investigation Conduct feasibility study to determine whether further development is warranted CSC 2202 Systems Analysis and Design
4
Preliminary Investigation Purpose/Aim To
decide whether to proceed with the project
CSC 2202 Systems Analysis and Design
5
Preliminary Investigation Objectives for a preliminary investigation 1. Understand the problem 2. Define the project scope and constraints 3. Identify the benefits 4. Estimate the time and costs 5. Report to management CSC 2202 Systems Analysis and Design
6
Preliminary Investigation Objectives
.
CSC 2202 Systems Analysis and Design
7
Preliminary Investigation Objectives 1. Understand the problem Identify
the true nature of the problem and the reason for the systems request Stated problem may not be the real problem Clear statement defines the investigation scope
CSC 2202 Systems Analysis and Design
8
Preliminary Investigation Objectives 2. Define the project scope and constraints
Project scope
Define the range or extent of the project Set project boundaries
Constraints
Identify conditions, restrictions, or requirements ➠ ➠
Present vs. future Internal vs. external
CSC 2202 Systems Analysis and Design
9
Preliminary Investigation Objectives 3. Identify the benefits Tangible
benefits
Can
be stated in dollars Based on increased revenue or reduced cost Intangible
benefits
Difficult
to measure in dollars Can involve job satisfaction or company image
CSC 2202 Systems Analysis and Design
10
Preliminary Investigation Objectives 4. Estimate the time and costs Determine what information is needed Identify the sources of information Decide whether to use interviews, if so how many, and what time needed
Decide whether to use surveys, if so who to complete it, and what time needed Estimate the cost of gathering, analyzing, and reporting the information to management
CSC 2202 Systems Analysis and Design
11
Preliminary Investigation Objectives 5. Report to management Final
task in the preliminary investigation Key elements Evaluation
of systems request Estimate of costs and benefits Recommendations
CSC 2202 Systems Analysis and Design
12
Preliminary Investigation Steps Steps in a preliminary investigation 1. Obtain authorization to proceed 2. Identify the necessary information 3. Perform fact-finding to gather the required information 4. Analyze the information 5. Present results and recommendations to management CSC 2202 Systems Analysis and Design
13
Preliminary Investigation Steps 1. Obtain authorization to proceed Projects
can create concern or opposition Need clear authorization from management Good communication is important Initial
meeting with managers and users Explain the project Describe your responsibilities Invite questions CSC 2202 Systems Analysis and Design
14
Preliminary Investigation Steps 2. Identify the necessary information Review
the preliminary investigation objectives List all information needed for these objectives Prepare a schedule of activities for this phase
CSC 2202 Systems Analysis and Design
15
Preliminary Investigation Steps 3. Perform fact-finding to gather the required information Analyze
organization charts Conduct interviews Review current documentation Observe current operations to obtain information Conduct a brief survey of people who use the system CSC 2202 Systems Analysis and Design
16
Preliminary Investigation Steps 4. Analyze the information Identify
alternatives
Include
costs and benefits Recommend an action Possible
actions
Take
no further action Apply some other solution Proceed to systems implementation phase Proceed to next SDLC phase — systems analysis CSC 2202 Systems Analysis and Design
17
Preliminary Investigation Steps 5. Present your results and recommendations to management
Typical report sections Introduction Systems request summary Findings Recommendations Time & cost estimates Expected benefits Appendix
Oral presentation also might be required CSC 2202 Systems Analysis and Design
18
Objectives and Terms of Reference As part of the planning process, analysts must ensure that: They
understand the objectives and terms of reference agreed with the client. They are aware of constraints that affect the analysis process. They plan to manage tasks in time.
CSC 2202 Systems Analysis and Design
19
Objectives and Terms of Reference The stated objectives of the client are usually recorded in the terms of reference document. These are agreed on by the client before analysis starts. The Mnemonic “SCOPE” summarizes the main areas included in the Terms of reference. CSC 2202 Systems Analysis and Design
20
Objectives and Terms of Reference S - System boundary C - Constraints O - Objectives P - Permission E - End products The TOR document has to define the above parameters. CSC 2202 Systems Analysis and Design
21
Objectives and Terms of Reference System boundary Defines the area of the organization under study and specifies the limits of the new system implemented as a result of the project.
CSC 2202 Systems Analysis and Design
22
Objectives and Terms of Reference Constraints Factors
e.g. budget, timescales, technology which may restrict the study or solution.
Objectives Statement
of expectation of client from the project. They have to be clear and measurable.
CSC 2202 Systems Analysis and Design
23
Objectives and Terms of Reference Permission Indicates
who in the clients organization is responsible for supervising the project and making decisions.
End products Description
of deliverables of the study. Usually in form of a report.
CSC 2202 Systems Analysis and Design
24
Feasibility Study •Is it possible? •Is it justified?
CSC 2202 Systems Analysis and Design
25
Feasibility Study It is a small scale systems analysis that gives limited details. Involves the analyst but is more time limited. Very important for large and complex projects – before you decide to proceed. However, it is no substitute for a full and detailed study. CSC 2202 Systems Analysis and Design
26
Feasibility Study A feasibility study is the measure of how beneficial the development or enhancement of an IS would be to the business.
CSC 2202 Systems Analysis and Design
27
Determining Feasibility Determining feasibility First
step is a determination of feasibility Goal is to identify nonfeasible projects as soon as possible Feasibility can change over time Nonfeasible
projects can be resubmitted Initially feasible projects can be rejected later
CSC 2202 Systems Analysis and Design
28
Levels of Feasibility The feasibility study has to address the following levels: Economic or financial feasibility Technical feasibility Operational feasibility Legal and ethical issues
CSC 2202 Systems Analysis and Design
29
Levels of Feasibility Operational (Functional) feasibility
The measure of how well a particular Information System will work in a given environment. Will the solution fulfil the end-users’ requirements? Will the organizational change result in an acceptable quality of working life for those affected by the system? CSC 2202 Systems Analysis and Design
30
Levels of Feasibility Technical feasibility Is
the measure of the practicality of a specific technical Information System solution and the availability of technical resources i.e. Do we have the technology & skills needed to develop & operate the system?
CSC 2202 Systems Analysis and Design
31
Levels of Feasibility Economic feasibility Is
the measure of the cost-effectiveness of an Information System solution i.e. Will the system result in competitive advantage to the enterprise?
CSC 2202 Systems Analysis and Design
32
Levels of Feasibility Legal feasibility
Will the proposed system conform to laws and regulations?
Ethical issues Will
the proposed system conform to the norms of ethics for the Information systems community? CSC 2202 Systems Analysis and Design
33
Evaluating Feasibility Feasibility analysis project teams makes a recommendation to the steering committee Steering committee makes a decision
proceed,
or stop now
which alternative?
Project team implements this decision CSC 2202 Systems Analysis and Design
34
Feasibility Analysis On completion of Feasibility Analysis: original
problem (or need) understood alternative solutions considered
Involves financial, technical and people factor considerations Concludes with recommendation, including costs and benefits CSC 2202 Systems Analysis and Design
35
Feasibility Analysis A project is economically feasible if the future benefits outweigh the costs The Systems Analyst calculates a project’s costs and benefits Cost-benefit analysis is performed when Conducting
a preliminary investigation Evaluating a project Making recommendations to management CSC 2202 Systems Analysis and Design
36
Describing Costs and Benefits Tangible and intangible costs
Tangible costs have a specific dollar value
Intangible costs are more difficult to measure in dollars
Examples: salaries, purchase of hardware or software
Examples: reduced customer satisfaction, low morale in the organization
Although intangible costs are important, tangible cost figures should be used if available
CSC 2202 Systems Analysis and Design
37
Tangible and Intangible Benefits Tangible Benefits include faster system larger volumes of transactions
➤Tangible
Intangible Benefits include promote goodwill better work environment
CSC 2202 Systems Analysis and Design
38
Cost Benefit Analysis Summarise costs and benefits of the project
to allow management to decide whether to proceed
Costs and benefits can be tangible and intangible
CSC 2202 Systems Analysis and Design
39
Cost Benefit Analysis information needed
Estimate cost of operating the current system Estimate cost of operating the proposed new system Description of benefits - tangible and intangible Risk assessment for doing and not doing the new project risky projects take longer than estimated to install risky projects likely to exceed cost estimate
CSC 2202 Systems Analysis and Design
40
Cost Benefit Analysis information needed
Framework for assessing risk familiarity
of company with the technology
proposed project “structure” (all requirements known?) size of project relative to those normally taken on
CSC 2202 Systems Analysis and Design
41
Tangible and Intangible Costs Tangible Costs include Research
and development costs Hardware costs Software costs Labor costs Maintenance costs Operational costs CSC 2202 Systems Analysis and Design
42
Tangible and Intangible Costs Intangible Costs include operational
slowdowns degradation in the workplace
CSC 2202 Systems Analysis and Design
43
Describing Costs and Benefits Cost classifications Costs
can be classified in several ways
Tangible
and intangible costs Direct and indirect costs Fixed and variable costs Developmental and operational costs
CSC 2202 Systems Analysis and Design
44
Describing Costs and Benefits Direct and indirect costs Direct
costs are those that can be associated with the development of a specific system Examples:
project team salaries, new hardware or software needed for the system
Indirect
costs, or overhead expenses, cannot be attributed to a particular system Examples:
network administrator’s salary, copy machine rental costs CSC 2202 Systems Analysis and Design
45
Describing Costs and Benefits Fixed and variable costs Fixed
costs are relatively constant and do not depend on a level of activity or effort Examples:
Variable
salaries, rental charges
costs depend on the level of
activity Examples:
printer paper, supplies, telephone line charges CSC 2202 Systems Analysis and Design
46
Describing Costs and Benefits Developmental and operational costs Development
costs are incurred only once, at the time the system is developed Examples:
system development team salaries, user training, hardware purchase
Operational
costs are incurred after the system is implemented and continue while the system is in use Examples:
system maintenance, ongoing training, annual license fees CSC 2202 Systems Analysis and Design
47
Benefit classifications Benefit classifications Benefits
can be classified into the same categories as costs Tangible
and intangible benefits Direct and indirect benefits Fixed and variable benefits Developmental and operational benefits Benefits
also can be classified as positive benefits and cost-avoidance benefits CSC 2202 Systems Analysis and Design
48
Positive and cost-avoidance benefits Positive and cost-avoidance benefits
Positive benefits are a direct result of the new information system
Examples: increased revenues, improved services, higher morale, better management
Cost-avoidance benefits refer to expenses that would be necessary if the new system is not installed
Examples: handling work with current staff instead of hiring, not having to replace hardware or software CSC 2202 Systems Analysis and Design
49
Techniques for Evaluating Financial Feasibility Cost benefit analysis Return on Total Assets (ROTA) Payback Analysis Net Present Value Break Even Analysis
CSC 2202 Systems Analysis and Design
50
Cost-Benefit Analysis Cost-benefit analysis is the process of comparing anticipated costs to anticipated benefits Cost-benefit analysis produces reliable information for making decisions Common cost-benefit techniques Payback analysis Return on investment (ROI) analysis Present value analysis
CSC 2202 Systems Analysis and Design
51
Payback Analysis Original Investment Payback = Average annual return on investment
Project investment decision based on how long it will take for the benefits of the system to pay back the development costs Useful measure to prioritise many projects which are competing for resources and commencement
CSC 2202 Systems Analysis and Design
52
Payback Analysis Payback analysis Payback analysis is the process of determining how long it takes for an information system, to pay for itself Four step process
1. 2. 3. 4.
Determine the system’s initial development cost Estimate annual benefits Determine annual operating costs Find the payback period by comparing total costs to accumulated benefits
CSC 2202 Systems Analysis and Design
53
Payback Analysis Payback analysis When
costs are plotted, the economically useful life of the system is shown Systems development costs are high at first, then drop Operational costs remain low at first, then increase as more maintenance is required Benefits usually increase rapidly when the system becomes operational, then level off CSC 2202 Systems Analysis and Design
54
Payback Analysis Payback analysis Pros
and cons
Payback
analysis emphasizes costs and benefits early in the system’s life and ignores those that occur later Even though it has drawbacks, payback analysis is widely used
CSC 2202 Systems Analysis and Design
55
Return on Total Assets (ROTA) Net income from the project
ROTA = Total assets invested in the project
Reveals effectiveness in generating profits from available assets A required rate of return is the percentage rate that an investment must earn in order for it to be financially attractive CSC 2202 Systems Analysis and Design
56
Return on investment Analysis Return on investment analysis ROI
is a percentage rate that measures profitability by comparing a project’s total net benefits (the return) to its total costs (the investment) ROI = (total benefits - total costs) / total costs Projects can be ranked using ROI CSC 2202 Systems Analysis and Design
57
Return on investment Analysis Return on investment analysis Pros
and cons
ROI
does consider all costs and benefits during the system’s life, and is a more precise method than payback analysis ROI only measures the overall rate of return for the total period, and annual rates can vary considerably ROI ignores the timing of costs and benefits CSC 2202 Systems Analysis and Design
58
Net Present Value Takes into account the time value of money
Able to compare today’s costs with costs in the future (also for benefits) CSC 2202 Systems Analysis and Design
59
Present Value Analysis Present value analysis The time value of money is a concept that adjusts future costs and benefits and expresses them in terms of current dollars The timing of costs and benefits directly affects the desirability of a project CSC 2202 Systems Analysis and Design
60
Present Value Analysis Benefits
that you receive now are more valuable than those you receive in the future, because you gain the use of the money and can invest it Costs that you incur now are more expensive than those you incur in the future, because you lose the use of the money immediately CSC 2202 Systems Analysis and Design
61
Present Value Analysis Present value analysis Present value adjustment factors are based on a specified interest rate called the discount rate The discount rate is the return a company might expect on a risk-free investment, such as a bond Each company determines its own acceptable rate of return for an information systems project Adjustment factors are printed in tables called present value tables, which are readily available
CSC 2202 Systems Analysis and Design
62
Present Value Analysis Present value analysis Pros
and cons
Present
value analysis not only considers all costs and benefits, but adjusts the values based on timing NPV results depend on future estimates, and are only as reliable as the forecasts themselves Many companies use all three methods to evaluate projects CSC 2202 Systems Analysis and Design
63
Break Even Analysis Break-even point is where it becomes profitable for the business to get the new information system Total costs include recurring costs (during operation of the system) plus development costs (once only)
CSC 2202 Systems Analysis and Design
64
The feasibility study report Has the following sections Background The current situation The proposed solution Costs and Benefits Recommendations. CSC 2202 Systems Analysis and Design
65
The feasibility study report Background consists of The
terms of reference Reasons for the study
The current situation consists of Overview
of the current situation Problems and requirements identified
CSC 2202 Systems Analysis and Design
66
The feasibility study report The proposed solution Description
of requirements for the new system along with a number of options explaining how this solution might be implemented. Technical, cost and operational implications are described.
CSC 2202 Systems Analysis and Design
67
The feasibility study report Costs and Benefits Comparison
of costs and benefits using an appropriate evaluation criteria.
Recommendations. Summary
of the previous sections of the
report Recommendations as to how the client should proceed. CSC 2202 Systems Analysis and Design
68
The “PIECES” framework Wetherbe's “PIECES” problem solving framework is a checklist for identifying problems with an existing information system. Useful for identifying operational problems to be solved, and their urgency CSC 2202 Systems Analysis and Design
69
The “PIECES” framework P I E C E S
- Performance - Information - Economy - Control - Efficiency - Services CSC 2202 Systems Analysis and Design
70
The “PIECES” framework Performance
Is current throughput and response time adequate?
Information
Do end users and managers get timely, pertinent, accurate and usefully formatted information?
CSC 2202 Systems Analysis and Design
71
The “PIECES” framework Economy Are services provided by the current system cost-effective? Could there be a reduction in costs and/or an increase in benefits? Control Are there effective controls to protect against fraud and to guarantee information accuracy and security?
CSC 2202 Systems Analysis and Design
72
The “PIECES” framework Efficiency Does current system make good use of resources: people, time, flow of forms? Services Are current services reliable? Are they flexible and expandable? CSC 2202 Systems Analysis and Design
73
Review Questions Using an organization with which you are familiar, prepare the Terms of Reference for a project to develop a new information system of your choice.
CSC 2202 Systems Analysis and Design
74
CSC 2202 Systems Analysis and Design
1
Introduction In systems analysis and design, poor initial planning leads to inadequate understanding of requirements which is a major cause of project failure.
CSC 2202 Systems Analysis and Design
2
Introduction (cont) The analyst needs to focus on the project objectives and ponder the following: What type of information is required? What are the constraints on the investigation? What are the potential problems that may make the task more difficult? CSC 2202 Systems Analysis and Design
3
Introduction (cont) Systems planning tasks Examine the systems request Conduct a preliminary investigation Conduct feasibility study to determine whether further development is warranted CSC 2202 Systems Analysis and Design
4
Preliminary Investigation Purpose/Aim To
decide whether to proceed with the project
CSC 2202 Systems Analysis and Design
5
Preliminary Investigation Objectives for a preliminary investigation 1. Understand the problem 2. Define the project scope and constraints 3. Identify the benefits 4. Estimate the time and costs 5. Report to management CSC 2202 Systems Analysis and Design
6
Preliminary Investigation Objectives
.
CSC 2202 Systems Analysis and Design
7
Preliminary Investigation Objectives 1. Understand the problem Identify
the true nature of the problem and the reason for the systems request Stated problem may not be the real problem Clear statement defines the investigation scope
CSC 2202 Systems Analysis and Design
8
Preliminary Investigation Objectives 2. Define the project scope and constraints
Project scope
Define the range or extent of the project Set project boundaries
Constraints
Identify conditions, restrictions, or requirements ➠ ➠
Present vs. future Internal vs. external
CSC 2202 Systems Analysis and Design
9
Preliminary Investigation Objectives 3. Identify the benefits Tangible
benefits
Can
be stated in dollars Based on increased revenue or reduced cost Intangible
benefits
Difficult
to measure in dollars Can involve job satisfaction or company image
CSC 2202 Systems Analysis and Design
10
Preliminary Investigation Objectives 4. Estimate the time and costs Determine what information is needed Identify the sources of information Decide whether to use interviews, if so how many, and what time needed
Decide whether to use surveys, if so who to complete it, and what time needed Estimate the cost of gathering, analyzing, and reporting the information to management
CSC 2202 Systems Analysis and Design
11
Preliminary Investigation Objectives 5. Report to management Final
task in the preliminary investigation Key elements Evaluation
of systems request Estimate of costs and benefits Recommendations
CSC 2202 Systems Analysis and Design
12
Preliminary Investigation Steps Steps in a preliminary investigation 1. Obtain authorization to proceed 2. Identify the necessary information 3. Perform fact-finding to gather the required information 4. Analyze the information 5. Present results and recommendations to management CSC 2202 Systems Analysis and Design
13
Preliminary Investigation Steps 1. Obtain authorization to proceed Projects
can create concern or opposition Need clear authorization from management Good communication is important Initial
meeting with managers and users Explain the project Describe your responsibilities Invite questions CSC 2202 Systems Analysis and Design
14
Preliminary Investigation Steps 2. Identify the necessary information Review
the preliminary investigation objectives List all information needed for these objectives Prepare a schedule of activities for this phase
CSC 2202 Systems Analysis and Design
15
Preliminary Investigation Steps 3. Perform fact-finding to gather the required information Analyze
organization charts Conduct interviews Review current documentation Observe current operations to obtain information Conduct a brief survey of people who use the system CSC 2202 Systems Analysis and Design
16
Preliminary Investigation Steps 4. Analyze the information Identify
alternatives
Include
costs and benefits Recommend an action Possible
actions
Take
no further action Apply some other solution Proceed to systems implementation phase Proceed to next SDLC phase — systems analysis CSC 2202 Systems Analysis and Design
17
Preliminary Investigation Steps 5. Present your results and recommendations to management
Typical report sections Introduction Systems request summary Findings Recommendations Time & cost estimates Expected benefits Appendix
Oral presentation also might be required CSC 2202 Systems Analysis and Design
18
Objectives and Terms of Reference As part of the planning process, analysts must ensure that: They
understand the objectives and terms of reference agreed with the client. They are aware of constraints that affect the analysis process. They plan to manage tasks in time.
CSC 2202 Systems Analysis and Design
19
Objectives and Terms of Reference The stated objectives of the client are usually recorded in the terms of reference document. These are agreed on by the client before analysis starts. The Mnemonic “SCOPE” summarizes the main areas included in the Terms of reference. CSC 2202 Systems Analysis and Design
20
Objectives and Terms of Reference S - System boundary C - Constraints O - Objectives P - Permission E - End products The TOR document has to define the above parameters. CSC 2202 Systems Analysis and Design
21
Objectives and Terms of Reference System boundary Defines the area of the organization under study and specifies the limits of the new system implemented as a result of the project.
CSC 2202 Systems Analysis and Design
22
Objectives and Terms of Reference Constraints Factors
e.g. budget, timescales, technology which may restrict the study or solution.
Objectives Statement
of expectation of client from the project. They have to be clear and measurable.
CSC 2202 Systems Analysis and Design
23
Objectives and Terms of Reference Permission Indicates
who in the clients organization is responsible for supervising the project and making decisions.
End products Description
of deliverables of the study. Usually in form of a report.
CSC 2202 Systems Analysis and Design
24
Feasibility Study •Is it possible? •Is it justified?
CSC 2202 Systems Analysis and Design
25
Feasibility Study It is a small scale systems analysis that gives limited details. Involves the analyst but is more time limited. Very important for large and complex projects – before you decide to proceed. However, it is no substitute for a full and detailed study. CSC 2202 Systems Analysis and Design
26
Feasibility Study A feasibility study is the measure of how beneficial the development or enhancement of an IS would be to the business.
CSC 2202 Systems Analysis and Design
27
Determining Feasibility Determining feasibility First
step is a determination of feasibility Goal is to identify nonfeasible projects as soon as possible Feasibility can change over time Nonfeasible
projects can be resubmitted Initially feasible projects can be rejected later
CSC 2202 Systems Analysis and Design
28
Levels of Feasibility The feasibility study has to address the following levels: Economic or financial feasibility Technical feasibility Operational feasibility Legal and ethical issues
CSC 2202 Systems Analysis and Design
29
Levels of Feasibility Operational (Functional) feasibility
The measure of how well a particular Information System will work in a given environment. Will the solution fulfil the end-users’ requirements? Will the organizational change result in an acceptable quality of working life for those affected by the system? CSC 2202 Systems Analysis and Design
30
Levels of Feasibility Technical feasibility Is
the measure of the practicality of a specific technical Information System solution and the availability of technical resources i.e. Do we have the technology & skills needed to develop & operate the system?
CSC 2202 Systems Analysis and Design
31
Levels of Feasibility Economic feasibility Is
the measure of the cost-effectiveness of an Information System solution i.e. Will the system result in competitive advantage to the enterprise?
CSC 2202 Systems Analysis and Design
32
Levels of Feasibility Legal feasibility
Will the proposed system conform to laws and regulations?
Ethical issues Will
the proposed system conform to the norms of ethics for the Information systems community? CSC 2202 Systems Analysis and Design
33
Evaluating Feasibility Feasibility analysis project teams makes a recommendation to the steering committee Steering committee makes a decision
proceed,
or stop now
which alternative?
Project team implements this decision CSC 2202 Systems Analysis and Design
34
Feasibility Analysis On completion of Feasibility Analysis: original
problem (or need) understood alternative solutions considered
Involves financial, technical and people factor considerations Concludes with recommendation, including costs and benefits CSC 2202 Systems Analysis and Design
35
Feasibility Analysis A project is economically feasible if the future benefits outweigh the costs The Systems Analyst calculates a project’s costs and benefits Cost-benefit analysis is performed when Conducting
a preliminary investigation Evaluating a project Making recommendations to management CSC 2202 Systems Analysis and Design
36
Describing Costs and Benefits Tangible and intangible costs
Tangible costs have a specific dollar value
Intangible costs are more difficult to measure in dollars
Examples: salaries, purchase of hardware or software
Examples: reduced customer satisfaction, low morale in the organization
Although intangible costs are important, tangible cost figures should be used if available
CSC 2202 Systems Analysis and Design
37
Tangible and Intangible Benefits Tangible Benefits include faster system larger volumes of transactions
➤Tangible
Intangible Benefits include promote goodwill better work environment
CSC 2202 Systems Analysis and Design
38
Cost Benefit Analysis Summarise costs and benefits of the project
to allow management to decide whether to proceed
Costs and benefits can be tangible and intangible
CSC 2202 Systems Analysis and Design
39
Cost Benefit Analysis information needed
Estimate cost of operating the current system Estimate cost of operating the proposed new system Description of benefits - tangible and intangible Risk assessment for doing and not doing the new project risky projects take longer than estimated to install risky projects likely to exceed cost estimate
CSC 2202 Systems Analysis and Design
40
Cost Benefit Analysis information needed
Framework for assessing risk familiarity
of company with the technology
proposed project “structure” (all requirements known?) size of project relative to those normally taken on
CSC 2202 Systems Analysis and Design
41
Tangible and Intangible Costs Tangible Costs include Research
and development costs Hardware costs Software costs Labor costs Maintenance costs Operational costs CSC 2202 Systems Analysis and Design
42
Tangible and Intangible Costs Intangible Costs include operational
slowdowns degradation in the workplace
CSC 2202 Systems Analysis and Design
43
Describing Costs and Benefits Cost classifications Costs
can be classified in several ways
Tangible
and intangible costs Direct and indirect costs Fixed and variable costs Developmental and operational costs
CSC 2202 Systems Analysis and Design
44
Describing Costs and Benefits Direct and indirect costs Direct
costs are those that can be associated with the development of a specific system Examples:
project team salaries, new hardware or software needed for the system
Indirect
costs, or overhead expenses, cannot be attributed to a particular system Examples:
network administrator’s salary, copy machine rental costs CSC 2202 Systems Analysis and Design
45
Describing Costs and Benefits Fixed and variable costs Fixed
costs are relatively constant and do not depend on a level of activity or effort Examples:
Variable
salaries, rental charges
costs depend on the level of
activity Examples:
printer paper, supplies, telephone line charges CSC 2202 Systems Analysis and Design
46
Describing Costs and Benefits Developmental and operational costs Development
costs are incurred only once, at the time the system is developed Examples:
system development team salaries, user training, hardware purchase
Operational
costs are incurred after the system is implemented and continue while the system is in use Examples:
system maintenance, ongoing training, annual license fees CSC 2202 Systems Analysis and Design
47
Benefit classifications Benefit classifications Benefits
can be classified into the same categories as costs Tangible
and intangible benefits Direct and indirect benefits Fixed and variable benefits Developmental and operational benefits Benefits
also can be classified as positive benefits and cost-avoidance benefits CSC 2202 Systems Analysis and Design
48
Positive and cost-avoidance benefits Positive and cost-avoidance benefits
Positive benefits are a direct result of the new information system
Examples: increased revenues, improved services, higher morale, better management
Cost-avoidance benefits refer to expenses that would be necessary if the new system is not installed
Examples: handling work with current staff instead of hiring, not having to replace hardware or software CSC 2202 Systems Analysis and Design
49
Techniques for Evaluating Financial Feasibility Cost benefit analysis Return on Total Assets (ROTA) Payback Analysis Net Present Value Break Even Analysis
CSC 2202 Systems Analysis and Design
50
Cost-Benefit Analysis Cost-benefit analysis is the process of comparing anticipated costs to anticipated benefits Cost-benefit analysis produces reliable information for making decisions Common cost-benefit techniques Payback analysis Return on investment (ROI) analysis Present value analysis
CSC 2202 Systems Analysis and Design
51
Payback Analysis Original Investment Payback = Average annual return on investment
Project investment decision based on how long it will take for the benefits of the system to pay back the development costs Useful measure to prioritise many projects which are competing for resources and commencement
CSC 2202 Systems Analysis and Design
52
Payback Analysis Payback analysis Payback analysis is the process of determining how long it takes for an information system, to pay for itself Four step process
1. 2. 3. 4.
Determine the system’s initial development cost Estimate annual benefits Determine annual operating costs Find the payback period by comparing total costs to accumulated benefits
CSC 2202 Systems Analysis and Design
53
Payback Analysis Payback analysis When
costs are plotted, the economically useful life of the system is shown Systems development costs are high at first, then drop Operational costs remain low at first, then increase as more maintenance is required Benefits usually increase rapidly when the system becomes operational, then level off CSC 2202 Systems Analysis and Design
54
Payback Analysis Payback analysis Pros
and cons
Payback
analysis emphasizes costs and benefits early in the system’s life and ignores those that occur later Even though it has drawbacks, payback analysis is widely used
CSC 2202 Systems Analysis and Design
55
Return on Total Assets (ROTA) Net income from the project
ROTA = Total assets invested in the project
Reveals effectiveness in generating profits from available assets A required rate of return is the percentage rate that an investment must earn in order for it to be financially attractive CSC 2202 Systems Analysis and Design
56
Return on investment Analysis Return on investment analysis ROI
is a percentage rate that measures profitability by comparing a project’s total net benefits (the return) to its total costs (the investment) ROI = (total benefits - total costs) / total costs Projects can be ranked using ROI CSC 2202 Systems Analysis and Design
57
Return on investment Analysis Return on investment analysis Pros
and cons
ROI
does consider all costs and benefits during the system’s life, and is a more precise method than payback analysis ROI only measures the overall rate of return for the total period, and annual rates can vary considerably ROI ignores the timing of costs and benefits CSC 2202 Systems Analysis and Design
58
Net Present Value Takes into account the time value of money
Able to compare today’s costs with costs in the future (also for benefits) CSC 2202 Systems Analysis and Design
59
Present Value Analysis Present value analysis The time value of money is a concept that adjusts future costs and benefits and expresses them in terms of current dollars The timing of costs and benefits directly affects the desirability of a project CSC 2202 Systems Analysis and Design
60
Present Value Analysis Benefits
that you receive now are more valuable than those you receive in the future, because you gain the use of the money and can invest it Costs that you incur now are more expensive than those you incur in the future, because you lose the use of the money immediately CSC 2202 Systems Analysis and Design
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Present Value Analysis Present value analysis Present value adjustment factors are based on a specified interest rate called the discount rate The discount rate is the return a company might expect on a risk-free investment, such as a bond Each company determines its own acceptable rate of return for an information systems project Adjustment factors are printed in tables called present value tables, which are readily available
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Present Value Analysis Present value analysis Pros
and cons
Present
value analysis not only considers all costs and benefits, but adjusts the values based on timing NPV results depend on future estimates, and are only as reliable as the forecasts themselves Many companies use all three methods to evaluate projects CSC 2202 Systems Analysis and Design
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Break Even Analysis Break-even point is where it becomes profitable for the business to get the new information system Total costs include recurring costs (during operation of the system) plus development costs (once only)
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The feasibility study report Has the following sections Background The current situation The proposed solution Costs and Benefits Recommendations. CSC 2202 Systems Analysis and Design
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The feasibility study report Background consists of The
terms of reference Reasons for the study
The current situation consists of Overview
of the current situation Problems and requirements identified
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The feasibility study report The proposed solution Description
of requirements for the new system along with a number of options explaining how this solution might be implemented. Technical, cost and operational implications are described.
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The feasibility study report Costs and Benefits Comparison
of costs and benefits using an appropriate evaluation criteria.
Recommendations. Summary
of the previous sections of the
report Recommendations as to how the client should proceed. CSC 2202 Systems Analysis and Design
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The “PIECES” framework Wetherbe's “PIECES” problem solving framework is a checklist for identifying problems with an existing information system. Useful for identifying operational problems to be solved, and their urgency CSC 2202 Systems Analysis and Design
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The “PIECES” framework P I E C E S
- Performance - Information - Economy - Control - Efficiency - Services CSC 2202 Systems Analysis and Design
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The “PIECES” framework Performance
Is current throughput and response time adequate?
Information
Do end users and managers get timely, pertinent, accurate and usefully formatted information?
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The “PIECES” framework Economy Are services provided by the current system cost-effective? Could there be a reduction in costs and/or an increase in benefits? Control Are there effective controls to protect against fraud and to guarantee information accuracy and security?
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The “PIECES” framework Efficiency Does current system make good use of resources: people, time, flow of forms? Services Are current services reliable? Are they flexible and expandable? CSC 2202 Systems Analysis and Design
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Review Questions Using an organization with which you are familiar, prepare the Terms of Reference for a project to develop a new information system of your choice.
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