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

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

Mixed Methods ($ and no $) Costs & Benefits from IS Economic aspects of IS (or IS economy) is assessed in planning of IS as well during IS production stage. Cost/Benefit analysis is a necessary component in any assessment of IS economy. Cost-Benefit Analysis Tangible Costs & Benefits ($) Intangible Costs & Benefits (no $) Measurement Type? Quantitative Quantitative & Qualitative Capital Budgeting Methods ($) Assessments of returns’ size Assessments of returns’ timing Mixed Methods ($ and no $) Portfolio Analysis (Risk control) Balanced Scorecard (Org. goals achievement)

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.

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. ?

Tangible Benefits 1/2 Savings on financial expenses : savings on labor expenses due to process automation savings due to reduced process time (e.g., reducing inventory costs in supply chain process) cost avoidance: not adding more employees (expenses) when improved process/IS can carry a larger volume of operations Organizational performance gains: increased process performance ($, t) with new IS  organizational productivity gain (output value/input cost)  financial returns (profit figures).

Tangible Benefits 2/2 Better decision making resulting in income increase (e.g., moving into new product and geographical markets) Cutting losses by improved management control (e.g., ERPS case of detecting fraudulent purchases) Data error reduction eliminating waste of business time & labour for repeated tasks.

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 decisions with Big Data) Improvement in the appearance of reports and other business documentation (e.g., formatting with MS Office) Increased knowledge capabilities (although necessary for making more attractive products, first new products must be made and pass the market test).

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) 0 1 2 3 4 Time (years) The shorter the wait period, the more economically valuable the IS.

Mixed Methods of Assessing IS 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) *Example: Risk of not completing an expensive system (e.g., ERPS): On the scale 1-10, the weight is 8 (so, it is a serious problem); the management comes up with this assessment The probability of being unable to cover the cost: On the scale 0-1, p=0.4; managers’ assessment, company has accumulation, steady income, and strong partner banks, whiuch altogether lowers the probability of experiencing the cost problem. Risk= 8 X 0.4 = 3.2 of possible 10 as the maximum (10 X 1=10) Conclusion: The risk is smaller, manageable (about 1/3 of maximum risk). Therefore, although the system is expensive this factor is not likely to endanger the system’s development.

Mixed Methods of Assessing IS 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 ($) Tangibles & Intangibles Process perf. ($, t, internal customer) Information Systems

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…

3. Rent: Cloud Advantages: Cloud Disadvantages: 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.

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.