1. Preparing the System Proposal Chapter 13 Topics: –Systems proposal –Determining hardware needs –Determining software needs –Decision to rent, lease, or buy –Tangible and intangible costs and benefits –Methods for selecting alternatives

2. Preparing the System Proposal Systems Proposal In order to prepare the systems proposal analysts must use a systematic approach to identify hardware and software needs –Ascertaining hardware and software needs –Identifying and forecasting costs and benefits –Comparing costs and benefits –Choosing the most appropriate alternative

3. Preparing the System Proposal Steps to Ascertain Hardware and Software Needs Inventory computer hardware currently available Estimate current and projected workload for the system Evaluate the performance of hardware and software using some predetermined criteria Choose the vendor according to the evaluation Obtain hardware and software from the vendor

4. Preparing the System Proposal Steps to Ascertain Hardware and Software Needs

5. Preparing the System Proposal Hardware Inventory Check –Type of equipment: model no., manufacturer –Status of equipment operation –Estimated age of equipment –Physical location of equipment –Department or person responsible for equipment

6. Preparing the System Proposal Criteria for Evaluating Hardware Time required for average transactions (including time for input and output) Total volume capacity of the system Idle time of the central processing unit Size of memory provided

7. Preparing the System Proposal People that Evaluate Hardware –Management –Users –Systems analysts

8. Preparing the System Proposal Three Options for Obtaining Computer Equipment –Buying –Leasing –Rental

9. Preparing the System Proposal Buying

10. Preparing the System Proposal Leasing

11. Preparing the System Proposal Renting

12. Preparing the System Proposal Evaluation of Vendor Support for Hardware Hardware support –full line of hardware, quality products, warranty Software support –complete software needs, custom programming, warranty Installation and training support – commitment to schedule, in-house training, technical assistance Maintenance support – routine maintenance procedures, specified response time in emergencies, equipment loan while repair is being done

13. Preparing the System Proposal Guideline for Evaluating Software –Performance effectiveness – perform all required and desired tasks, well-designed display screens, adequate capacity –Performance efficiency – fast response time, efficient input, output, storage of data and backup –Ease of use – satisfactory user interface, help menu, ReadMe files, flexible interface, adequate feedback, good error recovery –Flexibility – options for input and output, usable with other software –Quality of documentation – good organization, adequate online tutorial, Web site with FAQ –Manufacturer support – tech support hot line, newsletter/email, downloadable product updates

14. Preparing the System Proposal Costs and Benefits Analysis Systems analysts should take tangible costs, intangible costs, tangible benefits, and intangible benefits into consideration to identify cost and benefits of a prospective system

15. Preparing the System Proposal Tangible Costs Tangible costs are those that can be accurately projected by systems analysts and the business' accounting personnel Examples: –Cost of equipment –Cost of resources –Cost of systems analysts' time

16. Preparing the System Proposal Intangible Costs Intangible costs are those that are difficult to estimate, and may not be known Examples: –Cost of losing a competitive edge –Declining company image

17. Preparing the System Proposal Tangible Benefits Tangible benefits are advantages measurable in dollars that accrue to the organization through use of the information system Examples: –Increase in the speed of processing –Access to information on a more timely basis

18. Preparing the System Proposal Intangible Benefits Intangible benefits are advantages from use of the information system that are difficult to measure Examples: –Improved effectiveness of decision-making processes –Maintaining a good business image

19. Preparing the System Proposal Selecting the Best Alternative To select the best alternative, analysts should compare costs and benefits of the prospective alternatives using –Break-even analysis –Payback –Cash-flow analysis –Present value method

20. Preparing the System Proposal Break-Even Analysis Break-even analysis is the point at which the cost of the current system and the proposed system intersect Break-even analysis is useful when a business is growing and volume is a key variable in costs

21. Preparing the System Proposal Break-Even Analysis

22. Preparing the System Proposal Payback Period (PBP) Payback determines the number of years of operation that the system needs to pay back the cost of investing in it Payback is determined in one of two ways: –By increasing revenues –By increasing savings If the PBP of a project is 6 years and the project can exist 3 years in the fast technology change situation—it should be rejected.

23. Preparing the System Proposal How to determine PBP PAY BACK PERIOD (PBP) Investment: $ 20,000 Amount Recovered in 2002: $ 7,312 Remaining Investment to be recovered: $12,668 Amount Recovered in 2003: $ 7,768 Remaining Investment to be recovered: $ 4,920 Part of 2004 Needed : 4,920/7352= 0.67 (Assuming that Amount Recovered in 2004 is $7352) PBP = 1 + 1 + 0.67 = 2.67 YEARS

24. Preparing the System Proposal Payback Period

25. Preparing the System Proposal Three Drawbacks of the Payback Method –It is strictly a short-term approach to investment and replacement decision –It does not consider the importance of how repayments are timed –It does not consider total returns from the proposed systems project that may go well beyond the payback year

26. Preparing the System Proposal Cash-Flow Analysis Cash-flow analysis is used to examine the direction, size, and pattern of cash flow associated with the proposed information system Determines when a company will begin to make profit Determine when cash outlays and revenues will made up for initial investment

27. Preparing the System Proposal Cash-Flow Analysis

28. Preparing the System Proposal Present Value Method Assess all the economic outlays and revenues of the information system over its economic life and to compare costs today with future costs and today's benefits with future benefits Use present value when the payback period is long, or when the cost of borrowing money is high

29. Preparing the System Proposal Present Value Method Without considering present value Considering present value

30. Preparing the System Proposal Guidelines for Selecting the Best Alternative –Use break-even analysis if the project needs to be justified in terms of cost, not benefits or if benefits do not substantially improve with the proposed system. –Use payback when the improved tangible benefits form a convincing argument for the proposed system. –Use cash-flow analysis when the project is expensive relative to the size of the company. –Use present value when the payback period is long.