1. Systems Development Dr. Yan Xiong College of Business CSU Sacramento 10/12/03

2. Agenda Agenda Systems Development Life Cycle (SDLC) Systems Development Life Cycle (SDLC) Systems Development Planning Systems Development Planning Feasibility Analysis Feasibility Analysis

3. Front -end Systems Planning

4. Systems Development Life Cycle (SDLC) t Systems Development Life Cycle (SDLC) phases Systems analysis Systems analysis Conceptual design Conceptual design Physical design Physical design Implementation and conversion Implementation and conversion Operations and maintenance Operations and maintenance

5. SDLC t Each phase broken down into several steps or tasks t Each step has: u Start date u End date u Product (deliverable) t Steps may be repeated (Waterfall Model)

6. Systems Development Life Cycle Systems Analysis Do initial investigation Do system survey Do feasibility study Determine information needs and system requirements Deliver systems requirements Feasibility analysis and decision points

7. Feasibility Analysis t Traditionally, done once at project beginning, then forgotten t Should be redone after each SDLC stage t SDLC costs increase exponentially through each succeeding phase t Project uncertainty (# unknowns) decreases with each SDLC stage

8. SDLC Costs and Unknowns TIME (SDLC Phases) Magnitude Project Costs Project Costs Project Unknowns Project Unknowns

9. Feasibility Analysis t Forget about sunk costs! u they are the past u Alaska state personnel system t So, at end of each SDLC phase u conduct new feasibility analysis u now fewer unknowns than before u make decision of whether or not to proceed with SDLC

10. Systems Development Life Cycle Feasibility analysis and decision points Conceptual Design Identify and evaluate design alternatives Develop design specifications Deliver conceptual design requirements

11. Systems Development Life Cycle Feasibility analysis and decision points Physical Design Design output Design data base Design input Develop programs Develop procedures Design controls Deliver developed system

12. Systems Development Life Cycle Feasibility analysis and decision points Implementation / Conversion Develop plan Install hardware and software Train personnel, test the system Complete documentation Convert from old to new system Fine-tune and review Deliver operational system

13. Systems Development Life Cycle Operation and Maintenance Operate system Modify system Do ongoing maintenance Deliver improved system Systems Analysis

14. Participants Management Management Accountants Accountants IT Steering Committee IT Steering Committee Project development team Project development team systems analysts and programmers systems analysts and programmers External players External players customers customers vendors vendors

15. Accountants’ Roles Determine own information needs Determine own information needs Members of project development team Members of project development team Play active role in designing system controls Play active role in designing system controls Help perform feasibility (ROI) analyses Help perform feasibility (ROI) analyses

16. Steering Committee Set policies that govern AIS Set policies that govern AIS Ensure top-management participation Ensure top-management participation Monitor and control Monitor and control Facilitate coordination and integration of IS activities Facilitate coordination and integration of IS activities At Intel, called Management Review Committees (MRC) At Intel, called Management Review Committees (MRC)

17. Agenda Agenda Systems Development Life Cycle (SDLC) Systems Development Life Cycle (SDLC) Systems Development Planning Systems Development Planning Feasibility Analysis Feasibility Analysis

18. Development Planning t Need for planning – consistency – efficiency (no duplication) – lower costs – ensure meet overall project goals – time – money – system objectives

19. Planning Techniques t Several techniques discussed in textbook, such as u CPM u PERT t For most AIS projects, CPM and PERT are “over-kills” t Most commonly used is Gantt chart

20. Gantt Chart t Bar chart with project activities listed on left-hand side; time units (days or weeks) across top t For each activity, bar drawn from scheduled starting date to ending date t As activities completed, bar filled in t Can use $ units instead of time

21. Gantt Chart Structure ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ Activity Week Starting 1 2 3 4 5 6 7 8

22. Augmented Gantt Chart Augmented Gantt Chart TASK TASKPERSON % COMPLT % COMPLT BY BYMONTHSystemDescript ReqrmntAnalysis Cost-Benefit

23. Augmented Gantt Chart Augmented Gantt Chart TASK TASKFebruary March March April AprilSystemDescript ReqrmntAnalysis Cost-Benefit

24. Agenda Agenda Systems Development Life Cycle (SDLC) Systems Development Life Cycle (SDLC) Systems Development Planning Systems Development Planning Feasibility Analysis Feasibility Analysis

25. Feasibility Analysis t Systems analysis is first step in (SDLC) t Feasibility study (also called business case ) prepared and updated as necessary during remaining steps in SDLC t Steering committee uses study to decide whether to terminate project, proceed unconditionally, or proceed conditionally

26. Initial Feasibility Analysis  Technical feasibility : Can system be developed using existing technology?  Operational feasibility : Will the system be used by people in the organization?  Legal feasibility : Will there be conflicts with organization’s ability to discharge its legal obligations?

27. Initial Feasibility Analysis  Scheduling feasibility : Can system be implemented in time allotted?  Economic feasibility : Will benefits of the proposed system exceed its estimated costs?

28. Feasibility Analysis t Economic feasibility is most frequently analyzed t Basic framework for feasibility analysis is capital budgeting model – payback period – net present value (NPV) – internal rate of return (IRR)

29. Feasibility Analysis t Repeated after each stage t Why? u project cost increases exponentially as project moves through SDLC u even if sunk costs in prior stages, cost-beneficial to abort project before next stage if $ aren’t there t Testing example

30. Information System Costs t Categories u Hardware u Software u People u Supplies u Telecommunications u Physical Site

31. Info System Costs ( cont.) t When costs occur u One-time ( development) u Recurring ( operational ) t Indirect costs u Overhead ( e.g., utilities ) u Marginal costs v actual out-of-pocket

32. Out-of-Pocket Costs t Clerk performs 20 hours per week on task t System reduces this by 10 hours t Clerk earns $12 an hour t Savings $120 per week t What’s wrong with this picture?

33. Estimating Costs t Keep forecasts simple t Explain your logic t Rely on credible sources t Downplay intuition ( hunches) t Use other people t Build in contingency (fudge) factor

34. Estimating Costs t Principle of Insufficient Reason u If don’t have facts, assume nothing u e.g., hardware costs have increased 10% per year - absent any facts assume 10% increase next year

35. Methods For Comparing Systems t Costs first, then benefits t $ first, then qualitative factors t Methods: u Break-even Analysis u Payback Period u Discounted Payback Period

36. Break-even Analysis t Intersection of u Investment Period u Return Period t When start receiving positive cash flow t Surplus funds to be invested by Year X

37. Break-even Point $ $ Years Old System Old System New System New System Investment Period Investment Period Return Period Return Period Break-even Point Break-even Point

38. Payback Period t Where development costs offset by operational savings of new system t Graphic solution t Feasibility Matrix

39. Payback Period $ $ Years Old System Old System New System New System Develop Costs Develop Costs Operational Costs Operational Costs Development And Operational Areas are Equal Development And Operational Areas are Equal Payback Period Payback Period

40. Feasibility Matrix Type Type Cost CostYear 1Year 2Year 3Year 4CurrentSystem 62 62 65 65 70 70 76 76 New NewSystem 162 162 ** ** 100 ** 100 ** 33 33 35 35 Differ- ence ence -100 -100 -35 -35 +37 +37 +41 +41 ** Includes one-time development costs

41. New System Costs t While in development: u Development costs (e.g., programming) spread throughout development period (e.g., 18 months) u Old System operational costs UNTIL new system implemented t Example: u 18 month development

42. New System Costs New System CostsDevelop- ment ment 100 100 50 50 Old System Operating 62 62 33 33 ** ** New System Operating 17 17 ** ** 33 33 35 35 Total Total 162 162 100 100 33 33 35 35 1 1 2 2 3 3 4 4 ** ½ year old system, ½ year new system Year

43. Calculating Payback Periods Type Cost Type Cost Year Year 1 2 3 4 Difference Difference -100 -100 -35 -35 +37 +37 +41 +41 Cumulative Cumulative Difference Difference -100 -100 -135 -135 -98 -98 -57 -57 ** ** *** *** ** Difference positive - Includes Breakeven Point *** Cumulative Difference not yet positive – Payback Period beyond 4 years Cumulative Difference not yet positive – Payback Period beyond 4 years

44. Calculations t Assumption: All costs occur equally by month across each year u Principle of Insufficient Reason t $120K annual expenditure = $10K expenditures per month t For Break-even Point, calculation based on Difference row t For Payback calculation, calculation based on Cumulative Difference row

45. Calculations Payback = Year Last + A Payback = Year Last + A Period Negative A + B Period Negative A + B Cumulative Cumulative Difference Difference A = Cumulative Difference Last Negative Year B = Cumulative Difference Next Year After Negative NOTE: Same for Break-even, except that you use Difference Row rather than Cumulative Difference

46. Calculations Type Type Cost Cost Year Year 3 4 5 Difference +37 +37 +41 +41 +62 +62 Cumulative Difference Difference -98 -98 -57 -57 +5 +5 Previous Year was Last Negative Year For Break-even Point Previous Year was Last Negative Year For Break-even Point Last Negative Year For Payback Period Last Negative Year For Payback Period

47. Calculations Type Type Cost Cost Year Year 2 3 4Difference -35 -35 +37 +37 +41 +41 Cumulative Difference Difference -135 -135 -98 -98 -57 -57 Break-even Point = 2 + (35) / (35 + 37) = 2.48 years Break-even Point = 2 + (35) / (35 + 37) = 2.48 years

48. Calculations Type Type Cost Cost Year Year 3 4 5Difference -37 -37 +41 +41 +62 +62 Cumulative Difference Difference -98 -98 -57 -57 +5 +5 Payback Period = 4 + (57) / (57 + 5) = 4.92 years Payback Period = 4 + (57) / (57 + 5) = 4.92 years

49. Present Value of Money t But profit-seeking firm could earn money on development funds invested today t Return on Investment ( ROI ) t Present Value of Money = 1 / (1 + ROI) ** n 1 / (1 + ROI) ** n t n = number of years into future t Net Present Value (NPV) = sum of each future years present values

50. Discounted Payback Period t Don’t use for Break-even Point u There is no such thing as a Discounted Break-even Point t Add 2 new rows to Feasibility Matrix u Discount Rate v (1 – i) to the power of the year u Discounted Cumulative Difference v Discount Rate times Cum Diff

51. Example t Assume 20% ROI u Average last 3 years t For 1 st year: Discount = 1 / (1+.2)**1 =.83 t For 2 nd year: Discount = 1 / (1+.2)**2 =.69 Year 3 Year 3 Year 4 Year 4 Year 5 Year 5.58.58.48.48.40.40

52. Calculating Payback Periods Difference Difference -100 -100 -35 -35 +37 +37 Discount Discount (ROI =.2) (ROI =.2).83.83.69.69.58.58 Discounted Discounted Difference Difference -83 -83 -25 -25 +22 +22 Cum Disctd Cum Disctd Difference Difference -83 -83 -108 -108 -86 -86 1 1 2 2 3 3

53. Calculating Payback Periods Difference Difference +41 +41 +67 +67 ??? ??? Discount Discount (ROI =.2) (ROI =.2).48.48.40.40 ??? ??? Discounted Discounted Difference Difference +20 +20 +27 +27 ??? ??? Cum Disctd Cum Disctd Difference Difference -66 -66 -39 -39 ??? ??? 4 4 5 5 6 6 No payoff in 5 years 6 th year???

54. Topics Discussed Systems Development Life Cycle (SDLC) Systems Development Life Cycle (SDLC) Systems Development Planning Systems Development Planning Feasibility Analysis Feasibility Analysis