Chapter 11 Estimating Benefits From Information Systems Analysis

Chapter 11: Estimating Benefits From Information Systems Analysis and Design in an Age of Options SA&D in an Age of Options, Spurrier & Topi © Prospect Press 11 -1

Learning Objectives • Understand the importance of identifying and quantifying business benefits to justify a systems project using cost/benefit analysis • Distinguish system capabilities from business benefits • Focus on quantitative (tangible) benefits, qualitative non-quantifiable (intangible) benefits also matter • Understand the major sources of potential business benefits from IS • Issues in assessing benefits • Identify and quantify business benefits for an internal IS project that improves business efficiencies • Squaring Benefits with Costs • NOTE: The chapter scope narrowed but some new points added. 11 -2

Similar to cost estimates, benefits estimates accuracy varies: • Early: • Low requirements detail • Less specificity regarding business impacts • Late: • High requirements detail • Higher specificity regarding business impacts Figure 11 -1 Timing of business benefits estimation in the Systems Development Framework 11 -3

System's Benefits vs. System's Capabilities o A system's capabilities: Define key, high-level system characteristics addressing business problem/opportunity o Business Benefits from a system: The value (monetary and other)of key system capabilities o System capabilities generate business benefits. More precisely: System supports Process enables Business Benefit 11 -4

Example: Vision Statement Distinguishing System Capabilities vs. Business Benefits 11 -5

Systems' Capabilities & Business Benefits System's capabilities Business benefits – tangible/monetary value (but #5): 1. Increasing domain of automation • 2. Product innovation (automation aspect)* 3. E-commerce systems • 4. Software & data as marketable products (IT industry; digital content as product ) 5. Providing non-tangible value Labor Cost Saving (SAVE MONEY, INCREASE PROFIT) Enlarging sales & markets Increasing earnings (MAKE MONEY) • Expanding sales channels • Electronic IT & data sales - direct earnings • • Enhance product quality; Boost customer satisfaction/experience & loyalty; Strengthen company reputation; Improve work conditions & employee sat. /exp. • 11 -6

Issues in Assessing Benefits o Timing: Start in “Year 1”, after a system “goes live”; significant costs incurred by that time o Timing: Long-range, repeating; system is expected to provide benefits over its lifetime o Cost impact: Maintenance spending reduces net benefits (some costs may be hidden like security expenses) o Technology progress: Technology obsolescence makes impact on benefits (e. g. ERP owned vs. ERP sourced from Cloud) o Financial nature: Costs savings as benefit vs. Money-making as benefit – implications o Retroactive valuing (product made with help IS must be sold, then the contribution of IS may be assessed; e. g. , learning mgt. system) Q 11 -7

Impact of Business Time on Benefits • How many years into the future to estimate benefits? o Software doesn’t wear out, so do benefits go on forever? o Benefits could stop or fall over time o Companies make their choices; the sooner the expected returns – the better • How to value net profit increase of $150 k over time? o Even if the system does deliver $150 k in incremental profits each year… o Is $150 k in Year 1 worth the same to us now as $150 k in Year 2 (or Year 3, etc. )? o Need to consider the “time value of money” MIS 3510, prof. Travica 11 -8

Benefit Analysis Using Present Value (PV) • Using present value (NPV) is a standard for multiple year financial calculations. Logic: • Calculate annual estimated monetary gains during some future period 3 years = $75 K). (e. g. , $25 K x • Since money loses value over time, discount each year's amount at some rate (inflation rate, or interest rate for investment) - "time value of money" o Consequence: The future amount of money equals to a smaller amount now (present value, PV)* • Calculation: Future amount/(1+rate)years $25 K/(1+0. 5)3 = $25 K/1. 157 = $21. 6 K is PV of $25 K in three years 11 -9

Present Value of Expected Return Question: If the expected total return from an IS is $290, 000 (say, to cover the initial investment) with the discount rate of 5%, how many years will it take to get it? o In 18 years, the accumulated benefit (see Table 11 -9) o The total possible benefits in the indefinite period (perpetuity) is $25, 000/5%=$500, 000 25, 000 / (1. 05^18) Table 11 -9 Present value of business benefits year by year and accumulated value of business benefits Q 11 -10

Case: Health Care Claim System (HCCS) Multiple possible automation benefits: 1. Reduce labor hours 2. Reduce blended labor rate 3. Repurpose freed-up staff to increase revenues Cost savings Earnings increase Figure 11 -5 Example health care claims cost analysis business process Q 11 -11

HCCS Case : Current State vs. Future State Business Process Current State (mostly manual) Future State (automated) ETL (Extract/Transform/Load) Manually download from client Data Aggregation and Summarization Manually summarize via spreadsheets Software summarizes claims Cost Analysis and Projections Manual trends and “what if” projections Create Client Report and Peer Review Manually generate report, peer review, Software-generated report, reduced send to client peer review, send to client • Software-driven ETL Software trend analysis with softwaresupported “what if” analysis Multiple possible general automation benefits: o Reduce labor hours o Reduce blended labor rate (more junior staff, less senior staff) o Repurpose freed-up staff to increase revenues (potential not automatic benefit) 11 -12

Financial Benefit/Cost Analysis: Net Present Value (NPV) • Benefit estimation useful in the conjunction with estimating costs – economic feasibility. • NPV - comparing all benefits and all costs both discounted to Present Value for a specified period. Table 11 -10 Example (expanded) COSTS One time ($30. 00) PV ($228. 57) ($42. 86) ($28. 57) COSTS PV SUM ($330. 00) BENEFITS PV $600. 00 BENEFITS-COSTS $270. 00 • Benefits significantly bigger than costs, so the system is feasible. (Note: hardware costs not included. ) 11 -13

Return on Investment (ROI) Method • Two ways of calculating: o ROI (Method 1) = Estimated Benefits / Estimated Costs o ROI (Method 2) = (Estimated Benefits – Estimated Costs) / Estimated Costs Example: • (A) Assume yearly benefits estimated = $250, 000 and systems costs = $400, 000 o ROI (Method 1) = (3 × $250, 000) / $400, 000 = 1. 875 o If decision rule is that ROI should be at least 2, the decision is "no go". • (B) ROI (Method 2) = ((3 X $250, 000) - $400, 000)) / $400, 000 = 0. 875 o If decision rule is that ROI should be at least 1, the decision is "no go". o In both cases, the needed return is $266. 66 ($800/3) • Setting a higher ROI helps to control planning fallacy (underestimating costs & overestimating benefits in planning a system) 11 -14

Case: ROI with Present Value • ROI = benefits/costs; $600, 000 ÷ $330, 000 = 2. 22. ROI method confirms a 'go' decision. * • ROI is often used to avoid complications with NPV method. Table 11 -10 expanded COSTS One time ($30. 00) PV ($228. 57) ($42. 86) ($28. 57) COSTS PV SUM ($330. 00) BENEFITS PV $600. 00 BENEFITS-COSTS $270. 00 11 -15

Let’s Review • Estimating business benefits from IS is more challenging than estimating IS costs • System capabilities different from business benefits and enable these • Benefits: o Increasing process efficiency/costs savings/increasing profits o Increasing revenues (new sales channels, improved & new products) • Issues in assessing benefits (delayed start; incremental, long-range horizons; indirect impact on company products; retroactive valuing) • Case study shows how a system impacts on labor savings • Present value, Net Present Value, Return on Investment o Non-monetary (intangible) values (customer satisfaction & loyalty, better service, company reputation) 11 -16