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Economic Feasibility

Economic Feasibility

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Economic Feasibility

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  1. Economic Feasibility Outline Evaluation IS benefits – information value Making the investment decision Ibrahim Elbeltagi

  2. Evaluation • Why is evaluation important? • Investment in IT is high • IT is only one of many alternative claims on the enterprise’s resources. • Evaluation provides the benchmarks for what is to be achieved in economic, operational and organisational terms from the investment in IT • Some form of evaluation is always taking place. Ibrahim Elbeltagi

  3. Why is evaluation regarded as a problem? • The cost side • A significant proportion of IT costs are fixed and independent of utilisation. • Even with modern cost estimation tools, estimating the costs of developing major applications is still difficult and unreliable. • The project champion tends to have a strong attachment to and belief in the ultimate worth of the project under review. Ibrahim Elbeltagi

  4. Why is evaluation regarded as a problem? • The benefits side • Many applications are targeted at achieving second-order effects. • In many cases, the change which is to be evaluated is a major reorganisation in which IT may play a role, but it is the investment in the reorganisation as a whole which has to be evaluated. • The benefits from investments in IT infrastructure are difficult to evaluate. Ibrahim Elbeltagi

  5. The benefits side • The common view that an IT system that copes with 80-90% of the requirements for a particular system will yield satisfactory returns on investment may well turn out to be misleading • Two problems which increase the difficulty of estimation benefits stemming from IS investments are: • The inherent uncertainty as to outcomes. • The difficulty of differentiating the outcomes of alternative design. • Those who champion the investment proposal have an in- built commitment to the investment. Ibrahim Elbeltagi

  6. Further difficulties with judging information value • Recognising the distinction between tangible and intangible benefits • Tangible – easy to quantify • Increase in revenue • Reduction in cost • Cost avoidance • Time Saving Ibrahim Elbeltagi

  7. Further problems • Intangible benefits – difficult to quantify • Improved customer service • Gaining competitive advantage • More timely management information • Supporting core business functions • Avoiding competitive disadvantage • Improved management information • Improved product quality • Improved internal communication Ibrahim Elbeltagi

  8. IS benefits – Information value Benefit type Efficiency Effectiveness Strategic advance Leading to: Cost savings (tangible) Higher RoA Business growth (intangible) Justification technique Hard Soft Strategic Organisational level at which benefit is felt Tactical Operational Efficiency Effectiveness Competitiveness Type of generic business benefit Ibrahim Elbeltagi

  9. Types of IS investments • Operational value investments. • Productivity-improving projects – investments in transaction processing projects with short-term gain horizons – usually reduce costs in business processes. • Strategic value investment. • Business-enhancing or Risk-minimising project intended to improve revenue-generation potential – long term – hard to quantify Ibrahim Elbeltagi

  10. Types of IS investments • Threshold investment. • Investments that must be made in order to operate within the industry – needed for competitive survival • Infrastructure investment. • Intended to create a backbone for the organisation – improved management communication – medium-term gain horizons Ibrahim Elbeltagi

  11. Categories of value in the use of information • Return on investment. • Traditional type of value – cost/benefit analyses show up a positive difference giving a net value over time. • Strategic match. • Direct support of a stated business strategy by a particular project • Competitive advantage. • A value created from a new business or product, or increased market share Ibrahim Elbeltagi

  12. Categories of value in the use of information • Management information support. • Providing information about critical aspects of the business – eg CSFs. • Competitive response. • IT activities aimed at catching-up with competitor’s position (or even leap-frog them in ways that will be difficult to duplicate or overcome. • Strategic IS architecture. • A basic and necessary investment that enables subsequent strategic applications to occur. Ibrahim Elbeltagi

  13. The theoretical calculation of expected information value Ibrahim Elbeltagi

  14. Question • Which IS projects should receive funding at a particular time? • Procedure: Compare competing proposals and make selection guided by: • Current corporate strategy • Current IS strategy • Alignment between both IS and corporate strategy and the future needs. Ibrahim Elbeltagi

  15. Making the IS investment decision • Note: • Every selection has opportunity cost. • Many IS related benefits are unjustifiable • Various systems have different roles in the organisation. • Pure accounting approach not appropriate for long term projects. • Remenyi et al. (1991) in treatment of information as an economic entity report on some perceptions of IS importance: • IS helps us to gain a competitive advantage = 30% • Our business would not be possible without IS = 21% Ibrahim Elbeltagi

  16. IS benefits is a long term process Phase 1 Phase 2 Phase 3 Phase 4 Vision Investment Cultivation Harvest 2-3 years (Nolan Norton) Ibrahim Elbeltagi