1. Economic Aspects of Information Systems Updated 2015 MIS 2000 Information Systems for Management Instructor: Bob Travica

2. 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

3. Cost-Benefit Analysis Tangible Costs & Benefits ($) Intangible Costs & Benefits (no $) Capital Budgeting Methods ($) Assessments of returns’ size Assessments of returns’ timing Mixed Methods ($ and no $) Portfolio Analysis (Risk control) Balanced Scorecard (Org. goals achievement) Quantitative or qualitative figures? Quantitative Qualitative & Quantitative 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.

4. 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.

5. 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. ??

6. Tangible Benefits 1/2 -Savings on many counts: -savings on labor expenses -savings due to reduced process time (e.g., reducing inventory costs in supply chain process) -savings due to avoiding to add more employees when improved process/IS can carry a larger volume of operations -Organizational performance gains (new IS/process  organizational productivity  financial returns).

7. 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.

8. Intangible Benefits -Customer value that does not translate directly into monetary gains for a company -Better control and decision making, which do not translate readily into monetary gains -Improvement in the appearance of reports and other business documentation (better quality but no more money). -Increased knowledge capabilities (note: these are a condition for making more attractive products, but before this products are made and sold no monetary gains accrue).

9. 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 the IS –Present value of money used (future returns as well as costs discounted for some rate) as finances flow over years (NPV function in Excel) 2. Returns’ timing focus: Assessment of 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.

10. Mixed Methods of Assessing IS Economy 1/2 1.Portfolio Analysis –The focus is on controlling risks that different systems can bring –In planning IS, IS projects compared on risks they bear (completion within budget & time, technology demands, size of organizational change required) –Risk = probability a problem will happen x weight of problem –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)

11. 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. –IS contribution to these performance indicators is assessed periodically. Balanced Scorecard Tangibles Tangibles & Intangibles - Process focus! Intangibles

12. Software and Hardware Acquisition Three options: Make, Buy, Rent 1.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 own company) For pros & cons (benefits & costs) see the chapter. More…

13. 3. Rent: –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 (it is hard to get out of Cloud as a company relies more on a cloud vendor) –Unexpected changes in pricing services.

14. 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.