MIS - Information Systems for Management

Economic Aspects of

Information Systems
 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

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 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.

Cost-Benefit Analysis Measurement

Type?
• Tangible Costs & Benefits ($)
• Intangible Costs & Benefits (no $)
Quantitative Quantitative &
Qualitative

Capital Budgeting Methods ($) Mixed Methods ($ and no $)

• Assessments of returns’ size • Portfolio Analysis (Risk control)
• Assessments of returns’ timing • Balanced Scorecard (Org. goals
achievement)

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 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.

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 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.

?
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 Tangible Benefits 1/2

- Savings on financial expenses :

- savings on labor expenses due to process automation (general
principle)
- savings due to reduced process time (e.g., reducing inventory costs in
supply chain process; example: Walmart’s supply network)
- cost avoidance: not adding more employees (expenses) when
improved IS can carry a larger volume of operations (online stores in
holiday season)

- Organizational performance gains:

- increased process performance ($, t) with new IS  organizational
productivity gain (output value/input cost)  financial returns (profit
figures).
- Examples: Ford's parts accounting; Boeing-Rocketdyne development
project completed under budget

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 Tangible Benefits 2/2

- Better decision making resulting in income increase (e.g., moving

into new product and geographical markets). Examples of
companies that created new products and markets (Amazon.com,
Google, Facebook)
- Cutting losses by improved management control (example: ERPS
that helped detect fraudulent purchases)
- Data error reduction eliminating waste of business time & labour
for repeated tasks (office work).

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 Intangible Benefits
- Customer value (process performance aspect) that does not
translate directly into monetary gains for a company

- Better control and decision making, which do not translate readily

into monetary gains (e.g., exploring decision options with Big Data)

- Improvement in the appearance of reports and other business

documentation (e.g., formatting text documents)

- Increased knowledge capabilities (although necessary for making

more attractive products, first new products must be made and
then they have to pass a market test).

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 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 an IS is
– Present value of money used (future returns as well as costs
discounted for some rate) for financial models over a year
(NPV function in Excel)

• 2. Returns’ timing focus: Assessing when returns will occur

(e.g., Break-Even Analysis)

- The shorter the return wait

period, the more economically
valuable the IS.

0 1 2 3 4 Time (years)

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 Mixed Methods of Assessing
IS Economy 1/2

1. Portfolio Analysis
– The focus is on controlling/managing risks that different systems can
bring
– Risks: potential known difficulties (complications, problems)
– In planning IS, different IS projects compared on risks they bear (e.g.,
completion within budget & time, technology demands, size of
organizational change required)
– Risk = Weight (impact) of problem X Probability a problem will happen
– 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)

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 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.
– Information systems’ contribution to these performance indicators is assessed in regular
periods.

Balanced Scorecard

Tangibles ($) Tangibles &

Information Intangibles
Systems
-Process perf. ($, t,
-internal customer)

Intangibles

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 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 one’s own company)

• For pros & cons (benefits & costs) see the chapter.

More…

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• 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 (hard to leave IS vendor without damaging business)
– Unexpected changes in pricing services.

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 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.

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