PREPARING THE SYSTEMS PROPOSAL

METHODS AVAILABLE
The systems proposal is a distillation of all that the systems analyst has learned
about the business and what is needed to improve its performance. In order to
address information requirements adequately, the systems analyst must use
systematic methods for acquiring hardware and software; identify and forecast
future costs and benefits and perform cost-benefit analysis, as shown in Figure
12.1. All of these methods are used in preparing systems proposal material.

Information needs of users drive the selection of computer hard- wale, data storage
media, and any prepackaged software. The hardware and software system that is
eventually proposed is the analyst’s response to users’ information needs. This
chapter provides the methods necessary to project future needs systematically and
then weigh current hardware and software alternatives. Forecasting, guidelines for
hardware and software acquisition, and cost-benefit analysis are included.

ASCERTAINING HARDWARE AND SOFTWARE NEEDS

In this section, we cover the process of estimating the present and future workloads
of a business, and the process involved in evaluating computer hardware and
software to handle workloads adequately. Figure

FIGURE 12.1 Major activities In preparing the systems proposal

12.2 shows the steps the systems analyst takes in ascertaining hardware and
software needs. First, all current computer hardware must be inventoried to
discover what is on hand and what is usable. Then current and future system
workloads must be estimated. Following this, an evaluation of available hardware
and evaluation of software is undertaken.

The systems analyst needs to work along with users to determine what hardware
will be necessary. Hardware determinations can come only in conjunction with
determining information requirements. Knowledge of the organizational structure
(as discussed in Chapter 2) can also be helpful in hardware decisions. Once systems
analysts, users, and management have a good grasp of what kinds of tasks must be
accomplished, hardware options can be considered.
Inventorying Computer Hardware

Begin by inventorying what computer hardware is already available in the

organization. As will become apparent, some of the hardware options involve
expanding or recycling current hardware, so it is important to know what is on hand.

If an updated computer hardware inventory is unavailable, the systems analyst

needs to set up one quickly and carry through on it. You need to know:

FiGURE 12.2 Steps In choosing hardware and software

1. Type of equipment—model number, manufacturer

2. Status of equipment operation—on order, operating, in storage, in need of

repair

3. Estimated age of equipment

4. Projected life of equipment

5. Physical location of equipment

6. Department or person considered responsible for equipment

7. Financial arrangement for equipment-—owned, leased, or rented

Figure 12.3 provides an example of a hardware inventory form that can be given to
the relevant people. It should be easy to fill out, and

1. Equipment

a. CPU/type manufacturer/model

b. Storage/type/manufacture/model

C. Input/type manufacturer/model

d. Output/type/ manufacturer/model

e. Communications type/manufacturer/model

2. Status

On order
 Fully operational

In need of repair

In storage

3. Estimated Age of Equipment

4. Projected Life

5. Located

6. Name of individual responsible for equipment:

Purchase

Operation

Maintenance

7. Financial Agreement

Owned

Rented

Leased

FIGURE 12.3 Using a form for taking inventory of equipment currentiy available In
the organization

should explicitly request that peripherals such as disk drives and VDTs be
enumerated separately. Ascertaining the current hardware available will aid in a
sounder decision-making process when hardware decisions are finally made, since
much of the guesswork about what exists will be eliminated. Through your earlier
interviewing, questionnaires, and research of archival data, you will already know
the number of people available for data processing as well as their skills and
capabilities. Use this information to project how well the staffing needs for new
hardware can be met.

Estimating Workloads

The next step in ascertaining hardware needs is to estimate workload. This means
that systems analysts can formulate a number that represents both current and
projected workload for the system, so that any hardware obtained will possess the
capability to handle current and future workloads.
If estimates are accomplished properly, the business should not have to replace
hardware solely due to unforeseen growth in system use. (However, other events,
such as superior technological innovations. May dictate hardware replacement if the
business wants to maintain its competitive edge).

Out of necessity, workloads are sampled rather than putting actual workloads
through several computer systems. The guidelines given on sampling in Chapter 4
can be of use here, since in workload sampling the systems analyst is taking a
sample of necessary tasks and computer resources required to complete them.

Figure 12.4 is a comparison of the workload between an existing and proposed

information system. Notice that the company currently is using a manual system to
make a monthly summary of shipments to their distribution warehouses, and a
computer system is being suggested. The workload comparison also looks at cost
per hour of each system; when and how each process is done; how much human
time is required; and how much computer time is needed.

Evaluating Computer Hardware

Evaluating computer hardware is the shared responsibility of management, users,

and systems analysts. Although vendors will be supplying detail about their
particular offerings, analysts need to oversee the evaluation process personally
since they will have the best interests of the business at heart. Additionally,
systems analysts may have to educate users and management about general
advantages and disadvantages of hardware before they can capably evaluate it.

Based on current inventory of computer equipment and adequate estimates of

current and forecast workload, the next step in the process is to consider kinds of
equipment available that appear to meet projected needs. Information from vendors
on possible systems and system configurations becomes more pertinent at this
stage, and should be reviewed with management and users.

Additionally, workloads can be simulated and run on different systems, including

those already used in the organization. This is referred to as benchmarking.

Criteria that the systems analysts and users should use to evaluate performance of
different systems hardware include: time required for average transactions
(including how long it takes to input data and how

FIGURE 12.4 Comparisons of workloads between, existing and proposed systems

long it takes to receive output); total volume capacity of the system (how much can
be processed at the same time before a problem arises); idle time of the central
processing unit; and size of memory provided. Some criteria will be shown in formal
demonstrations; some cannot be simulated and must be gleaned from
manufacturer is specifications. It is important to be clear about required and desired
functions before getting too wrapped up in vendors claims during demonstrations.

Once functional requirements are known and the current products available are
comprehended and compared with what already exists in the organization,
decisions are made by the systems analysts in conjunction with users and
management about whether obtaining new hardware is necessary. Options can be
thought of as existing on a continuum from using only equipment already available
in the business all the way to obtaining entirely new equipment. In between are
options to make minor or major modifications to the existing computer system.

Computer Size And Use

The rapid advance of technology dictates that the systems analyst research types
of computer available at the particular time that the systems proposal is being
written. Therefore, we simply provide an overview of available sizes of computers
and their typical uses rather than dwell on features of specific computer models.
Computer sizes range all the way from the smallest lap-sized microcomputers to
room-sized supercomputers. Each has different attributes to consider when deciding
how to implement a computer system.

Microcomputers. Microcomputers seem ubiquitous, and with their increased

portability they can indeed be used almost anywhere. Acceptability of
microcomputers as a tool for the individual to own was furthered by dubbing them
“personal computers.”

Microcomputer systems typically consist of a keyboard or mouse as a user

interface: a VDT for input; a simple operating system: limited primary storage; the
same VDT and a printer for output secondary storage on floppy diskettes; and/or a
hard disk. Microcomputers are useful for individuals, for small businesses with
limited data storage needs, or for automating small systems such as home security.

Minicomputers. A minicomputer is a little larger than the micro. joining

minicomputers together through networking can result in computer power rivaling
that found in a large scale computer, and may actually super scale a large scale
computer in the flexibility it affords. Minicomputers are more expensive than
microcomputers, but they offer superior networking and storage capabilities. Some
businesses also view minicomputers as more business oriented than
microcomputers, but this opinion is gradually eroding as more business application
software becomes available for microcomputers.
Medium scale computers. Medium scale computers are one step above
minicomputers in size and offer concurrently more capacity and speed. Rather than
needing to network a medium scale computer, a business would use its capabilities
to process many jobs at the same time.

Large scale computers. Large scale computers have faster capabilities than the
medium scale ones. They process numerous jobs from many different sites
simultaneously. Their storage capacity is huge.

Supercomputers. The last size of computer we consider is the super computer. Due
to the size and cost of supercomputers, few analysts have as yet had the
experience of working on projects involving them. Super computers are typically
shared by different user groups for different applications. For example, a group of
university geologists and a group of companies from the oil industry might band
together to purchase a supercomputer, taking advantage of its incredibly fast
calculating ability and immense primary storage to work on joint interests.

Alternative Date Storage Devices

Storage of data, either before or after processing, is extremely important to the

smooth functioning and eventual cost of the system. Generally, the choice of
storage medium is determined by the kinds of processing needed. Key questions
include how long data will be kept until processing, how large files are, and what
kind of access to stored data is necessary.

Magnetic tape. Magnetic tape is one of the older types of computer storage and is a
commonly used one. Its main advantage is relatively low cost per record stored. So
that it is a feasible storage medium for high volume applications.

Its chief disadvantage is the inability to access one record quickly for updating or
query, since data are stored and read in blocks, as shown in Figure 12.5. In order to
update a single record, the entire tape would

FIGURE 12.5 How data are accessed from magnetic tape

have to be reread and rewritten. Magnetic tape is useful for applications in which
data are saved to be run later.

Disks. Disks are also a magnetic medium, but they are better suited to storage of
information that must be received quickly. In Figure 12.6, you can see that disks are
arranged in sectors and tracks. This emphasizes one of the main advantages of
disks over magnetic tape their use of sector/track organization for accessing a few
records quickly, rather than having to read through an entire tape sequentially. This
means that disks are better suited than magnetic tape to low-volume applications.
Additionally, disks are preferable for real-time uses, since records can be a altered
quickly and new data can then be used to carry out further transactions correctly.

Floppy diskettes. Floppy diskettes (or floppies) have similar characteristics to disks.
Floppies are also referred to as flexible diskettes because the 5 ¼ size bends.
Diskettes that are 3 ½ are encased in plastic, but are the same floppy material
inside. Floppies are used with micro

FIGURE 12.6 How data are accessed from disks

computers and are good for low-volume uses. Their chief advantage is portability
and low cost. Their main disadvantages are Low storage Capacity per floppy (which
necessitates constantly changing diskettes and makes backing up tedious), and the
ability to process only one file at a time.

Hard disk drives. The only other reasonable storage and processing alternative for
small computer systems is use of a hard disk, which has sealed within it both
storage capacity and reading capacity. The chief advantages of hard disk drives is
their greatly expanded storage capacity and their ease of handling compared to
floppy diskettes. Hard disks can be either fixed or removable. Their chief
disadvantages are their relatively high upfront price and the ultimate necessity of
somehow backing up hard disk files.

Acquisition Of Computer Equipment

The three main options for acquisition of computer hardware include buying,
leasing, or renting it. There are advantages and disadvantages to weigh for each of
the decisions, as shown in Figure 12.7. Some of the

FIGURE 12.7 Comparing the advantages and disadvantages of buying, leasing, and
renting computer equipment

more influential factors to consider in deciding which option is best for a particular
installation include: initial versus long-term costs; whether the business can afford
to tie up capital in computer equipment; and whether the business desires full
control of and responsibility for the computer equipment.
Buying implies that the business will itself own the equipment. One of the main
determinants of whether to buy is the projected life of the system. If the system will
be used longer than four to five years (with all other factors held constant). The
decision is usually made to buy. Notice in the example in Figure 12.8 that the cost
of purchase after six years is dramatically lower than that of leasing or renting. As
systems become smaller and distributed systems become increasingly popular,
more businesses are deciding to purchase equipment.

Leasing, rather than buying, computer hardware is another possibility. Leasing

equipment from the vendor or a third party leasing company is more practical when
the projected life of the system is less than four years. Additionally, if significant
change in technology is imminent, leasing is a better choice. Leasing also allows the
business to put its money elsewhere, where it can be working for them, rather than
being tied up in capital. Over a long period, however, leasing is not an economical
way to acquire computer power.

Rental of computer hardware is the third main option for computer acquisition. One
of the main advantages of renting is that none of the company’s capital is tied up.
Hence, no financing is required. Also, renting computer hardware makes it easier to
change system hardware. Finally, maintenance and insurance are usually included
in rental agreements. However, because of the high costs involved, and the fact
that the company will not own the rented equipment, rental should be
contemplated only as a short-term move to handle nonrecurring or limited
computer needs, or when technological changes are volatile.

Evaluation Of Vendor Support For Computer Hardware

There are several key areas to evaluate when weighing the support services
available to businesses from vendors. Most vendors offer testing of

FIGURE 12.8 Comparison of alternatives for computer acquisition

hardware upon delivery and a 90-day warranty covering any factory defects, but
you must ascertain what else the vendor has to offer. Vendors with comparable
quality frequently distinguish themselves from others by the range of support
services they offer.

A list of key criteria to check when evaluating vendor support is provided in Figure
12.9. Most of the extra vendor support services listed there are negotiated
separately from hardware lease or buy contracts.
Support services include routine and preventive maintenance of hardware; specified
response time (within six hours; next working day, etc.) in case of emergency
equipment breakdowns; loan of equipment in the event that hardware must be
permanently replaced or off-site repair is required; and in-house training, or group
seminars off site for users. Remember that it may be more difficult to obtain
training for unique hardware that is not widely used by other organizations. While
the possibility of a customized installation may be attractive, the prospects for its
long term support maybe diminished. Peruse the support services accompanying
the purchase or lease of equipment, and remember to involve appropriate legal
staff before signing contracts for equipment or services.

Unfortunately, evaluating computer hardware is not as straightforward as simply

comparing costs and choosing the least expensive option. Some other eventualities
commonly brought up by users and management include: (11 the possibility of
adding onto the system if the need comes up later; (2) the possibility of interfacing
with equipment from

FIGURE 12.9 Guidelines for vendor selection

Vendor Selection Criteria

1. Hardware Support

Full line of hardware

Quality products

Warranty

2. Software Support

Complete software needs

Custom programming

Warranty

3. Installation and Training

Commitment to schedule

In house training

Costumer hot line

4. Maintenance
 Routine maintenance procedures

Specified response time in emergencies

Equipment loan while repair is being done

other vendors if the system needs to grow; (3) the benefits of buying more memory
than is projected as necessary, with the expectation that the business will
eventually “grow into it”; and (4) corporate stability of the vendor.

Adding on to the existing system often is the spur for systems projects. Installing a
system with add-on capability is a worthwhile way to proceed. Although it takes a
little extra planning, it is cheaper and more flexible than the third approach of
obtaining excess memory and carrying it in inventory for a number of years.

Competition among vendors has made the idea of producing hardware that is
compatible with a competitor’s important for vendors’ survival. However, before
becoming convinced that buying cheaper compatibles is the way to endow your
system with add-on capability, do enough research to feel confident that the
original vendor is a stable corporate entity.

Software Evaluation

Packaged software, rather than application programs specifically written for an

installation, are becoming more readily available and certainly should be given
careful consideration. Many hours of valuable programmer time can be saved if
packaged software is deemed suitable for part or all of the system and extensive
customizing isn’t necessary. The bar chart in Figure 12.10 shows the cost of
software (projected as ever-increasing) as part of total hardware/software costs.

FIGURE 12.10 The cost of software as percentage of total hardware/software costs is

rising

Software Evaluation

1. Performance Effectiveness

Able to perform all required tasks

 Able to perform all tasks mat may be desired at some time in the future

Wall-designed VDT screens

Adequate capacity

2. Performance Efficiency

Fast response time

Efficient input

Efficient output

Efficient storage of data

Efficient back-up

3. Ease of Use

Satisfactory user interface

Help menus available

Flexible interface

Adequate feedback

Good error recovery

4. Flexibility

Options for input

Options for output

Usable with other software

5. Quality of Documentation

Good organization

Adequate tutorial

Answers questions adequately

6. Manufacturer Support

Hot line

Newsletter
 Frequent (low-cost) updates

FIGURE 12.11 Guidelines for evaluating software

Once again, you will b dealing with vendors who may have their own best interests
at heart. You must be willing to evaluate software along with users and not be
unduly influenced by vendors’ sales pitches. Specifically, there are six main
categories on which to grade software, as shown in Figure 12.11: performance
effectiveness and efficiency, ease of use, flexibility, quality of documentation, and
manufacturer support.

Evaluate packaged software based upon a demonstration with test data from the
business considering it and an examination of accompanying documentation.
Vendors’ descriptions alone will not suffice. Vendors typically certify that software is
working when it leaves their supply house, but they will not guarantee that it will be
error-free in every instance or will not “crash” when incorrect actions are taken by
users. Obviously, they will not guarantee their packaged software if used in
conjunction with faulty hardware.

The need for multiple copies of software (for use at several microcomputer
workstations, for instance) means negotiating a multiple use agreement with the
vendor so that copyrights are not infringed through

Consulting Opportunity 12.1

Veni, Vidi, Vendi

or

I Came, I Saw, I Sold

“It’s really some choice. I mean, no single package seems to have everything we
want. Some of them come darn close, though,” says Roman, an advertising
executive for Empire Magazine, with whom you have been working on a systems
project. Recently, the two of you have decided that packaged software would
probably suit the advertising department is needs and stem its general decline.

“The last guy’s demo we saw, you know, the one who worked for ‘Data Coliseum,’
really had a well-rounded pitch. And I like their brochure. Full color printing, on card
stock. Classic,” Roman asserts.
“And what about those people from ‘Vesta Systems?’ They are really fired up. And
their package was easy to use with a minimum of ceremony. Besides, they said
they would train all twelve of us, on site, no charge. But look at their advertising.
They just take things off their printers. It is not even letter quality.”

Roman fiddles in his chair as he continues his ad-hoc review of software and
software vendors. “That one package from Mars, Inc., really, sold me all on its own,
though. I mean, it had a built-in calendar. And I like the way the menus for the
screen displays could all be chosen by Roman numerals, It was easy to follow. And
the vendor isn’t going to be hard to move on price. I think they’re already in a price
war.

“But, do you want to know my favorite?” Roman asks archly. “It’s the one put out by
Jupiter, Unlimited, I mean, it has everything, doesn’t it? It costs a little extra coin,
but it does what we need it to do, and the documentation is heavenly. They don’t do
any training, of course they think they’re above it.”

You are already plotting that in order to answer Roman’s burning questions by your
March 15 deadline, you need to evaluate the software systematically as well as the
vendors, and then render a decision, Evaluate each vendor/package on what Roman
has said so tar (assume you can trust his opinions). What are Roman’s apparent
biases when evaluating software and vendors? What further information do you
peed about each company and its software before making a selection?

the creation of illegal copies. This often means purchase of one software package at
its regular price and purchase of any additional copies at a reduced price.

It is also possible to negotiate a special vendor services contract covering support

for purchased software. This might include emergency and preventive maintenance;
free or reduced-price updates; additional copies of documentation; and special user
training.

IDENTIFYING AND FORECASTING COSTS AND BENEFITS

Costs and benefits of the proposed computer system must always be considered
together, since they are interrelated and often interdependent. Although the
systems analyst is trying to propose a system that fulfills various information
requirements, decisions to continue with the proposed system will be based on a
costs and benefits analysis, not on information requirements. In mans’ ways,
benefits are measured by costs, as will become apparent in the next section.
Forecasting Costs And Benefits

Systems analysts are required to predict certain key variables before the proposal is
submitted to the client. To some degree, a systems analyst will rely on “what-if”
analysis: for example, “What if labor costs rise only 5 percent per year for the next
three years, rather than 10 percent?” The systems analyst should realize that you
cannot rely on “what-if” analysis for everything if the proposal is to be credible,
meaningful, and valuable.

The systems analyst has many forecasting models available. Figure 12.12
represents a decision tree for choosing one of the forecasting methods. The main
condition is the availability of historical data. If they are unavailable, the analyst
must turn to one of the judgment methods including estimates from the sales force,
surveys to estimate customer demand, Delphi studies (a consensus forecast
developed independently by a group of experts through a series of iterations),
creating scenarios, or drawing historical analogies.

If historical data are available, the next differentiation between classes of

techniques involves whether the forecast is conditional or unconditional. Conditional
implies that there is an association among variables in the model or that a causal
relationship exists. Common methods in this group include correlation, regression,
leading indicators, econometrics, and input-output models.

Unconditional forecasting means the analyst isn’t required to find or identify any
causal relationships. Consequently, systems analysts find these methods are low
cost, easy-to-implement alternatives. Included in

FIGURE 12.12 Selected forecasting techniques available to the systems analyst

this group are graphical extrapolation, moving averages, and analysis of time series
data. Since these methods are simple, reliable, and cost effective, the remainder of
the section focuses on them.

Analysis Of Time Series Data

When quantitative historical data are present, the systems analyst can estimate
future trends. The analyst should gather relevant data and graph it so as to
determine if there are any patterns. There are three common patterns, as shown in
Figure 12.13: linear trend, seasonal, and cyclical. Fluctuating patterns are called
seasonal trends if they repeat annually. If patterns repeat regularly but not
annually, we call these patterns cyclical. The analyst needs to be aware of these
patterns when estimating demand, workloads, and economic factors.

Estimation Of Trends

Trends can be estimated in a number of different ways. The most widely used
techniques are: (1) graphical judgment, (2) the method of least

FIGURE 12.13 Three factors that must be Identified for accurate forecasting

squares, and (3) the moving average method. A brief explanation of these
techniques is in order.

Graphical judgment. The simplest way to identify a trend and forecast future trends
is by graphical judgment. This is accomplished by simply looking at the graph and
estimating freehand an extension of a line or curve. An example of graphical
judgment is illustrated in Figure 12.14.

The disadvantages of this method are obvious from looking at the graphs in the
figure. The extension of the line or curve may depend too

FIGURE 12.14 Different conclusions can easily be drawn from the same set of data.

much on individual judgment and may not represent the real situation. The
graphical judgment method is useful however, because the ability to perform
sensitivity analysis (what-if) has increased with the introduction of electronic
spreadsheets

The method of least squares. When a trend line is constructed, the actual data
points will fall on either side of that line. The objective in estimating a trend using
the least squares method is to find the “best fitting line” by minimizing the sum of
the deviations from a line. Once the best fitting line is found, it can be graphed, and
the line can be extended to forecast what will happen.
The best fitting line or least square line, is developed from the data points (X1, Y1),
(X2, Y2),.. (Xx, Y), where the X coordinates signify the time periods and the Y
coordinates represent the variable the systems analyst is trying to predict. The
equation for the least square line is expressed in the form

Y=m*X+b

where the variable m represents the slope of the line and b represents the Y
intercept, the point at which the line intersects the Y axis.

An example of a least-square line is drawn in Figure 12.15. In this illustration, the

least square line is drawn to estimate a trend in transact ions from January to
October. The volume starts at 21,000 in January and rises an average of 2,000 units
per month.

We recommend a more computationally efficient method to find the least square

equation by calculating the center of gravity of the data by taking x = X — X and v
= Y — Y and then calculating the least square line as

 Σxy 
y =  2 * x
 Σx 

finally substituting back the X — X for x and Y — Y for Y.

Moving averages. The method of moving averages is useful because some seasonal,
cyclical, or random patterns may be smoothed, leaving the trend pattern. The
principle behind moving averages is to calculate the arithmetic mean or data from a
group of periods

FIGURE 12.15 The objective of the least squares method Is to find the “best
fittingline”

Y1 + Y2 + ... + YN
N

and then to calculate the next arithmetic mean by discarding the oldest period’s
data and adding data from a new period

Y2 + Y1 + ... + YN −1
N

and in this manner say the average is moving.

Figure 12.16 shows one type of moving average. Here five years data are averaged
and the resulting figure is indicated. Notice that years 1976 through 1980 inclusive
are averaged to represent 1978. Then the years 1977 through 1981 are averaged to
get a representative figure for 1979, and so on. When this s graphed as it is in
Figure 12.17, it is easily noticeable that the widely fluctuating data are smoothed.

The moving average method is useful for its smoothing ability, but at the same time
it has many disadvantages. First, the data at the very beginning and end is lost. In
the above example, we lost data for 1976 and 1977 at the beginning and years
1985 and 1986 at the end. The trend line must be extended from 1984, rather than
from 1986 as in least squares. Furthermore, moving averages are more strongly
affected by extreme values than the methods of graphical judgment and least
squares.

There are many worthwhile forecasting packages available for microcomputers as

well as for mainframes. The analyst should learn forecasting well, as it often
provides information valuable in justifying the entire project.

FIGURE 12.16 Calculating a five-year moving average

Consulting Opportunity 12.2

The Birth of a System

“Yup. What little there is all mine. I started in this business because could not keep
my hands off of the stuff. I loved tinkering with our electronic equipment. Taking
apart TVs and VCRs. Ask my wife. Lillian. Then I started helping friends with their
projects, and they thought I was pretty good. When I inherited some money. I
opened this little shop selling and repairing TVs and VCRs and renting videotapes”
says D. W. Griffith, owner of a video rental and repair store.

“Right now,” D. W. continues as he tows you around the small store, “we use a
manual system for keeping track of rental videotapes. We make a 3 x 5 card for
each title we own the name of the person renting the tape is recorded on this card.”

“The cards were okay for a while, but now I need your help. I’m afraid that if things
keep growing like they have. I’ll need a computer soon. But I didn’t get into this
business overnight, and I want to be sure that the computer will pay for itself. I
need proof. I’ve got to see It in black and white.” D. W. confides.

‘I was interested enough to keep a log of demand for rental tapes for the past 18
months.” D. W. continues. “Here ft Is.”
Hoping to catch up on some movies you’ve missed recently, you agree to do a small
systems project for D. W. in return for a fee and some free videotaped films. Using
the methods you have learned so far forecast the demand for tape rentals and the
amount of new titles.

FIGURE 12.17 A five-year moving average smooth widely fluctuating data

Identifying Benefits And Costs

Benefits and costs can be thought of as both tangible, and intangible. Both tangible
and intangible benefits and costs must be taken into account when systems are
considered.

Tangible Benefits

Tangible benefits are advantages measurable in dollars that accrue to the

organization through use of the information system. Examples of tangible benefits
are an increase in speed of processing, getting otherwise inaccessible information,
getting information on a more timely basis than possible before, taking advantage
of the computer’s superior calculating power, and lowering the amount of employee
time needed to complete specific tasks. And there are still others. Although
measurement is not always easy, tangible benefits can actually be measured in
terms of doll are saved, resources saved, or time saved.

Intangible Benefits

Some benefits that accrue to the organization from use of the information system
are difficult to measure but are important nonetheless. These are known as
intangible benefits.

intangible benefits include improving the decision-making process. enhancing

accuracy. becoming more competitive in customer service, maintaining a good
business Image, and increasing job satisfaction for employees by eliminating
iedious tasks. As you can judge from the list given. intangible benefits u extremely
important and can have far reaching Implications for the business in relating h
people outside the organization as well as within it.

While Intangible benefits of an information system are important factors In deciding

whether to proceed with a system, a system built solely for Its Intangible benefits
will not be successful, You must discuss both tangible and intangible benefits In
your proposal, since presenting both will allow decision makers In the business to
make a well informed decision about the proposed system.
 Consulting Opportunity

The Birth of a System II: The Sequel

“That’s a good question, I can think of a million problems we have here. but just off
the top of my head. Here are the big ones” says D. W. Griffith during his second
interview with you. its taking us lots of time to keep up records. It’s getting to be
extremely difficult to sniff out tapes that aren’t returned. I like detective flicks, but
I’m no Sherlock Holmes. I usually have to track down tapes myself. and that takes
me away from my repair service.

“What really gripes is about tapes that aren’t returned on time Is that they result In
lost rentals, since most of my customers choose from the selections In stock that
they can see on the shelves. And I don’t have any information about the categories
of tapes my customers prefer. But part of it is my fault, I guess, since i haven’t
bothered to set up a reservation system. I mean, there are probably more problems,
but those are the ones I handle every day,” says U. W.

You analyze the recording process and determine that employees can save two
minutes for each tape rented and half a minute for each title in Inventory per
month. Mr. Griffith himself gets involved with tracking down late tapes (about one
for every 250 tapes rented) and can save half an hour per month (or each tape hi
has to track down If he uses the computer Instead.

Assume that Mr. Griffith can take out a small loan at 15 percent to purchase the
computer and pay for development costs. The economy is seasonably good with an
inflation rate of 5 percent Your time, as well as Mr. Griffith’s time, can be valued at
£20 per hour. His employees time Is worth $5 per hour.

You estimate that systems analysis will take thirty hours, system design forty hours,
and development and Implementation thirty hours. Mr. Griffith will be involved In
answering questions far about fifteen hours and in addition to the above you will
have to individually train two people and Mr. Griffith for five hours each.

The microcomputer, disk drives, printer, and software cost S4000, After the system
Is up and running, you have advised Mr. Griffith that be will need to earmark $20
pm mouth for supplier and maintenance.

After discussing your analysis with U. W. he says, “I don’t like giving you a lot of
direction, but would you make a list for me? I’d like to screen all of this, so I can
project what will happen. Give It your best shot. so I can take a dose-up look.” From
the foregoing data, prepare a list of tangible and intangible costs and benefits for
Mr. Griffith You will ha asked to analyze these costs In Consulting Opportunity 12,4.
Tangible Costs

The concepts of tangible and intangible costs present a conceptual parallel to the
tangible and intangible benefits discussed already. Tangible costs are (hose that
can be accurately protected b the systems analyst and the business accounting
personnel.

Included in tangible costs are the cost of equipment such as computers and
terminals, costs of resources, costs of systems analysts’ time, cost of programmers’
time, and other employees’ salaries. These Costs are typically well established or
can be found out quite easily and are the costs that will require a cash outlay of the
business.

Intangible Costs

Intangible costs are difficult to estimate, and may not be known. They include the
cost of losing a competitive edge; losing the reputation for being first with an
innovation, or the leader in a field; declining company image due to increased
customer dissatisfaction: and ineffective decision making due to untimely or
inaccessible information. As you can imagine, it is next to impossible to project
accurately a dollar amount for intangible costs. In order to aid decision makers who
want to weigh the proposed system and all of its implications, you must include
intangible costs, even though the’ are not quantifiable.

COMPARING COSTS AND BENEFITS

There are many well-known techniques for comparing the costs and benefits of the
proposed system. They include break-even analysis, pay-back, cash-flow analysis,
and present value. All of these techniques provide straightforward ways of yielding
information to decision makers about the worthiness of the proposed system.

Break-even Analysis

By comparing costs alone, this kind of analysis allows the systems analyst to
determine the break-even capacity of the proposed information system. The point
at which total costs of the current system and proposed system intersect represents
the break-even point, where it becomes profitable for the business to get the new
information system.

Total costs include the costs that recur during operation of the system plus the
developmental costs that occur only once (one-time costs of installing a new
system)—.-that is, the tangible costs that were just discussed. Figure 12.18 is an
example of break-even analysis on a small store that maintains inventory using a
manual system. As volume rises, the costs of the manual system rise at an
increasing rate. A new computer system would cost a substantial sum up front, but
the incremental costs for higher volume would be rather small. The graph shows
that the computer system would be cost-effective if the business sold about 600
units per week.

Break-even analysis is useful when a business is growing and volume is a key

variable in costs. One disadvantage of break-even analysis is that benefits are
assumed to remain the same, regardless of which system

FIGURE 12.18 Break-even analysis for the proposed automated inventory system

is in place. From our study of tangible and intangible benefits, we know this is
clearly not the case.

Payback

Payback is a simple way to assess whether a business should invest in a proposed

information system based on how long it will take for the benefits of the system to
pay back the costs of developing it. Briefly, the payback method determines the
number of years of operation that the information system needs to pay back the
cost of investing in it. Figure 12.19 illustrates a system with a payback period of 3½
years.

This is done through two ways—either by increasing revenues or increasing savings.

A combination of the two methods can also be used.

FIGURE 12.19 Payback analysis showing a payback period of 3½ years

Since this is a popular way to assess alternative investments, businesses typically

will have a set time period for payback assessments (three years, for example). This
is something you can find out from the accounting personnel with whom you are
working on the systems project.

If the proposed system has a projected payback of six years in a company that
adheres to a three-year maximum payback on projects involving fast-changing
technology, the system will be rejected. Payback that is made within the range used
by the business, but is still longer than typical (i.e., four years instead of three), may
not be rejected outright but may be subject to scrutiny through other methods.

Although the payback method offers a well-known and simple way to assess the
worthiness of the information system, it has three draw-backs that limit its
usefulness. One drawback is that it is strictly a short-term approach to investment
and replacement decisions; the second is that it does not consider the importance
of how repayments are timed; and the third is that the payback method does not
consider total returns from the proposed systems project that may go well beyond
the payback year. Other forms of analysis should be used to augment the payback
method and overcome some of these flaws.

Cash-flow Analysis

Cash-flow analysis examines the direction, size, and pattern of cash flow that is
associated with the proposed information system. If you are proposing the
replacement of an old information system with a new one, and the new information
system will not be generating any additional cash for the business, there are only
cash outlays associated with the project. If this is the case, the new system cannot
be justified on the basis of new revenues generated and must be examined closely
for other tangible benefits if it is to be pursued further.

Figure 12.20 shows a small company that is providing a mailing service to other
small companies in the city. Revenue projections are that only $5,000 will be
generated in the first quarter, but after the second quarter revenue will grow at a
steady rate. Costs will be large in the first two quarters and then level off. Cash-flow
analysis is used to determine when a company will begin to make a profit (in this
case, it is the

FIGURE 12.20 Cash-flow analysis for the computerized mail addressing system

third quarter with a cash flow of $7,590) and when it will be “out of the red”—that
is, when revenue has made up for the initial investment (in the first quarter of year
2 when accumulated cash-flow changes from a negative amount to a positive
$10,720).
The proposed system should have increased revenues along with cash outlays.
Then the size of cash flow must be analyzed along with the patterns of cash flow
associated with the purc1ase of the new system. You must ask when cash outlays
and revenues will be occurring, only for the initial purchase but over the life of the
information system as well.

Present Value

Present value analysis helps the systems analyst to present to business decision
makers the time value of the investment in the information system as well as the
funds flow (as discussed in the previous section). Present value is a way to assess
all of the economic outlays and revenues of the information system over its
economic life and to compare costs today with future costs and today’s benefits
with future benefits.

In Figure 12.21, system costs total $272,000 over six years and benefits total
$280,700. Therefore, we might conclude that benefits outweigh the costs. However,
benefits only started to surpass costs after the fourth rear, and dollars in the sixth
‘ear will not be equivalent to dollars in year 1.

For instance, a dollar investment at 7 percent today will be worth S1.67 at the end
of the year and will double in approximately ten years. The present value, therefore,
is the cost or benefit measured in today’s dollars and.depends on the cost of
money. The cost of money is the opportunity cost, or the rate that could be
obtained if the money invested in the proposed system was invested in another
(relatively safe) project.

The present value of $1.00 at a discount rate of i is calculated by determining the

factor

FIGURE 12.21 Without considert,ng present value, the benefits appear to outweigh
the costs

FIGURE 12,22 Taking into account present value, the conclusion is that the costs are
greater than the benefits. The discount rate, I, Is assumed to be .12 In calculating
the multipliers in this table.

where n is the number of periods. Then the factor is multiplied by the dollar amount
yielding present value, as shown in Figure 12.22. In this example, the cost of money
(i.e. discount rate) is assumed to be .12 (12 percent) for the entire planning horizon.
Multipliers are calculated for each period: n = 1, n = 2, ... , a = 6. Present value of
both costs and benefits are then calculated using these multipliers. When this is
done, the total benefits (measured in today’s dollars) are $179,484—less than the
costs (also measured in today’s dollars). The conclusion to be drawn is that the
proposed system is not worthwhile if present value is considered.

Although this example, which used present value factors, is useful in explaining the
concept, all electronic spreadsheets have a built-in present value function. The
analyst can directly compute present value in this manner.

Guidelines for Analysis

The use of the above methods depends on the methods employed and accepted
within the organization itself. However, for general guidelines it is safe to say:

1. Use break-even analysis if the project needs to be justified in terms of cost, not
benefits: or if benefits do not substantially improve with the proposed system.

2. Use payback when the improved tangible benefits form a convincing argument
for the proposed system.

3. Use cash-flow analysis when the project is expensive, relative to the size of the
company; or when the business would be significantly affected by a large drain
(even if temporary) on funds.

4. Use present value when the payback period is long, or when the cost of
borrowing money is high.

Whichever method is chosen, it is important that cost/benefit analysis be

approached systematically, in a way that can be explained and justified to
management, who will eventually decide whether to commit resources to the
systems project. Next, we turn to the importance of comparing many systems
alternatives.

Examining Alternative Systems

Through the use of break-even, payback, cash-flow, and present value analyses, it
is possible to compare alternatives for the information system. As was shown
previously, it is important to use multiple analyses in order to cover adequately the
shortcomings of each. Although you will consider several alternatives, the proposal
itself will recommend only one. This means that you will have done comparative
analyses about which system makes better economic sense before the proposal is
written. Those analyses can be included to provide support for the system you are
recommending.

Do not think that there is only one “correct’ system solution to help a business solve
its problems and reach its goal. Different businesses call for different system
attributes, and systems analysts themselves differ about the best way to handle
various business problems.

Based on your ascertainment of information requirements, the tangible and

intangible costs and benefits of the system, and so on, compare

Consulting Opportunity 12.4

The Birth of a System Ill: The Final Chapter

“The list you made of tangible and intangible costs and benefits really helped.”
raved D. W. “You had to do some tight editing to make anything out of that
melodrama I spun for you the other day. Before we produce a system, however, I’d
like you to analyze the tangible costs and benefits you wrote for me. Even films
have critics.” D. W. reminds you, as he slips back out of view and heads back to his
repair bench.

Using one of the methods discussed in this chapter, perform the analysis D. W.
called for, and make a convincing case for the systems solution you preview. Use
graphs to get the proper angle on the project and put the debut of your analyses in
its best light.

the alternatives with which you are working. This might call for the use of one of the
multiple-criteria methods described in Chapter 11. Be open-minded as you compare
alternatives so that the system you are recommending can be said to fit within the
business as its members experience it.

The key point is that you ‘want to compare and contrast options in as fair a manner
as possible. so that a true choice is offered to organizational decision makers. The
closer their initial identification with and acceptance of the proposed system, the
greater the likelihood of continued use and acceptance once the system is in place.
Continue including decision makers in the planning, even though you must in some
ways expect to play the role of the systems expert now.

SUMMARY
Evaluating hardware and software; identifying and forecasting costs and benefits;
and performing cost/benefit analysis are all necessary activities the systems analyst
must accomplish in preparing material for the systems proposal. Information
requirements help shape what software is purchased or written, as well as what
hardware is necessary to perform required data transformation functions.

Systems analysts must estimate workloads in order to adequately characterize

current and projected workload capacity necessary for hardware. Sample workloads
can then be run on hardware under consideration.

Options for size and power of computer range from microcomputers to

supercomputers. Systems require adequate data storage so that stored data are not
endangered through periodic access to other data and so that users are not slowed
by having to go through unstrored data during an inquiry. Many storage media are
available: magnetic tapes are inexpensive and good for massive data storage;
magnetic disks are good for on-line systems that require interactive capability;
floppy diskettes are useful for smaller systems, but costly and time-consuming to
back up; and hard disks provide large storage capacity for smaller computer
systems.

Although computer equipment changes rapidly, the process used in evaluating

hardware need not. Through inventorying equipment already on hand and on order,
systems analysts will be able to better determine if new, modified, or current
computer hardware is to be recommended.

Computer hardware can be acquired through purchase, lease, or rental. Vendors will
supply support services such as preventive maintenance and user training that are
typically negotiated separately.

Packaged software must also be evaluated by the systems analyst and pertinent
users. Much programming time can be saved if such a package is usable without
extensive customizing. Software needs to be evaluated on how well it performs
desired functions, its ease of use; adequacy of documentation: and other support
services vendors may offer.

Preparing a proposal means identifying all of the costs and benefits of a number of
alternatives. The systems analyst has a number of methods available to forecast
future costs, benefits, volumes of transactions, and economic variables that effect
costs and benefits. Costs and benefits can be tangible (i.e., quantifiable) or
intangible (i.e., nonquantifiable and resistant to direct comparison).

A systems analyst has many methods for analyzing costs and benefits. Break-even
analysis examines the cost of the existing system versus the cost of the proposed
system. The payback method determines the length of time it will take before the
new system is profitable. Cash-flow analysis is appropriate when it is critical to know
the amount of cash outlays, while present value takes into consideration the cost of
borrowing money. These tools help the analyst examine the alternatives at hand
and make a well-researched recommendation in the systems proposal.