Chapter 13

Topics:
Systems proposal Determining hardware needs Determining software needs Decision to rent, lease, or buy Tangible and intangible costs and benefits Methods for selecting alternatives

Preparing the System Proposal

Systems Proposal

In order to prepare the systems proposal analysts must use a systematic approach to identify hardware and software needs
Ascertaining hardware and software needs Identifying and forecasting costs and benefits Comparing costs and benefits Choosing the most appropriate alternative

Preparing the System Proposal

Steps to Ascertain Hardware and Software Needs

Inventory computer hardware currently available Estimate current and projected workload for the system Evaluate the performance of hardware and software using some predetermined criteria Choose the vendor according to the evaluation Obtain hardware and software from the vendor

Preparing the System Proposal

Steps to Ascertain Hardware and Software Needs

Preparing the System Proposal

Hardware Inventory Check

Type of equipment: model no., manufacturer Status of equipment operation Estimated age of equipment Physical location of equipment Department or person responsible for equipment

Preparing the System Proposal

Criteria for Evaluating Hardware

Time required for average transactions (including time for input and output) Total volume capacity of the system Idle time of the central processing unit Size of memory provided

Preparing the System Proposal

People that Evaluate Hardware

Management Users Systems analysts

Preparing the System Proposal

Three Options for Obtaining Computer Equipment

Buying Leasing Rental

Preparing the System Proposal

Buying

Advantages Cheaper than leasing or renting over the long run Ability to change system Provides tax advantages of accelerated depreciation Full control

Disadvantages Initial cost is high Risk of obsolescence Risk of being stuck if choice is wrong Full responsibility

Preparing the System Proposal

Leasing

Advantages No capital is tied up No financing is required Leases are lower than rental payments

Disadvantages Company doesnt own the system when lease expires Usually a heavy penalty for terminating the lease Leases are more expensive than buying

Preparing the System Proposal

Renting

Advantages No capital is tied up No financing is required

Disadvantages Company doesnt own the computer

Easy to change systems Cost is very high because vendor assumes Maintenance and the risk (most expensive insurance are usually option) included

Preparing the System Proposal

Evaluation of Vendor Support for Hardware

Hardware support
full line of hardware, quality products, warranty

Software support
complete software needs, custom programming, warranty

Installation and training support

commitment to schedule, in-house training, technical assistance

Maintenance support
routine maintenance procedures, specified response time in emergencies, equipment loan while repair is being done

Preparing the System Proposal

Guideline for Evaluating Software

Performance effectiveness perform all required and

desired tasks, well-designed display screens, adequate capacity Performance efficiency fast response time, efficient input, output, storage of data and backup Ease of use satisfactory user interface, help menu, ReadMe files, flexible interface, adequate feedback, good error recovery Flexibility options for input and output, usable with other software Quality of documentation good organization, adequate online tutorial, Web site with FAQ Manufacturer support tech support hot line, newsletter/email, downloadable product updates
Preparing the System Proposal

Costs and Benefits Analysis

Systems analysts should take tangible costs, intangible costs, tangible benefits, and intangible benefits into consideration to identify cost and benefits of a prospective system

Preparing the System Proposal

Tangible Costs

Tangible costs are those that can be accurately projected by systems analysts and the business' accounting personnel Examples:
Cost of equipment Cost of resources Cost of systems analysts' time

Preparing the System Proposal

Intangible Costs

Intangible costs are those that are difficult to estimate, and may not be known Examples:
Cost of losing a competitive edge Declining company image

Preparing the System Proposal

Tangible Benefits

Tangible benefits are advantages measurable in dollars that accrue to the organization through use of the information system Examples:
Increase in the speed of processing Access to information on a more timely basis

Preparing the System Proposal

Intangible Benefits

Intangible benefits are advantages from use of the information system that are difficult to measure Examples:
Improved effectiveness of decision-making processes Maintaining a good business image

Preparing the System Proposal

Selecting the Best Alternative

To select the best alternative, analysts should compare costs and benefits of the prospective alternatives using
Break-even analysis Payback Cash-flow analysis Present value method

Preparing the System Proposal

Break-Even Analysis

Break-even analysis is the point at which the cost of the current system and the proposed system intersect Break-even analysis is useful when a business is growing and volume is a key variable in costs

Preparing the System Proposal

Break-Even Analysis

Preparing the System Proposal

Payback Period (PBP)

Payback determines the number of years of operation that the system needs to pay back the cost of investing in it Payback is determined in one of two ways:
By increasing revenues By increasing savings

If the PBP of a project is 6 years and the project can exist 3 years in the fast technology change situationit should be rejected.

Preparing the System Proposal

How to determine PBP

PAY BACK PERIOD (PBP)

Investment: Amount Recovered in 2002: Remaining Investment to be recovered: Amount Recovered in 2003: Remaining Investment to be recovered: $ 20,000 $ 7,312 $12,668 $ 7,768 $ 4,920

Part of 2004 Needed : 4,920/7352= 0.67 (Assuming that Amount Recovered in 2004 is $7352)
PBP = 1 + 1 + 0.67 = 2.67 YEARS

Preparing the System Proposal

Payback Period

Preparing the System Proposal

Three Drawbacks of the Payback Method

It is strictly a short-term approach to investment and replacement decision It does not consider the importance of how repayments are timed It does not consider total returns from the proposed systems project that may go well beyond the payback year

Preparing the System Proposal

Cash-Flow Analysis

Cash-flow analysis is used to examine the direction, size, and pattern of cash flow associated with the proposed information system Determines when a company will begin to make profit Determine when cash outlays and revenues will made up for initial investment

Preparing the System Proposal

Cash-Flow Analysis

Preparing the System Proposal

Present Value Method

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

Preparing the System Proposal

Present Value Method

Without considering present value

Considering present value

Preparing the System Proposal

Guidelines for Selecting the Best Alternative

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. Use payback when the improved tangible benefits form a convincing argument for the proposed system. Use cash-flow analysis when the project is expensive relative to the size of the company. Use present value when the payback period is long.
Preparing the System Proposal