Economic Feasibility - Identifying, Forecasting Costs & Benefits

Costs and benefits of the proposed computer system must always be considered together, because 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 cost-benefit analysis, not on information requirements. In many ways, benefits are measured by costs, as becomes apparent in the next section.

Forecasting

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 a what-if analysis, such as, “What if labor costs rise only 5 percent per year for the next three years, rather than 10 percent?” The systems analyst should realize, however, that he or she 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. The main condition for choosing a model is the availability of historical data. If they are unavailable, the analyst must turn to one of the judgment methods: 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 such 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 that these methods are low-cost, easy-to-implement alternatives. Included in this group are graphical judgment, moving averages, and analysis of time-series data. Because these methods are simple, reliable, and cost effective, the remainder of the section focuses on them.

Estimation of Trends

Trends can be estimated in a number of different ways. One way to estimate trends is to use a moving average. This method 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 of data from a fixed number of periods; a three-month moving average is simply the average of the last three months. For example, the average sales for January, February, and March is used to predict the sales for April. Then the average sales for February, March, and April are used to predict the sales for May, and so on.

When the results are graphed, 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. Moving averages are more strongly affected by extreme values than by using graphical judgment or estimating using other methods such as least squares. The analyst should learn forecasting well, as it often provides information valuable in justifying the entire project.

Identifying Benefits and Costs

Benefits and costs can be thought of as either tangible or 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 the use of the information system. Examples of tangible benefits are an increase in the speed of processing, access to otherwise inaccessible information, access to information on a more timely basis than was possible before, the advantage of the computer’s superior calculating power, and decreases in the amount of employee time needed to complete specific tasks. There are still others. Although measurement is not always easy, tangible benefits can actually be measured in terms of dollars, resources, or time saved.

Intangible Benefits

Some benefits that accrue to the organization from the use of the information system are difficult to measure but are important nonetheless. They 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 tedious tasks. As you can judge from the list given, intangible benefits are extremely important and can have far-reaching implications for the business as it relates to people both outside and within the organization.

Although intangible benefits of an information system are important factors that must be considered when 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, because presenting both will allow decision makers in the business to make a well informed decision about the proposed system.

Tangible Costs

The concepts of tangible and intangible costs present a conceptual parallel to the tangible and intangible benefits discussed already. Tangible costs are those that can be accurately projected by the systems analyst and the business’s accounting personnel.

Included in tangible costs are the cost of equipment such as computers and terminals, the cost of resources, the cost of systems analysts’ time, the cost of programmers’ time, and other employees
salaries. These costs are usually well established or can be discovered 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 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 a dollar amount for intangible costs accurately. To aid decision makers who want to weigh the proposed system and all its implications, you must include intangible costs even though they are not quantifiable.

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