Transcript Value of Investing in GIS - the University of Redlands

The Value of Investing in IT
Chapter 7 Slides from
James Pick, Geo-Business: GIS in the Digital
Organization, John Wiley and Sons, 2008.
Copyright © 2008 John Wiley and Sons.
DO NOT CIRCULATE WITHOUT
PERMISSION OF JAMES PICK
Copyright (c) 2008 by John Wiley
and Sons
Developing GIS
• GIS is known to go through stages of
growth in an organization.
• It needs to be nurtured in the early stages
and then takes off, often too fast.
• Controls and administration are established.
• The leadership and management problem is
how best to nurture and develop GIS in an
organization.
• Discussion – what are your ideas?
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Justifications for C-B Analysis
• Useful in planning in an organization. There are
competing demands for investments and
resources. C-B analysis can help to resolve this.
• Helps in auditing. The C-B analysis can be done
retrospectively, to determine whether a project
was beneficial.
• Uses in political decision-making. This is shorterterm than the first and less complete. It helps
resolve issues (King and Schrems, 1978).
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4 factors to set the context of C-B
analysis
1.
Statement of purpose. Why is the C-B analysis being done? For
direct use in a decision? Indirect use? Political purpose?
2.
Time simultaneity. Is the C-B analysis for a project that prospective,
current, or past?
3.
Scope. Will the analysis examine all the C-B items, some of them,
or only one, for sensitivity analysis?
4.
Criterion. How will the costs and benefits be compared, after they
have been gathered. This is the criterion. Examples: formula,
graphical comparison, NPV.
Adapted from King and Schrems, 1978.
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Higher Costs of a GIS versus a
conventional IS: data collection maintenance and visualization
• GIS is usually more expensive than a conventional
IS due to the needs to gather both attribute and
boundary file data.
• Studies show that the data/ boundary file
collection and management cost for GIS may be
65 to 80 percent of total system development
costs.
• The visualization aspects imply that more
intangible costs apply for a GIS.
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3 Factors that Differentiate GIS C-B
Analysis from non-Spatial IT C-B
• GIS software tends to be linked with other
technologies and software, such as GPS, wireless
mobile devices, RFID, statistical and modeling
software.
• GIS data consists of both attribute data and spatial
data, and they are collected differently and must
be linked together.
• GIS visualization is hard to quantify. Hence it
adds relatively more to intangible benefits.
(Source: Pick, 2005)
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Comparison of Cost-Benefit for a Simple GS System to a GIS
System Closely Coupled with Another System or Technology
(Fig. 7.1)
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Tangible Costs of a GIS
•Hardware
•Software
•Data collection
•Transformation of manual maps and data into digital
format
•Maintenance costs for hardware and software
•Maintenance of data
(Source: Pick, 2004)
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Tangible Costs of a GIS (cont.)
•
•
•
•
•
•
•
•
•
Supplies
Design and construction of data-bases
Hiring more staff
Training present staff
Outsourcing (e.g. GIS applications
programming)
Consulting
Licensing
Communications interfaces and networks
Space, site, and utilities
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Topic for Study: Tangible Benefits of a
GIS
•Salary and benefits lowering from reducing the workforce
•Cost reduction (through employees performing their tasks more
efficiently
•Cost avoidance in the future (projected greater workload per
employee
•Expansion of revenues (achieved through improved data quality,
improved efficiency
•Improved productivity
•Improved performance
•Higher value of assets
(Source: Pick, 2005)
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Intangible Benefits of a GIS
•Improved decision making
•Effectiveness of managers and executives
•Reaching strategic objectives
•Environmental scanning
•Speed and timeliness of information
•Volume and quality of information
(Source: Pick, 2004)
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Intangible Benefits of a GIS
(cont.)
• Better capability to sell products
• Improved collections of money
• Identification of missing revenue sources
efficiency and workflow
• Better utilization of assets
• Reduced error
• Reduced liability (e.g. monitory security)
• External benefits
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Units of Analysis
Among the units of analysis for GIS
C-B are:
– Industry
– Company
– Department or division
– Project
– Individual
For smaller units, costs and benefits are more easily estimated. For
all these levels the “coupling” of GIS with other systems can
complicate GIS C-B.
For enterprise-wide GIS, the “coupling” takes a different form of
connection with other enterprise systems, such as ERP.
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Extraneous Influences on C-B
Analysis at higher units of analysis
• At the firm and higher levels, extraneous
influences impact the C-B analysis. These
might be economic influences (economic
cycles), pricing of hardware and software,
changes in “coupled” technologies, etc.
These are usually excluded from C-B
studies, but need to be considered in a
broader perspective.
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High Costs of Acquiring Spatial
Data
• Costs of the data are estimated at 80 percent
(Tomlinson, 2003)
• Capital costs to develop the data-bases are mostly in
the public sector, so large public data-bases available
at low cost in U.S.– example is Census. In Europe, the
data is costly.
• However, there are problems with multi-country
public data, since boundary files often don’t follow
common standards.
• Example, U.S. and Mexico Census attributes and
boundary rules are quite different (Pick et al., 2000a,
2000b).
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Net Present Value
• Net present value (NPV) formulae can
estimate the net benefit for future years.
• The appropriate discount rates need to be
assumed.
• The perking of interest this year points to
a period when NPV will be more
important
• See book chapter (Pick, 2005) for
formulae. Copyright (c) 2008 by John Wiley
and Sons
Comparison with a Criterion
Some common criteria are:
• Maximize the present value of the benefits
minus the present value of the costs.
• Maximize the ratio of benefits over costs.
• Assume a given level of costs for all
alternatives and maximize benefits
• Assume a given level of benefits for all
alternatives and minimize costs
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Stakeholders and Externalities
• Cost-benefit results may vary from the vantage points
of different stakeholders in an organization.
• For instance, GIS in an advertising firm will have
different costs and benefits for the corporation itself,
the firm’s customers, its investors, and the general
public.
• The effort of cost-benefit work is made more difficult
and time-consuming by adding diverse stakeholder
analyses.
• However, it may be worth the effort, if there are large
differences in the stakeholder outcomes. At the
minimum, stakeholders should be mentioned in the
cost-benefit analysis.
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Case Study of Sears Roebuck
• Sears Roebuck constitutes a case example of the
benefits of GIS in a large scale enterprise. Sears
delivers a vast amount of merchandise nationally
every day.
• Yearly its 1,000 delivery trucks perform over 4
million deliveries to homes (Kelley, 1999). Its
truck delivery system covers 70 percent of the
U.S. territory (Kelley, 1999).
• However, prior to implementing GIS, the
manual process at Sears was very time
consuming and wasteful, with many hours each
day spent by routing-center workers locating
street addresses.
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Sears Roebuck Case Study
(cont.)
• There was an average time slippage rate of 20
percent of deliveries.
• In the early 1990s, an enterprise-wide GIS
system was constructed by geocoding Sears’
millions of customer addresses and setting up
optimized delivery with the goal of 90 percent
reliability in the promised delivery window
(Kelley, 1999).
• The GIS calculates daily delivery routes, based
on a model that includes “estimated travel times,
in-home time, truck capacity, optimal stop
sequence” (Kelley, 1999).
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Sears Integrated GIS Systems for Product
Repair Services and Home Delivery
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(Source: Jones, 2005) Fig. 7.2
Sears Delivery – Transit Time Reduction
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(Source: Jones, 2005) Fig. 7.3
Case Study of Sears Roebuck
(cont.)
Tangible Benefits
• For tangible benefits, the system has increased its
efficiency by reducing the time for routing and
addressing from an average of 5 hours daily to 20
minutes. The miles per delivery-truck stop were
lowered by 0.6 mile, which allows 4 more stops per
truck per day (Kelley, 1999). This has allowed
reduction in the number of Sears national routing
centers from 46 to 12.
• Delivery orders have expanded by 9 percent with the
same-sized truck fleet. In all, equipment and facilities
savings from the GIS-based networking enhancement
are $30 million per year.
(Kelley, 1999).
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Case Study of Sears Roebuck
(cont.)
Intangible benefits
The intangible benefits apply to Sears management
and customers.
Sears middle and top management are able to use
the information in this system strategically to plan
improved efficiency versus its competitors over
long periods of time, a strategic efficiency
approach resembling Walmart’s well-known
inventory and just-in-time delivery systems.
At the customer level, reducing the 20 percent of
missed deliveries down to less than five percent
has had image-enhancement benefits that help in
marketing other company products.
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Case Study of Sears Roebuck
(cont.)
• In this case, what was different versus an enterprise-wide
non-spatial system deployed in a large corporation?
• Several factors differ.
– First, the initial data acquisition was relatively expensive
and time consuming, since over four million addresses
had to be geocoded and then tediously corrected (Kelley,
2002). However, once this one-time massive data
acquisition took place, the costs of subsequent data
acquisition were within a normal range for IS
applications.
– Another difference is the integration of GIS with GPS on
the delivery trucks. Knowing the location of each truck in
real-time allows more optimal management of the whole
fleet. However, as we discussed, the necessity to couple
GIS with other systems may increase the overall cost.
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Value of IT Investments Approach
• The “value of IT investment” approach examines
the level of IT investment and variety of returns
on investment.
• The methodology started in the late 1970s and has
produced hundreds of studies. Early studies
tended to be pessimistic regarding the productivity
resulting from investment.
• This led to the term, “productivity paradox,” i.e.
the paradox that companies or larger economic
units invest in IT but fail to realize appropriate
productivity gains (Brynjolffson, 1993).
• The difference from C-B analysis is that it is
especially sensitive to the problems to IT
measurement problems in cost-benefit analysis.
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Case Study: Norwich Union:
Unexpected Benefits of GIS
• One of the two lead spatial products is Norwich’s
flood map for the UK, which is the country’s
leading source of flood insurance information,
both for Norwich and other insurance companies
that acquire the maps.
• The system has recently been upgraded so an
individual home can be assessed very precisely
online regarding the latest flood boundaries and an
accurate rate can be given.
• Due to this individual-home precision, the extent
of flood zones has been reduced.
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Norwich Union (cont.)
• Norwich’s second lead spatial product, “Pay as You Drive”
Insurance is a new one that Norwich launched for young drivers in
2005. A GPS device is installed in the car that estimates the
customer’s monthly insurance premium, based on when, where,
and how often he/she drives.
• The data are transmitted from the car of the policyholder to
Norwich, via satellite (Figure 7.4). Based on the real-time data and
utilizing IBM software, Norwich adjusts the premium rates.
• This is different from traditional car insurance, which calculates
premiums yearly based on actuarial tables. It’s analogous to mobile
phone use, where a person pays depending on usage.
• The young drivers have saved up to 25 percent on their premiums,
versus traditional. The product was rolled out to customers in 2006.
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GPS Device for Norwich’s “Pay as
You Drive” Insurance.
GPS unit being plugged into
the vehicle.
(Source: Stevenson and Hunt, 2006)
The driver can also plug the
device into his/her pc and
review his/her driving
behavior
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Case Study of Norwich Union (cont.)
• The benefit to Norwich is that the drivers with the devices
tend to be more cautious, and thus lower Norwich’s risk
with this group of insured.
• An unexpected plus is that the driving data for the driver
population, with the identities of policyholders stripped
off, are useful to Norwich Union internally for
demographic and marketing studies. With appropriate legal
sanction, the stripped data could also become a product
marketed to other companies interested in driving and
traffic patterns.
• Norwich has a high level of net benefits, along with low
costs, except for purchase of expensive external data.
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GIS and Outsourcing
• GIS came somewhat late to outsourcing but
today large GIS outsourcing firms
– RMSI Private Limited, Noida, India
• 2000 employees. Focus on projects outside India
– NIIT GIS Ltd. (ESRI India)
• 300 employees in GIS division. Focused more on
the public sector in India and some large firms such
as Reliance.
• Is a franchise of ESRI Inc. in Redlands, California,
world’s largest GIS software firm
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GIS and Outsourcing – What are
the Challenges and Issues
• Understanding the geography – in India and
elsewhere.
• Obtaining the digital map layers
– Is available for public sector in India
– Is challenging to obtain in India for private
sector but possible.
– Easy to obtain in some nations such as U.S. but
might be hard to understand and implement.
• Other challenges and issues??
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