Transcript Object Oriented Analyis & Design Training Agenda

Feasibility and Cost-Benefit Analysis
Introduction

The chapter will address the following questions:



What are the feasibility checkpoints in the systems development
life cycle?
What are the four types of feasibility and what is the description of
each?
How do you perform various cost-benefit analyses using timeadjusted costs and benefits?
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
1
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Feasibility Analysis - A Creeping
Commitment Approach

Feasibility Checkpoints in the Life Cycle


Feasibility is the measure of how beneficial or practical the
development of an information system will be to an organization.
Feasibility analysis is the process by which feasibility is
measured.
 Feasibility should be measured throughout the life cycle.
 The scope and complexity of an apparently feasible project can
change after the initial problems and opportunities are fully
analyzed or after the system has been designed.
 Thus, a project that is feasible at one point in time may become
infeasible at a later point in time.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
2
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Feasibility Analysis - A Creeping
Commitment Approach

Feasibility Checkpoints in the Life Cycle


Feasibility is the measure of how beneficial or practical the
development of an information system will be to an organization.
Feasibility analysis is the process by which feasibility is
measured.
 Feasibility should be measured throughout the life cycle.
 The scope and complexity of an apparently feasible project can
change after the initial problems and opportunities are fully
analyzed or after the system has been designed.
 Thus, a project that is feasible at one point in time may become
infeasible at a later point in time.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
3
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
1
2
Survey
Study
3
Definition
End-users
4
Configuration
9
5
6
Support
Design
Procurement
8
7
Delivery
Construction
Vendors
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
4
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Four Tests for Feasibility

Most analysts agree that there are four categories of
feasibility tests:
Operational feasibility is a measure of how well the solution
of problems or a specific solution will work in the organization.
It is also a measure of how people feel about the
system/project.
 Technical feasibility is a measure of the practicality of a
specific technical solution and the availability of technical
resources and expertise.
 Schedule feasibility is a measure of how reasonable the project
timetable is.
 Economic feasibility is a measure of the cost-effectiveness of a
project or solution. This is often called a cost-benefit analysis.

Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
5
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Four Tests for Feasibility

Operational Feasibility


Operational feasibility criteria measure the urgency of the problem (survey
and study phases) or the acceptability of a solution (definition, selection,
acquisition, and design phases).
There are two aspects of operational feasibility to be considered:
 Is the problem worth solving; will the solution to the problem work?
• Use PIECES as a screen (performance, information , economy, control,
efficiency, services)

How do the end-users and management feel about the problem
(solution)?
•
•
•
•
Does management support the system?
How do the end-users feel about their role in the new system?
What end-users or managers may resist or not use the system? If so, how?
How will the working environment of the end-users change? Can or will
end-users and management adapt to the change?
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
6
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Four Tests for Feasibility

Operational Feasibility

Usability Analysis:
 Usability analysis is often performed with a working prototype
of the proposed system.
• This is a test of the system’s user interfaces and is measured in
how easy they are to learn, to use and support the desired
productivity levels of the users.
• The goal is to identify the areas of the system where the users are
prone to make mistakes, processes which may be confusing or too
complicated, and also observe the reactions of the user and assess
their productivity.
• Some organizations (HP, Apple) have in-house Usability Testing
Centers
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
7
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Four Tests for Feasibility

Technical Feasibility


Technical feasibility can only be evaluated after those phases
during which technical issues are resolved — namely, after the
evaluation and design phases of our life cycle have been
completed.
Technical feasibility addresses three major issues:
 Is the proposed technology or solution practical?
• Is it available, is it mature, are there other users?

Do we currently possess the necessary technology?
• If so, will our license allow this new use? Is the technology
available commercially or through special beta testing?

Do we possess the necessary technical expertise, and is the
schedule reasonable?
• Do we need vendor staff on-site?
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
8
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Four Tests for Feasibility

Schedule Feasibility

Given our technical expertise, are the project deadlines reasonable?
 Some projects are initiated with specific deadlines.
• You need to determine whether the deadlines are mandatory or
desirable.
• If the deadlines are desirable rather than mandatory, the analyst
can propose alternative schedules.

It is preferable (unless the deadline is absolutely mandatory) to
deliver a properly functioning information system two months late
than to deliver an error-prone, useless information system on time!
 Missed schedules are bad.
 Inadequate systems are worse!
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
9
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Four Tests for Feasibility

Economic Feasibility

The bottom line in many projects is economic feasibility.
 During the early phases of the project, economic feasibility
analysis amounts to little more than judging whether the
possible benefits of solving the problem are worthwhile.
 As soon as specific requirements and solutions have been
identified, the analyst can weigh the costs and benefits of each
alternative.
• This is called a cost-benefit analysis.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
10
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Four Tests for Feasibility

The Bottom Line


You have learned that any alternative solution can be evaluated
according to four criteria: operational, technical, schedule, and
economic feasibility.
How do you pick the best solution? It's not always easy.
 Operational and economic issues often conflict.
 The final decision can only be made by sitting down with endusers, reviewing the data, and choosing the best overall
alternative.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
11
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

How Much Will the System Cost?

Costs fall into two categories.
1 There are costs associated with developing the system.
• Can be estimated from the outset of a project and should be refined
at the end of each phase of the project.
2
There are costs associated with operating a system.
• Can only be estimated once specific computer-based solutions
have been defined (during the selection phase or later).
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
12
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

How Much Will the System Cost?

Systems development costs:
 Are usually one-time costs that will not recur after the project has
been completed.
 Sample systems development costs:
•
•
•
•
•
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
Personnel costs - include benefits and contract personnel
Computer usage - include conversion, development, parallel testing
Training - include travel costs
Supply, duplication, and equipment costs.
Cost of any new computer equipment and software.
13
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

How Much Will the System Cost?


The lifetime system benefits must recover both the developmental
and operating costs.
Systems operating costs:
 Recur throughout the lifetime of the system.
 The costs of operating a system over its useful lifetime can be
classified as fixed and variable.
• Fixed costs occur at regular intervals but at relatively fixed rates.
Examples of fixed operating costs include:
– Lease payments and software license payments.
– Prorated salaries of information systems operators and support
personnel (although salaries tend to rise, the rise is gradual and
tends not to change dramatically from month to month).
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
14
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

How Much Will the System Cost?

Systems operating costs:
• Variable costs occur in proportion to some usage factor. Examples
include:
– Costs of computer usage (e.g., CPU time used, terminal
connect time used, storage used) which vary with the work
load.
– Supplies (e.g., preprinted forms, printer paper used, punched
cards, floppy disks, magnetic tapes, and other expendables),
which vary with the work load.
– Prorated overhead costs (e.g., utilities, maintenance, and
telephone service).

Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
After determining the costs and benefits for a possible solution,
you can perform the cost-benefit analysis.
15
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

What Benefits Will the System Provide?



Benefits normally increase profits or decrease costs, both highly
desirable characteristics of a new information system.
To as great a degree as possible, benefits should be quantified in
dollars and cents.
Benefits are classified as tangible or intangible.
 Tangible benefits are those that can be easily quantified.
• Tangible benefits are usually measured in terms of monthly or
annual savings or of profit to the firm.
• Examples include: fewer processing errors, reduced expenses, and
increased sales.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
16
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

What Benefits Will the System Provide?

Benefits are classified as tangible or intangible. (continued)
 Intangible benefits are those benefits believed to be difficult or
impossible to quantify.
• Examples include: improved customer goodwill and improved
employee moral.
• Unfortunately, if a benefit cannot be quantified, it is difficult to
accept the validity of an associated cost-benefit analysis that is
based on incomplete data.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
17
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

Is the Proposed System Cost-Effective?


There are three popular techniques to assess economic feasibility,
also called cost-effectiveness.
 Payback analysis.
 Return on investment.
 Net present value.
One concept that should be applied to each technique is the
adjustment of cost and benefits to reflect the time value of money.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
18
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

Is the Proposed System Cost-Effective?

The Time Value of Money:
 A concept shared by all three techniques is the time value of
money — a dollar today is worth more than a dollar one year
from now.
 Some of the costs of a system will be accrued after
implementation.
 All benefits of the new system will be accrued in the future.
 Before cost-benefit analysis, these costs should be brought back
to current dollars.
• Why go to all this trouble?
• Because projects are often compared against other projects that
have different lifetimes.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
19
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

Is the Proposed System Cost-Effective?

Payback Analysis:
 The payback analysis technique is a simple and popular
method for determining if and when an investment will pay for
itself.
• Because systems development costs are incurred long before
benefits begin to accrue, it will take some period of time for the
benefits to overtake the costs.
• After implementation, you will incur additional operating expenses
that must be recovered.
• Payback analysis determines how much time will lapse before
accrued benefits overtake accrued and continuing costs.
– This period of time is called the payback period.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
20
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

Is the Proposed System Cost-Effective?

Payback Analysis:
 How do you determine the payback period?
• Adjust the costs and benefits for the time value of money (that is,
adjust them to current dollar values).
– The present value of a dollar in year n depends on something
typically called a discount rate.
– The discount rate is a percentage similar to interest rates that
you earn on your savings account.
– The discount rate for a business is the opportunity cost of
being able to invest money in other projects.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
21
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

Is the Proposed System Cost-Effective?

Payback Analysis:
 How do you determine the payback period? (continued)
– The current value, actually called the present value, of a dollar
at any time in the future can be calculated using the following
formula:
PVn = 1(1 + i)n
– where PVn is the present value of $1.00 n years from now and
i is the discount rate.
• Determine time period when lifetime benefits will overtake the
lifetime costs.
– This is the break-even point.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
22
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
23
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

Is the Proposed System Cost-Effective?

Return-on-Investment Analysis:
 The return-on-investment (ROI) analysis technique compares
the lifetime profitability of alternative solutions or projects.
 The ROI for a solution or project is a percentage rate that
measures the relationship between the amount the business gets
back from an investment and the amount invested.
 The ROI for a potential solution or project is calculated as
follows:
• ROI = (Estimated lifetime benefits - Estimated lifetime costs) /
Estimated lifetime costs

Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
The solution offering the highest ROI is the best alternative.
24
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Cost-Benefit Analysis Techniques

Is the Proposed System Cost-Effective?

Net Present Value:
 The net present value of an investment alternative is
considered the preferred cost-benefit technique by many
managers.
 Costs are represented by negative cash flows while benefits are
represented by positive cash flows.
 After discounting all costs and benefits, subtract the sum of the
discounted costs from the sum of the discounted benefits to
determine the net present value.
• If it is positive, the investment is good.
• If negative, the investment is bad.

Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
When comparing multiple solutions or projects, the one with
the highest positive net present value is the best investment.
25
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
26
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Feasibility Analysis of Candidate Systems

Candidate Systems Matrix



The candidate systems matrix documents similarities and
differences between candidate systems; however, it offers no
analysis.
The columns of the matrix represent candidate solutions.
The rows of the matrix represent characteristics that serve to
differentiate the candidates. The breakdown is as follows:
Candidate 1 Name Candidate 2 Name Candidate 3 Name
Technology
Interfaces
Data
Processes
Geography
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
27
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Characteristics
Portion of System Computerized
Brief description of that portion of the
system that would be computerized in
this candidate.
Benefits
Brief description of the business benefits
that would be realized for this
candidate.
Servers and Workstations
A description of the servers and
workstations needed to support this
candidate.
Software Tools Needed
Software tools needed to design and
build the candidate (e. g., database
management system, emulators,
operating systems, languages, etc.). Not
generally applicable if applications
software packages are to be purchased.
Application Software
A description of the software to be
purchased, built, accessed, or some
combination of these techniques.
Method of Data Processing
Generally some combination of: on-line,
batch, deferred batch, remote batch, and
real-time.
Output Devices and Implications
A description of output devices that
would be used, special output
requirements, (e.g. network, preprinted
forms, etc.), and output considerations
(e.g., timing constraints).
Input Devices and Implications
A description of Input methods to be
used, input devices (e.g., keyboard,
mouse, etc.), special input requirements,
(e.g. new or revised forms from which
data would be input), and input
considerations (e.g., timing of actual
inputs).
Storage Devices and Implications
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
Candidate 1
COTS package Platinum
Plus from Entertainment
Software Solutions would be
purchased and customized to
satisfy Member Services
required functionality.
This solution can be
implemented quickly
because its a purchased
solution.
Candidate 2
Member Services and
warehouse operations in
relation to order fulfillment.
Candidate 3
Same as candidate 2.
Fully supports user required
business processes for
Soundstage Inc. Plus more
efficient interaction with
member accounts.
Same as candidate 1.
Same as candidate 2.
MS Visual Basic 5.0
System Architect 3.1
Internet Explorer
MS Visual Basic 5.0
System Architect 3.1
Internet Explorer
Package Solution
Custom Solution
Same as candidate 2.
Client/Server
Same as candidate 1.
Same as candidate 1.
(2) HP4MV department
Laser printers
(2) HP5SI LAN laser
printers
(2) HP4MV department
Laser printers
(2) HP5SI LAN laser
printers
(1) PRINTRONIX bar-code
printer (includes software &
drivers)
Same as candidate 2.
Technically architecture
dictates Pentium pro, MS
Windows NT class servers
and Pentium, MS Windows
NT 4.0 workstations
(clients).
MS Visual C++ and MS
ACCESS for customization
of package to provide report
writing and integration.
Keyboard & mouse
MS SQL Server DBMS with
100GB arrayed capability.
Web pages must be designed
to VGA resolution. All
internal screens will be
designed for SVGA
resolution.
Apple “Quick Take” digital
camera and software
(15) PSC Quickscan laser
bar-code scanners
(1) - HP Scanjet 4C Flatbed
Scanner
Keyboard & mouse
Same as candidate 1.
Candidate ...
Same as candidate 1.
Same as candidate 2.
Same as candidate 1.
Brief description of what data would be
stored, what data would be accessed
from existing stores, what storage media
would be used, how much storage
capacity would be needed, and how
data would be organized.
28
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Feasibility Analysis of Candidate Systems

Feasibility Analysis Matrix

This matrix complements the candidate systems matrix with an
analysis and ranking of the candidate systems. It is called a feasibility
analysis matrix.
 The columns of the matrix correspond to the same candidate
solutions as shown in the candidate systems matrix.
 Some rows correspond to the feasibility criteria.
 Rows are added to describe the general solution and a ranking of
the candidates.
 The cells contain feasibility assessment notes for each candidate.
 Each row can be assigned a rank or score for each criteria (e.g., for
operational feasibility, candidates can be ranked 1, 2, 3, etc.).
 After ranking or scoring all candidates on each criteria, a final
ranking or score is recorded in the last row.
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
29
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Feasibility Criteria
Operational Feasibility
Wt.
30%
Functionality. A description of to what
degree the candidate would benefit the
organization and how well the system
would work.
Candidate 1
Only supports Member
Services requirements and
current business processes
would have to be modified to
take advantage of software
functionality
Candidate 2
Fully supports user required
functionality.
Candidate 3
Same as candidate 2.
Score: 60
Current production release of
Platinum Plus package is
version 1.0 and has only been
on the market for 6 weeks.
Maturity of product is a risk
and company charges an
additional monthly fee for
technical support.
Score: 100
Although current technical
staff has only Powerbuilder
experience, the senior
analysts who saw the MS
Visual Basic demonstration
and presentation, has agreed
the transition will be simple
and finding experienced VB
programmers will be easier
than finding Powerbuilder
programmers and at a much
cheaper cost.
Score: 100
Although current technical
staff is comfortable with
Powerbuilder, management is
concerned with recent
acquisition of Powerbuilder
by Sybase Inc.
MS SQL Server is a current
company standard and
competes with SYBASE in
the Client/Server DBMS
market. Because of this we
have no guarantee future
versions of Powerbuilder
will “play well” with our
current version SQL Server.
Candidate ..
Political. A description of how well
received this solution would be from
both user management, user, and
organization perspective.
Technical Feasibility
30%
Technology. An assessment of the
maturity, availability (or ability to
acquire), and desirability of the
computer technology needed to support
this candidate.
Expertise. An assessment to the
technical expertise needed to develop,
operate, and maintain the candidate
system.
Required to hire or train C++
expertise to perform
modifications for integration
requirements.
MS Visual Basic 5.0 is a
mature technology based on
version number.
Score: 50
Economic Feasibility
Score: 95
Score: 60
30%
Cost to develop:
Approximately $350,000.
Approximately $418,040.
Approximately $400,000.
Payback period (discounted):
Approximately 4.5 years.
Approximately 3.5 years.
Approximately 3.3 years.
Net present value:
Approximately $210,000.
Approximately $306,748.
Approximately $325,500.
Detailed calculations:
See Attachment A.
See Attachment A.
See Attachment A.
10%
Score: 60
Less than 3 months.
Score: 85
9-12 months
9 months
100%
Score: 95
60.5
Score: 80
92
Schedule Feasibility
Score: 90
An assessment of how long the solution
will take to design and implement.
Ranking
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
30
Score: 85
83.5
Copyright Irwin/McGraw-Hill 1998
Feasibility and Cost-Benefit Analysis
Summary





Introduction
Feasibility Analysis - A Creeping Commitment
Approach
Four Tests for Feasibility
Cost-Benefit Analysis Techniques
Feasibility Analysis of Candidate Systems
Prepared by Kevin C. Dittman for
Systems Analysis & Design Methods 4ed
by J. L. Whitten & L. D. Bentley
31
Copyright Irwin/McGraw-Hill 1998