MIS 2000 Information Systems for Management
Instructor: Bob Travica
Economic Aspects of
Information Systems
Updated June 2015
Outline
• Costs & Benefits from IS
• Financial Assessments of Information Systems Economy
(size and timing of returns)
• Combined Assessments of Information Systems
Economy
• Software & Hardware Acquisition (develop, buy, rent)
• Summary
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Costs & Benefits from IS
• Economic aspects of IS (or IS economy) is assessed in planning of
IS as well during IS production stage.
• Cost/Benefit analysis is a necessary component in any assessment
of IS economy.
Cost-Benefit Analysis
• Tangible Costs & Benefits ($)
• Intangible Costs & Benefits (no $)
Quantitative or
qualitative figures?
Quantitative
Capital Budgeting Methods ($)
• Assessments of returns’ size
• Assessments of returns’ timing
Qualitative &
Quantitative
Mixed Methods ($ and no $)
• Portfolio Analysis (Risk control)
• Balanced Scorecard (Org. goals
achievement)
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Tangible Costs
- Direct investment in software & hardware (one time)
- IS installation & employee training (one time)
- Operating costs for an IS (recurring) – expenditures on software
licences, labor costs of IS staff, IS maintenance, overhead for
facilities, expenses of communications carried out by computer
networks partaking in IS.
- Loss of money and time with new IS that does not perform as
expected (opportunity cost).
- Total Cost of Ownership sums up all the costs in a system life
cycle.
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Intangible Costs
- Effort put in learning a new IS and associated process
- Employees’ loss of work motivation due to new processes/IS
- Employees’ resistance to new processes/IS
- Lower customer satisfaction due to improperly performing IS
- Limitations in decision making when a new IS cannot deliver
reports managers need to make decisions.
- Note that intangible costs may result in tangible costs.
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Tangible Benefits 1/2
- Savings on many counts:
- savings on labor expenses
- savings due to reduced process time (e.g., reducing inventory
costs in supply chain process)
- savings due to avoiding to add more employees when improved
process/IS can carry a larger volume of operations
- Organizational performance gains: new IS & process 
organizational productivity (output value/input cost) 
financial returns (profit figures).
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Tangible Benefits 2/2
- Better decision making resulting in income increase (e.g., moving
into new product and geographical markets)
- Cutting losses by improved management control (e.g., ERPS case
of detecting fraudulent purchases)
- Data error reduction eliminating waste of business time & labour
for repeated tasks.
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Intangible Benefits
- Customer value that does not translate directly into monetary gains
for a company
- Better control and decision making, which do not translate readily
into monetary gains
- Improvement in the appearance of reports and other business
documentation (better quality but no more money).
- Increased knowledge capabilities (note: these are a condition for
making more attractive products, but before this products are
made and sold no monetary gains accrue).
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Financial Assessments of IS Economy
• 1. Returns’ size focus: Various ratios of how much an IS returns
in relation to its costs (Benefit/Cost Ratio, Net Present Value,
Return on Investment):
– The higher the ratios, the more economically valuable the IS
– Present value of money used (future returns as well as costs
discounted for some rate) as finances flow over years (NPV function
in Excel)
• 2. Returns’ timing focus: Assessment of when returns will occur
(e.g., Break-Even Analysis)
- The shorter the wait period,
the more economically valuable
the IS.
0
1
2
3
4
Time (years)
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Mixed Methods of Assessing
IS Economy 1/2
1. Portfolio Analysis
– The focus is on controlling risks that different systems can bring
– Risks: potential known difficulties (complications, problems)
– In planning IS, different IS projects compared on risks they bear (e.g.,
completion within budget & time, technology demands, size of
organizational change required)
– Risk = Weight (impact) of problem X Probability a problem will happen
– Risk can be thought of as a special and critical cost
– Riskier projects: Expensive systems*, new technologies, and larger org.
changes (e.g., enterprise systems)
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Mixed Methods of Assessing
IS Economy 2/2
2. Balanced Scorecard
– The focus is on achieving organizational goals
– A combination of tangible and intangible benefits in select areas – finances,
customer relations, key processes, growth potential, anything else important
for a company.
– IS contribution to these performance indicators is assessed periodically.
Balanced Scorecard
Tangibles
Tangibles &
Intangibles
- Process focus!
Intangibles
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Software and Hardware Acquisition
• Three options: Make, Buy, Rent
1. In-house Development (company's IS Department does
programming, hardware acquisition, and IS installation)
2. Buy:
– Off-the-shelf software (e.g., Microsoft Office, SAP)
– Buy custom-built software (a software vendor writes software
according to the client company’s requirements).
– Note: If there is a system development capability in the IS
Department, the buy options are called “outsourcing” (sourcing
outside of own company)
• For pros & cons (benefits & costs) see the chapter.
More…
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• 3. Rent:
– Annual licencing of software or hardware
– Rent via the Cloud (partial or total IS services).
• Cloud Advantages:
– Reduce costs: pay-per-use, avoiding development & maintenance
costs
– Client benefits from new IT as vendor keeps updating it to remain
competitive  gains in client’s business processes.
• Cloud Disadvantages:
– Synchronizing business processes between client and vendor
– Risk of compromising confidentiality of business data
– Vendor lock-in (it is hard to get out of Cloud as a company relies
more on a cloud vendor)
– Unexpected changes in pricing services.
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Summary
•
Costs of IS can be tangible (expressed in monetary terms) & intangible
(all other forms). Examples of tangible costs are investment in
computer software and hardware, and system’s operating costs.
•
Benefits of Information Systems can be tangible & intangible. Examples
of tangible benefits are cost reduction and income gains.
•
Financial Assessments of IS economy focus on the size of returns (e.g.,
NPV) and on timing of returns (e.g., payback period).
•
Mixed Assessments of IS economy cover tangible and intangible C/B
(portfolio analysis, and balanced scorecard).
•
Software can be developed by the company’s IS department,
purchased, or rented; hardware is usually purchased or rented. Each
option has pros and cons.
•
Cloud (cloud computing) is the trendy rental option with significant pros
& cons.
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