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 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.



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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.



3



1

Survey

2

Study

End-users

3

Definition

4

Configuration

6

Procurement



9

Support

8

Delivery

5

Design

7

Construction

4

Vendors



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 .


Systems Analysis & Design Methods 4ed by J. L. Whitten & L. D. Bentley Copyright Irwin/McGraw-Hill 1998

5





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


Systems Analysis & Design Methods 4ed by J. L. Whitten & L. D. Bentley end-users and management adapt to the change?

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




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



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

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?



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

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!



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

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.



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

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.



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Cost-Benefit Analysis Techniques



How Much Will the System Cost?



Costs fall into two categories.

1

2

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.

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).



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




Systems development costs:

 Are usually one-time costs that will not recur after the project has been completed.

 Sample systems development costs:

• 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 .



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




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).



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




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).

 After determining the costs and benefits for a possible solution, you can perform the cost-benefit analysis.



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

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.



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

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.



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

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.



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




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.



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




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 .



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




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.



21









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 .



22





23









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

 The solution offering the highest ROI is the best alternative.



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




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.



 When comparing multiple solutions or projects, the one with the highest positive net present value is the best investment.


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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:

Technology

Interfaces

Data

Processes

Geography

Candidate 1 Name Candidate 2 Name Candidate 3 Name



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Candidate ...

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

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.

Fully supports user required business processes for

Soundstage Inc. Plus more efficient interaction with member accounts.

Same as candidate 1.

Candidate 3




A description of the servers and workstations needed to support this candidate.

Software Tools Needed

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.

MS Visual Basic 5.0

System Architect 3.1

Internet Explorer

MS Visual Basic 5.0

System Architect 3.1

Internet Explorer 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 Package Solution Custom Solution Same as candidate 2.

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).

Client/Server

(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)



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

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.

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






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

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.



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Candidate ..

Feasibility Criteria


Functionality . A description of to what degree the candidate would benefit the organization and how well the system would work.

Wt.

Candidate 1

30% 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


Political . A description of how well received this solution would be from both user management, user, and organization perspective.

Technical Feasibility

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.

Score: 60

30% 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.

Required to hire or train C++ expertise to perform modifications for integration requirements.

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.

MS Visual Basic 5.0 is a mature technology based on version number.

Score: 95

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.

Economic Feasibility

Cost to develop:

Payback period (discounted):

Net present value:

Detailed calculations:

Schedule Feasibility

An assessment of how long the solution will take to design and implement.

Score: 50

30%

Approximately $350,000.

Approximately 4.5 years.


See Attachment A.

Score: 60

10% Less than 3 months.




See Attachment A.

Score: 85

9-12 months

Score: 60




See Attachment A.

9 months

Score: 90

Score: 95

60.5

Score: 80

92

Score: 85

83.5

Ranking 100%



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Summary











Introduction

Feasibility Analysis - A Creeping Commitment

Approach






31


Object Oriented Analyis & Design Training Agenda

The chapter will address the following questions:

Feasibility Checkpoints in the Life Cycle

Feasibility Checkpoints in the Life Cycle

Most analysts agree that there are four categories of feasibility tests:

Operational Feasibility

Operational Feasibility

Technical Feasibility

Schedule Feasibility

Economic Feasibility

The Bottom Line

How Much Will the System Cost?

How Much Will the System Cost?

How Much Will the System Cost?

How Much Will the System Cost?

What Benefits Will the System Provide?

What Benefits Will the System Provide?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Candidate Systems Matrix

Feasibility Analysis Matrix

Related documents

Products

Support

Object Oriented Analyis & Design Training Agenda

The chapter will address the following questions:

Feasibility Checkpoints in the Life Cycle

Feasibility Checkpoints in the Life Cycle

Most analysts agree that there are four categories of feasibility tests:

Operational Feasibility

Operational Feasibility

Technical Feasibility

Schedule Feasibility

Economic Feasibility

The Bottom Line

How Much Will the System Cost?

How Much Will the System Cost?

How Much Will the System Cost?

How Much Will the System Cost?

What Benefits Will the System Provide?

What Benefits Will the System Provide?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Is the Proposed System Cost-Effective?

Candidate Systems Matrix

Feasibility Analysis Matrix

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