Chapter 13
Topics:
– Systems proposal
– Determining hardware needs
– Determining software needs
– Decision to rent, lease, or buy
– Tangible and intangible costs and benefits
– Methods for selecting alternatives
Preparing the System Proposal
Systems Proposal
• In order to prepare the systems proposal
analysts must use a systematic approach to
identify hardware and software needs
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Ascertaining hardware and software needs
Identifying and forecasting costs and benefits
Comparing costs and benefits
Choosing the most appropriate alternative
Preparing the System Proposal
Steps to Ascertain Hardware and Software Needs
• Inventory computer hardware currently available
• Estimate current and projected workload for the
system
• Evaluate the performance of hardware and
software using some predetermined criteria
• Choose the vendor according to the evaluation
• Obtain hardware and software from the vendor
Preparing the System Proposal
Steps to Ascertain Hardware and Software Needs
Preparing the System Proposal
Hardware Inventory Check
– Type of equipment: model no.,
manufacturer
– Status of equipment operation
– Estimated age of equipment
– Physical location of equipment
– Department or person responsible for
equipment
Preparing the System Proposal
Criteria for Evaluating Hardware
• Time required for average transactions
(including time for input and output)
• Total volume capacity of the system
• Idle time of the central processing unit
• Size of memory provided
Preparing the System Proposal
People that Evaluate Hardware
– Management
– Users
– Systems analysts
Preparing the System Proposal
Three Options for Obtaining Computer
Equipment
– Buying
– Leasing
– Rental
Preparing the System Proposal
Buying
Advantages
Disadvantages
Cheaper than leasing
or renting over the
long run
Ability to change
system
Provides tax
advantages of
accelerated
depreciation
Full control
Initial cost is high
Risk of obsolescence
Risk of being stuck if
choice is wrong
Full responsibility
Preparing the System Proposal
Leasing
Advantages
Disadvantages
No capital is tied up
Company doesn’t own
the system when lease
expires
Usually a heavy penalty
for terminating the
lease
Leases are more
expensive than buying
No financing is
required
Leases are lower than
rental payments
Preparing the System Proposal
Renting
Advantages
Disadvantages
No capital is tied up
Company doesn’t own
the computer
No financing is required
Easy to change systems Cost is very high
because vendor assumes
Maintenance and
the risk (most expensive
insurance are usually
option)
included
Preparing the System Proposal
Evaluation of Vendor Support for Hardware
• Hardware support
– full line of hardware, quality products, warranty
• Software support
– complete software needs, custom programming, warranty
• Installation and training support
– commitment to schedule, in-house training, technical
assistance
• Maintenance support
– routine maintenance procedures, specified response time
in emergencies, equipment loan while repair is being done
Preparing the System Proposal
Guideline for Evaluating Software
– Performance effectiveness – perform all required and
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desired tasks, well-designed display screens, adequate
capacity
Performance efficiency – fast response time, efficient
input, output, storage of data and backup
Ease of use – satisfactory user interface, help menu,
ReadMe files, flexible interface, adequate feedback,
good error recovery
Flexibility – options for input and output, usable with
other software
Quality of documentation – good organization, adequate
online tutorial, Web site with FAQ
Manufacturer support – tech support hot line,
newsletter/email, downloadable product updates
Preparing the System Proposal
Costs and Benefits
Analysis
• Systems analysts should take tangible
costs, intangible costs, tangible benefits,
and intangible benefits into consideration
to identify cost and benefits of a
prospective system
Preparing the System Proposal
Tangible Costs
• Tangible costs are those that can be
accurately projected by systems analysts
and the business' accounting personnel
• Examples:
– Cost of equipment
– Cost of resources
– Cost of systems analysts' time
Preparing the System Proposal
Intangible Costs
• Intangible costs are those that are
difficult to estimate, and may not be
known
• Examples:
– Cost of losing a competitive edge
– Declining company image
Preparing the System Proposal
Tangible Benefits
• Tangible benefits are advantages
measurable in dollars that accrue to the
organization through use of the
information system
• Examples:
– Increase in the speed of processing
– Access to information on a more timely basis
Preparing the System Proposal
Intangible Benefits
• Intangible benefits are advantages from
use of the information system that are
difficult to measure
• Examples:
– Improved effectiveness of decision-making
processes
– Maintaining a good business image
Preparing the System Proposal
Selecting the Best Alternative
• To select the best alternative, analysts
should compare costs and benefits of the
prospective alternatives using
– Break-even analysis
– Payback
– Cash-flow analysis
– Present value method
Preparing the System Proposal
Break-Even Analysis
• Break-even analysis is the point at which
the cost of the current system and the
proposed system intersect
• Break-even analysis is useful when a
business is growing and volume is a key
variable in costs
Preparing the System Proposal
Break-Even Analysis
Preparing the System Proposal
Payback Period
(PBP)
• Payback determines the number of years of
operation that the system needs to pay back
the cost of investing in it
• Payback is determined in one of two ways:
– By increasing revenues
– By increasing savings
• If the PBP of a project is 6 years and the
project can exist 3 years in the fast technology
change situation—it should be rejected.
Preparing the System Proposal
How to determine
PBP
• PAY BACK PERIOD (PBP)
Investment:
Amount Recovered in 2002:
Remaining Investment to be recovered:
Amount Recovered in 2003:
Remaining Investment to be recovered:
$ 20,000
$ 7,312
$12,668
$ 7,768
$ 4,920
Part of 2004 Needed : 4,920/7352= 0.67
(Assuming that Amount Recovered in 2004 is $7352)
PBP = 1 + 1 + 0.67 = 2.67 YEARS
Preparing the System Proposal
Payback Period
Preparing the System Proposal
Three Drawbacks of the Payback Method
– It is strictly a short-term approach to
investment and replacement decision
– It does not consider the importance of how
repayments are timed
– It does not consider total returns from the
proposed systems project that may go well
beyond the payback year
Preparing the System Proposal
Cash-Flow Analysis
• Cash-flow analysis is used to examine
the direction, size, and pattern of cash
flow associated with the proposed
information system
• Determines when a company will
begin to make profit
• Determine when cash outlays and
revenues will made up for initial
investment
Preparing the System Proposal
Cash-Flow Analysis
Preparing the System Proposal
Present Value Method
• Assess all the economic outlays and
revenues of the information system over
its economic life and to compare costs
today with future costs and today's
benefits with future benefits
• Use present value when the payback
period is long, or when the cost of
borrowing money is high
Preparing the System Proposal
Present Value Method
Without considering present value
Considering present value
Preparing the System Proposal
Guidelines for Selecting the Best Alternative
– Use break-even analysis if the project needs to be
justified in terms of cost, not benefits or if benefits
do not substantially improve with the proposed
system.
– Use payback when the improved tangible benefits
form a convincing argument for the proposed
system.
– Use cash-flow analysis when the project is
expensive relative to the size of the company.
– Use present value when the payback period is
long.
Preparing the System Proposal