Cost-Benefit Analysis in Information Systems Development

Since cost plays quite an important role in deciding the new system, it must be identified and estimated properly. Costs vary by type and consist of various distinct elements. Benefits are also of different type and can be grouped on the basis of advantages they provide to the management. The benefits of a project include four types:

  • Cost-savings benefits
  • Cost-avoidance benefits
  • Improved-service-level benefits
  • Improved-information benefits

Cost-savings benefits lead to reduction in administrative and operational costs. A reduction in the size of the clerical staff used in the support of an administrative activity is an example of a cost-saving benefit.

Cost-avoidance benefits are those, which eliminate future administrating and operational costs. No need to hire additional staff in future to handle an administrative activity is an example of a cost-avoidance benefit.

Improved-service-level benefits are those where the performance of a system is improved by a new computer-based method.

Improved-information-benefit is where computer based methods lead to better information for decision-making. For example, a system that reports the most-improved fifty customers as measured by an increase in sales is an improved-information. This information makes it easier to provide better service to major customers.

Categories of Costs and Benefits

The costs associated with the system are expenses, outlays or losses arising from development and using a system. But the benefits are the advantages received from installing and using this system.

1. Tangible or Intangible Costs and Benefits

Tangibility refers to the ease with which costs or benefits can be measure. An outlay of cash for any specific item or activity is referred to as a tangible cost. These costs are known and can be estimated quite accurately.

Costs that are known to exist but their financial value cannot be exactly measured are referred to as intangible costs. The estimate is only an approximation. It is difficult to fix exact intangible costs. For example, employee moral problem because of installing new system is an intangible cost. How much moral of an employee has been affected cannot be exactly measured in terms of financial values.

Benefits are often more difficult to specify exactly than costs. For example, suppliers can easily quote the cost of purchasing a terminal but it is difficult for them to tell specific benefits or financial advantages for using it in a system. Tangible benefits such as completing jobs in fewer hours or producing error free reports are quantifiable. Intangible benefits such as more satisfied customers or an improved corporate image because of using new system are not easily quantified. Both tangible and intangible costs and benefits should be taken into consideration in the evaluation process. If the project is evaluated on a purely intangible basis, benefits exceed costs by a substantial margin. We call such projects cost effective. On the other hand, if intangible costs and benefits are included, the total costs (tangible-intangible) exceed the benefits making the project an undesirable investment. Hence it is desirable that systems projects should not be evaluated on the basis of intangible benefits alone.

2. Direct or Indirect Costs and Benefits

Direct costs are those which are directly associated with a system. They are- applied directly to the operator. For example, the purchase of DVD for Rs.400/- is a direct cost because we can associate the floppy box with money spent. Direct benefits also can be specifically attributable to a given project. For example, a new system that can process 30 per cent more transactions per day is a direct benefit.

Indirect costs are not directly associated with a specific activity in the system. They are often referred to as overhead expenses. For example, cost of space to install a system, maintenance of computer centre, heat, light and air-conditioning are all tangible costs, but it is difficult to calculate the proportion of each attributable to a specific activity such as a report. Indirect benefits are realized as a by-product of another system. For example, a system that tracks sales-calls on customers provides an indirect marketing benefit by giving additional information about competition. In this case, competition information becomes an indirect benefit although its work in terms of money cannot be exactly measured.

3. Fixed or Variable Costs and Benefits

Some costs and benefits remain constant, regardless of how a system is used. Fixed costs are considered as sunk costs. Once encountered, they will not recur. For example, the purchase of an equipment for a computer centre is called as fixed cost as it remains constant whether in equipment is being used extensively or not. Similarly, the insurance, purchase of  software etc. In contrast, variable costs are incurred on a regular basis. They are generally proportional to world volume and continue as long as the system is in operation. For example sample, the cost of computer forms vary in proportion to the amount of processing or the length of the reports desired.

Fixed benefits also remain constant by using a new system, if 20 percent of staff member are reduced, we can call it a fixed benefit. The benefit of personnel saving may occur month. Variable benefits, on the other hand, are realized on a regular basis. For example are reduced, we can call it a fixed benefit. The benefit of personnel saving may occur month. Variable benefits, on the other hand, are realized on a regular basis. For example the library information system that saves two minutes in providing information about a month. Variable benefits, on the other hand, are realized on a regular basis. For example the library information system that saves two minutes in providing information about particular book whether it is issued or not, to the borrower compared with the manual system. The amount of time saved varies with the information given to the number of borrowers.

Bookmark the permalink.