Copyright Irwin/McGraw-Hill 1998 1 Feasibility and Cost-Benefit Analysis Prepared by Kevin C....

Prepared by Kevin C. Dittman for

Systems Analysis & Design Methods 4ed

by J. L. Whitten & L. D. BentleyCopyright Irwin/McGraw-Hill 19981

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 time-

adjusted costs and benefits?





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.





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.




Feasibility and Cost-Benefit Analysis1

Survey

2

Study

3

Definition

4

Configuration

5

Design

6

Procurement

7

Construction

8

Delivery

9

Support

End-users

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.





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?






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





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?






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!






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.






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 end-

users, reviewing the data, and choosing the best overall alternative.





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).






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:• 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.






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).






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).

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






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.






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.






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.






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.






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.







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.







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.










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

The solution offering the highest ROI is the best alternative.






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.

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









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 NameTechnologyInterfacesDataProcessesGeography




Feasibility and Cost-Benefit AnalysisCharacteristics Candidate 1 Candidate 2 Candidate 3 Candidate ...Portion of System Computerized

Brief description of that portion of thesystem that would be computerized inthis candidate.

COTS package PlatinumPlus from EntertainmentSoftware Solutions would bepurchased and customized tosatisfy Member Servicesrequired functionality.

Member Services andwarehouse operations inrelation to order fulfillment.

Same as candidate 2.

Benefits

Brief description of the business benefitsthat would be realized for thiscandidate.

This solution can beimplemented quicklybecause its a purchasedsolution.

Fully supports user requiredbusiness processes forSoundstage Inc. Plus moreefficient interaction withmember accounts.


Servers and Workstations

A description of the servers andworkstations needed to support thiscandidate.

Technically architecturedictates Pentium pro, MSWindows NT class serversand Pentium, MS WindowsNT 4.0 workstations(clients).

Same as candidate 1. Same as candidate 1.

Software Tools Needed

Software tools needed to design andbuild the candidate (e. g., databasemanagement system, emulators,operating systems, languages, etc.). Notgenerally applicable if applicationssoftware packages are to be purchased.

MS Visual C++ and MSACCESS for customizationof package to provide reportwriting and integration.

MS Visual Basic 5.0System Architect 3.1Internet Explorer

MS Visual Basic 5.0System Architect 3.1Internet Explorer

Application Software

A description of the software to bepurchased, built, accessed, or somecombination of these techniques.

Package Solution Custom Solution Same as candidate 2.

Method of Data Processing

Generally some combination of: on-line,batch, deferred batch, remote batch, andreal-time.

Client/Server Same as candidate 1. Same as candidate 1.

Output Devices and Implications

A description of output devices thatwould be used, special outputrequirements, (e.g. network, preprintedforms, etc.), and output considerations(e.g., timing constraints).

(2) HP4MV departmentLaser printers(2) HP5SI LAN laserprinters

(2) HP4MV departmentLaser printers(2) HP5SI LAN laserprinters(1) PRINTRONIX bar-codeprinter (includes software &drivers)

Web pages must be designedto VGA resolution. Allinternal screens will bedesigned for SVGAresolution.


Input Devices and Implications

A description of Input methods to beused, input devices (e.g., keyboard,mouse, etc.), special input requirements,(e.g. new or revised forms from whichdata would be input), and inputconsiderations (e.g., timing of actualinputs).

Keyboard & mouse Apple “Quick Take” digitalcamera and software(15) PSC Quickscan laserbar-code scanners(1) - HP Scanjet 4C FlatbedScannerKeyboard & mouse


Storage Devices and Implications

Brief description of what data would bestored, what data would be accessedfrom existing stores, what storage mediawould be used, how much storagecapacity would be needed, and howdata would be organized.

MS SQL Server DBMS with100GB arrayed capability.

Same as candidate 1. Same as candidate 1.





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.




Feasibility and Cost-Benefit AnalysisFeasibility Criteria Wt. Candidate 1 Candidate 2 Candidate 3 Candidate ..

Operational Feasibility

Functionality. A description of to whatdegree the candidate would benefit theorganization and how well the systemwould work.

Political. A description of how wellreceived this solution would be fromboth user management, user, andorganization perspective.

30% Only supports MemberServices requirements andcurrent business processeswould have to be modified totake advantage of softwarefunctionality

Score: 60

Fully supports user requiredfunctionality.

Score: 100


Score: 100Technical Feasibility

Technology. An assessment of thematurity, availability (or ability toacquire), and desirability of thecomputer technology needed to supportthis candidate.

Expertise. An assessment to thetechnical expertise needed to develop,operate, and maintain the candidatesystem.

30% Current production release ofPlatinum Plus package isversion 1.0 and has only beenon the market for 6 weeks.Maturity of product is a riskand company charges anadditional monthly fee fortechnical support.

Required to hire or train C++expertise to performmodifications for integrationrequirements.

Score: 50

Although current technicalstaff has only Powerbuilderexperience, the senioranalysts who saw the MSVisual Basic demonstrationand presentation, has agreedthe transition will be simpleand finding experienced VBprogrammers will be easierthan finding Powerbuilderprogrammers and at a muchcheaper cost.

MS Visual Basic 5.0 is amature technology based onversion number.

Score: 95

Although current technicalstaff is comfortable withPowerbuilder, management isconcerned with recentacquisition of Powerbuilderby Sybase Inc.MS SQL Server is a currentcompany standard andcompetes with SYBASE inthe Client/Server DBMSmarket. Because of this wehave no guarantee futureversions of Powerbuilderwill “play well” with ourcurrent version SQL Server.

Score: 60Economic Feasibility

Cost to develop:

Payback period (discounted):

Net present value:

Detailed calculations:

30%

Approximately $350,000.

Approximately 4.5 years.


See Attachment A.

Score: 60




See Attachment A.

Score: 85




See Attachment A.

Score: 90Schedule Feasibility

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

10% Less than 3 months.

Score: 95

9-12 months

Score: 80

9 months

Score: 85Ranking 100% 60.5 92 83.5





Summary

Introduction Feasibility Analysis - A Creeping

Commitment Approach Four Tests for Feasibility Cost-Benefit Analysis Techniques Feasibility Analysis of Candidate Systems

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