ISDP1: system methodologies-COST-BENEFITS ANALYSIS IN SYSTEM UNIT 4

1.0 INTRODUCTION In a way, Cost Benefit Analysis (CBA for short) is the starting point of any system analysis. It is the procedure by which the worthwhile of a system approach is determined, without which there would be no effective idea of the costs and consequences of the new information system being contemplated. 2.0 OBJECTIVES By the end of this unit, you should be able to: • Explain the role of CBA in system analysis • Outline the steps of CBA • Explain the different types of CBA • Explain the mechanics of CBA
  • Overview

The purpose of a CBA is to support better decision-making to ensure that resources are effectively allocated to support the missions of the organization. The CBA should demonstrate that at least three alternatives were considered, and the chosen alternative is the most cost-effective within the context of budgetary and political considerations.

  • Time Period

The CBA time period should match the system life cycle. The system life cycle includes the following stages/phases:

  • feasibility study
  • design
  • development
  • implementation
  • operation
  • maintenance

A system life cycle ends when the system is terminated or is replaced by a system that has significant differences in processing, operational capabilities, resource requirements, or system outputs. Significant differences is a very subject term, and some organizations may feel that a 10% change is significant, while others may feel that the change must be over 30% to be significant.

  • Alternatives

Analyses must consider at least three alternative means of achieving program objectives, one of which is to continue with no change. This provides a comparative baseline. Other alternatives could include:

  • in-house development versus contractor development
  • in-house operation versus contractor operation
  • ment versus purchasing equipment
  • current operational procedures versus new operational procedures
  • one technical approach versus another technical approach
  • Types of Analysis

Benefit-Cost Analysis (BCA) is a systematic, quantitative method of assessing the life cycle costs and benefits of competing alternative approaches. This includes determining which one of the alternatives is best.

A Cost-Effectiveness Analysis (CEA) is a simplified BCA which can be done when either the benefits or the costs are the same for all alternatives. The analysis is greatly simplified because the best alternative is either the one with the most benefits (when the costs are the same for all alternatives) or the one with the lowest cost (when the benefits are the same for all alternatives).

  • Identifying and Measuring Benefits and Costs

CBAs must include comprehensive estimates of the projected benefits and costs for all alternatives. Benefits to which naira value cannot be assigned (intangible benefits) should be included along with tangible benefits and costs. Intangible benefits should be evaluated and assigned relative numeric values for comparison purposes. For example, maximum benefit could be assigned a value of 5, average benefits a value of 3, and minimum benefits a value of 1. Evaluating and comparing benefits that have both naira values and relative numeric values requires extra effort, but it allows subjective judgment to be a factor in the analysis.

CBAs should be explicit about the underlying assumptions used to arrive at estimates of future benefits and costs. For example, the number of users of an IT system might be assumed to increase at a rate of 10% each of the 6 years of the system life cycle.

Costs incurred in the past (Sunk Costs) and savings or efficiencies already achieved (Realized Benefits) should not be considered in a CBA. When a CBA is done on a project that is already underway, there may be pressure to compare all costs and benefits from the beginning of the project. In that situation, the question to be answered is whether or not the benefits of proceeding justify the costs associated with continuing the project. The classic example of this is a situation where large amounts of money have been spent designing a system that has not been successfully implemented, and the project is being re-evaluated. The fact that a lot of money has been spent is no reason to continue spending. CBAs focus on the future and decisions have to be based on the expected costs and benefits of the proposed alternatives. Past experience is relevant only in helping estimate the value of future benefits and costs.

  • Decision Criteria

Projects should be initiated or continued only if the projected benefits exceed the projected costs. The only exception is if benefits are mandated by law.

Benefit-Cost Analysis – The standard criterion for justifying an IT project is that the benefits exceed the costs over the life cycle of the project. The competing alternative with the greatest net benefit (benefits minus costs) should be selected. When all benefits and costs cannot be assigned monetary values, relative values for costs and benefits can be used, and the alternative with the greatest net benefit (benefit values minus cost values) should still be selected.

Cost-Effectiveness Analysis – When comparing alternatives with identical costs and different benefits, the alternative with the largest benefits should be selected. When comparing alternatives with identical benefits and different costs, the alternative with the lowest costs should be selected.

     The Mechanics of the CBA Process

 

3.7.1 When Is A CBA Required?

 

A CBA is always required before a decision is made to initiate or continue an IT project; the only issue is the level of detail required for the analysis. The process described here is appropriate for a very large, complex, and costly IT project. Scaled down versions of the CBA would be appropriate for smaller, less costly projects; and your organization should provide guidelines to determine the amount of scaling that would be appropriate for IT projects based on their size, cost, and complexity.

3.7.2 When is the CBA Performed?

A cost-benefit analysis should occur prior to initiating or modifying an IT system. Most of the activities described below may be completed before the CBA is initiated, concurrently with the CBA, or as part of the CBA. The CBA is a key input for the investment review that should take place before a new project proceeds to the acquisition or development phase.

  • Define The Problem – Clearly define and document the problem. If possible, it should be described from a management perspective.
  • Review the Current Work Process Documentation – If no Documentation exists, it must be developed. If it is not clear and up-to-date, it should be updated to clearly describe the current work process. The information processing requirements must be part of the documentation for the current work process or the current IT system.
  • Evaluate the Work Process – There are two questions to address in the work process evaluation: Should We Be Doing This? and Can the Process Be Improved?
  • Define the New Processing Requirements – Define the information processing requirements for the proposed work process at a general level. The security requirements should be addressed in terms of data integrity, reliable processing, privacy and confidentiality.
  • Determine Its Performance Measures – Identify indicators for measuring and assessing performance of the process and the IT system in relation to the mission of the organization. Also determine the means of collecting and storing the performance data.

The Cost-Benefit Analysis may have to be updated several times during the life cycle of a system. The first cut at a CBA may be quite brief, and can be used to get concept approval to proceed with a detailed CBA. After the detailed CBA has been completed, the development and implementation plans may call for a prototype system or a pilot phase to test the costs and benefits on a limited scale before the full system is implemented for all users. If that occurs, a third version of the CBA would reflect revised costs and benefits, and would be used to decide whether or not to proceed with full implementation of the system. The post-implementation review of a system may also require an updated CBA to determine if the expected benefits are being achieved, and to decide if the operation of the system should continue as implemented, or if the system should be modified to achieve benefits to justify continued operation.

3.7.3 Who Should Do The CBA?

One person should be responsible for ensuring that a CBA is done. However, that person will need to assemble a team with expertise in IT systems development and operation, budget, finance, statistics, procurement, IT architecture and the work process being analyzed. A team brings different perspectives to the analysis and the process of estimating costs and benefits, and should ensure more realistic estimates than those of just one person. Additionally, one person rarely has expertise in all of the areas required for a CBA and the knowledge of the work process that is being automated.

  • CONCLUSIONstems Metholo Methodologythodologylogy

CBA, as we noted at the beginning of the unit, is the bedrock of the system analysis, for it gives the analyst an accurate idea of the costs involved in implementing systems. The outcome of the CBA would therefore inform on the range of alternatives available.

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