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Establishing the business value

of information system

What are the business value of IS?

- IS should meet firms strategic goals

- IS should meet user requirements

- IS need to be a good investment for a firm

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How can our company measure thebusiness benefits of our informationsystems? What models should be used tomeasure that business value?

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Costs and Benefits of Information Systems

Costs:

Hardware, telecommunications, software,

services, personnel Tangible benefits (cost savings):

Increased productivity, lower operational costs,reduced workforce, etc.

Intangible benefits: Improved asset utilization, improved resource

control, improved organizational planning, etc.

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Capital Budgeting

Rely on measuring cash inflows and outflows

4 capital budgeting models Payback method

Accounting rate of return on investment (ROI)

Net present value

Internal rate of return (IRR)

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Case Example: Capital Budgeting for a New Supply Chain Management System

Heartland Stores

General merchandise retail chain upgradingsupply chain management system

Reduce inventory costs: Items stocked in inventory

Reduce labor costs: Inventory and tracking personnel

Reduce telecommunication costs: Less time onphone tracking inventory and shipments

Reduce transportation costs: Consolidatingshipments, more efficient shipping schedules

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Costs and benefits of the new supply chain management system

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Payback Method

Time required to pay back initial investment

of project

Original investment=

Number of years to pay

backAnnual net cash inflow

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Accounting Rate of Return on Investment (ROI)

Desired rate of return must equal or exceed cost of capital

(Total benefits Total cost Depreciation)= Net benefit

Useful life

Net benefit= ROI

Total initial investment

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Net Present Value

Compare investment with future savings and earnings

Present

value of

expected

cash flows

- Initial

investment

cost

= Net present

value

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Internal Rate of Return (IRR)

Rate of return, or profit, that an investment

is expected to earn

Discount (interest) rate that will equate the

present value of the projects future cash

flows to the initial investment cost

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Real Options Pricing Models

Models using techniques for valuing financialoptions to evaluate information technologyinvestments with uncertain returns

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Limitations of Financial Models

Costs and benefits dont occur in same time frame

Difficulties in measuring intangible benefits

Overlook social and organizational costs and

benefits

Inadequate consideration to cost arising from

organizational disruption created by a new system,such as the cost to train end users.