MANAGEMENT INFORMATION SYSTEMS
Chapter Five: Information Technology Economic Benefits
Business Value of Systems and Managing Change
By the end of this chapter the learner shall be able to;
- Evaluate models for understanding the business value of information systems.
- Analyze the principal causes of information system failure.
- Assess the change management requirements for building successful systems.
- Select appropriate strategies to manage the system implementation process.
- Identify the challenges posed implementing new systems and management solutions.
5.1 Understanding the Business Value of Information Systems
Just as you can analyze the benefit of purchasing a new piece of equipment for your business, you can analyze the impact of an information system. Think about it: you tell the boss you need a new storage system for all the widgets you are producing. The boss will ask you to complete some type of analysis to see how the bottom line will be affected. The same is true for a new information system. Just how will it benefit the business overall? What benefits will your customers gain from the new system?
However, you can’t reduce everything to dollars and cents. Sometimes the benefits of the new system will be measured in other ways, but you can employ several different methods to evaluate a new information system, just as you would a new storage system.
5.2 Traditional Capital Budgeting Models
Capital budgeting models are one of several techniques used to measure the value of investing in long term capital investment projects. The process of analyzing and selecting various proposals for capital expenditures is called capital budgeting. Firms invest in capital projects to expand production to meet anticipated demand or to modernize production equipment to reduce costs.
Firms also invest in capital projects for many noneconomic reasons, such as installing pollution control equipment, converting to a human resources database to meet some government regulations, or satisfying nonmarket public demands. Information systems are considered long- term capital investment projects.
Six capital budgeting models are used to evaluate capital projects:
- The payback method
- The accounting rate of return on investment (ROI)
- The net present value
- The cost-benefit ratio
- The profitability index
- The internal rate of return (IRR)
Capital budgeting methods rely on measures of cash flows into and out of the firm.
Capital projects generate cash flows into and out of the firm. The investment cost is an immediate cash outflow caused the purchase of the capital equipment. In subsequent years, the investment may cause additional cash outflows that will be balanced cash inflows resulting from the investment. Cash inflows take the form of increased sales of more products (for reasons such as new products, higher quality, or increasing market share) or reduced costs in production and operations. The difference between cash outflows and cash inflows is used for calculating the financial worth of an investment. Once the cash flows have been established, several alternative methods are available for comparing different projects and deciding about the investment.
Financial models assume that all relevant alternatives have been examined, that all costs and benefits are known, and that these costs and benefits can be expressed in a common metric, specifically, money. Tangible benefits can be quantified and assigned a monetary value.