Chapter 9. How te develop and acquire information systems?

What is 'making the business case'?

People only want to invest money in a project if they are convinced that it is a good investment. The process of identifying, presenting and quantifying the value that a system generates is referred to as making the business case.

To prove that an information system adds value to the organization, managers must provide strong arguments and evidence. If you are working in the field of finance, marketing, management or accounting then it is likely that you have to make the case for new or existing information systems.

Before a company will invest in a new information system, the system is first proposed. Making the business case is important for this proposition because it shows whether an investment adds value.

It is relatively easy to identify the costs that arise when a new IS is developed. However, quantifying the tangible productivity is much harder.  There has been a lot of research in the past years about the impact of investments in IS on worker productivity. They have found cases where salaries, IS expenditures and number of IS staff have increased. Unfortunately, the results from the investments are often disappointing.

It is hard to identify if expenditures on technologies lead to increased productivity. Information systems may increase productivity but it possible that at the same time, other forces have reduced productivity. Examples of such factors are government regulations and taxes.

It should be that technology investments increase the productivity of the organization. However, there are cases where information systems have led to less effective communication and less productivity. This contradiction is known as the productivity paradox. There are several factors that lead to this productivity paradox of information systems:

• Measurement problems
  Organizations often measure the wrong thing; they measure efficiency instead of effectiveness.
• Time lags
  There may be a time lag between when the investment is made and when the investment leads to improvements.
• Redistribution
  The new IS may lead to improvements for individual firms but not for an entire industry.
• Mismanagement
  It could be that the new IS is not managed or implemented well.

When making the business case, several different arguments can be used. Managers often use three types of arguments:

• Arguments based on faith
• Arguments based on fear
• Arguments based on facts

Arguments based on faith are based on beliefs about the strategy of the organization, industry forces, customer perceptions, competitive advantage etc. The arguments that are based on faith are often the most compelling. If there is faith then the lack of hard data can be overcome.

In the faith-based arguments the manager must include the objectives of the firm, the strategy and which different information systems are needed. Cases must be built on all three types of arguments in order to convince the company of the investment.

Arguments that are based on fear can be based on several factors, like the factors of competition or the factors of the industry where the firm operates. Competition or rivalry can affect technology investments. This is the most important factor. The arguments that are based on fear are like: we need to implement this new system because otherwise the competitors will beat us and we will have to leave the market.

Many people want to see convincing, quantitative facts. Such facts can be provided by a cost-benefit analysis of the IS. When a small firm develops a Web-based order entry system then it will follow the following steps:

• Identify costs
• Identify benefits
• Perform cost-benefit analysis
• Compare competing investments

To determine the total cost of ownership (TCO) for an investment, you could use a cost-benefit analysis. The goal of TCO is to understand the total cost of acquisition and the costs associated with maintenance of the system.

There are two types of costs; recurring costs and non-recurring costs. Non-recurring costs are those that occur once and are not expected to continue after implementation of the system, like reparation costs. Recurring costs continue during the life of the system, like personnel costs. Personnel costs are often the largest recurring costs for a company. One must also look at the tangible and intangible costs.

In the next step you have to determine the intangible and tangible benefits. Tangible benefits are relatively easy to determine, while it is quite difficult to quantify intangible benefits. Intangible benefits of a system include things like improvement in customer service. Intangible benefits can be very important for a company and can lead to implementing the system even if the overall cost-benefit analysis is negative.

When the costs and benefits are identified, the cost-benefit analysis can be performed. In such an analysis you could compare total expected tangible costs with tangible benefits. You could also perform a break-even analysis, in which you calculate at which point costs and benefits are equal. Another analysis you cloud perform is the net-present-value analysis, which computes the present value of future cash flows by using the rate of return.

When the necessary analyses are done, the companies must compare competing investments to decide in which ones to invest. A method that can be used to make a decision is the weighted multicriteria analysis. With this method you put weights on the requirements and constraints for each investment to compare them.

When you are ready to make your case then you have to present your arguments and evidence to the decision-making people of the firm. Some recommendations for presenting your case are:

• Know your audience
  People can have different perspectives on subjects.
• Convert benefits to monetary terms
  For people it is easier to rationalize decisions if monetary terms are used.
• Devise proxy variables
  Proxy variables can be used to clarify the effect of the investment on the firm, if it is not easy to quantify this effect.
• Measure what is important to the management
  It is, naturally, important to show the thinks that the senior managers find most important.

How is a system developed?

System analysis and design is defined as the process of building, designing and maintaining information systems. This process is done by individuals who are referred to as system analysts.

When a company wants a new information system it can choose between off-the-shelf and custom software. Some software can be used by many different industries and can therefore be bought off the shelf.

To meet the specifications of a company, custom software is developed. This development can be performer by people of the company itself or it may be outsourced. Compared to general purpose commercial technologies, custom software has two main benefits:

• Customizability
• Problem specificity (the company only pays for the features that it requires)

There are not many companies that build an entire system themselves. Many develop information systems that include a large number of preprogrammed modules and technologies.

Off-the-shelf software has the advantage that it is generally less costly, faster to procure, less risky and has higher quality than custom software.

There are programs that have a source code that is open and can be modified and seen by anyone. Such software is referred to as open source software. This program uses inputs form a larger base of users that allows us to improve the software and help to solve problems. An example of an open source software is Firefox.

All three software that we mentioned above have benefits, which can be combined. A company can buy off-the-shelf software and then add custom software. Generally, off-the-shelf software is acquired from an external vendor.

There are several tools and techniques that can be used to develop information systems. These techniques and tools evolve rapidly. A system analyst puts many small software modules and technologies together into a comprehensive system. The decomposition of a problem makes it easier to solve complex, large problems. The analyst has the primary responsibility for the system.

The development project is often also managed by the system analyst. In his role as project manager he needs skills in the field of management, technology, customer relationships, conflict management and leadership. He is responsible for the failure or success of the project.

When an information system is built or modified, then the system analysts depend on the information that is provided by the users of the system.

The life of an information system, from conception to retirement, is described by the system development life cycle (SDLC). This cycle has the following four phases:

1. System planning and selection
2. System analysis
3. System design
4. System implementation and operation

Some companies use an information system planning process for the first phase. With this system, all possible systems development projects are identified and assessed by the senior manager, business group or steering committee.

In the second phase, the goal of the designers is to fully understand how the business is currently using its information systems. This phase has three sub phases:

1. Collecting requirements
   This is the process of gathering and organization information from customers, business processes, managers, users and documents. This is done to understand the functioning of the proposed IS. There are several techniques that can be used to collect information, like questionnaires, interviews, observations, document analysis and joint application design (group meetings).
2. Modeling data
   Data includes the facts that tell something about people, events or objects.
3. Modeling process and logic
   In this phase we model how we input, process and present data to users.

The third phase of the cycle is the system design in which the proposed system designed. When building an IS, the following elements must be designed:

• Processing and logic operations
• Databases and files
• Human-computer interface (HCI); an HCI is the contact point between a system and its users,

When systems are easy to understand, which is called usability, then the error rate is lower, users are more satisfied and the efficiency is increased.

The fourth phase is the implementation of the system. There are several activities that have the goal to transform the designed system into a working system. Activities include testing a software programming. Before a system can be used one must do several tests. Methods that can be used are beta testing, alpha testing and developmental testing.

Besides these activities there are also activities that are focused on preparing the company for the use of the new IS. Such activities include training for users and system conversion. System conversion refers to the process of decommissioning how things are currently done and installing the new system in the organization.

For each information system there are many types of documentation. These documents can include training manuals, user guides, reference guides and installation procedures.

After a system is installed it enters the phase of maintenance. This is a repeating phase. There are several maintenance types:

• Corrective maintenance
• Adaptive maintenance
• Preventive maintenance
• Perfective maintenance

If there are proposed changes to the system, these changes have to be documented, reviewed, authorized and managed. This process is referred to as change request management.

Patch management systems are used to facilitate the different forms of systems maintenance for the user. In many off-the-shelf packages these patch management systems are included.

We have showed that SLCD can be used to manage the development of information systems. However, there are also other approaches that can be used. An alternative that is often used is prototyping. This approach uses trial-end-error to find out how the systems should operate.

How to acquire information systems?

We have showed several approached that can be used to develop a system. However, there are many situations where such approaches are not feasible. The following four situations might require alternative approaches:

• When the information systems staff is limited
• When the information systems staff has limited skills
• When the information systems staff is overworked
• When there are problems with the performance of the information systems staff

An external acquisition is defined as buying an existing system from an external party (vendor). When making an external acquisition, many organizations will use a competitive bid process. Most processes have the following five stages:

1. Systems planning and selection
2. Analysis of the systems
3. Development of request for proposal
4. Evaluation of the proposal
5. Selection of the vendor

A request for proposal (RFP) is a document that companies use to tell the vendor what your requirements are and to invite the vendor to provide him information. Included are things like the existing applications and systems, the criteria and time and budget constraints.

In the fourth step the proposal system has to be evaluated. This can be done with a method called systems benchmarking. This method uses standardized performance tests to compare different systems.

There are often multiple systems that meet your requirements. You choose the one that will fit better than the other ones. This can be done on the basis of certain criteria that you set.

When companies buy an off-the-shelf software they often have to sign a license agreement. Each license has different restrictions. The two most important types of licenses are:

• Shrink-wrap licenses and click-wrap licenses: the first is activated when the shrink wrap on the package is removed and the latter is used for downloaded software (like the accept button when downloading software)
• Enterprise license (also called volume license)
  These licenses often contain limitations of liability and warranty disclaimers to protect the software.

Companies can outsource the development of new systems. A company can have several reasons to outsource the development. Such reasons include:

• Cost and quality concerns (outsourcing achieves higher quality and a lower price)
• IS performance problems
• Financial factors
• Organizational culture
• Internal tensions
• Supplier pressures
• Primary competency is not running IS

For an outsource project to be successful there must be a good relationship between the company and the outsourcing party. It is important that the chief information officer makes sure that the legal and professional relationship with the outsourcing partner is good. Furthermore, there must be clear and realistic performance measurements.

Companies can have different types of relationships with their outsourcing party.

• Strategic relationship
• Preferred relationship
• Basic relationship

Bulletpoint

• The process of identifying, presenting and quantifying the value that a system generates is referred to as making the business case.
• It should be that technology investments increase the productivity of the organization. However, there are cases where information systems have led to less effective communication and less productivity. This contradiction is known as the productivity paradox.
• When making the business case, several different arguments can be used. Managers often use three types of arguments:
  • Arguments based on faith
  • Arguments based on fear
  • Arguments based on facts
• When a small firm develops a Web-based order entry system then it will follow the following steps:
  • Identify costs
  • Identify benefits
  • Perform cost-benefit analysis
  • Compare competing investments
• When the costs and benefits are identified, the cost-benefit analysis can be performed. In such an analysis you could compare total expected tangible costs with tangible benefits. You could also perform a break-even analysis, in which you calculate at which point costs and benefits are equal. Another analysis you cloud perform is the net-present-value analysis, which computes the present value of future cash flows by using the rate of return.
• System analysis and design is defined as the process of building, designing and maintaining information systems. This process is done by individuals who are referred to as system analysts.
• To meet the specifications of a company, custom software is developed. Compared to general purpose commercial technologies, custom software has two main benefits:
  • Customizability
  • Problem specificity (the company only pays for the features that it requires)
• The life of an information system, from conception to retirement, is described by the system development life cycle (SDLC). This cycle has the following four phases:
  1. System planning and selection
  2. System analysis
  3. System design
  4. System implementation and operation
• In the second phase, the goal of the designers is to fully understand how the business is currently using its information systems. This phase has three sub phases:
  1. Collecting requirements
  2. Modeling data
  3. Modeling process and logic
• The third phase of the cycle is the system design in which the proposed system designed. When building an IS, the following elements must be designed:
  • Processing and logic operations
  • Databases and files
  • Human-computer interface (HCI); an HCI is the contact point between a system and its users,
• The fourth phase is the implementation of the system. There are several activities that have the goal to transform the designed system into a working system. Activities include testing a software programming.
• After a system is installed it enters the phase of maintenance. This is a repeating phase. There are several maintenance types:
  • Corrective maintenance
  • Adaptive maintenance
  • Preventive maintenance
  • Perfective maintenance
• An external acquisition is defined as buying an existing system from an external party (vendor). When making an external acquisition, many organizations will use a competitive bid process. Most processes have the following five stages:
  1. Systems planning and selection
  2. Analysis of the systems
  3. Development of request for proposal
  4. Evaluation of the proposal
  5. Selection of the vendor
• When companies buy an off-the-shelf software they often have to sign a license agreement. The two most important types of licenses are:
  • Shrink-wrap licenses and click-wrap licenses: the first is activated when the shrink wrap on the package is removed and the latter is used for downloaded software (like the accept button when downloading software)
  • Enterprise license (also called volume license)
    These licenses often contain limitations of liability and warranty disclaimers to protect the software.
• For an outsource project to be successful there must be a good relationship between the company and the outsourcing party. Companies can have different types of relationships with their outsourcing party.
  • Strategic relationship
  • Preferred relationship
  • Basic relationship

Tentamentickets

• Know how to perform a cost-benefit analysis.
• Know the different stages of the system development life cycle (SDLC).