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Saturday, March 8, 2014


The value of information is measured in terms of benefits to the organization. The benefits may be tangible that can be easily quantified. For example, 5% increase in sales is a tangible benefit, which corresponds to Rs. 50,000. If the cost of the information that led to this additional profit is Rs. 20,000. Then the value of the information is Rs. 30,000. Sometimes, the benefits may be intangible and cannot be easily quantified. For instance, the information may help consumers to connect to a company better. The employees may feel respected in an organization if more information is shared with them. In both the cases, the attrition rate will decrease and the corresponding benefit cannot be directly measured in terms of financial benefit to the organization. 

In fact, whenever an organization identifies an opportunity for using information to its advantage, it develops an information system. However before developing the system, a cost/benefit analysis is done to figure out net benefit of the system. There are many methods to assess value of information system, which is explained below. 

1) Cost-benefit Analysis

IT project and investments has to take its place in the queue for all too scarce cash resources, and the rules for justifying are the same as for any other project.

A more sophisticated argument is that, because the risks inherent in decision about IT are higher, the expected ROI needs to higher before an investment can be justified.

Because of high sum, IT investment has a high potential to damage the organization. A new product is equally risky.

But fundamentally, decision makers are less comfortable about IT because of their ignorance of the issues and they lack faith in the estimates presented to them. The main points:

IT is high risk, high cost; at the same time IT has potential for substantial benefits
Managers are not conversant with all aspects of the decision - due to rapid pace of change of technology.
There is no trusted track record of benefits of IT investments
IT decision should be made by IT professionals in consultation with general management of the organization.
IT investment should get integrated with organization’s strategy/processes.
An organization should start with simple and inexpensive systems, gain experience and then move to better, more involved systems.
The systems being used by the competition may be used as a guideline. 

Identification of IT Costs

IT cost is so hard to estimate that one may be off by 50% or more. One of reasons is that the overheads are excessive. If one unit of money is invested in IT, 27 units will be spent on human resources etc. The Table-1 gives the cost involved. 
                         Table-1 : Cost involved in IT
a)      Direct Cost
Environmental operating cost
Hardware cost
File server
Backup devices
Network printer
Software cost
Operating system
Networking software
Installation and configuration costs
Network wiring,
In-house customizing time
Re-engineering business process
Electricity, air-conditioning,
paper, toner, cartridges,
disks, paper
Training cost
Database software course
Maintenance cost
Yearly service contract for hardware, Software upgrades, annual fee

b) Indirect Human Costs

Indirect human cost is more significant than direct cost and it is very illusive in nature.

Following is the taxonomy of indirect human costs:

Management Time
Management effort and dedication
Employee Training
Management Resources
Personnel Issues
Cost of ownership
Employee Time
Employee Motivation

c) Indirect Organizational Costs

Losses in productivity
Organizational Productivity
Strains on Organizational Resources
Opportunity Cost and Risk
Business Process Reengineering
Covert Resistance

Identification of Benefits

The following are the potential benefits of an IT system. In an implementation, some of the benefits may get realized and some may not get realized.

Reduced Head Count
Reduced manufacturing cost
Reduced inventory cost
Reduced down time
Better quality control
Additional new customers
Increased sales from existing customers
Better image of the Organization
Higher employee morale
Reduced attrition rate
The ability to recruit better employees 

This approach of doing cost-benefit analysis is known as Total Cost of Ownership (TCO). The model attempts to include all costs including direct and indirect costs of owing the information system. One can include non-business uses of a computer system as a cost factor. This model gives you complete freedom to include any relevant cost or benefits. This model is versatile. It has been used to assess the net benefits of owing a computer system. The model has been applied to information systems as well. TCO, in many cases, has revealed weaknesses of an information system in terms of under-utilization or mismanagement. There are some service company who specialize in TCO analysis. 

2) Return on Investment (ROI)

Another measure of IS value is return on investment (ROI). This method tries to

quantify additional profits that are generated as a percentage of the investment in information system technology. For an example, a manufacturing firm invested 5 lakh rupees in IS and an additional benefit due to increased sales is 50 thousand rupees, then the return on investment is

––––––– × 100 = 10%

In other words, the return on investment is 10%. The company might perform this analysis before installing the information system with an objective of determining the utility of the system. The same analysis may be performed after the installation to check the delivered benefits of the IS against expected benefits.

3) Earning Growth

Another measure of IS value is the increase in earnings growth. Let us say, an organization experienced 6% sales growth in year 2000. After installing IS, the sales growth became 11%. Assuming that no other factors affected sales, 5% increase in the sales are due to information system.

4) Market Share

Similar to earning growth one can also evaluate value of IS in terms of increased market share.

5) Customer Awareness and Satisfaction

Customer satisfaction is one of the most valued intangible benefits of an information system. For instance, an information system may help customer track status of their orders. Customer may check the stock status before he places an order. The information may be available online or through an operation who has access to information system of the company. There are many companies that conduct survey on behalf of their client company’s to determine the satisfaction level of their customers.


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