Cost-Benefit Analyses continued, Risk Assessment + Recommendations of an IS Business Case

7 Feb

Driving on from the tail-end of my previous blog where I detailed cost-analyses methods NPV, PBP and IRR respectively, here I will be highlighting other such methods – namely ROI, ARR, MIRR, Cost-Benefit ratio and Profitability Index. Subsequently, in the second half of this blog I will be discussing the risk assessment and recommendation factors which should be included in a business case.

– Return on Investment (ROI): I noticed that this method was touched upon recently in another topic by @anon100, where in essence they defined it as “a performance measure used to evaluate the efficiency of a number of different investments”. They also described the 4 factors –  financial, effectiveness, efficiency, and impact –  that drive ROI analysis. Although it isn’t quite suited to capturing soft benefits (e.g. customer satisfaction and employee productivity gains), results from a relatively recent survey of 200 IT professionals found that 80% of respondents felt that it is a method which is of increasing importance. Cited as one of the more basic methods of analysis, it is caluclated as (total benefits – total costs) / original investment. (1)(2)

– Average Rate of Return (ARR): The average rate of return expresses the profits arising from a project as a percentage of the initial capital cost. However, the definition of profits and capital cost vary. For instance, the profits may be taken to include depreciation or else they may not. Although being simplistic in nature, a drawback of this method is that it doesn’t take into account the project duration nor the timing of cash flows over the course of it.

– Modified Internal Rate of Return (MIRR): Usually used to rank various choices. As the name would suggest, MIRR is a modification of the already discussed IRR. It i) adds up the negative cash flows after discounting them to time zero, ii)) adds up the positive cash flows after factoring in the proceeds of reinvestment at the final time period, then iii) works out what rate of return would equate the discounted negative cash flows at time zero to the future value of the positive cash flows at the final time period. This rate is the MIRR. (1)

– Cost-Benefit ratio: Total benefits / total costs.

– Profitability Index: Present value of cash inflows / investments. (2)

It is important to emphasise the fact that a successful cost-benefit analysis should comprise all costs involved in the project, and demonstrate that it is more cost-effective for an organisation to undertake the preferred option as recommended by the business case. (3)

Moving on… Risk Assessment. Briefly touched on in my opening blog, this is another crucial element to an IS business case; it identifies the risks associated with the circumstances of it, including all options considered, and then recommends methods to mitigate these risks. This assessment may include a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis and thus by including this in the business case it then enables you to describe how the initiative fits into the organisation’s overall environment. Two types of risk that the business case will need to cover are risks associated with going ahead with the initiative and also the risks that the initiative will mitigate.

Another element I wish to detail is recommendations. The business case should lead the reader towards accepting a particular recommendation. Factors such as the issue at hand, options, costs and risks should lead the reader towards understanding that the recommendation is the best means to addressing a given situation. The business case for IS investment should entail a solid argument as to why a certain recommendation is the best option to go with. Lastly, providing an implementation plan for the recommended option can be quite a useful tool in order to obtain decision-maker support. It should comprise a timeline with key milestones so that the decision maker can see what is anticipated as being achieved and also a series of KPI’s (key performance indicators), so that progress can be tracked. Measures should be both tangible and obviously of relevance to the initiative. (3)

With all this in mind, is there anything else that people feel should be included in a business case for IS investment that we haven’t delved upon yet?

(Sources:

(1) http://www.mmu.ac.uk/bit/docs/Cost-Benefit-analysis-toolkit-v2.pdf

(2) Lecture notes via Blackboard / Computerworld, 2003 / IW 2001-VIII-08, survey

(3) http://prov.vic.gov.au/wp-content/uploads/2011/05/1010g4.pdf )

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