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Book Contents

Ch. 12
Evaluating Decision Support Systems Projects

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Cost-Benefit Analysis

The primary benefit of DSS should be improved decisions. This intangible benefit presumes that managers will change their decision processes and actually use a data warehouse. In a recent Sentry Market survey, 30% of respondents identified "access to data" as the biggest benefit of a data warehouse. Other important benefits of DSS include: improved data accuracy; better control of data; better data consistency; decentralization of data; cost savings; and less reliance on legacy systems. Few managers think that DSS will result in cost savings.

Typical measures in Cost-Benefit Analysis (CBA) are ROI, NPV, and discounted cash flow. Cost-Benefit Analysis is grounded in finance and accounting and closely tied to the budget process. This analysis addresses the allocation of capital. CBA provides the appearance of accuracy and precision. CBA is useful for evaluating cost-savings projects and automation of current processes. CBA is difficult to use for decision-support, infrastructure, and strategic projects. For example, cost models for data warehouses are not available. Benefits are tough to measure. Benefits are not quantifiable or easily converted to dollars.

Examples of DSS cost factors include direct hardware and software costs, project personnel costs, support services (vendors or consultants), process change costs (people, material), and incremental infrastructure costs. Examples of DSS benefit factors include improved access to data, improved accuracy and consistency of data used in decision making, faster access to decision support, and cost savings from process improvements.

We can identify both tangible and intangible costs and benefits. We call a cost or benefit tangible if we can quantify the consequences. Intangible costs and benefits are difficult and sometimes impossible to quantify. Intangible results need to be considered in an evaluation, but too many intangibles limit the validity of the cost-benefit analysis.

Cost-Benefit Analysis is a systematic, quantitative method for assessing the life cycle costs and benefits of competing alternatives. It involves explicitly stating assumptions, disregarding sunk costs and prior results, estimating direct and indirect costs and benefits, discounting costs and benefits, and performing sensitivity analysis. Discounting involves calculating how much a dollar of costs or benefits is worth today, even though it will be realized in the future. Discounting calculates the time value of money.

We can perform a cost-benefit analysis by following steps:

  1. Define alternatives to the proposed project
  2. Collect Cost and Benefit Data
  3. Document assumptions
  4. Estimate Costs and Benefits (direct, indirect, tangible, intangible)
  5. Establish Measurement criteria (especially for benefits)
  6. Evaluate all alternatives using NPV, Benefit/Cost Ratio or Payback

The DSS Project Evaluator Decision Aid (Figure 12.2), available at URL http://DSSResources.COM/decisionaids/cbanalysis.html may be useful in determining whether or not to implement a DSS. The program uses the annual operating cost, development cost, benefits, the number of users, and the discount rate to determine the long-term return, payback, benefit/cost ratio, and several other values important to consider when developing a DSS. The cost per user ratio is useful for determining how expensive the DSS is per person using the DSS. The benefit/cost ratio can be used to determine whether the total discounted benefits of the project are greater than the total discounted costs. Discounted means that they are adjusted for a fixed rate of inflation, the discount rate. If it is less than one, the total benefits are less than the total costs. The payback tells how many years it will take until overall benefits exceed overall costs. The LT (Long Term) Return is the overall value of the DSS, excluding costs to develop the DSS.

Figure 12.2 DSS Project Evaluator Decision Aid

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