systems development dr. yan xiong college of business csu sacramento 10/12/03

Systems DevelopmentSystems Development

Dr. Yan XiongDr. Yan XiongCollege of BusinessCollege of BusinessCSU SacramentoCSU Sacramento

10/12/0310/12/03

AgendaAgenda• Systems Development Life Systems Development Life

Cycle (SDLC)Cycle (SDLC)• Systems Development PlanningSystems Development Planning• Feasibility AnalysisFeasibility Analysis

Front -end Systems PlanningFront -end Systems Planning

Systems Development Systems Development Life Cycle (SDLC) Life Cycle (SDLC) Systems Development Life Cycle (SDLC) phasesSystems Development Life Cycle (SDLC) phases

• Systems analysisSystems analysis• Conceptual designConceptual design• Physical designPhysical design• Implementation and conversionImplementation and conversion• Operations and maintenanceOperations and maintenance

SDLCSDLC Each phase broken down Each phase broken down

into several steps or into several steps or taskstasks

Each step has:Each step has: Start dateStart date End dateEnd date Product (deliverable)Product (deliverable)

Steps may be repeated Steps may be repeated (Waterfall Model)(Waterfall Model)

Systems Development Systems Development Life Cycle Life Cycle

Systems Analysis Do initial investigation Do system survey

Do feasibility study Determine information needs

and system requirements Deliver systems requirements

Feasibility analysis and decision points

Feasibility AnalysisFeasibility Analysis Traditionally, done once at Traditionally, done once at

project beginning, then forgottenproject beginning, then forgotten Should be redone after each Should be redone after each

SDLC stageSDLC stage SDLC costs increase exponentially SDLC costs increase exponentially

through each succeeding phasethrough each succeeding phase Project uncertainty (# unknowns) Project uncertainty (# unknowns)

decreases with each SDLC stagedecreases with each SDLC stage

SDLC Costs and UnknownsSDLC Costs and Unknowns

TIME (SDLC Phases)TIME (SDLC Phases)

Mag

nitu

deM

agni

tude

Project CostsProject Costs

ProjectUnknowns ProjectUnknowns

Feasibility AnalysisFeasibility Analysis Forget about sunk costs!Forget about sunk costs!

they are the pastthey are the past Alaska state personnel systemAlaska state personnel system

So, at end of each SDLC phaseSo, at end of each SDLC phase conduct new feasibility analysisconduct new feasibility analysis now fewer unknowns than beforenow fewer unknowns than before make decision of whether or not to make decision of whether or not to

proceed with SDLCproceed with SDLC



Conceptual Design Identify and evaluate design alternatives

Develop design specifications Deliver conceptual design

requirements



Physical Design Design output Design data base Design input Develop programs

Develop procedures Design controls

Deliver developed system



Implementation / Conversion Develop plan

Install hardware and software Train personnel, test the system Complete documentation Convert from old to new system

Fine-tune and review Deliver operational system


Operation and Maintenance Operate system

Modify system Do ongoing maintenance Deliver improved system

SystemsAnalysis

ParticipantsParticipants• ManagementManagement• AccountantsAccountants• IT Steering CommitteeIT Steering Committee• Project development teamProject development team

• systems analysts and programmerssystems analysts and programmers• External playersExternal players

• customerscustomers• vendorsvendors

Accountants’ RolesAccountants’ Roles• Determine own information needsDetermine own information needs• Members of project development teamMembers of project development team• Play active role in designing system controlsPlay active role in designing system controls• Help perform feasibility (ROI) analysesHelp perform feasibility (ROI) analyses

Steering CommitteeSteering Committee• Set policies that govern AISSet policies that govern AIS• Ensure top-management participationEnsure top-management participation• Monitor and controlMonitor and control• Facilitate coordination and integration of IS activitiesFacilitate coordination and integration of IS activities• At Intel, called Management Review Committees (MRC)At Intel, called Management Review Committees (MRC)

Development PlanningDevelopment Planning Need for planningNeed for planning– consistencyconsistency– efficiency (no duplication)efficiency (no duplication)– lower costslower costs– ensure meet overall project goalsensure meet overall project goals

– timetime– moneymoney– system objectivessystem objectives

Planning TechniquesPlanning Techniques Several techniques discussed Several techniques discussed

in textbook, such asin textbook, such as CPMCPM PERTPERT

For most AIS projects, For most AIS projects, CPM and PERT are “over-kills”CPM and PERT are “over-kills”

Most commonly used is Gantt chartMost commonly used is Gantt chart

Gantt ChartGantt Chart Bar chart with project activities listed on left-hand Bar chart with project activities listed on left-hand

side; time units (days or weeks) across top side; time units (days or weeks) across top For each activity, bar drawn from scheduled starting date to For each activity, bar drawn from scheduled starting date to

ending dateending date As activities completed, bar filled inAs activities completed, bar filled in Can use $ units instead of timeCan use $ units instead of time

Gantt Chart StructureGantt Chart Structure____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Activity Week Starting12345678

Augmented Gantt ChartAugmented Gantt Chart

TASKTASK PERSONPERSON

% % COMPLTCOMPLT

BYBYMONTHMONTH

SystemSystemDescriptDescript

ReqrmntReqrmntAnalysisAnalysis

Cost-Cost-BenefitBenefit

Augmented Gantt ChartAugmented Gantt Chart

TASKTASK February February

MarchMarch AprilApril

SystemSystemDescriptDescriptReqrmntReqrmntAnalysisAnalysisCost-Cost-BenefitBenefit

Feasibility AnalysisFeasibility Analysis Systems analysis is first step in (SDLC)Systems analysis is first step in (SDLC) Feasibility studyFeasibility study (also called (also called business casebusiness case) )

prepared and updated as necessary during remaining steps prepared and updated as necessary during remaining steps in SDLCin SDLC

Steering committee uses study to decide whether to terminate Steering committee uses study to decide whether to terminate project, proceed unconditionally, or proceed conditionally project, proceed unconditionally, or proceed conditionally

Initial FeasibilityInitial Feasibility Analysis Analysis Technical feasibilityTechnical feasibility: Can system be developed : Can system be developed

using existing technology?using existing technology? Operational feasibilityOperational feasibility: Will the system be used by people in the : Will the system be used by people in the

organization?organization? Legal feasibilityLegal feasibility: Will there be conflicts with organization’s ability to : Will there be conflicts with organization’s ability to

discharge its legal obligations?discharge its legal obligations?

Initial FeasibilityInitial Feasibility Analysis Analysis

Scheduling feasibilityScheduling feasibility: : Can system be implemented Can system be implemented in time allotted? in time allotted?

Economic feasibilityEconomic feasibility: Will : Will benefits of the proposed system benefits of the proposed system exceed its estimated costs?exceed its estimated costs?

Feasibility AnalysisFeasibility Analysis Economic feasibilityEconomic feasibility is most frequently analyzed is most frequently analyzed Basic framework for feasibility analysis is capital budgeting Basic framework for feasibility analysis is capital budgeting

modelmodel– payback periodpayback period– net present value (NPV) net present value (NPV) – internal rate of return (IRR)internal rate of return (IRR)

Feasibility AnalysisFeasibility Analysis Repeated after each stageRepeated after each stage Why?Why?

project cost increases project cost increases exponentially as project exponentially as project moves through SDLCmoves through SDLC

even if sunk costs in prior stages, even if sunk costs in prior stages, cost-beneficial to abort project cost-beneficial to abort project before next stage if $ aren’t therebefore next stage if $ aren’t there

Testing exampleTesting example

Information System CostsInformation System Costs CategoriesCategories

HardwareHardware SoftwareSoftware PeoplePeople SuppliesSupplies TelecommunicationsTelecommunications Physical SitePhysical Site

Info System Costs (Info System Costs (contcont.).) When costs occurWhen costs occur

One-time One-time ((development)development) Recurring Recurring ((operationaloperational))

Indirect costsIndirect costs Overhead Overhead ((e.g., utilitiese.g., utilities)) Marginal costsMarginal costs

actual out-of-pocketactual out-of-pocket

Out-of-Pocket CostsOut-of-Pocket Costs Clerk performs 20 hours Clerk performs 20 hours

per week on taskper week on task System reduces this by 10 hoursSystem reduces this by 10 hours Clerk earns $12 an hourClerk earns $12 an hour Savings $120 per weekSavings $120 per week What’s wrong with this picture?What’s wrong with this picture?

Estimating CostsEstimating Costs Keep forecasts simpleKeep forecasts simple Explain your logicExplain your logic Rely on credible sourcesRely on credible sources Downplay intuition (Downplay intuition (hunches)hunches) Use other peopleUse other people Build in contingency (fudge) factorBuild in contingency (fudge) factor

Estimating Costs Estimating Costs Principle of Insufficient ReasonPrinciple of Insufficient Reason

If don’t have facts, If don’t have facts, assume nothingassume nothing

e.g., hardware costs have e.g., hardware costs have increased 10% per year - increased 10% per year - absent any facts assume 10% absent any facts assume 10% increase next yearincrease next year

Methods For Methods For Comparing SystemsComparing Systems Costs first, then benefitsCosts first, then benefits $ first, then qualitative factors$ first, then qualitative factors Methods:Methods:

Break-even AnalysisBreak-even Analysis Payback PeriodPayback Period Discounted Payback PeriodDiscounted Payback Period

Break-even AnalysisBreak-even Analysis Intersection ofIntersection of

Investment PeriodInvestment Period Return PeriodReturn Period

When start receiving When start receiving positive cash flowpositive cash flow

Surplus funds to be Surplus funds to be invested by Year Xinvested by Year X

Break-even PointBreak-even Point

$$

YearsYears

OldSystem OldSystem

NewSystem NewSystem

Investment PeriodInvestment Period

ReturnPeriodReturnPeriod

Break-even PointBreak-even Point

Payback PeriodPayback Period Where development costs Where development costs

offset by operational savings offset by operational savings of new systemof new system

Graphic solutionGraphic solution Feasibility MatrixFeasibility Matrix

Payback PeriodPayback Period

$$

YearsYears

OldSystem OldSystem

NewSystem NewSystemDevelop

CostsDevelop Costs

Operational CostsOperational Costs

DevelopmentAnd OperationalAreas are Equal

DevelopmentAnd OperationalAreas are Equal

Payback PeriodPayback Period

Feasibility MatrixFeasibility Matrix

TypeType CostCost

YearYear 11

YearYear 22

YearYear 33

YearYear 44

CurrentCurrentSystemSystem

6262 6565 7070 7676

NewNewSystemSystem

162162 ****

100 100 ****

3333 3535

Differ-Differ- ence ence

-100-100 -35-35 +37+37 +41+41

**** Includes one-time development costsIncludes one-time development costs

New System CostsNew System Costs While in development:While in development:

Development costs (e.g., Development costs (e.g., programming) spread throughout programming) spread throughout development period (e.g., 18 months)development period (e.g., 18 months)

Old System operational costs Old System operational costs UNTIL UNTIL new system implementednew system implemented

Example:Example: 18 month development18 month development

New System CostsNew System Costs

Develop-Develop- mentment

100100 5050

Old SystemOld SystemOperatingOperating

6262 3333 ****

New System New System OperatingOperating

1717 ****

3333 3535

TotalTotal 162162 100100 3333 3535

11 22 33 44

**** ½ year old system, ½ year new system½ year old system, ½ year new system

YearYear

Calculating Payback PeriodsCalculating Payback Periods

Type CostType Cost YearYear 11

YearYear 22

YearYear 33

YearYear 44

DifferenceDifference -100 -100 -35-35 +37+37 +41+41

CumulativeCumulative DifferenceDifference

-100-100 -135-135 -98-98 -57-57

**** ******

**** Difference positive - Includes Breakeven PointDifference positive - Includes Breakeven Point

****** Cumulative Difference not yet positive – Payback Period beyond 4 years

Cumulative Difference not yet positive – Payback Period beyond 4 years

CalculationsCalculations Assumption: All costs occur Assumption: All costs occur

equally by month across each yearequally by month across each year Principle of Insufficient ReasonPrinciple of Insufficient Reason

$120K annual expenditure = $10K $120K annual expenditure = $10K expenditures per monthexpenditures per month

For Break-even Point, calculation based For Break-even Point, calculation based on on DifferenceDifference row row

For Payback calculation, calculation For Payback calculation, calculation based on based on Cumulative Difference Cumulative Difference row row

CalculationsCalculations Payback = Year Last + APayback = Year Last + A Period Negative A + BPeriod Negative A + B CumulativeCumulative Difference Difference

A = Cumulative Difference Last Negative YearA = Cumulative Difference Last Negative YearB = Cumulative Difference Next Year After NegativeB = Cumulative Difference Next Year After Negative

NOTE: Same for Break-even, except that you use NOTE: Same for Break-even, except that you use Difference Row rather than Cumulative DifferenceDifference Row rather than Cumulative Difference

CalculationsCalculations TypeType CostCost

YearYear 33

YearYear 44

YearYear 55

DifferenceDifference +37+37 +41+41 +62+62

CumulativeCumulative DifferenceDifference -98-98 -57-57 +5+5

Previous Year wasLast Negative YearFor Break-even Point

Previous Year wasLast Negative YearFor Break-even Point

Last Negative YearFor Payback PeriodLast Negative YearFor Payback Period


YearYear 22

YearYear 33

YearYear 44

DifferenceDifference -35-35 +37+37 +41+41

CumulativeCumulative DifferenceDifference -135-135 -98-98 -57-57

Break-even Point = 2 + (35) / (35 + 37) = 2.48 years Break-even Point = 2 + (35) / (35 + 37) = 2.48 years


YearYear 33

YearYear 44

YearYear 55

DifferenceDifference -37-37 +41+41 +62+62

CumulativeCumulative DifferenceDifference -98-98 -57-57 +5+5

Payback Period = 4 + (57) / (57 + 5) = 4.92 yearsPayback Period = 4 + (57) / (57 + 5) = 4.92 years

Present Value of MoneyPresent Value of Money But profit-seeking firm could But profit-seeking firm could

earn money on development earn money on development funds invested todayfunds invested today

Return on Investment Return on Investment ((ROIROI)) Present Value of Money =Present Value of Money = 1 / (1 + ROI) ** n1 / (1 + ROI) ** n n = number of years into futuren = number of years into future Net Present Value (NPV)Net Present Value (NPV) = sum of each = sum of each

future years present valuesfuture years present values

Discounted Payback PeriodDiscounted Payback Period Don’t use for Break-even PointDon’t use for Break-even Point

There is no such thing as a There is no such thing as a Discounted Break-even PointDiscounted Break-even Point

Add 2 new rows to Feasibility MatrixAdd 2 new rows to Feasibility Matrix Discount RateDiscount Rate

(1 – i) to the power of the year(1 – i) to the power of the year Discounted Cumulative DifferenceDiscounted Cumulative Difference

Discount Rate times Cum DiffDiscount Rate times Cum Diff

ExampleExample Assume 20% ROIAssume 20% ROI

Average last 3 yearsAverage last 3 years For 1For 1stst year: year:

Discount = 1 / (1+.2)**1 = .83Discount = 1 / (1+.2)**1 = .83 For 2For 2ndnd year: year:

Discount = 1 / (1+.2)**2 = .69Discount = 1 / (1+.2)**2 = .69

Year 3Year 3 Year 4Year 4 Year 5Year 5 .58.58 .48.48 .40.40


DifferenceDifference -100-100 -35-35 +37+37 DiscountDiscount (ROI = .2) (ROI = .2)

.83.83 .69.69 .58.58

DiscountedDiscounted DifferenceDifference -83-83

-25 -25 +22+22

Cum DisctdCum Disctd DifferenceDifference

-83-83 -108-108 -86-86

11 22 33


DifferenceDifference +41+41 +67+67 ?????? DiscountDiscount (ROI = .2) (ROI = .2)

.48.48 .40.40 ??????

DiscountedDiscounted DifferenceDifference +20+20

+27+27 ??????

Cum DisctdCum Disctd DifferenceDifference

-66-66 -39-39 ??????

44 55 66

No payoff in 5 yearsNo payoff in 5 years 6th year???6th year???

Topics DiscussedTopics Discussed• Systems Development Life Systems Development Life


systems development dr. yan xiong college of business csu sacramento 10/12/03

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