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GEOGRAPHIC INFORMATION SYSTEM II (SUG554)

Assoc. Prof. Sr. Zamani Bin Ismail Room B501 Contact: 03-55444528 or 019-3605218

Part 7

Cost Benefit Analysis

Recap - Choosing a GIS


Involves 4 stages
Analysis of requirement, Specification of requirements, Evaluation of alternatives Implementation of system

Dec 2010 - April 2011

Steps in GIS acquisition

What is cost benefit analysis (CBA)?


Assessment of costs (initial and recurring) for the installation of a GIS Assessment of benefits of a GIS installation what is the value of its products? Comparison of costs and benefits
Project should go ahead only if benefits exceed the costs For comparison, benefits and costs must be comparable measured in the same units, over same period

Why do it?
A major GIS implementation is a large monetary investment and upper management wants to know the expected benefits of the system before they agree to the purchase, i.e. the Return of Investment (ROI) CBA is a standard procedure in many areas, including the information processing industry. Three uses of CBA of computer systems;
i. as a planning tool for choosing among alternatives select the system which meets minimal benefit requirements and offers the highest benefit/cost ration. as a quantitative support to politically influence a decision a major factor in influencing the decision to proceed. as an audit tool for existing project future planning for the system can be based on the outcome

ii. iii.

Dec 2010 - April 2011

Accrual
An organization will want to know the costs and benefits that accrue to the organization
These are not necessarily all the costs
Some costs may be borne by government through costcost-sharing arrangements Some costs may be borne by the vendors

The benefits which accrue to the organization are not necessarily all of the benefits of the system Some government organization may wish to make decisions based on costs & benefit to society as a whole, not to the organization

Defining costs
The most important aspect of reporting costs is to include all costs, costs, not just the acquisition of the hardware and GIS software. Whether or not to include certain costs leads to the questioning the purpose of the agency as well as the purpose of the GIS E.g. should the cost of data collection be included in the total costs for a GIS implementation?
No if the data would have been collected whether or not a GIS was to be implemented Yes if the data was collected specifically to create the GIS database Partially if the data would have been collected, but not at the higher level of precision preferred for GIS database

OneOne-time vs. recurring costs


OneOne-time costs are incurred for hardware, possibly data, staff training Recurring costs are incurred for maintenance contracts, staff salaries, rent, utilities, etc OneOne-time & recurring costs and benefits must be adjusted to identical periods for the purposes of comparison
E.g. sum the oneone-time & recurring costs & benefits over entire period of project, e.g. 5 years E.g. express recurring costs & benefits on an annual basis, and apportion oneone-time costs appropriately.
E.g. assign 1/5 of the oneone-time costs to each year of project may have to add interest charges on initial investment, allowances for inflation etc.

Dec 2010 - April 2011

Benefits of a GIS
Benefits are much more difficult to quantify than costs
Costs can be expressed in dollars Benefits are often intangible, difficult or impossible to quantify

Benefits are generally tied to the expected products Products may be:
The same products as before but created using the GIS instead of the previous manual or CAD/CAM (i.e. nonnonGIS) methods New products that could not be produced without the GIS

Benefits of a GIS
Types of products
1. simple map output of the database or subsets thereof 2. map products requiring the spatial analysis functions of a GIS 3. products which may not be end products, but input to a decision making process

CBA based solely on map output is different from an analysis involving the spatial analysis and decision support system functions of a GIS
The latter type is much more complex There is a need to understand how decision makers use information, specifically geographical information, and how they value that information

Benefits of a GIS
Difficult to define some product product
E.g. the concept is clear enough in the case of a map or report but less so when the GIS is used to browse a database

There is still much to be understood about apply and demand for GIS products

Dec 2010 - April 2011

Classifying benefits
Tangible benefits: benefits:
Cost reduction thro thro
Decreased

tasks

operating costs - e.g. time savings for routine & repetitive for instance map

Staff time savings e.g. fewer staff required Cost avoidances e.g. less space required for,

storage

Increased revenue by
Having BetterBetter-quality

new range of output maps, tables, etc product

Intangible benefits: benefits:


Improved information sharing and flows BetterBetter-informed decision making Stronger competitive ability BetterBetter-motivated workforceworkforce- more career options, less tedious tasks Greater analysis and understanding of problems Justification for decisions made Improved visualization of data

Examples of benefits
Total cost of producing maps by manual means was greater than total cost of making identical maps using GIS tangible benefit Use of GIS allows garbage collection company to reduce staff through better scheduling of workload and collection routes tangible, possible to quantify Emergency vehicles reduce average arrival time by using GIS supplied information on road conditions tangible if we can quantify the increased cost resulting from delayed arrival (heart attack victim less like to survive, etc)

Examples of benefits
Timber company reduced costs of logging because GIS could be used to avoid costly mistakes in locating roads & other logging infrastructure tangible but hard to quantify, implies we can predict the mistakes which would have been made in the absence of GIS Information from GIS was used to avoid costly litigation in land ownership case tangible but hard to quantify, implies we can predict the outcome of the case if GIS information had not been available Forest Service find a better location for a campsite through use of GIS intangible, implies we can predict the decision which would have been made in the absence of GIS

Dec 2010 - April 2011

Tangible & Intangible Cost & Benefits


Category
Economic (tangible)

Costs
Hardware Software Training New staff or skills Additional space Data purchase or collection

Benefits
Reduced costs (e.g. of staff) Greater throughput Increased revenues New market services or product

Institutional (intangible)

Interpersonal shifts Layoffs of lowlow-skilled staff, partially replaced by fewer if individually more expensive skilled staff

Improved client relationships Better decisions Improved morale Better information flow Better culture of achievers achievers

Comparing Costs & Benefits


Those benefits easily quantify can be compared directly to costs However, it may be wrong to look at the problem as a matter of predicting costs and benefits as static, simple quantities
Realistically, a system is likely to change substantially over any extended planning horizon The ability to expand the system easily without major structural change may be a hidden benefit

Benefit Cost Equation

The result of the benefit cost analysis is the benefit/cost ratio. IF this ratio is greater than one, the GIS is economically justified. This assumes that a benefit/cost ratio of 1/1 or higher is acceptable (i.e. ,other, more beneficial alternatives do not exist). 'The magnitude of benefits relative to costs indicates whether the expenditures represented are efficient use of scarce resources.

Dec 2010 - April 2011

General benefit cost relationship to justify a GIS

Source: The economic evaluation of implementing a GIS-Dickinson(1988)

Alternatives
Other ways of assessing the value of a GIS include;
CostCost-effectiveness analysis compares the cost of providing the same service using alternative means Payback period dividing the cost of implementing a system by the estimated annual net benefits of using it. ValueValue-added approached emphasizes the new things that a GIS allows an organization to perform.

GOOD LUCK IN YOUR EXAMINATION THAT WILL BE ON MAY 5th 2011

Dec 2010 - April 2011

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