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A Feasibility Study is an exercise which is undertaken to decide whether or not a project should be done. There is no point in rushing into something and three quarters of the way through the project realize that it can't be done. That is a waste of time and money. Rather plan in the beginning and work out all possible scenarios so that not only the project is completed but it is completed in the most efficient and cost-effective possible way. There are four main types of feasibility which needs to be analyzed when conducting a feasibility study. They are technical feasibility, economic feasibility, schedule feasibility and operational feasibility. Technical feasibility looks at whether or not the project can be completed. Economic feasibility looks at how much it will cost. Schedule feasibility is how long it will take and operational feasibility sort of sums the first three up and works out whether or not the project should go ahead. When it comes to the economic feasibility that is a bit more complicated as there is more than one way to calculate this. Some use net present value while others use return on investment. What discount rate you use is also a critical factor in calculating this.
GETI-2100: Informatique de Gestion Information System Engineering: Analysis and Design Chapter 2: Feasibility Study Prof. Stéphane Faulkner Université catholique de Louvain, 2005-2006 Feasibility Study 1 Chapter Overview What is a feasibility study? What to study and conclude? Types of feasibility: Technical, Economic, Schedule, Operational Quantifying benefits and costs: Payback analysis, Net Present Value Analysis, Return on Investment Analysis Comparing alternatives Feasibility Study 2 1 The feasibility study phase Objectives of a feasibility study: To find out if an system development project can be done: - ...is it possible? - ...is it justified? To suggest possible alternative solutions To provide management with enough information to know: - Whether the project can be done - Whether the final product will benefit its intended users - What the alternatives are - Whether there is a preferred alternative A feasibility study is a management-oriented activity After a feasibility study, management makes a “go/no-go” decision. Need to examine the problem in the context of broader business strategy Feasibility Study 3 Content of a feasibility study Things to be studied in the feasibility study: The present organizational system - Stakeholders, users, policies, functions, objectives,... Problems with the present system - Inconsistencies, inadequacies in functionality, performance,… Possible solution alternatives - “Sticking with the current system” is always an alternative - Different business processes for solving the problems - Different levels/types of computerization for the solutions Advantages and disadvantages of the alternatives Feasibility Study 4 2 Four types of feasibility Technical feasibility Is the project possible with current technology? - How much technical risk is there? Does the technology exist at all? - Is it available locally? - Can it be obtained? - Will it be compatible with other systems? Economic feasibility Is the project possible, given resource constraints? What benefits will result from the system? - Both tangible and intangible benefits - Quantify them! What are the development and operational costs? Are the benefits worth the costs? Feasibility Study 5 Four types of feasibility (2) Schedule feasibility Is it possible to build a solution in time to be useful Operational feasibility Urgency of the problem and the acceptability of any solution: - If the system is developed, will it be used? Human and social issues… - Manager resistance? - Organizational conflicts and policies? - Social acceptability? - Legal aspects and government regulations? Feasibility Study 6 3 Technical feasibility Is the proposed technology or solution practical? Do we currently possess the necessary technology? Do we possess the necessary technical expertise, and is the schedule reasonable? Is relevant technology mature enough to be easily applied to our problem? What kinds of technology will we need? Some organizations like to use state-of-the-art technology …but most prefer to use mature and proven technology A mature technology has a larger customer base for obtaining advice concerning problems and improvements Is the required technology available “in house”? If the technology is available …does it have the capacity to handle the solution? If the technology is not available …can it be acquired? Feasibility Study 7 Economic feasibility Cost-benefit analysis Purpose - answer questions such as: - Is the project justified (I.e. will benefits outweigh costs)? - Can the project be done, within given cost constraints? - What is the minimal cost to attain a certain system? - Which alternative offers the best return on investment? Selection among alternative financing arrangements (rent/lease/purchase) Difficulties - benefits and costs can both be intangible, hidden and/or hard to estimate - ranking multi-criteria alternatives Feasibility Study 8 4 Types of benefits Examples of particular benefits: cost reductions, error reductions,, increased flexibility of operation, improved operation, better (e.g., more accurate) and more timely information Benefits may be classified into one of the following categories: Monetary : when $-values can be calculated Tangible (Quantified) : when benefits can be quantified, but $-values can't be calculated Intangible : when neither of the above applies How to identify benefits? By organizational level (operational, lower/middle/higher management) By department (production, purchasing, sales,...) Feasibility Study 9 Types of costs Project-related costs: Development and purchasing costs: who builds the system (internally or contracted out)? software used (buy or build)? hardware (what to buy, buy/lease)? facilities (site, communications, power,...) Installation and conversion costs: installing the system, training of personnel, file conversion,.... Operational costs (on-going): Maintenance: hardware (maintenance, lease, materials,...), software (maintenance fees and contracts), facilities Personnel: operation, maintenance Feasibility Study 10 5 Sample costs for a client/server development project Feasibility Study 11 Accounting methods Assuming that both benefits and costs can be identified and evaluated, how do we compare them to determine project feasibility? Payback Analysis: how long will it take (usually, in years) to pay back the project, and accrued costs: Total costs(initial + incremental) - Yearly return(or savings) Return on Investment Analysis: compares the lifetime profitability of alternative solutions Lifetime benefits - Lifetime costs Lifetime costs Net Present Value Analysis: determines the profitability of the new project in terms of today's dollar values Feasibility Study 12 6 Discount rates A dollar today is worth more than a dollar tomorrow… The dollar values used in this type of analysis should be normalized to refer to current year dollar values For this, we need a number, the discount rate, which measures the opportunity cost of investing money in other projects, rather than the information system development one. This number is company- and industry-specific To calculate the present value, i.e., the real dollar value given the discount rate i, n years from now, we use the formula Present 1 Value(n) (1 + i)n For example, if the discount rate is 12%, then Present Value (1) = 1/(1 + 0.12)1 = 0.893 Present Value (2) = 1/(1 + 0.12)2 = 0.797 Feasibility Study 13 Payback analysis Basically, we need to compute: Total costs(initial + incremental) - Yearly return(or savings) but it must be done with present dollar values Feasibility Study 14 7 Payback analysis for client-server system alternative Feasibility Study 15 How to compute exactly the payback period Need to determine the time period when lifetime benefits will overtake the lifetime costs. This is the break-even point Determining the fraction of a year when a payback actually occurs: |beginningYear amount| (endYear amount + |beginningYear amount|) For our last example 51,611 / (70,501 + 51,611) = 0.42 Therefore, the payback period is 3.42 years Feasibility Study 16 8 Net present value analysis for client- server system alternative Feasibility Study 17 Return On Investment (ROI) The ROI analysis technique compares the lifetime profitability of alternative solutions or projects The ROI for a solution or project is a percentage rate that measures the relationship between the amount the business gets back from an investment and the amount invested The ROI for a potential solution or project is calculated as follows: ROI = (Estimated lifetime benefits - Estimated lifetime costs) Estimated lifetime costs or, ROI = Net Present value / Estimated lifetime costs For our example ROI = (795,440-488,692)/ 488,692= 62.76%, The solution offering the highest ROI is the best alternative Feasibility Study 18 9 Schedule feasibility How long will it take to get the technical expertise? We may have the technology, but that doesn't mean we have the skills required to properly apply that technology May need to hire new people or re-train existing systems staff Whether hiring or training, it will impact the schedule Assess the schedule risk: Given our technical expertise, are the project deadlines reasonable? If there are specific deadlines, are they mandatory or desirable? If the deadlines are not mandatory, the analyst can propose several alternative schedules What are the real constraints on project deadlines? If the project overruns, what are the consequences? - Deliver a properly functioning information system two months late… - …or deliver an error-prone, useless information system on time? Missed schedules are bad, but inadequate systems are worse! Feasibility Study 19 Operational feasibility How do end-users and managers feel about… …the problem you identified? …the alternative solutions you are exploring? You must evaluate: Not just whether a system can work… … but also whether a system will work Any solution might meet with resistance: Does management support the project? How do the end users feel about their role in the new system? Which users or managers may resist (or not use) the system? - People tend to resist change. - Can this problem be overcome? If so, how? How will the working environment of the end users change? Can or will end users and management adapt to the change? Feasibility Study 20 10 Comparing alternatives with the feasibility analysis matrix In a feasibility analysis matrix, the columns correspond to the candidate solutions; Rows correspond to the feasibility criteria; Cells contain the feasibility assessment notes for each candidate Each row can be assigned a rank or score for each criterion (e.g., for operational feasibility, candidates can be ranked 1, 2, 3, etc.); After ranking or scoring all candidates on each criterion, a final ranking or score is recorded in the last row Feasibility Study 21 Feasibility study matrix: example (1) Feasibility Study 22 11 Feasibility study matrix: example (2) Feasibility Study 23 Additional readings [Hammer90] Hammer, M., "Re-Engineering Work: Don't Automate, Obliterate", Harvard Business Review, July-August 1990. [Hammer93] Hammer, M., and Champy, E., Re-Engineering the Corporation, Harper Business, 1993. Feasibility Study 24 12
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