Sample Feasibility Analysis Matrix by MaryJeanMenintigar

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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.

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									      GETI-2100: Informatique de Gestion

      Information System Engineering: Analysis and Design




                  Chapter 2: Feasibility Study

                         Prof. Stéphane Faulkner
              Université catholique de Louvain, 2005-2006


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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




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                                                                                  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

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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



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                                                                                   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?


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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?




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                                                                         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?
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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




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                                                                                        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,...)




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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




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                                                                                        5
Sample costs for a client/server
development project




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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



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                                                                                       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

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Payback analysis
 Basically, we need to compute:
   Total costs(initial + incremental) - Yearly return(or savings)
 but it must be done with present dollar values




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                                                                                7
Payback analysis for client-server system
alternative




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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




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                                                                               8
Net present value analysis for client-
server system alternative




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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
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                                                                              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!

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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?



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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




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Feasibility study matrix: example (1)




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Feasibility study matrix: example (2)




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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.




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