Introduction
The benefits of Geographic Information Systems (GIS) no longer needs to be demonstrated.
However, are GIS projects a priority against other IT projects ?
When it comes to defining the investment strategy and evaluating the projects to be carried out, how can GIS projects benefits be measured?
The techniques for evaluating investment projects are well known. Among these techniques, the estimation of the net present value (NPV) makes it possible to evaluate the flow of expenses and revenues over time.
Deemed incomplete, purely financial evaluations were supplemented by approaches based on the evaluation of knowledge and the optimization of the organization’s business processes.
The notion of alignment between information system and the organization’s strategy thus appeared. This presupposes the formulation of a clear strategy for the information system as well as for the organization, in a context where the correlation between IT spending and performance improvement is not always verifiable.
The proposed contribution presents some of these approaches and reflections applied to GIS.
Context
Statistics show that around 30% of IT projects are abandoned before the end of the project life cycle. Approximately 53% of projects exceed forecast budgets by more than 90%. Only 16% of projects are carried out according to initial forecasts. This percentage is around 9% for large organizations.
GIS projects are no exception.
Evaluation Methods
Methods for evaluating investment projects include three stages:
- First, the estimation of financial flows (cash flow) taking into account the initial investment, expenses and economic benefits during the life cycle of the project.
- Then, the estimation of an indicator representing the economic value of the investment.
- And finally, the comparison of this indicator to an accepted validation criterion.
Commonly used figures of merit
Among the most used indicators or figures of merit we find:
The payback period consists of estimating the time that the investor must wait before recovering the initial investment.
The NPV, which is the difference between the expected financial flows discounted at the project evaluation date and the initial investment.
The internal rate of return (IRR), which represents the rate corresponding to an NPV equal to zero.
Collection period
In this case, the comparison factor being the acceptable recovery time of the invested capital. This indicator does not take into account financial flows after recovery of the investment.
NPV
The NPV is the difference between the financial flows of the periods considered discounted at date zero and the initial capital. The values of future flows are discounted using a rate (discount rate) according to the financial formulas of compound interest.
The investment projects to be prioritized are those which have an NPV greater than zero.
This indicator is to be preferred because it integrates time. GIS projects generally have a long life cycle, lasting more than ten years.
IRR
The NPV varies depending on the discount rate used. Some organizations prefer to use the internal rate of return, that is, the rate at which the NPV is zero.
How to estimate financial flows
The whole difficulty of the method chosen is the prior estimation of financial flows, and in particular of economic benefits.
These flows are made up of investments, operating costs and economic benefits, not to mention the effects of depreciation and taxes.
The cost of investments and operating costs are easily measurable, unlike the economic benefits, some of which are intangible.
Other approaches
Other approaches have emerged in the United States, where more than half of the world’s computing power is installed. Among these approaches we can mention:
- The tangible factor elimination approaches of Baruch Lev and Paul Strassmann.
- By evaluating a large set of indicators to try to capture knowledge-related capital
- By analytical breakdown of costs
- The much-promoted Balance Score Card (BSC) method from Kaplan and Norton
- The method proposed by Housel and Bell (KVA) which consists of evaluating by business process the ratio between commercial revenues allocated to the process in relation to process costs; the cost being calculated according to the training time necessary to carry out the activities, the complexity of the process, the quantity of instructions necessary to carry out the process, the execution time, etc.
These capital valuation methods have been applied at the accounting level to establish the income statements of companies in the IT sector. The BSC method has been used since 2006 by around 1,250 companies; in particular for the IT, HR and finance support functions in the framework of the formalization of the organization’s strategy and the alignment of this strategy with the business processes.
These reflections raise the question of alignment between the organization’s strategy and investments in Information Systems.
To analyze this alignment, it seems necessary (following Paul Strassmann) to identify which performance measures are already in place.
In the absence of a practical method we limit ourselves to the consideration of tangible financial advantages mainly concerning the reduction of costs and possible additional revenues. We can also take into consideration the advantages generated in carrying out the activities of the processes directly concerned, without or with the use of new systems or by using the best alternative solution to the implementation of the IS.
Conclusions
The NPV is recommended, because it integrates the temporal dimension. The life cycle of a GIS project is long; it is over 7 years.
Investments in technology (tangible) and knowledge (intangible) must be separated.
Each GIS project must be evaluated in its context and according to criteria consistent with the organization implementing it.
There is no correlation between IT spending and profitability
The identification of the economic advantages of implementing a GIS as well as the management of change should be driven by management.