The Value of Investing in IT Chapter 7 Slides from James Pick, Geo-Business: GIS in the Digital Organization, John Wiley and Sons, 2008. Copyright © 2008.

The Value of Investing in IT

Chapter 7 Slides from

James Pick, Geo-Business: GIS in the Digital Organization, John Wiley and Sons, 2008.

Copyright © 2008 John Wiley and Sons.

DO NOT CIRCULATE WITHOUT

PERMISSION OF JAMES PICK

Copyright (c) 2008 by John Wiley and Sons

Developing GIS• GIS is known to go through stages of growth in an

organization.• It needs to be nurtured in the early stages and then

takes off, often too fast.• Controls and administration are established.• The leadership and management problem is how

best to nurture and develop GIS in an organization.• Discussion – what are your ideas?


Justifications for C-B Analysis

• Useful in planning in an organization. There are competing demands for investments and resources. C-B analysis can help to resolve this.

• Helps in auditing. The C-B analysis can be done retrospectively, to determine whether a project was beneficial.

• Uses in political decision-making. This is shorter-term than the first and less complete. It helps resolve issues (King and Schrems, 1978).


4 factors to set the context of C-B analysis

1. Statement of purpose. Why is the C-B analysis being done? For direct use in a decision? Indirect use? Political purpose?

2. Time simultaneity. Is the C-B analysis for a project that prospective, current, or past?

3. Scope. Will the analysis examine all the C-B items, some of them, or only one, for sensitivity analysis?

4. Criterion. How will the costs and benefits be compared, after they have been gathered. This is the criterion. Examples: formula, graphical comparison, NPV.

Adapted from King and Schrems, 1978.


Higher Costs of a GIS versus a conventional IS: data collection -

maintenance and visualization• GIS is usually more expensive than a conventional

IS due to the needs to gather both attribute and boundary file data.

• Studies show that the data/ boundary file collection and management cost for GIS may be 65 to 80 percent of total system development costs.

• The visualization aspects imply that more intangible costs apply for a GIS.


3 Factors that Differentiate GIS C-B Analysis from non-Spatial IT C-B

• GIS software tends to be linked with other technologies and software, such as GPS, wireless mobile devices, RFID, statistical and modeling software.

• GIS data consists of both attribute data and spatial data, and they are collected differently and must be linked together.

• GIS visualization is hard to quantify. Hence it adds relatively more to intangible benefits.

(Source: Pick, 2005)Copyright (c) 2008 by John Wiley

and Sons

Comparison of Cost-Benefit for a Simple GS System to a GIS System Closely Coupled with Another System or Technology

(Fig. 7.1)Copyright (c) 2008 by John Wiley

and Sons

Tangible Costs of a GIS

•Hardware

•Software

•Data collection

•Transformation of manual maps and data into digital format

•Maintenance costs for hardware and software

•Maintenance of data (Source: Pick, 2004)


Tangible Costs of a GIS (cont.)• Supplies • Design and construction of data-bases • Hiring more staff • Training present staff • Outsourcing (e.g. GIS applications programming) • Consulting• Licensing• Communications interfaces and networks • Space, site, and utilities


Topic for Study: Tangible Benefits of a GIS

•Salary and benefits lowering from reducing the workforce

•Cost reduction (through employees performing their tasks more efficiently

•Cost avoidance in the future (projected greater workload per employee

•Expansion of revenues (achieved through improved data quality, improved efficiency

•Improved productivity

•Improved performance

•Higher value of assets (Source: Pick, 2005)


Intangible Benefits of a GIS•Improved decision making

•Effectiveness of managers and executives

•Reaching strategic objectives

•Environmental scanning

•Speed and timeliness of information

•Volume and quality of information (Source: Pick, 2004)


Intangible Benefits of a GIS (cont.)

• Better capability to sell products• Improved collections of money • Identification of missing revenue sources

efficiency and workflow • Better utilization of assets• Reduced error• Reduced liability (e.g. monitory security)• External benefits


Units of AnalysisAmong the units of analysis for GIS C-B are:

– Industry– Company– Department or division– Project– Individual

For smaller units, costs and benefits are more easily estimated. For all these levels the “coupling” of GIS with other systems can complicate GIS C-B. For enterprise-wide GIS, the “coupling” takes a different form of connection with other enterprise systems, such as ERP.


Extraneous Influences on C-B Analysis at higher units of analysis

• At the firm and higher levels, extraneous influences impact the C-B analysis. These might be economic influences (economic cycles), pricing of hardware and software, changes in “coupled” technologies, etc. These are usually excluded from C-B studies, but need to be considered in a broader perspective.


High Costs of Acquiring Spatial Data

• Costs of the data are estimated at 80 percent (Tomlinson, 2003)

• Capital costs to develop the data-bases are mostly in the public sector, so large public data-bases available at low cost in U.S.– example is Census. In Europe, the data is costly.

• However, there are problems with multi-country public data, since boundary files often don’t follow common standards.

• Example, U.S. and Mexico Census attributes and boundary rules are quite different (Pick et al., 2000a, 2000b). Copyright (c) 2008 by John Wiley

and Sons

Net Present Value

• Net present value (NPV) formulae can estimate the net benefit for future years.

• The appropriate discount rates need to be assumed.

• The perking of interest this year points to a period when NPV will be more important

• See book chapter (Pick, 2005) for formulae.


Comparison with a Criterion

Some common criteria are:Some common criteria are:

• Maximize the present value of the benefits minus the present value of the costs.

• Maximize the ratio of benefits over costs.

• Assume a given level of costs for all alternatives and maximize benefits

• Assume a given level of benefits for all alternatives and minimize costs


Stakeholders and Externalities• Cost-benefit results may vary from the vantage points of

different stakeholders in an organization. • For instance, GIS in an advertising firm will have

different costs and benefits for the corporation itself, the firm’s customers, its investors, and the general public.

• The effort of cost-benefit work is made more difficult and time-consuming by adding diverse stakeholder analyses.

• However, it may be worth the effort, if there are large differences in the stakeholder outcomes. At the minimum, stakeholders should be mentioned in the cost-benefit analysis.


Case Study of Sears Roebuck• Sears Roebuck constitutes a case example of the

benefits of GIS in a large scale enterprise. Sears delivers a vast amount of merchandise nationally every day.

• Yearly its 1,000 delivery trucks perform over 4 million deliveries to homes (Kelley, 1999). Its truck delivery system covers 70 percent of the U.S. territory (Kelley, 1999).

• However, prior to implementing GIS, the manual process at Sears was very time consuming and wasteful, with many hours each day spent by routing-center workers locating street addresses.


Sears Roebuck Case Study (cont.)

• There was an average time slippage rate of 20 percent of deliveries.

• In the early 1990s, an enterprise-wide GIS system was constructed by geocoding Sears’ millions of customer addresses and setting up optimized delivery with the goal of 90 percent reliability in the promised delivery window (Kelley, 1999).

• The GIS calculates daily delivery routes, based on a model that includes “estimated travel times, in-home time, truck capacity, optimal stop sequence” (Kelley, 1999).


(Source: Jones, 2005) Fig. 7.2

Sears Integrated GIS Systems for Product Repair Services and Home Delivery


Sears Delivery – Transit Time Reduction

(Source: Jones, 2005) Fig. 7.3Copyright (c) 2008 by John Wiley and Sons

Tangible Benefits• For tangible benefits, the system has increased its

efficiency by reducing the time for routing and addressing from an average of 5 hours daily to 20 minutes. The miles per delivery-truck stop were lowered by 0.6 mile, which allows 4 more stops per truck per day (Kelley, 1999). This has allowed reduction in the number of Sears national routing centers from 46 to 12.

• Delivery orders have expanded by 9 percent with the same-sized truck fleet. In all, equipment and facilities savings from the GIS-based networking enhancement are $30 million per year.

(Kelley, 1999).

Case Study of Sears Roebuck (cont.)


Intangible benefitsThe intangible benefits apply to Sears management

and customers. Sears middle and top management are able to use

the information in this system strategically to plan improved efficiency versus its competitors over long periods of time, a strategic efficiency approach resembling Walmart’s well-known inventory and just-in-time delivery systems.

At the customer level, reducing the 20 percent of missed deliveries down to less than five percent has had image-enhancement benefits that help in marketing other company products.



• In this case, what was different versus an enterprise-wide non-spatial system deployed in a large corporation?

• Several factors differ. – First, the initial data acquisition was relatively expensive

and time consuming, since over four million addresses had to be geocoded and then tediously corrected (Kelley, 2002). However, once this one-time massive data acquisition took place, the costs of subsequent data acquisition were within a normal range for IS applications.

– Another difference is the integration of GIS with GPS on the delivery trucks. Knowing the location of each truck in real-time allows more optimal management of the whole fleet. However, as we discussed, the necessity to couple GIS with other systems may increase the overall cost.



Value of IT Investments Approach• The “value of IT investment” approach examines

the level of IT investment and variety of returns on investment.

• The methodology started in the late 1970s and has produced hundreds of studies. Early studies tended to be pessimistic regarding the productivity resulting from investment.

• This led to the term, “productivity paradox,” i.e. the paradox that companies or larger economic units invest in IT but fail to realize appropriate productivity gains (Brynjolffson, 1993).

• The difference from C-B analysis is that it is especially sensitive to the problems to IT measurement problems in cost-benefit analysis.


Case Study: Norwich Union: Unexpected Benefits of GIS

• One of the two lead spatial products is Norwich’s flood map for the UK, which is the country’s leading source of flood insurance information, both for Norwich and other insurance companies that acquire the maps.

• The system has recently been upgraded so an individual home can be assessed very precisely online regarding the latest flood boundaries and an accurate rate can be given.

• Due to this individual-home precision, the extent of flood zones has been reduced.


Norwich Union (cont.)

• Norwich’s second lead spatial product, “Pay as You Drive” Insurance is a new one that Norwich launched for young drivers in 2005. A GPS device is installed in the car that estimates the customer’s monthly insurance premium, based on when, where, and how often he/she drives.

• The data are transmitted from the car of the policyholder to Norwich, via satellite (Figure 7.4). Based on the real-time data and utilizing IBM software, Norwich adjusts the premium rates.

• This is different from traditional car insurance, which calculates premiums yearly based on actuarial tables. It’s analogous to mobile phone use, where a person pays depending on usage.

• The young drivers have saved up to 25 percent on their premiums, versus traditional. The product was rolled out to customers in 2006.


GPS Device for Norwich’s “Pay as You Drive” Insurance.

GPS unit being plugged into the vehicle.

The driver can also plug the device into his/her pc and review his/her driving behavior(Source: Stevenson and Hunt, 2006)


Case Study of Norwich Union (cont.)

• The benefit to Norwich is that the drivers with the devices tend to be more cautious, and thus lower Norwich’s risk with this group of insured.

• An unexpected plus is that the driving data for the driver population, with the identities of policyholders stripped off, are useful to Norwich Union internally for demographic and marketing studies. With appropriate legal sanction, the stripped data could also become a product marketed to other companies interested in driving and traffic patterns.

• Norwich has a high level of net benefits, along with low costs, except for purchase of expensive external data.


GIS and Outsourcing• GIS came somewhat late to outsourcing but

today large GIS outsourcing firms– RMSI Private Limited, Noida, India

• 2000 employees. Focus on projects outside India

– NIIT GIS Ltd. (ESRI India) • 300 employees in GIS division. Focused more on the

public sector in India and some large firms such as Reliance.

• Is a franchise of ESRI Inc. in Redlands, California, world’s largest GIS software firm


GIS and Outsourcing – What are the Challenges and Issues

• Understanding the geography – in India and elsewhere.

• Obtaining the digital map layers– Is available for public sector in India– Is challenging to obtain in India for private sector

but possible.– Easy to obtain in some nations such as U.S. but

might be hard to understand and implement.• Other challenges and issues??


The Value of Investing in IT Chapter 7 Slides from James Pick, Geo-Business: GIS in the Digital Organization, John Wiley and Sons, 2008. Copyright © 2008.

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