Information Systems

UNIT 6 INFORMATION SYSTEMS Economics

ECONOMICS
Structure
6.1 Introduction: Growing Need of Information
6.2 Objectives
6.3 Data, Information and Knowledge
6.4 Value and Cost of Information
6.5 Information Systems: Success and Failure
6.6 Summary
6.7 Unit End Exercises
6.8 References and Suggested Further Readings.

6.1 INTRODUCTION: GROWING NEED OF

INFORMATION

In ancient times, people were required to keep record of their possession so that
governing body could tax them. Government and traders kept records to plan their
activities better. As society became more structured, the manufacturing sector also
got structured in the form of factories. As factories grew in size, it became necessary
for factory owners and managers to keep records of inventory and accounts.
Management needed more information for internal decisions. Investors, on the other
hand, needed information about the organizations, its soundness, and health. In spite
of the technological developments, there is an ever-increasing pressure for more and
more information.

Information and Information Technology have become a strategic necessity. The

business environment is no more as stable as it used to be and it has become much
more competitive. It has become mandatory on the part of the organizations to make
full use of information with the help of technology to service. In an organization,
information and technology exist in the form of an information system. Whenever, an
external or internal pressure is anticipated or felt by the organization, information
system (IS) helps the organization to plan critical response activities. The individuals
are supported by IS to fulfill their roles. The organizations use IS to track consumer
behavior. A shift is the consumer behavior may trigger a change in the marketing
strategy of an organization in a timely manner. The organization may take proactive
measures rather than firefighting measures.

There was a swing from integration to fragmentation. Now we are trying to integrate
once again. Most organizations were controlled and managed by single individuals.
But as the business diversified and grew, it became necessary to delegate authority
and responsibility to others. The communication lines and their length measured. As a
result, the owner often had very little knowledge and control on the decisions made at
the lower levels. More people at the lower levels got involved in their immediate
problems losing sight of the organization’s overall goals. The situation is depicted in
the following Figure:

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Information Systems-I
Level I

Level II

Level III

Level IV

Fig. 6.1: An organization as a hierarchical unit and arbitrary communication channels

At Level I is the owner, Level II has middle management, Level III is lower level
management and at level IV are the workers.

Too many communication channels got established. The situation is changing and
some kind of structure is being introduced. The content scenario is closer to what is
shown below in Figure 6.2

Level I

Level II

Level III

Level IV

Fig. 6.2: An organization as a hierarchical unit and hierarchical communication channels

With increased size of organization, the volume of data generated within the
organization also increased. The information for rational decision-making, however,
became more difficult to extract from the pile of data.

6.2 OBJECTIVES

After reading this unit, you should be able to:

• Define data, information and knowledge;
• Appreciate the growing need for information;
• Reveal the relationship between data and information, information and
knowledge;
• Explain the concepts like cost and value of information; and
• Illustrate the main reasons for success and failure of an MIS.

6.3 DATA, INFORMATION AND KNOWLEDGE

Data is raw material with which we start and information is the finished product.
For example, look at the following links:
1234 5000.00
2345 7000.00
3456 4500.00
2571 8000.00
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You would agree that the above lines contain data. But in the present form, the above Information Systems
data is useless. Let me now put the data in the proper context as follows: Economics

Account Number Money withdrawn

on 25/02/2004
1234 5000.00
2345 7000.00
3456 4500.00
2571 8000.00

The data is now usable and we can process it to extract information such as the
amount withdrawn from account number 1234 is 5000.00. We can consolidate the
data and extract the information that 24500.00 Rs. were withdrawn on 25/2/04.

Information has been defined as

Data that have been put into a meaningful and useful context and
communicated to a recipient who uses it to make decisions it reduces
uncertainty, reveals additional alternatives or helps eliminate irrelevant or poor
ones.

Returning back to our example, the bank manager may decide the amount of required
cash based on the information of total money withdrawn.

The information makes a person more knowledgeable. Knowledge is an awareness

and understanding of a set of information that help decision-making. Knowledge
makes a person wise. The sequence is the following-data is processed to get
information; information makes a person knowledgeable, knowledge adds to the
wisdom.

The information should have certain characteristics to be valuable to its recipient.

These characteristics vary from being accurate to secure. If information is not
accurate, the decision maker may not rely on the information. The situation becomes
worse if the recipient of the information is not aware of its inaccuracy. The decision
maker may use inaccurate information assuming it to be accurate. The following is a
comprehensive list of desired characteristics:

1) Accurate: The information should be accurate and error free. The information
may be inaccurate due to incorrect data that has been used to generate
information. The data may be inaccurate due to human error. This is commonly
referred to as garbage-in-garbage-out (GIGO).

2) Complete: The information must be complete. The information should not have
been filtered that presents a biased picture to the recipient. Let us say,
salespersons of organizations are reporting sales information to the sales
manager. They make those sales for month of July are exceptionally low. They
delete this information from their report whereas the sales manager might be
interested in July sales just as much as in other month’s sales. He might even be
aware of the seasons for the dip and might be planning to boost sales in July. The
incomplete information may be useless for him.

3) Economical: We all understand that information has an associated cost and it is

expected to be beneficial for the recipient. The benefit must be much greater
than the cost.

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Information Systems-I 4) Flexibility: Let us understand flexibility through an example. In a bank, the bank
manager would like to know the total amount withdraw and deposited through
transactions distributed and recovered through bank. A client would like to check
the total money he withdraws from his account and his present balance. The
information that the bank possesses should be flexible enough to present different
views of data to different people.

5) Reliable and verifiable: Information is said to be reliable if one can depend on

it. The some of data and information both should be reliable. In case, there is any
doubt or the user wants to be absolutely sure, he might like to verify.

6) Relevant: This Characteristic is self-explanatory.

7) Simple: The information must be presented in proper format to make it simple

for user. Too much information may result in information overload. The user may
not be able to extract important information.

8) Timely: The information may loose its value if it is not received in a timely
manner. Imagine reading yesterday’s newspaper today.

9) Accessible and secure: The information should be easily accessible to

authorized persons. At the same time, the information should be secure from
unauthorized users.
To summarize, information is the result or product of processing data as depicted
below.

Data Processor
Information

Data life cycle

We can think of data having their own life cycle namely, data generation, data
manipulation, transmission of data (and communication of information) and storing/
retrieving and reproduction data.

The generation of data could take place internally and/or externally. This data has to
be captured by recording of data from an event or occurrence in some from such as
sales slips, personnel forms, purchase order etc.

The captured data would have to be stored either in person’s mind or in document or
in ‘mechanical’ or electronic device, microfilm, and punched cards/tapes or in device
of some suitable form before they may be operated upon or authorized.

Stored data would have to be retrieved by searching out and gaining access to
specific data elements from the medium where it is stored.

Retrieved data may be converted or reproduced to different form storage or

presentation format by way of documents reports etc.

Data are also constantly being transported to the user in processed from. It is
transferred to storage from the source, then processed and passed on the user, who
again returns it to storage after working on it, which becomes available for further
retrieval.

The randomly accumulated data has to sorted and classified to reveal appropriate
information. For example, sales data can be classified product-wise, territory-wise,
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salesperson-wise etc. Such a classification will give the sales data more meaning. Information Systems
Economics
Sometimes aggregation or synthesis of many pieces of data to structure a meaningful
whole or complete report is often required.

Processing of data might entail quite a bit of manipulation and calculations involving
addition, subtraction, multiplication, division etc. based on certain formulae.
Computations might have to be performed for deriving employee’s pay, customer’s
bill, financial ratios etc. Management science/operational research models might be
used for determining optional product mix, aggregate planning, and economic order
quantity determination.

Data stored must be utilized on some occasion by some one at some point of time;
otherwise there is no point in putting it in the inventory. When data is finally put in a
usable form it can be retrieved and turned into information at appropriate time for
decision-making.

Some types of a continuous verification and evaluation of data ought to be taken

because there is also an economic aspect of cost processing data versus the value of
information. Therefore, data files should be continuously monitored to eliminate
useless data.

It is important to destroy data following its evaluation or use. Destruction of data

records may be on a purely routine basis following one time use or may occur in
review of old records. Destruction is the terminal stage or the end of the data life
cycle. The data life cycle is portrayed in Figure 6.3:
Store Retroeve

Sort

Generate
Store Manipulate Utilize

Synthesize

Destroy

Fig. 6.3: Date Life Cycle

6.4 VALUE AND COST OF INFORMATION

The value of information is measured in terms of benefits to the organization. The

benefits may be tangible that can be easily quantified. For example, 5% increase in
sales is a tangible benefit, which corresponds to Rs. 50,000. If the cost of the
information that led to this additional profit is Rs. 20,000. Then the value of the
information is Rs. 30,000. Sometimes, the benefits may be intangible and cannot be
easily quantified. For instance, the information may help consumers to connect to a
company better. The employees may feel respected in an organization if more
information is shared with them. In both the cases, the attrition rate will decrease
and the corresponding benefit cannot be directly measured in terms of financial
benefit to the organization.

In fact, whenever an organization identifies an opportunity for using information to its

advantage, it develops an information system. However before developing the 5
Information Systems-I system, a cost/benefit analysis is done to figure out net benefit of the system. There
are many methods to assess value of information system, which is explained below.
1) Cost-benefit analysis
IT project and investments has to take its place in the queue for all too scarce cash
resources, and the rules for justifying are the same as for any other project
A more sophisticated argument is that, because the risks inherent in decision about IT
are higher, the expected ROI needs to higher before an investment can be justified.
Because of high sum, IT investment has a high potential to damage the organization.
A new product is equally risky.
But fundamentally, decision makers are less comfortable about IT because of their
ignorance of the issues and they lack faith in the estimates presented to them. The
main points:
• IT is high risk, high cost; at the same time IT has potential for substantial benefits
• Managers are not conversant with all aspects of the decision - due to rapid pace
of change of technology.
• There is no trusted track record of benefits of IT investments
• IT decision should be made by IT professionals in consultation with general
management of the organization
• IT investment should get integrated with organization’s strategy/processes
• An organization should start with simple and inexpensive systems, gain
experience and then move to better, more involved systems
• The systems being used by the competition may be used as a guideline.
Identification of IT Costs

IT cost is so hard to estimate that one may be off by 50% or more. One of reasons is
that the overheads are excessive. If one unit of money is invested in IT, 57 units will
be spent on human resources etc. The Table 6.1 gives the cost involved.

a) Direct Cost
Table 6.1: Cost Involved in IT

Environmental operating cost UPS

Hardware cost File server

Terminals
Backup devices
Network printer

Software cost Operating system

RDBMS
Networking software

Installation and configuration costs Network wiring,

In-house customizing time
Re-engineering business process

Overheads Electricity, air-conditioning, paper, toner

cartridges, disks, paper

Training cost Database software course

Maintenance cost Yearly service contract for hardware

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 Software upgrades, annual fee Information Systems
Economics
b) Indirect Human Costs

Indirect human cost is more significant than direct cost and it is very illusive in nature.
Following is the taxonomy of indirect human costs:
• Management Time
• Management effort and dedication
• Employee Training
• Management Resources
• Personnel Issues
• Cost of ownership
• Employee Time
• Employee Motivation
c) Indirect Organizational Costs
• Losses in productivity
• Organizational Productivity
• Strains on Organizational Resources
• Opportunity Cost and Risk
• Business Process Reengineering
• Covert Resistance
Identification of Benefits

The following are the potential benefits of an IT system. In an implementation, some

of the benefits may get realized and some may not get realized.
• Reduced Head Count
• Reduced manufacturing cost
• Reduced inventory cost
• Reduced down time
• Better quality control
• Additional new customers
• Increased sales from existing customers
• Better image of the Organization
• Higher employee morale
• Reduced attrition rate
• The ability to recruit better employees
This approach of doing cost-benefit analysis is known as Total Cost of Ownership
(TCO). The model attempts to include all costs including direct and indirect costs of
owing the information system. One can include non-business uses of a computer
system as a cost factor. This model gives you complete freedom to include any
relevant cost or benefits. This model is versatile. It has been used to assess the net
benefits of owing a computer system. The model has been applied to information
systems as well. TCO, in many cases, has revealed weaknesses of an information
system in terms of under-utilization or mismanagement. There are some service
company who specialize in TCO analysis. 7
Information Systems-I Activity A
Pick an information system that you have used and do a cost-benefit analysis. Make
educated guess for cost and benefit figures.
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2) Return on Investment (ROI)

Another measure of IS value is return on investment (ROI). This method tries to

quantify additional profits that are generated as a percentage of the investment in
information system technology. For an example, a manufacturing firm invested 5 lakh
rupees in IS and an additional benefit due to increased sales is 50 thousand rupees,
then the return on investment is
50,000
–––––––– × 100 = 10%.
500,000
In other words, the return on investment is 10%. The company might perform this
analysis before installing the information system with an objective of determining the
utility of the system. The same analysis may be performed after the installation to
check the delivered benefits of the IS against expected benefits.
3) Earning Growth
Another measure of IS value is the increase in earnings growth. Let us say, an
organization experienced 6% sales growth in year 2000. After installing IS, the sales
growth became 11%. Assuming that no other factors affected sales, 5% increase in
the sales are due to information system.
4) Market Share
Similar to earning growth one can also evaluate value of IS in terms of increased
market share.
5) Customer Awareness and Satisfaction
Customer satisfaction is one of the most valued intangible benefits of an information
system. For instance, an information system may help customer track status of their
orders. Customer may check the stock status before he places an order. The
information may be available on-line or through an operation who has access to
information system of the company. There are many companies that conduct survey
on behalf of their client company’s to determine the satisfaction level of their
customers.

6.5 INFORMATION SYSTEMS: SUCCESS AND

FAILURE
An Information System is developed to assist management in problem specific
decision-making. An Information System development project has all features in
common with other software projects. The project may succeed or it may fail. A
project is a success if it is completed within time and budget. Moreover, it must meet
needs of its users and organization. Over a period of time, the following main success
and failure factors have been identified. There are many factors that contribute to
8 the success of a project

.
1) The project scope should be stable and well understood. If the scope of the Information Systems
project changes during the development of the software, the project is likely to Economics
suffer in terms of quality, schedule and budget overrun.

2) An MIS project that aims at re-engineering the business processes of an

organization faces major challenge. Such projects are high-risk but at the same
time have high potential for major benefits.

3) The technology development platform and development language exposure are

other critical factors. Sometimes, the technology may be new and the team may
have difficulty using the technology. The platform and language newness may
also create trouble for the team.

4) Support from the management is vital for the success of the project. If
management looses interest in the project, budget may be cut, key people may be
moved to another project or the moral support required by the team may become
non-existent.

5) The objective of MIS must be in tune with the objective of the organization. For
instance, objective of an organization is to cut cost. An MIS that aims to handle
financial transactions of the company is not in tune with the company’s objective.

6) The system should be user friendly and the response time should be reasonable
so that the user does not feel frustrated or over-powered by the system.

7) MIS should be developed with a clear objective that must be documented before
the development commences. The objective must be identified with the help of
all stakeholders. An analyst may have to interview concerned people to establish
their needs. He should consolidate the inputs and make a presentation in front of
stakeholders and the development team. This exercise may have to be repeated
till the objective becomes clear.

8) An important aspect of an MIS is data. Data policy such as what data will be
included, who will provide the data, who will validate the data, who will integrate
the data and how will the data retire should be clearly stated. These seemingly
trivial issues can turn a success into a failure.

9) A quality control plan must be in place to ensure quality of specification and

quality of conformance.

10) The concerned people should be adequately trained on the new system.

11) The system should be properly documented so that attrition does not affect the
project or MIS adversely.

6.6 SUMMARY

In this unit, you have been introduced to basic concept of data, information, and
knowledge. You have also learnt the growing need for information in the society. The
life cycle of data was introduced. The information has a cost and value associated
with it which was discussed in some detail. An information system depends on many
factors for its success. We discussed the main reasons for success and failure of an
MIS.

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Information Systems-I
6.7 UNIT END EXERCISES

1) Define data and information. What is the difference between the two?
2) What is the need of information in present day society? Why is it necessary to
have a structure in an organization?
3) What are the main characteristics of information?
4) What are various ways of assessing the value of information? Explain each
method briefly?
5) Write a detailed note on data life cycle.
6) What are the main reasons for success and failure of an information system?

6.8 REFERENCES AND SUGGESTED FURTHER

READINGS

Davis, G.B., 1974. MIS Conceptual Foundations, Structure and Development,

McGraw Hill: New York.

Jawadekar, W.S. 1998, Management Information System, Tata McGraw Hill

Publishing Company Ltd.

Kanter, J., 1972. Management Oriented MIS, Prentice Hall Inc: Englewood-Cliffs.

Zani, W.S., 1973. “A blue print for MIS”, Harvard Business Review.

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