National Academies Press: OpenBook

Information Technology Systems at Airports--A Primer (2012)

Chapter: Chapter 5 - Evaluating IT Investments A Common Decision Tool

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Suggested Citation:"Chapter 5 - Evaluating IT Investments A Common Decision Tool." National Academies of Sciences, Engineering, and Medicine. 2012. Information Technology Systems at Airports--A Primer. Washington, DC: The National Academies Press. doi: 10.17226/14622.
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Suggested Citation:"Chapter 5 - Evaluating IT Investments A Common Decision Tool." National Academies of Sciences, Engineering, and Medicine. 2012. Information Technology Systems at Airports--A Primer. Washington, DC: The National Academies Press. doi: 10.17226/14622.
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Suggested Citation:"Chapter 5 - Evaluating IT Investments A Common Decision Tool." National Academies of Sciences, Engineering, and Medicine. 2012. Information Technology Systems at Airports--A Primer. Washington, DC: The National Academies Press. doi: 10.17226/14622.
×
Page 51
Page 52
Suggested Citation:"Chapter 5 - Evaluating IT Investments A Common Decision Tool." National Academies of Sciences, Engineering, and Medicine. 2012. Information Technology Systems at Airports--A Primer. Washington, DC: The National Academies Press. doi: 10.17226/14622.
×
Page 52
Page 53
Suggested Citation:"Chapter 5 - Evaluating IT Investments A Common Decision Tool." National Academies of Sciences, Engineering, and Medicine. 2012. Information Technology Systems at Airports--A Primer. Washington, DC: The National Academies Press. doi: 10.17226/14622.
×
Page 53
Page 54
Suggested Citation:"Chapter 5 - Evaluating IT Investments A Common Decision Tool." National Academies of Sciences, Engineering, and Medicine. 2012. Information Technology Systems at Airports--A Primer. Washington, DC: The National Academies Press. doi: 10.17226/14622.
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Page 54

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5.1 A Process for Valuing IT Systems Evaluating the value of proposed systems is one of the more difficult tasks airport executives undertake. Executives often make investment decisions based on incomplete data. For example, total costs of the system may be underestimated, potential funding sources may be overlooked, or benefits may not be properly quantified. The solution is to have a consistent methodology for evaluating systems and a scoring mechanism for valuing them individually or against one another to make objective investment decisions. Evaluating and deciding on IT investments is done during the system planning phase of the IT system lifecycle. (See Chapter 4 for information about all the activities performed during the system planning phase.) This chapter outlines a four-step methodology for making these tough investment decisions: • Documenting system benefits. • Determining TLC. • Performing a cost–benefit analysis. • Scoring system values objectively. 5.2 Documenting System Benefits The system benefits are the most important component when evaluating the value of a sys- tem. Without benefits there would be no reason to invest in the system. The IT department must take the lead on collaborating with stakeholders so that the benefits of a proposed system are described effectively. It’s important for stakeholders to agree on the expected benefits so that they will support the value that is assigned. Benefits are difficult to define. Some have financial value and others have intangible value that cannot be expressed in monetary terms. Table 5-1 gives examples of both financial and nonfinan- cial benefits to look for. Clearly, the easier path to funding a project is to establish that the financial value outweighs the capital costs. Make every effort to find the hidden financial value in nonfinancial benefits. Following is an example. In a project such as installing common use kiosks, a nonfinancial benefit, “enhances passenger satisfaction,” can be converted to a financial benefit by doing a little research. Calls to other airports might reveal that this technology and the improved passenger experience have translated into a small increase (1% or 2%) of passengers using the airport—which could mean 20,000 more passengers 49 C H A P T E R 5 Evaluating IT Investments— A Common Decision Tool

per year for a medium-sized airport. If each passenger generates $15 in revenue through park- ing, landing fees, concessions, and so forth, that’s $150,000 of additional revenue for the airport. This becomes a quantifiable financial benefit of the system. Stakeholders are the place to turn for such information because they typically have the data needed to turn intangible benefits into financially meaningful ones. 5.3 Determining Total Lifecycle Costs A key factor in deciding to invest in a new system is the cost. Capital costs (one-time costs) are often the only costs used when making investment decisions. However, ongoing O&M costs should also be considered when evaluating a new system because many of the system benefits are derived during the O&M phase. The TLC of a system is defined as the sum of all one-time (non- recurring) costs and recurring costs over the full life span of a system. For IT systems, the life span is usually only 3 to 7 years because technology changes at a high rate in the industry. Table 5-2 reflects common costs to consider when calculating the TLC for a system. 5.4 Cost–Benefit Analysis A cost–benefit analysis, performed after the system benefits and TLC have been determined, is a process for assessing a project’s business case. The TLC is weighed against the system’s total expected benefits to determine if there is a positive return. Figure 5-1 shows a suggested spread- sheet format (with sample data plugged in) to use when performing a cost–benefit analysis. The formulas for the spreadsheet can be complex and should be implemented by CFOs. For ease of understanding, the financial discussions in the following are presented at a high level. 50 Information Technology Systems at Airports–A Primer Table 5-1. Examples of benefit valuation.

• Lines 1 through 3 represent the expected one-time costs of the system. • Line 1—Project Direct Capital Costs. Typically any cost for the project (not O&M) that will require a purchase order, such as the direct cost of the vendor who will supply the system, hardware, software, and implementation services. Beyond that obvious cost there may be other direct capital costs, such as consultants or design firms to complete some of the design steps, develop specifications, provide guidance during procurement, oversee implementation, or conduct independent validation and verification tasks. • Line 2—Project Labor Costs. The costs of airport personnel to execute the project. A one-time expense, project labor costs do not include vendor implementation labor, but they do include airport IT department and stakeholder labor and the following types of work: – Project management – Design and requirements definition – Procurement – Data cleansing and entry – Test plan review Evaluating IT Investments—A Common Decision Tool 51 Figure 5-1. Sample cost–benefit analysis. Table 5-2. Common lifecycle costs.

– Testing and implementation oversight – Initial training • Line 3—Outside Funding. In many cases, an airport project’s capital costs can be offset by funding from the FAA (through AIP or PFC eligibility), Transportation Security Administration (TSA), or other federal or state grant sources. Funding is discussed in more detail in Chapter 4 under the planning phase. • Lines 4 to 7 represent the financial benefits to be achieved by implementing the system. These are the annual recurring costs, cost savings, or cost avoidance for each of the years in the evaluation period. • Line 4—Net Change to Revenue. A given project can cause one or more sources of revenue to increase or decrease, usually related to a change in the number of units (passengers, planes, cars, etc.) resulting from the project’s implementation. Occasionally the project allows for unit-price changes (e.g., higher parking rates, square foot lease rates, or concessions fee percentage) because the project improved the perceived value of the commodity. In other cases, the project creates a new revenue source where none was there before, so estimates of the unit volume and unit price both have to be made for each year. • Line 5—Net Change to Direct O&M Costs. Represents the cumulative effect of direct O&M cost changes, which would be reflected as budget changes in years following the project’s implementation. Direct costs are nonlabor expenses such as hardware and software mainte- nance, required telecommunications services, and consumables such as paper, printers, ribbons, and ID cards. Elimination of previous direct costs should also be taken into account; that is, costs from the current system that go away when the project is completed and the old system is decommissioned, such as expensive consumables, maintenance on obsolete equipment, or telecommunications circuits. • Line 6—Net Change to O&M Labor Costs. Sometimes the labor to keep the new system run- ning can be converted to direct costs through outsourcing and/or maintenance contracts. This category must include labor in the IT system and stakeholder organizations that is required to operate and use the system. Labor no longer required to operate the old system should be subtracted if the project involves replacing an older system. • Line 7—Interest on Capital Avoidance/Deferral. By implementing one project, the capital required for another project can sometimes be deferred or avoided completely. Projected inter- est savings on the money not spent because a project was deferred is represented as a sav- ings associated with the project being implemented. • Lines 8 and 9—Net Cash Flow and Cumulative Cash Flow. Net cash flow represents the total investment in the system, taking into account all the projected costs over the evaluation period minus the financial cost savings achieved by implementing the system. The cumulative cash flow shows the expected net cash flow for each year of the system life span in the evaluation period. After calculating all costs and benefits and entering them into the spreadsheet, the data can be analyzed to assess the value of the system. Three important factors are usually calculated when performing a cost–benefit analysis: – NPV – IRR – Break-even point • Line 10—Net Present Value. Brings all project costs into the present, taking the net monthly savings over the evaluation period (adjusted by the cost of money), presenting them as a lump sum, and subtracting net capital costs. If the result is still positive, the project is worth doing. The NPV is a means of representing the magnitude of the benefits of the investment or, simply put, is an indicator of the value of an investment. • Line 11—Internal Rate of Return. Used in capital budgeting to measure and compare the prof- itability of investments. The IRR is an indicator of the efficiency of an investment. The higher a project’s IRR, the more desirable it is to undertake. Assuming all other factors are equal among various projects, the one with the highest IRR should probably be given highest priority. 52 Information Technology Systems at Airports–A Primer

• Line 12—Break-Even Point. The fastest and easiest calculation to do, the break-even point determines the point in time that total savings resulting from the system benefits surpass the costs of implementing the system. Most airports look for payback periods in the 3-year time frame. Anything with a payback period of more than 5 years should be carefully vetted. 5.5 Scoring Systems The cost–benefit analysis discussed in the previous section only takes into account benefits that can be quantified in terms of financial savings. When evaluating a potential investment in a system, the nonfinancial benefits need to be considered too. Figure 5-2 represents a spreadsheet with a simple scoring system that includes both nonfinancial benefits and valuation data from the cost–benefit analysis. The spreadsheet is divided into three sections: • Project information • Nonfinancial evaluation • Financial evaluation Project information provides, in brief narrative form, a description of the system, project responsibility, proposed system benefits, and potential risks of implementation. Nonfinancial evaluation takes into account all the benefits of the system that could not be quan- tified in dollars but are still important. Each benefit can be assigned a relative weighting of importance. For example, a regulatory requirement might be given a very high weighting on the scoring sheet. Each benefit is then scored from 1 to 5 based on the criteria presented for each. Using all the benefit scores, a total weighted score of the nonfinancial benefits can be calculated. Financial evaluation takes into account the data calculated in the cost–benefit analysis. As with the intangible benefits, each financial aspect is weighted and scored, which allows the financial value of the proposed system to be calculated. In the example presented in Figure 5-2, the project has an average nonfinancial valuation and a good financial value. Each airport needs to determine what values represent a good investment for it. Often, airports establish hurdle rates based on their particular financial environment—also known as the minimum rate of return the airport is willing to accept before starting a project. The spreadsheet can also be used to compare the relative value of one system to another. Often, limited budgets dictate that some proposed systems, even though they have a good financial valua- tion, cannot be approved. This scoring mechanism allows an objective comparison of proposed systems to determine which ones will bring greater value to the airport. Evaluating IT Investments—A Common Decision Tool 53

54 Information Technology Systems at Airports–A Primer Figure 5-2. System valuation scoring sheet.

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TRB’s Airport Cooperative Research Program (ACRP) Report 59: Information Technology Systems at Airports--A Primer is designed to help facilitate mutual understanding between airport executives and information technology (IT) professionals to enable them to work together effectively on IT projects. One of the goals of the report is to help airports achieve better performance and reliability of IT systems and fewer cost overruns and delays during system implementation.

ACRP Report 59 offers techniques to identify critical IT issues and communicate effectively on those issues. The report also addresses sound IT principles for implementing new IT systems, describes the benefits and value of various IT systems, and highlights the fundamental architecture concepts of IT systems as they relate to airports.

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