INTRODUCTION
This comprehensive workbook is designed to guide you in creating a financial and strategic analysis for a Geospatial Information Technology (GIT) project focused on shared data and services It outlines each step of the process, enriched with detailed examples and case studies to enhance understanding Accompanying the workbook is a CD that contains templates to assist you in developing your own business case, along with a thorough instruction guide for utilizing these templates and completed versions for reference based on the case studies presented in the book.
This book offers valuable insights into the application of Geographic Information Technology (GIT) by various government organizations, along with recommendations for further reading on this topic and related subjects.
WHY READ ABOUT GOVERNMENT AGENCIES OUTSIDE MY OWN SECTOR?
Government organizations often operate within the same geographic areas, making Geographic Information Technology (GIT) projects ideal for fostering inter-agency collaboration Such collaboration can enhance service levels across agencies while simultaneously lowering costs associated with data collection, maintenance, and technology support Therefore, understanding the diverse applications of GIT within government is essential for maximizing efficiency and effectiveness.
This book will help you identify potential partners, recognize cost distribution opportunities, and incorporate the benefits of collaboration and data sharing into your project design and business case.
WHO SHOULD USE THIS WORKBOOK?
This book is designed expressly for GIT practitioners and managers who are responsible for defining and prioritizing projects and for obtaining project funding
This book equips you with essential tools for making informed decisions and effectively communicating with stakeholders involved in investment decisions, whether you are managing a GIT program at the local, state, or federal level.
HOW TO USE THIS WORKBOOK AND THE ACCOMPANYING CD
To get the most out of this workbook, the authors recommend that you open the accompanying Case Study
As you explore each case study, refer to the Financial Analysis file on the CD for valuable insights These files serve as essential examples while you navigate the workbook sections focused on benefit and cost estimation, as well as financial analysis.
After studying the book and examining the case studies, you will be equipped to create your own business case Utilize the instructions provided on the CD, which are also available in the appendix of this workbook, to choose the suitable template file.
The Business Case Templates and Instructions folder provides a comprehensive guide for preparing your business case, following a step-by-step process outlined in the accompanying workbook For assistance in defining your project, consult the survey results and application examples included in the workbook Additionally, the literature review offers valuable insights into GIT investment analysis and related subjects for those seeking to deepen their understanding.
WHY BUILD A SHARED DATA AND SERVICES GIT BUSINESS CASE?
Investing in a multi-participant Geospatial Information Technology (GIT) project involves significant initial costs and delayed tangible benefits, making it a complex decision for elected and appointed officials With limited time to understand the technology's intricacies, they rely on a basic comprehension of GIT while evaluating various investment opportunities To make informed choices, officials focus on essential metrics such as cumulative costs and benefits, which help determine the payback period, break-even point, and overall return on investment.
GIT project managers in government sectors face a challenging issue: while researching the costs of a multi-participant GIT program is relatively straightforward, quantifying its potential benefits proves to be more complex It is essential for collaborating organizations to identify these benefits and forecast their financial impact, a responsibility often assigned to GIT project managers or staff advocating for the investment Given the typically high initial costs of such programs, officials are understandably cautious and seek assurance that the financial analysis is robust and credible.
This workbook represents years of extensive research by GITA and the FGDC, offering a systematic methodology aimed at developing benefit estimates Its focus is on instilling confidence in management to effectively establish a credible business case and assess return on investment.
This workbook begins with concise introductory paragraphs outlining the essential concepts for each section Its primary objective is to guide practitioners in developing a compelling business case to secure project funding effectively.
The workbook includes numerous examples designed to highlight the various benefits of implementing a shared data and services GIT project These examples are categorized by specific business use areas mentioned throughout the text, with detailed definitions provided at the conclusion of Chapter 2.
The literature review and survey summary results contained in the Appendices are an additional valuable source of ideas to consider when developing your project scope and business case
This collection of case studies showcases diverse project implementations, highlighting variations in budget, participant numbers, and project complexity They demonstrate how the principles outlined in this workbook can be effectively applied to assess small multi-departmental initiatives or to strategize large-scale multi-agency programs.
OVERVIEW OF SHARED DATA AND SERVICES GIT AND BUSINESS CASE STRUCTURE
OVERVIEW OF SHARED DATA AND SERVICES GIT
This chapter provides an overview of shared GIT data and services, highlighting their applications and advantages It also outlines the fundamental components of a business case, encompassing project definition, financial analysis, and strategic analysis.
This chapter outlines the business applications of GIT, which will be referenced throughout the workbook to illustrate both tangible and intangible benefits Our survey results indicate that many GIT programs cater to multiple business needs, highlighting their versatility and effectiveness.
SHARED DATA AND SERVICES OVERVIEW
Numerous government agencies are forming GIT partnerships to enhance data and service sharing, leading to reduced costs and improved quality of spatial information This collaborative approach is not unfamiliar to local governments, as many already engage in sharing services and resources, resulting in lower expenses and economies of scale in procurement.
Government agencies have historically utilized shared services for administrative functions like payroll and telephone systems Recently, there has been a notable shift towards the collaboration on advanced technology solutions, particularly in web-based services, exemplified by the development of county-wide portals.
Shared services are economically advantageous when the expenses of operating essential services independently become unsustainable This situation frequently arises in sectors that depend on intricate computer applications for effective service delivery, particularly in land and property services that utilize Geospatial Information.
Shared geographic data encompasses base maps such as aerial photography, physical maps, parcels, and street centerlines Additionally, shared applications include tools for data maintenance and basic user access Shared services may involve application development, outsourced data maintenance, application administration, hardware, and user support When multiple government agencies operate within the same geographic area, it is beneficial for them to share geographic information and standardize their spatial data management processes Utilizing the same GIS software enhances opportunities for collaborative application development, making the case for sharing GIS resources even more compelling.
The initial phase towards achieving a unified vision among various agencies involves consolidating and centralizing Geographic Information Technology (GIT) support resources for essential administrative tasks Following this, efforts can be streamlined by sharing maintenance processes, such as managing the GIT program and base maps, which will help reduce redundancy The next logical step is to centralize hardware by migrating all GIT systems to a shared platform, resulting in decreased maintenance efforts and costs while also optimizing computer room and office space for participating agencies Ultimately, the final phase entails sharing GIT software and databases through the consolidation of software licenses, enhancing collaboration and efficiency across agencies.
To successfully implement a shared vision, the program must be meticulously planned and executed in phases, focusing on aligning working procedures, policies, and software versions while also cleaning up data sets Despite the complexity and duration of the program, it is essential that tangible benefits are realized at the conclusion of each phase Incorporating the planning of these benefits is a crucial aspect of developing a robust business case.
Geographic Information Technology (GIT) is defined as an automated system designed to manage and analyze information with a spatial reference It encompasses a combination of hardware, software, data, and procedures that work in unison to capture, manage, analyze, maintain, and visually present geospatial information related to the real world.
Information has a spatial reference if it can be tied to a map Typically, over 80 percent of a agency’s information necessary to support its daily operations has a geospatial reference.
GIT is more than just a mapping tool; it is an advanced management, query, and analysis system that helps users understand and visualize geospatial relationships among various features A well-designed GIT, combined with an integrated database, can effectively address a wide range of generic questions.
Effective data management is streamlined when users can easily determine what exists at a specific location, which can be identified through various means such as place names, zip codes, billing addresses, geographic coordinates, or by selecting features on a screen For instance, by clicking on a street or entering an address, users can instantly access information about assets, planned construction projects, property sales, main breaks, and demographic data associated with that location.
The condition query focuses on identifying locations that meet specific criteria, rather than just pinpointing what exists in a given area For instance, users can locate state highway roadways built before 1960 that have undergone particular types of road repairs.
Trends reflect the changes over time in specific locations or conditions, highlighting differences that may arise For instance, a Geographic Information Technology (GIT) analysis can reveal increasing groundwater contamination in environmentally sensitive areas, indicating a significant rise in contaminant levels and the extent of intrusion over a defined time period.
Spatial patterns play a crucial role in urban planning, particularly in analyzing the distribution of new home building permits Geographic Information Technology (GIT) can effectively correlate this data with the locations of essential community services, such as schools, police and fire stations, and medical clinics By examining these relationships, planners can identify areas that may require additional services to adequately support community growth.
Modeling allows users to explore potential outcomes by posing "what if" questions, which help predict the effects of proposed changes This approach is particularly useful in emergency situations, enabling the simulation of scenarios such as contaminant spills or terrorist attacks By using modeling techniques, users can effectively plan and strategize the safe evacuation of survivors from dangerous environments.
GIT AS A CORE ENABLING TECHNOLOGY
GIT BENEFITS
This chapter outlines the benefits organizations can achieve through the implementation of a shared data and services GIT program, offering methodologies for quantifying these tangible advantages to support a strong business case It addresses how to manage uncertainties related to benefit assumptions and concludes with a comprehensive list of tangible benefits associated with the twelve business use areas discussed in Chapter 2.
Tangible benefits can be expressed in dollar values, reflecting potential future revenue or cost savings Cost savings, also known as avoided costs, represent expenses that would arise if a proposed investment is not undertaken Revenue benefits can stem from increased demand, the launch of new services, or improved collection rates on receivables through better tracking and data management Additionally, avoided costs encompass reductions in operating expenses, including payroll, materials, equipment, and technology fees, as well as one-time savings from fines or judgments.
Not all benefits of a project can be quantified, particularly when it comes to intangible outcomes that are crucial for strategic analysis in a business case Intangible benefits related to GIT projects, such as customer goodwill, employee morale, quality of life, environmental health, and community growth, may not directly impact financial analysis but can be equally or more significant than tangible benefits For instance, maintaining business viability is a strategic advantage that can strengthen a business case even when tangible benefits are lacking.
The GIT applications provide both tangible and intangible benefits, making it crucial to define them clearly in the project scope, as outlined in Chapters 1 and 2.
One of the key benefits of GIT is the increase in productivity, allowing individuals to complete more tasks within the same timeframe Organizations can leverage this boost in productivity through three distinct avenues, ultimately enhancing overall efficiency and output.
Boosting productivity allows organizations to enhance their output of products or services, leading to potential revenue growth if there is sufficient market demand for these additional offerings While this productivity advantage is often seen with physical improvements, it is less common in GIT projects and will not be further discussed in this workbook.
Labor cost avoidance is a key benefit of implementing a shared data and services GIT program, as it allows organizations to enhance productivity while maintaining current output levels, potentially leading to staff reductions This strategy eliminates associated labor costs, such as salaries, benefits, and expenses related to office space, equipment, and support services Including labor cost avoidance in financial analyses is essential, as it significantly increases the potential for cost savings.
Organizations that maintain staff levels while increasing productivity can offer new or enhanced services, which hold intrinsic value This value prompts organizations to allocate staff to more impactful tasks rather than reducing positions While some entities actively measure the benefits of these new services, others, particularly those facing overstaffing or reduced responsibilities, often focus solely on quantifying budget cuts For these organizations, it is crucial to incorporate the evaluation of new services and elevated service levels into their strategic analysis.
Before calculating productivity gains, it is essential to set the parameters for quantifying productivity These parameters include:
Whether the organization is willing to quantify new services or higher service levels for purposes of financial analysis.
A salary multiplier accounts for additional fringe costs, including payroll taxes and insurance premiums, typically ranging from 15% to 80% of the base salary This multiplier is used to calculate the burdened hourly rate, which is the actual hourly wage increased by the fringe multiplier For instance, if an employee earns $20 per hour and has a fringe multiplier of 30%, their burdened hourly rate would be $26 per hour, calculated as $20 multiplied by 1.3.
Average attrition rates (the number of positions employees vacate each year) Employees vacate positions when they move to different positions, retire, or otherwise leave the organization.
Finance departments typically provide these parameters They may differ across agencies The fringe multiplier and attrition rate may differ across job classifications.
To accurately estimate benefits, a thorough assessment of the staff positions impacted by the proposed applications is essential If the number of affected positions is limited (fewer than ten), individual cost calculations can be performed However, for larger groups, it is advisable to categorize positions based on similar job titles, roles, and salary ranges.
Estimate Annual Labor Hour Savings
Labor hour savings are a function of the proposed GIT application(s) Each savings estimate should be tied to a specific cause and should be stated as an annual figure For example:
Eliminate annual map book binding process (3 clerks @ 40 hours per clerk each year) for a total labor savings of 120 hours per year for Records Clerks
Reduce time needed to retrieve record drawings by 15 minutes per retrieval Field crews retrieve record drawings approximately 10,000 times per year Total savings in years 1 through 3:
In year 4, following the acquisition, field crew retrievals are projected to increase to 12,000 annually, resulting in significant time savings Specifically, this growth translates to a reduction of 3,000 field crew hours per year, calculated as 12,000 times 0.25 hours per retrieval This improvement underscores the efficiency gains anticipated post-acquisition.
To ensure effective quality control, it's essential to compare the projected labor hour savings for a specific job category with the total available labor hours for that category For instance, if a single individual occupies a position, the total hourly savings for that role cannot surpass the maximum hours one person can work in a year, unless there are plans to increase staffing in that category, which should be clearly indicated in the financial analysis.
Project managers can effectively address inquiries regarding benefit predictions by documenting the specific causes of labor savings for each project type This approach allows them to illustrate the impact of the GIT project on individuals and quantify the resulting financial savings.
Translate Labor Hour Savings into Dollar Amounts
Labor hour savings are translated into dollars by multiplying the total saved hours by the burdened hourly rate (i.e., salary plus fringe) for the affected staff position or category
To effectively eliminate positions, agencies should round hourly savings to the nearest whole number of positions removed or avoided The full-time labor hours for a position typically amount to around 2000 per year, but it’s crucial to assess the actual productive hours specific to each role before deciding on necessary hour reductions Generally, employees spend about 10% to 25% of their time on overhead activities, indicating that a reduction of 1500 to 1900 core workload hours may suffice to justify eliminating a full-time position Conversely, if employees in a job category are frequently working overtime, merely reducing workload hours may not be adequate for position elimination; instead, it could lead to significant overtime cost avoidance.
To effectively measure productivity linked to new services or enhanced service levels, organizations can utilize any quantity of labor hours in their benefit dollar calculations.
The annual productivity benefit of a particular GIT project is the sum of the annual dollar benefits for each affected staff position This can be expressed as follows:
ANNUAL PRODUCTIVITY BENEFIT = (C1 ´ S1) + (C2 ´ S2) + ẳ + (Cp ´ Sp)
Where: p = a particular staff position or category
C = the burdened hourly cost of the staff position (salary plus fringe)
S = the annual impact of the application on the staff position in terms of hours saved for positions in the category
GIT COSTS
This chapter examines the essential costs involved in developing a business case for a shared data and services GIT investment, highlighting both one-time startup expenses and ongoing costs after project completion It emphasizes the importance of considering these costs to accurately assess the investment's value Additionally, the chapter addresses shared costs and sunk costs, providing a comprehensive overview At the conclusion, it presents examples of typical GIT costs to further illustrate these financial considerations.
START-UP AND OPERATING COSTS
Investment costs fall into two categories:
One-time (start-up) costs are essential to consider in financial analysis, as they represent negative cash flow in the year incurred, regardless of whether they are capitalized or expensed immediately Capitalization allows these costs to be recorded as assets and depreciated over the investment's lifespan, which can influence project alternatives It is crucial to evaluate the ability to capitalize costs within strategic analysis, particularly for projects funded from capital budgets Examples of one-time costs in GIT projects include initial setup expenses and equipment purchases.
Ongoing Costs These are typically funded out of operating budgets (i.e., expensed in the year incurred) Examples of GIT operating costs include:
Financial analyses for proposed projects focus solely on future cash flows, disregarding sunk costs from past expenditures Despite the temptation to factor in significant historical expenses, such as a substantial data conversion investment for GIT, these costs are immutable and should not influence future investment evaluations Ultimately, the value of any future investment is determined by its prospective benefits and costs, not by prior financial commitments If decision makers are concerned about large sunk costs, this topic can be explored within the strategic analysis framework.
In the last decade, we have dedicated $9.5 million to creating county-based street centerline maps and acquiring essential GIS hardware and software The SWOMP project aims to capitalize on this significant investment, delivering tangible benefits for both our organization and the broader community or state.
This $8 million historical investment is not included in the SWOMP project cost estimates because the money has already been spent.
When conducting financial analysis, it is essential to differentiate between internal and external costs associated with funding agencies For instance, if a federal agency invests in upgrading its Geographic Information Technology (GIT) software, it must account for the total expenses related to the new software and upgrade services Conversely, any costs incurred by state agencies that need to adjust their existing GIT applications and interfaces due to this upgrade are considered external and should not be included in the federal agency's financial assessment.
In the latter example, the strategic analysis might include a discussion of the external costs.
When multiple agencies collaborate on Geographic Information Technology (GIT) projects, the associated costs are shared among participants based on their interlocal agreements or memoranda of understanding To create effective business cases for these multi-participant GIT projects, it is essential to itemize all costs and identify which agency is responsible for each expense This allows business analysts to accurately assess cash flows for financial analysis and address strategic considerations accordingly.
Internal staff time can be a significant GIT project cost Internal labor costs can include:
New positions created as part of the project This may include system or database administrators and technical support personnel.
Salary increases related to the project This may include raises needed to retain drafting technicians who become proficient in GIT.
The time cost associated with reallocating existing staff to develop, support, or utilize the proposed applications can be significant This expense may become politically sensitive within organizations that operate on program budgets, especially if the reallocated hours constitute a substantial portion of employees' total work time.
When a project's business case proposes reallocating a GIT Technician position full-time for two years, it raises concerns about budget justification if the GIT investment is delayed or rejected, and the long-term viability of the position after the project Organizations with program-based budgets may face job security issues similar to those encountered when estimating productivity-related cuts To address this, internal labor costs can be reframed as a reduced productivity benefit, allowing these costs to be subtracted from the projected gains in workforce productivity This approach not only generalizes the project's impact on labor spending but also alleviates job security concerns tied to productivity and internal development cost estimates, without affecting the project's overall financial viability.
The hourly cost of internal labor should be the burdened rate (hourly wage plus fringe).
Figure 4.1 is a GIT project cost estimate that includes internal labor costs.
Satellite Imagery System Support Contract $50,000
SWOMP user support by GIT help desk
Average help desk employee hourly wage: $25
Estimate support needs @ 200 hours per year
Figure 4.1 Example of GIT project cost estimate
In Figure 4.1, there are two internal labor costs: a one-time cost of $3,600 associated with the Project
Manager’s time, and an ongoing cost of $6,000 per year in GIT Help Desk staff time These costs can be recast as reduced productivity benefits using the following equation:
REDUCED ANNUAL PRODUCTIVITY BENEFIT =SAP-[AIL+(OILáPP)]
SAP = sum of all applications’ annual productivity benefits
AIL = annual internal labor cost (to be recast)
OIL = one-time internal labor cost (to be annualized over project life and recast)
PP = planning period (project life) (See Chapter 5 for details)
Figure 4.2 illustrates the application of the equation to internal labor costs from Figure 4.1 It begins by summing the annual productivity benefits from the applications (labeled SAP) Next, the ongoing internal labor cost for the help desk (labeled AIL) is deducted from this annual benefit Additionally, the one-time project management cost (labeled OIL) is amortized over the project’s lifespan (PP label), resulting in an annual reduction benefit of $360, calculated from $3,600 spread over 10 years Consequently, the revised estimate for annual productivity benefits is $59,040, down from the initial estimate of $65,400.
Figure 4.2 Internal labor costs recast as reduced annual productivity benefit
EXAMPLES OF TYPICAL GIT COSTS
When developing a GIT business case, it's essential to consider both one-time and ongoing costs associated with these investments While the following examples are not exhaustive, they serve as a foundational guide for understanding the financial implications of GIT initiatives.
Project planning and business analysis/systems analysis
Technical staff development and training
Office space, furnishings, phones, and other general equipment for new staff positions
New hardware to support the application
New software to support the application
Operating / On-going Costs – Personnel Costs
Applications: Total Annual Labor Hours Saved: Productivity Value:
$65,400 Recast ongoing cost of help desk support: (6,000)
City Project Manager One Time Cost ($3600) over 10 Year Project Life: (360)
Applications: Total Annual Labor Hours Saved: Productivity Value:
$65,400 Recast ongoing cost of help desk support: (6,000)
City Project Manager One Time Cost ($3600) over 10 Year Project Life: (360)
Applications: Total Annual Labor Hours Saved: Productivity Value:
$65,400 Recast ongoing cost of help desk support: (6,000)
City Project Manager One Time Cost ($3600) over 10 Year Project Life: (360)
Salaries and fringe for new staff (for execution of the supported business processes, technical support, ongoing workflow or systems analysis, and/or data maintenance)
Ongoing training and conference attendance for new staff positions
Allocations related to new staff positions (e.g., telephone services, office automation software maintenance fees, personal computer upgrades, administrative overhead allocations)
Increases to salary and fringe for existing staff (to reflect new duties and associated salary adjustments)
Additional ongoing training and conference attendance for existing staff positions
Operating / On-going Costs – Technology Costs
Hardware maintenance contracts and/or periodic upgrades
Software license maintenance fees and/or periodic upgrades
Hardware and software lease costs
Application service provider (ASP) fees (if applicable)
Additional communication fees (e.g., wireless charges, leased lines)
Contracts for application support and enhancements, including periodic workflow and performance analysis
Operating / On-going Costs – Data Costs
Contracts for offsite data storage
Contracts for data maintenance/updates
Operating / On-going Costs – Technology Costs
Office supplies to support a shared data and services GIT program
Building maintenance (or maintenance/overhead allocations) for new office space
FINANCIAL ANALYSIS
This chapter covers essential financial analysis metrics, including Return on Investment, Internal Rate of Return, Breakeven Point, and Payback Period, detailing their appropriate applications for investment comparison It also explores techniques for defining cash flows, the impact of opportunity costs, and the importance of accounting for inflation in financial evaluations The chapter concludes with a discussion on sensitivity analysis and its integration into the justification of shared data and service GIT projects.
Financial analysis evaluates the cash flows associated with an investment, identifying positive cash flows as potential revenues or cost savings Chapter 3 offers guidelines and examples for estimating the benefits of GIT projects, while Chapter 4 outlines the costs involved, including one-time capital expenses and ongoing operational costs Understanding both the benefits and costs is essential for a comprehensive financial assessment of GIT projects.
The accompanying CD includes financial analysis templates and completed examples for each case study in this workbook As readers progress through the chapter, they may find it beneficial to reference these Microsoft® Excel files A basic understanding of Excel navigation is sufficient to utilize the case study files effectively.
PROJECT LIFE AND CASH FLOW SCHEDULE
A cash flow schedule outlines the costs and benefits associated with each year of a project's lifespan, which typically ranges from several years to several decades For effective financial analysis, it's essential to define a finite life or planning period for the project Key factors influencing this duration must be carefully considered.
Business nature of the applications (i.e., How long will the processes be relevant, and how many agencies will benefit from it?)
Speed of technology change (i.e., When will newer technology replace these applications?)
The significance of future cash flows in financial analysis hinges on determining when they no longer influence outcomes To ensure a comprehensive assessment, the planning period must be sufficiently extended to encompass all one-time costs and benefits, as well as at least one occurrence of each recurring cost and benefit.
Data acquisition plays a crucial role in project planning, as properly maintained data sets can serve as long-term assets, warranting a planning horizon of 10 years or more for projects focused on significant data collection Conversely, hardware and software are considered short-lived assets, making a 5-year planning period more suitable for projects that primarily involve technology development.
The Finance Departments of representative agencies offer guidelines for planning periods across various project types It is essential that the cash flow schedule accurately represents the years in which specific costs and benefits are realized, irrespective of the accounting methods employed to record these financial flows as revenues and expenses.
Figure 5.1 shows how activities related to costs and benefits can be mapped to a project timeline Accurate scheduling of costs and benefits requires a solid understanding of the project implementation schedule
Benefits usually materialize only after the completion of the implementation process, while costs can arise at different phases throughout the implementation Additionally, some expenses may persist annually even after the implementation has concluded.
Figure 5.1 High level timeline for costs and benefits
A spreadsheet serves as an effective tool for converting a high-level project timeline into a detailed cash flow schedule, where costs are represented as negative flows and benefits as positive flows By utilizing spreadsheet equations, users can compute the total costs and benefits for each year of the project, as well as determine cumulative values by adding the current year's totals to the previous year's cumulative amounts.
TIME VALUE OF MONEY (OPPORTUNITY COSTS)
The timing of benefits and costs significantly affects their present value, as having $100 today is more advantageous than receiving the same amount next year This is due to the potential for investment, allowing the money to grow over time When an organization must wait a year to access a $100 benefit, it incurs an opportunity cost, which is the potential return lost from investing that amount immediately Conversely, if a $100 cost can be postponed for a year, the negative impact of that expense is lessened, as the funds can be invested prior to the expenditure.
Opportunity Costs for Future Investments
The essential concepts in addressing the time value of money for future investments are: future values, present values, and the discount rate.
A future value is the actual cash flow that will be realized at the time shown GIT cost and benefit estimates are typically expressed as future values.
The present value of future costs or benefits represents their worth today, enabling a realistic comparison of cash flows across different time periods To accurately assess financial metrics such as return on investment and net present value, it is essential to convert future values of GIT costs and benefits into present values.
The discount rate serves as a crucial multiplier that transforms future values into present values, reflecting the annual return rate from alternative investments, such as government bonds or comparable investment options Finance Departments typically offer guidelines on the appropriate discount rates for their organizations This rate is also known by various terms, including cutoff rate, hurdle rate, required rate of return, or opportunity cost of capital.
The following equation shows how a simple (or nominal) discount rate converts a future cash flow to its present value.
PV = Present value of the cash flow
FVn = Future value estimated for year n
DR = Discount Rate n = The year of the future cash flow (e.g., n = 1 for current period cash flows, n = 2 for next year’s cash flows)
A spreadsheet can effectively transform a cash flow schedule into present values, as illustrated in Figure 5.3 Initially, it calculates annual costs and benefits as future values Subsequently, the spreadsheet employs a specific equation to convert these cash flows into present values Similar to the undiscounted schedule, the cumulative values are determined by adding the present value of the current year's cash flow to the cumulative total from the previous year.
Figure 5.3 Using a spreadsheet to convert a cash flow schedule to present values
Opportunity Costs and Historical Analyses
Present Value of Annual Benefit in Year 3:
Present Value of Cumulative Benefits in Year 3:
= PV Year 3 Benefits + PV Year 2 Cumulative Benefits
The time value of money plays a crucial role in historical analyses of past investments by utilizing discount rates to transform actual historical cash flows into adjusted values for a specific year, similar to how future cash flows are converted into present values Key concepts in this process include understanding actual historical cash flows, determining adjusted values, and establishing a basis for these adjusted values.
An actual historical cash flow is a cost or benefit expressed in the dollars actually spent (or realized) in the year the cost or benefit occurred.
The adjusted value of historical cash flows reflects the purchasing power of dollars in a specific year, often the year the project began, such as $2.3 million in 2001 dollars This adjustment facilitates a meaningful comparison of cash flows from different time periods To accurately calculate financial metrics like return on investment and net present value, it's essential to convert actual historical cash flows into values for a single reference year.
STRATEGIC ANALYSIS AND THE BUSINESS CASE
This chapter outlines the strategic value and business case for the proposed shared data and services GIT program, emphasizing the importance of presenting intangible benefits that traditional financial analyses may overlook It also highlights project interrelationships and benefits that extend beyond the organization Additionally, a recommended format for an Executive summary is provided, along with examples of strategic (intangible) benefits across twelve business use areas, ensuring a comprehensive understanding of the program's value.
Thorough financial analysis of proposed GIT investments is uncommon, and assessments of actual financial performance are even less frequent, particularly for shared data and service GIT projects Considering the significance and scale of these investments, the absence of detailed business case analysis is regrettable, which underscores the purpose of this workbook.
A rigorous business case is essential for guiding decision makers in evaluating a proposed shared data and services GIT investment across various agencies While assembling accurate cost projections is relatively straightforward and crucial for budgeting, estimating benefits poses greater challenges and is often influenced by the underlying assumptions of the business case It is vital to acknowledge the uncertainties tied to benefit estimates when assessing a proposed investment Ultimately, the purpose of a business case is not to ensure specific benefits but to offer a reasonable assessment of the investment's prudence and relative value.
Evaluating actual historical cash flows for a project is essential for enhancing estimating skills and improving the reliability of future business cases Preparing a historical business case allows organizations to learn valuable lessons applicable to future project evaluations Regular post-implementation reviews of capital projects, supported by the concepts and templates in this workbook, ensure effective assessments and informed decision-making for related future initiatives.
It is important that in addition to the financial metrics discussed in the previous chapters that the business case include a discussion of the strategic value of the investment.
The strategic analysis segment of a business case is crucial for understanding the financial evaluation, as it illustrates how an investment aligns with an organization's mission and objectives while highlighting intangible benefits Additionally, this analysis examines the interconnections between projects, which is especially vital for GIT initiatives that involve data capture, as the collected data can facilitate various future projects.
Strategic analysis plays a crucial role in building a compelling business case for investment, often presented in a narrative format before the financial metrics are introduced through established templates.
The strategic analysis section of a business case is essential for outlining intangible benefits, which are benefits that cannot be easily quantified Examples of these strategic advantages include improved employee morale, enhanced safety, increased public goodwill, and greater assurance of business continuity among organizations Additionally, it is important to highlight the potential negative consequences for the organization if the project does not move forward.
A strategic analysis outlines the interconnections between projects and highlights the anticipated benefits that will arise once the foundational groundwork is established for future initiatives.
A foundation-type GIT project that creates a spatial inventory of transportation networks establishes a crucial basis for future linear asset management and security planning initiatives While the immediate benefits may be limited to shared data access and maintenance, the strategic advantages include the potential launch of a linear asset management program that can lower asset life cycle costs Additionally, this project lays the groundwork for a comprehensive linear asset security assessment and critical infrastructure protection plan, enhancing public safety and promoting business continuity during natural or man-made disasters.
Project interrelationships play a crucial role in GIT investments across various agencies, as their value often extends beyond mere financial justification These projects are significant primarily because they lay the groundwork for future initiatives that can yield positive financial outcomes Clearly articulating this potential in the business case is essential for garnering support and understanding the broader impact of these investments.
A shared data and services GIT project should deliver advantages that surpass the interests of the funding agencies involved When funding agencies share data with other organizations or the public, all data users stand to gain significant benefits While these advantages can often be quantified, they may not be reflected in the financial analysis if they do not directly benefit the funding agency Therefore, it is essential to outline these external benefits in the strategic analysis.
The development of a GIT capital project coordination application by a county agency offers significant external benefits for City and County agencies and utilities Participating agencies can expect reduced capital project costs and extended pavement life due to fewer excavations on maintained streets and highways Additionally, local businesses will experience less disruption and improved project coordination, while residents will enjoy a better quality of life with fewer disruptive excavations While some benefits can be quantified, others remain intangible, all contributing to the strategic value of the proposed GIT project.
COOPERATIVE SHARED DATA AND SERVICE GIT PROJECTS
When a Geographic Information Technology (GIT) project offers substantial external benefits, it creates opportunities for collaboration with external agencies beyond the initial participants For instance, a regional planning agency looking to develop a capital project coordination application may discover potential partners among local governments, utility companies, and significant landholders, including universities, hospital districts, and military bases.
Shared data and service projects pose a unique challenge in business case development, as each participant must convince their governing board or council of the project's benefits and the fairness of cost allocation This necessitates a comprehensive analysis of the overall project, along with a detailed examination of the costs and benefits for each participant involved.
When conducting a financial analysis for an organization's involvement in a shared data and services GIT project, it is essential to focus solely on the costs and benefits that directly impact the participant In contrast, the strategic analysis should encompass a comprehensive overview of the entire project, detailing all associated costs, the distribution methods among participants, and the benefits that extend to external agencies and the broader community.
The complete shared data and services GIT business case includes the following elements:
RESEARCH FINDINGS AND RECOMMENDATIONS
This section of the document encapsulates the research findings presented in the appendices of the workbook, featuring key elements such as the Literature Review Matrix, a summary of survey results, and insights from a case study.
Findings Recommendations regarding application of the research and further research directions are provided in this section.
LITERATURE REVIEW PROCESS AND MATRIX
The literature review is available in two formats: a general-IT format and a GIT-specific format, both detailed in Appendix A The GIT-specific review is organized in a matrix format, utilizing abstracts for concise literature representation This matrix was designed to provide agency participants and other users with a quick reference categorized by topic In this format, numbered citations are arranged in rows, with application topics listed across, allowing users to easily query for relevant articles and swiftly locate associated abstracts using their numbers.
The review of GIT-specific papers was conducted using two main sources: the annual conference proceedings of GITA and the findings from FGDC’s Business Case Action Team Additional resources were sourced from GITA's international conferences, seminars, webcasts, and URISA conference proceedings.
The literature review on IT provides a comprehensive narrative that establishes the context for studying return on investment (ROI) in IT projects Extensive research was conducted using academic and commercial databases, such as ABI/Inform and the ACM Digital Library, to gather relevant information on IT ROI This review was further informed by insights from Dr Roger Pick, a Professor of Management Information Systems at the Bloch School of Business, University of Missouri at Kansas City.
Some of the major findings from the literature review were:
Great benefits have been realized from using GIT systems for proactive maintenance.
Benefits increase when used to accomplish broad objectives across multiple departments and organizations.
Although government agencies may not be required to measure profitability, their services can be quantified and optimized.
There is currently strong interest in development of ROI metrics for mobile GIT solutions.
Enterprise Architecture issues add considerable complexity to ROI calculations as well as increasing benefits.
ROI metrics are fairly mature for mainstream IT and adaptable for GIT analysis.
Areas ripe for further research include calculation of risk, intangible benefits and other areas of uncertainty.
The matrix below outlines the authors, titles of their papers, the relevant application areas of benefits, and the corresponding industries they represent For further details, please refer to Appendix C, which includes the related GIT business case literature.
In mid-October 2004, the ROI project launched a web-based survey on the Zoomerang platform This survey began with an initial user questionnaire designed to gather contact details and industry sector information After completing the first survey, users had the opportunity to participate in multiple subsequent surveys.
12 application areas Appendix B includes the detailed finding of the survey results.
GITA's extensive promotion of the survey attracted over 200 visitors, showcasing significant interest in the topic Ultimately, 219 surveys were completed, with participation from various government agencies and utilities.
Responses to the surveys were from a number of different countries.
Single responses were received from Brazil, Hungary, India, Japan, Netherlands, Nigeria, Portugal and Turkey
Compiled survey results by application topic are presented in the material following this introduction General benefits presented by the respondents include:
Currency and accuracy of mapping base is key to making good business decisions.
There is now access to information that was previously inaccessible due to time constraints or political boundaries.
Base maps can be shared across multiple departments and agencies.
Data is improved in accuracy and completeness.
Workflow management is made efficient by having seamless end-to-end business processes.
Better service is provided to the public through remote access to property information, tax information, tax payments.
Capability is provided for ad hoc presentation of maps, map production by non-technical staff, communication of decisions using maps.
Data is sold and leased to other agencies in the region.
Capabilities are provided for emergency preparedness and preplanning, for training scenarios, and for reporting to the state.
A number of unique and interesting projects were described by respondents Among these are:
Sensor web for environmental applications
GIT implementation strategy and business case, developing a strategic roadmap
Risk modeler and high consequence area (HCA) analysis application for liquid pipeline system, built to comply with regulatory requirements
Emergency Management GIS project, identifying critical assets, chemical release plume modeling, preplanning and mitigation
Risk analysis of water contamination, land preservation, urbanized encroachment on park lands and undeveloped watershed.
GIT applications for drinking water security
Underground locating and ticket research application, facilitates screening and improved line locating efficiencies
Enterprise GIS application for defining ward and poll boundaries for optimum voter counts
Application of GIS to public and environmental health, including mosquito population monitoring and larvacide applications, water well monitoring and permitting, health care worker routing, wood chuck monitoring
The case study results highlight the effectiveness of the developed ROI toolset in addressing the diverse needs of various GIS programs across local and state organizations This toolset has evolved to meet the specific requirements of each participating agency due to its exposure to a wide range of circumstances The first case study focuses on the City of Cleveland, which consolidates all project costs and departmental benefits under one framework The second case study examines a single participant's perspective within a statewide collaborative GIT program, showcasing the toolset's adaptability and utility.
Cleveland is entering the final year of a comprehensive nine-year project aimed at enhancing GIS capabilities across all city departments while effectively managing data related to the city's water, wastewater, and electric utility assets This advanced system significantly boosts work process efficiency, streamlines asset record-keeping, and enhances data access and reporting functionalities.
The program uniquely employs 50 local residents for project data conversion, replacing the need for third-party consultants or overseas vendors, which is vital for advancing a large-scale initiative in an economically challenged city As a foundational GIS infrastructure project, the Cleveland initiative surpasses other case studies in both scale and cost, promising significant returns on investment This analysis focuses on completing Phase 2 activities, which encompass the development of parcel and infrastructure data, as well as the creation and implementation of 27 proposed core and pilot applications.
This project will enhance services across all City departments, benefiting Water, Water Pollution Control, Cleveland Public Power, Public Safety (including Police, Fire, EMS, and Dog Warden), Public Service (encompassing Roads, Bridges, Waste Collection, and Snow Removal), as well as Parks, Planning, Economic Development, Community Development, Building and Housing, and Health.
Data conversion and application development are currently underway, with completion expected by December 2006 The projected cost for these initiatives, along with system administration over the next 20 years, is approximately $48 million in today’s dollars.
The estimated net present value (NPV) for this investment is nearly $200 million, indicating an impressive annualized return on investment of 21% The investment is projected to break even by 2008, showcasing a payback period of just three years.
The anticipated benefits of this project primarily stem from estimated productivity improvements, with no expected reduction in the city workforce due to GIS implementation Additionally, significant savings are projected from decreased road resurfacing costs, attributed to enhanced construction planning Sensitivity analysis indicates an annualized return on investment (ROI) of 13%, with a six-year payback period based solely on savings from road resurfacing, excluding any productivity benefits.
Strategic advantages encompass enhanced decision-making by managers through access to superior information, timely responses to statewide excavation coordination requests from the Ohio Utility Protection Service, increased community access to public data, and the GIS serving as a foundation for the creation of various new applications.