AM/FM/GIS Investment Analysis
C. Warren Ferguson
Chief Operations Officer Smallworld Systems, Inc.
5600 Greenwood Plaza Blvd. Suite 300, Englewood, CO 80111
Investment Analysis is acknowledged as the best way to properly value an investment in
modem technology. The traditional cost benefit analysis provides limited information for
AM/FM/GIS technology justification. An Investment Analysis includes use of investment
appraisal techniques to measure all the different types of risk, flexibility and project
synergy, as well as cost benefit.
This paper discusses Investment Analysis methodology and demonstrates how to make
more fully informed decisions. An AM/FM/GIS project example is included.
AM/FM/GIS information technologies may very well become the digital
information infrastructure for successful businesses in today’s new, and sure to
be competitive, future. There are no road maps to follow into this uncertain
future. There are three basic business drivers in the world today: (1) customers
take charge, (2) competition gets tougher and (3) change is constant. It is
important to note that these business drivers are universal. They occur
throughout the world in somewhat different ways depending on the nature of the
economy, and the political/cultural context of the area.
Today’s presentation will review the traditional cost/benefit approach to valuing
your information technology, look quickly at where the real benefits of AM/FM/GIS
will most likely come from and then look at an improved approach to valuing your
AM/FM/GIS investment -an approach that combines a modern investment
analysis with the traditional costlbenefit.
It is important to recognize that to value any investment, we must how today
where future profik wi// be earned. Observers and pundits of the business
scene are unanimous in their notion that for a business to succeed, indeed to
suwive, its design and operation must include the power and the flexibility to add
value in an uncertain future.
The traditional approach to valuing AM/FM/GIS
AM/FM/GIS has traditionally been justified on the basis of either a quantitative
cost/benefit analysis (CBA) or the qualitative notion that it was a “strategic
requirement.” In today’s demanding business environment these forms of
344?analysis often provide decision makers with data upon which they can take no
action. There are usually several reasons for this un-actionable data, but in any
case the decision maker is unable to find justification to proceed. The inability to
proceed may mean a project never gets started. Or it may mean that it dries up
after a pilot or prototype. Or it may mean that an on-going project never gets to
upgrade its technology.
The traditional costlbenefit analysis (CBA) approach to valuing project
investments is to apply either a non-discounted technique or a market based
discount rate to the project cash flows. The typical result of a CBA is the
“payback period” or the internal return on investment (ROI). CBA is not a
complete science for full and proper valuation of project investments. It is open to
much abuse. Unfortunately its non-discounting techniques can produce different
and often conflicting results from the same financial information. It can produce
financial results that are not a true value of the investment - projects that actually
produce a loss are sometimes made to appear profitable.
Three critical deficiencies are worthy of brief discussion. First, CBA is a project
cash flow analysis. It is a cash flow analysis of that one project; done from a
historical perspective and treating the project as a standalone item. While project
cash flow must be considered, a modern business makes decisions on the basis
of its overall cash flows. Second, CBA is simply historical in perspective because
we cannot use it to compare new ways of doing things; new, improved or re-engineered
work processes. Third, CBA includes no information on markets,
industry type and/or entire companies in its analysis.
In traditional CBA five types of benefits are considered:
Type 1- Productivity
Type 2- Capability
Type 3- Response to unanticipated events
Type 4- Intangibles
Type 5- Revenue generation
However when you begin to specifically define these benefits you find the
Type 1- Productivity - quantifiable benefits from improving efficiency of
current practices and from improvements to existing processes.
Type 2- Capability - quantifiable benefits that result from expanded
capabilities or benefits that offer added capabilities.
Type 3, 4 & 5 are intangible benefits and are un-definable in hard dollars.
Accordingly, very few CBAS ever count any dollars from benefit types 3, 4 or 5
even though those benefit types are very real in the world.
AM/FM/GIS Benefit Prospects
AM/FM/GIS has sometimes been difficult to describe. It has been called an
enabling technology. It has been called a tool-kit. It has been called a system. It
has been called a solution. But for all that it has been called many
implementations have simply failed to measure-up as successes in today’s terms.
345?Complex applications such as outage or work management systems, or
interfaces to them, have left much to be desired.
It is the implementation of complex applications within the framework of
AM/FM/GIS technologies that enables a new benefits reality. The resulting
simple information system architecture will provide considerable benefits
including: a single set of software tools to use and maintain, a single data source
and single point data maintenance, a rapid application development and
deployment environment, as well as seamless and easy to use applications.
Mr. Hank Emery, has recently published several articles relating to AM/FM/GIS
projects and complex applications (see Emery, 1995). He evaluates projects on a
number of standard factors including complex applications and interfaces to other
systems. Among the complex applications he evaluates are work order
processing, design engineering, job cost estimating, work print plotting, and field
outage restoration. Similarly, he evaluates interfaces to work management
systems, trouble and outage systems and network analysis systems, as well as
others. He notes “the lack of implementation of complex applications and
interfaces” and goes on to observe that “the non-implemented areas present
large opportunities for development and implementation.”
Legacy AM/FM/GIS systems have been rooted in mainstream computing
technology dating from the late 70’s and early 80’s. The Smallworld generation of
AM/FM/GIS systems is emerging based on computing technologies of the 90’s.
Object-oriented programming, distributed object models, GIS CASE tools and
extended database architectures are in production use today. These
technologies provide an AM/FM/GiS environment where complex applications
can be implemented successfully in a simple information system architecture and
the benefits of complex applications can be realized.
For a full discussion of these latest technical issues, please see the paper
presented at the AM/FM International Conference XIX by Mr. Peter M. Batty titled
“The Impact of New Technologies on AM/FM/GIS” (see Batty, 1996)
An Improved Approach to valuing AM/FM/GIS
New benefits resulting from complex applications operating within the AM/FM/GIS
technology framework offer new directions and new dimensions for a business
model fully responsive to today’s fundamental business drivers. These
AM/FM/GIS solutions should be evaluated as an investment in the future for they
are an investment in the creation of an adaptive business environment that has
the flexibility to succeed in the years ahead.