196.
PROFILE ON SYSTEM DEVELOPMENT &
CONSULTANCY SERVICE
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TABLE OF CONTENTS
PAGE
I.
I.
SUMMARY
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II.
SERVICE DESCRIPTION & APPLICATION
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III.
MARKET STUDY AND SERVICE CAPACITY
A. MARKET STUDY
B. SERVICE CAPACITY & OPERATIONAL PROGRAMME
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196-4
196-9
IV.
MATERIALS AND INPUTS
A. MATERIALS
B. UTILITIES
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196-10
196-11
V.
TECHNOLOGY & ENGINEERING
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A. TECHNOLOGY
B. ENGINEERING
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196-14
VI.
MANPOWER & TRAINING REQUIREMENT
A. MANPOWER REQUIREMENT
B. TRAINING REQUIREMENT
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196-15
196-16
VII.
FINANCIAL ANLYSIS
A. TOTAL INITIAL INVESTMENT COST
B. OPERATION COST
C. FINANCIAL EVALUATION
D. ECONOMIC BENEFITS
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196-17
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SUMMARY
This profile envisages the establishment of an institution that
development service with a capacity of
provide system
developing and installing 30 systems
per
annum. Systems to be developed might be MIS for banks, Insurance companies, factories
(both private and public), Inland Revenue Bureaus, Transport Bureau, Educational
Bureau, City Administration/ Sub Cities/ Woreda/ Kebele net work, Federal Ministry
Offices (Intranet), Private business enterprises (networking), Hospitals, Universities, etc.
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The present demand for the proposed service is estimated at 373 systems per annum.
The demand is expected to reach at 703 systems by the year 2020.
The total investment requirement is estimated at about Birr 904.62 thousand, out of
which Birr 131.5 thousand
is required for equipment. The service will create
employment opportunities for 7 persons.
The project is financially viable with an internal rate of return (IRR) of 29.82% and a net
present value (NPV) of Birr 610.27 thousand, discounted at 8.5%.
II.
SERVICE DESCRIPTION AND APPLICATION
System development includes the designing of computer programmes based on specific
need of an organization.
The developed progrmmes allow large organizations to
manage, access, and store huge amounts of information on various computer systems,
from sales reports to customer lists to airline reservations.
III.
MARKET STUDY AND SERVICE CAPACITY
A.
MARKET STUDY
1.
Past Supply and Present Demand
The use of ICT brings many advantages, among which, are cost saving, efficient service
delivery, good governance, transparency and smooth flow of information among all
sectors of the economy as well as among the citizens.
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The benefit of ICT as an engine to accelerate development of other economic sectors is
fully recognized by the government of Ethiopia. Accordingly, widespread activities in
ICT capacity building are underway. To mention few of these activities:
WoredaNet which connects more than 600 Woredas (local administrative
districts) all around the country that provides sufficient bandwidth for video
conferencing.
The SchoolNet project which is intended to connect more than 550 High
Schools around the county to have internet access with broadband connectivity to
implement standardized distance education through Video Conferencing.
The Commission for Disaster Prevention and Preparedness (CDPP) is
implementing a Management Information strategy based on a wide area network,
integrating three independent networks based in Addis Ababa, to integrate early
warning, relief transport operations, air services and food-aid management in line
with the national strategy of Disaster Prevention and Preparedness. The long-term
objective is to develop a networking structure, which systematically integrates the
ports, warehouses, and the various CDPP departments to enable access to data and
information by the CDPP and regional bureaux, partners in the UN system,
donors and NGOs through the establishment of a common database.
The Ethiopian Agricultural Research Organization (EARO) has earmarked a
budget of 6.5 Million US Dollar for Internetworking (LAN WAN) project
spanning 30 research centers across the country.
The Addis Ababa University (AAU) has begun a big Internetworking project
among its five departments under three campuses at an estimated budgetary
allocation of 1.52 Million US Dollar.
The Ethiopian Chamber of Commerce (ECC) and the Addis Ababa Chamber of
Commerce (AACC) have jointly drafted an ICT development project to establish
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a web-based information clearinghouse and an ICT training center, at an allocated
budget of 1.22 Million Birr.
-
The Amhara Bureau of Planning & Economic Development (BoPED) has put
together a project document for a TCP/IP based Internetworking system to link its
Head Quarter with 11 Zonal Offices.
Therefore, considering the governments clear commitment to capacity building of sector
offices the resulting increase in demand for system development and consultancy is
expected to be big enough to generate a very sizable market for the service.
Currently there are about 170 ICT service providers ( ICT Resource Assessment of the
City, IPS,2007). These companies create job opportunity, provide services to other
economic sectors, generate income that would be used to expand their company and
invest for the development of other economic sectors. Generally, those ICT companies
can be categorized into the following groups:
System development
Training
Sales
Hardware and Software Troubleshooting
Consultancy
Secretarial services which include photocopy, typing, internet caf, call service,
etc
However, there is no available information on how many enterprises are engaged in each
category of the sector.
At present very few institutions have automated their office systems. Many institutions
are interested to automate their systems and use ICT as tools to enhance their efficiency
and productivity. In this regard, the existing consulting firms are few in numbers to meet
the existing market and do not have adequate capacity to execute large ICT projects. As
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indicated in the ICT Resource Assessment of the City ( IPS,2007) there is delay in
finishing
system development projects on time. As an example the planned and
completion year of some selected projects is shown in Table 3.1.
Table 3.1
PLANNED AND COMPLETION YEAR OF SOME SELECTED ICT PROJECTS
Sr.
Company Name
No.
Type of
Client
Project
Agreed
Starting
Completion
Delay
Upon
Date
Date
(Year)
Project
Duration
3
4
CDS PLC
BISOFT PLC
Investment
Addis Ababa
MIS
Investment
RegSys
Authority
AATIDB
Custor
Transport
AA Transport
Computing PLC
Management
Authority
MIS
Micro Computer Financial & Ethiopian
Group
Personnel
Health and
Systems
Nutrition
1 year
1996 E.C
1999 E.C.
(Last phase)
1 year
1994
1999 E.C.
1 year
E.C.
1996
(Last phase)
1999 E.C.
E.C.
(Last phase)
1993
1998
1 year
E.C.
Institute
As can be seen from the table, projects often delay for 3 to 6 years behind schedule the
cases of which is attributable to lack of efficiency by the consultancy firms.
The basic materials needed to implement ICT
system are computers and internet
connection. Therefore, in order to estimate the demand for system development and
consultancy internet subscription is used as a base.
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According to the Resource Assessment of the City ( IPS,2007), there are a total of 11,308
internet subscribers of which 66% ( 7,463) are government organizations, N.G.O,
educational and research institutions and business. Accordingly, conservatively assuming
that only 5% of the institutions will implement ICT systems, the current ( 2008) demand
for system development and consultancy is estimated at 373.
2.
Projected Demand
An indicator of demand for system development and consultancy is demand for
computer. During the period 2000-2006 the country have imported a total of 382,729
computers spending about Birr 1.6 billion, which brings the annual average during the
time under consideration to about 38,276 and Birr 105.73 million in terms of quantity and
value respectively. Over the same period the import of computers has registered an
annual average growth rate of 57% in terms of quantity and 29% in terms of value.
However, in order to be conservative demand for system development and consultancy is
assumed to grow by 5% annually. Accordingly, the projected demand for system
development and consultancy is shown in Table 3.2.
Table 3.2
PROJECTED DEMAND FOR SYSTEM DEVELOPMENT AND CONSULTANCY
Projected
Year
2008
2009
2010
Demand
392
411
432
196-8
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
453
476
500
525
551
579
608
638
670
703
3. Service Fee
Based on current price charged by similar institution a service charge of Birr 50,000 per
system development service is adopted for financial analyses.
B.
SERVICE CAPACITY AND OPERATIONAL PROGRAMME
1.
Plant Capacity
This study aims at establishing an enterprise that will be engaged in carrying out
consultancy and advisory services for system development in an organization. It is not
there fore, a manufacturing plant, but a service giving enterprise.
The market study indicates the projected demand for system development consultancy
and advisory service for the year 2009 will be 411, and 703 for the year 2020. This
indicates that there is a wide gap to be filled in carrying out consultancy services in the
area of developing management information systems for public and private enterprises.
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This is very important since globalization of the worlds industrial economies greatly
enhances the value of information to the firm and offers new opportunities to businesses.
Communicating with distributors and suppliers of various kinds of products, operating 24
hours a day in different national environments, and servicing local and international
reporting, needs a major business challenge that requires powerful information system
responses.
This study focuses on the establishment of consultancy firms that are able to carry out
activities such as information system analysis of an organization in public and private
enterprises, system design, and carryout the programming, testing, conversion, and
production and maintenance work. Several of such consultancy services will have to be
established in order to fill gap described in the market study.
The system development consultancy firm is expected to produce 30 operational systems
each year. Systems to be developed might be MIS for banks, insurance companies,
factories (both private and public), Inland Revenue bureaus, Transport bureau,
educational bureau, city administration/ sub cities/ woreda/ kebele net work, federal
ministry offices (Intranet), private business enterprises (networking). Hospitals,
universities, etc.
2.
Service Programme
The system development center will start its operation at 70% of its full capacity and
grows to 85% and 90% in the second and third year and reaches 100% in the fourth year
and then after. The service program is shown in Table 3.3.
TABLE 3.3
SERVICE PROVISION PROGRAMME
Year
4-10
196-10
Annual system development
21
25
27
30
service(no.)
capacity utilization
70
85
90
100
( %)
IV.
MATERIALS AND INPUTS
A.
MATERIALS
The envisaged consultancy firm utilizes materials from two sources. One is the material
(s) required by the consultancy firm to implement the project.
The materials thus
required will be bought by the client, and is not going to be borne by the consultancy
firm. The second materials (s) are those required by the consultancy firm during the
period of system development. Such materials include cables, CDs, floppy discs, tools
and others. Annual requirement is estimated to be Birr 500,000 for consultancy and
advisory service.
B.
UTILITIES
The major utilities required by the project are electricity and water. The required quantity
of these utilities and their respective cost is shown on Table 4.2 below.
Table 4.2
ANNUAL UTILITIES REQUIREMENT AND COST
Sr.
Utility
No.
1
Electricity
2
Water
Total
V.
Unit of
Measure
kWh
m3
Qty
60,000
1,500
TECHNOLOGY AND ENGINEERING
Cost
( Birr )
28,416
4,875
33,291
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A.
TECHNOLOGY
1.
The Process of System Development
System development refers to the following activities.
a)
a)
System analysis
b)
System design
c)
Programming
d)
Testing
e)
Conversion
f)
Production and maintenance
System Analysis
This is the analysis of the problem that an organization will try to solve with an
information system. It consists of defining the problem, identifying its causes, specifying
the solution, and identifying the information requirements that must be met by a system
solution. The system solution often requires building a new information system or
improving an existing one.
The consultant (also called system analyst) creates a road map of the existing
organization and systems, identifying primary owners and users of data in the
organization.
organization.
He also describes the existing hardware and software that serve the
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Based on the organizational analysis, the consultant details the problems of existing
systems. By examining documents, work papers, and procedures, observing system
operations, and interviewing key users of the systems, the system analyst can identify the
problem areas and objectives to be achieved by a solution.
b)
System Design
Details how a system will meet the information requirements as determined by the
system analysis. There are two ways of carrying out system design. Logical design and
physical design.
Logical Design:- lays out the components of the information system and their relation
ship to each other as they would appear.
Physical Design: is the process of translating the abstract logical model into the specific
technical design for the new system. It produces the actual specifications for hardware,
software, physical data bases, input/output media, manual procedures, and specific
controls.
c)
Completing the System Development Process
This is the process of translating the solution specifications established during system
analysis and design into a fully operational information system. The activities involved
in this process are: Programming, testing, Conversion, production, and maintenance.
-
During programming stage, the system specifications that were prepared
during the design stage are translated into program code. On the basis of
detailed design documents for files, transaction and report layouts, and other
design details, specifications for each program in the system are prepared.
Testing: is conducted to ascertain whether the system produces the right
results.
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-
Conversion: is the process of changing from the old system to the new system.
Moving from an old system to a new one requires that end users be trained to
use the new system. Detailed documentation showing how the system works
from both the technical and end-user standpoint is finalized during conversion
time for use in training and everyday operations.
Production and maintenance: after the new system is installed and conversion
is complete, the system is said to be in production. During this stage the
system will be reviewed by users (the client) and the consultant (particularly
technical specialist) to determine how well it has met its original objectives
and to decide whether any revisions or modifications are in order.
Maintenance refers to changes in hardware, software, documentation or
procedures to a production system to correct errors, meet new requirements,
or improve processing efficiency.
This project does not have any negative impact on environment.
2.
Source of Technology
System development consultancy and advisory service requires certain equipment,
devices and tools for its own use.
These include hard wares (Computers, testing
equipment and electronic tools) and various soft wares for implementing system
development plans. Such technology can be procured locally from enterprises that are
engaged in computer sales. These include DELL, HP, ACER, etc agents that are locally
operational.
B.
ENGINEERING
1.
Equipment Required by Consultancy Services
List of equipment required by the Consultancy services is shown in Table 5.1 below.
These equipment can be procured from local markets.
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Table 5.1
EQUIPMENT REQUIRED BY SYSTEM DEVELOPMENT CONSULTANCY
SERVICES & COST
Sr.
No.
1
2
3
4
5
6
7
2.
Description
Desktop computer- with
monitor, high capacity
server, complete with all
accessories
Soft wares (Various types)
used for testing,
programming, etc
Printer (Laser jet)
Photo copy machine
Fax machine
Internet connection
Other accessories
Total
Qty.
Cost
(000 Birr)
50
Reqd
1
1
1
Reqd
Reqd
6.5
40
22
3
5
131.5
Land, Building and Civil Works
Land might not be a requirement for the envisaged consultancy and advisory service. It
would be appropriate to rent offices for this purpose. It is proposed that a total area about
80m2 will suffice at the initial stage of operation. At later stages, as the business develops
and the consultancy services widen its scope of operation, the office space requirement
will grow. Rent for the above area is estimated to be Birr 6,000 per month. Annual rent
expenditure will therefore be Birr 72,000.
VI.
MANPOWER AND TRAINING REQUIREMENT
A.
MANPOWER REQUIREMENT
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The consultancy and advisory services will require manpower qualified in
electrical/computer engineering, particularly in system design and implementation. The
list of manpower required is given in Table 6.1 below.
Table 6.1
MANPOWER REQUIREMENT & LABOUR COST (BIRR)
Sr.
Description
No.
1
2
3
4
5
B.
Electrical/computer engineer
Technician
Secretary
Cleaner
Driver
Sub-Total
Employees benefit(25% of the
Req.
No.
2
2
1
1
1
7
basic salary)
Total
TRAINING REQUIREMENT
Monthly
Salary
9,000
5,000
1,000
350
500
-
Annual Salary
108,000
60,000
12,000
4,200
6,000
190,200
47,550
237,750
As the technical staffs are those with sufficient qualifications, there is no need to provide
training. However, the end users of the client organization will have to be trained on how
to use the new information system. The consultancy firm is responsible to conduct the
training program.
The cost of training depends on the complexity of the system
developed and implemented. For the purpose of this study training cost of Birr 20,000 is
allotted.
VII.
FINANCIAL ANALYSIS
The financial analysis of the system development project is based on the data presented
in the previous chapters and the following assumptions:-
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Source of finance
30 % equity
70 % loan
Bank interest
8.5 %
Discount cash flow
8.5%
Accounts receivable
30 days
Raw material local
30 days
Cash in hand
5 days
Accounts payable
30 days
Repair and maintenance
5% of machinery cost
A.
TOTAL INITIAL INVESTMENT COST
The total investment cost of the project including working capital is estimated at
Birr
904.62 thousand. The major breakdown of the total initial investment cost is shown in
Table 7.1.
Table 7.1
INITIAL INVESTMENT COST ( 000 Birr)
Sr.
Cost Items
No.
1 Land lease value
Local
Cost
-
Foreign
Cost
-
Total
Cost
-
131.50
450.00
Building and Civil Work
Equipment
Office Furniture and Equipment
131.5
100.00
Vehicle
450.00
100.00
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6
Pre-production Expenditure*
124.56
124.56
Working Capital
98.56
98.56
904.62
904.62
Total Investment Cost
*
N.B Pre-production expenditure includes interest during grace period ( Birr 74.56
thousand), training ( Birr 20 thousand)
and Birr 30 thousand costs of registration,
licensing and formation of the company including legal fees, commissioning expenses,
etc.
B.
OPERATION COST
The annual production cost at full operation capacity is estimated at Birr 1.07
million (see Table 7.2). The material and utility cost accounts for 49.77 percent of the
operation cost. The other major components of the operation cost are depreciation, direct
labour and financial cost which account for 11.53%, 10.65% and 9.17% respectively.
The remaining 18.87 % is the share of working premises rental, , utility, labour overhead,
repair and maintenance and other administration cost.
Table 7.2
ANNUAL OPERATING COST AT FULL CAPACITY ('000 BIRR)
Items
Raw Material and Inputs
Cost
500.00
33.29
46.67
3.11
6.6
114.1
0.61
10.65
Administration Costs
47.6
76.1
4.44
7.10
Working premises rental
Total Operating Costs
Depreciation
72.0
849.6
123.6
6.72
79.30
Cost of Finance
98.3
9.17
Utilities
Maintenance and repair
Labour direct
Labour overheads
11.53
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Total Production Cost
C.
FINANCIAL EVALUATION
1.
Profitability
1,071.44
100
Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 33.20thousand to
Birr 167.81thousand during the life of the project. Moreover, at the end of the project life
the accumulated cash flow amounts to Birr 1.30 million.
2.
Ratios
In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.
3.
Break-even Analysis
The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
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break-even point of the project including cost of finance when it starts to operate at full
capacity (year 3) is estimated by using income statement projection.
BE =
Fixed Cost
38 %
Sales Variable Cost
4.
Payback Period
The pay back period, also called pay off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
projects initial investment will be fully recovered within 4 years.
5.
Internal Rate of Return
The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
in a bank account. Accordingly, the IRR of this project is computed to be 29.82 %
indicating the viability of the project.
6. Net Present Value
Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
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time during the life of a project in to a common measuring unit i.e. present value.
It is a
standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.
Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 610.27 thousand which is acceptable.
D.
ECONOMIC BENEFITS
The project can create employment for 7 persons. In addition to supply of the domestic
needs, the project will generate Birr 0.431 million in terms of tax revenue.
