**2.1.1 Software**

The standard software such as e-mail, web servers, corporate intranets, newsgroups, shared file systems, or centralized databases in an enterprise is commonly already existed. Hence, there is no software cost even only transfer knowledge such as the exchange of e-mail, the use of instant messaging tools, or the use of internet search engines. However, if the enterprise wishes to establish a level of knowledge integration and wishes to manage, encourage, and shepherd the transfer of knowledge, these tools are probably inadequate for the task.

In this case, the enterprise will want to invest in a commercially available product designed specifically for the tasks that the company wishes to be able to accomplish with the KMS. Costs for this may be quite high, but this KMS will be more likely to be utilized by the users, even if more user friendly than competing products.

### **2.1.2 Hardware**

Along with the cost of software, the enterprise must also consider the costs of the infrastructure or hardware that will be needed to support the KMS. The application that is chosen may need its own application server on which to run or it may co-locate with existing applications on a server that the company already owns. If the system is placed on a server with applications already running, the company will have to consider the cost of any performance degradations that the other applications may occurrence. A server will need

Fuzzy-Monte Carlo Simulation for Cost Benefit

computer code (Chen & Huang, 2009).

methods for reducing costs on final products.

al., 2010).

**2.3 Related works in cost-benefit analysis of KMS investment** 

Analysis of Knowledge Management System Investment 75

KMS is an increased quality of a finished product. Quality, which is delivered by KMS accounts for 20% of benefits (Anderson, 2002). An employee who uses the KMS might be able to obtain knowledge that will reduce the amount of defective finished products or will increase the effectiveness and quality or innovation of the products (Plessis, 2007). Another intangible benefit that will be recognized from the KMS is an increase in employee productivity. Productivity and speed, which is delivered by KMS account for 55% of benefits (Anderson, 2002). Employees, who use the KMS will be able to think creatively, innovatively, and also work faster, because they will find information on the KM environment that allows them to avoid repeating the work of others, such as a snippet of

The higher-quality product means potential to increase product sale or to decrease customers' dissatisfaction (Berry & Waldfogel, 2010). Consequently, it will improve the company's revenues and profit. Furthermore, an employee productivity and speed are strong related to delivery time of a finished product, while one factor that causes increase order of the finished product is an improved delivery time to customer (Ustundag et al., 2010). In addition, cost saving is also a benefit that can be realized through utilization of KMS. The practices of learning new knowledge, and sharing what is known by individuals, would enhance organizational capabilities and firm performance in terms of cost saving (Law & Ngai, 2008). Cost saving represents approximately one-quarter of benefits from KM investment (Anderson, 2002). The KMS can save in a labor costs and material costs, but the true benefit of cost saving through a KMS is realized when employees discover and share

Benefits might be difficult to measure, because many of the benefits are intangible, and cost savings delivered by KMS investment with an amount of USD*xxx* in the balance sheet will not be immediately illustrated. In addition, it is almost impossible to find metrics that will produce a one-to-one correlation between KM and financial impact (Vestal, 2002). The measurement of intangible benefits such as increased customer satisfaction and increased productivity of an employee, or cost savings is the key to evaluate the attractiveness of KMS investment. Furthermore, an evaluation of financially risk of KMS investment is needed by using objectives and parameters such as revenue, other benefits, capital and operating costs. A suitable investment model needs to be developed in order to estimate the financial outcome of the project and ascertain whether it meets any predetermined financial criteria as to what constitutes an attractive project (Ustundag et

Traditional cost-benefit analysis used in evaluating the value of EIS investment likes KMS relies on cash flow measures. Cost-benefit analysis include: payback period, rate of return on investment (ROI), net present value (NPV), profitability index, and internal rate of return (IRR) (TBC, 1998; Tang and Beynon, 2005). They assume that all costs and benefits are known, and it can be illustrated in a common metric–money. However, these assumptions are rarely met in the real life (K.C. Laudon and J.P. Laudon, 2005). They observed that most of the traditional cost-benefit analysis methods miss out a great deal of strategic considerations in an attempt to quantify and discount monetary units of intangibles. Therefore, this paper introduces an approach that can handle the problem that had defined earlier such as;(1) how to bridging the tangible and intangible benefits for cost-benefit

rack space in the server room, a universal power supply, and a network connection. Any upgrades to the enterprises network for handling an increased traffic attributable to the KMS should be considered.

Even if the company chooses to use the current systems and equipment, this equipment will be experiencing heavier loads than in the past, and this should be considered. If e-mail is chosen as a required tool, the mail server should be able to handle the increased traffic. The database server is needed to handle increased loads if it is to host a KM database. If the internet is required as part of a KMS, then the enterprise should be ensured that there is enough bandwidth available to handle all incoming and outgoing traffic and purchase more if needed.

#### **2.1.3 Incentive programs**

Another cost that should be considered, which is easily overlooked especially in the planning stages of a KMS investment, is the cost of programs that will be instituted to encourage employees to use the new system. A KMS is only useful when it is being used heavily, and the use of the system must likewise be encouraged by management. This means that the investment cost of a KMS must include the costs of awards and rewards that will be distributed to employees to encourage adoption and participation. In addition to the material costs involved, this program will also need an employee or group of employees to administer the program, determining the criteria for receiving an award, and determining the employees who are to be rewarded for their levels of participation. Managers will need to make their employees aware of the rewards program and encourage their charges to participate.

#### **2.1.4 Implementing and maintaining cost**

The implementing and maintaining cost of a KMS comes in many forms and all forms must be considered when calculating total costs. One implementing cost that should be considered is the cost for employing a member of the IT staff to install the KM hardware and software on all needed servers and client machines. In addition, the IT staff will need to configure the application to meet the needs of the business. This will require input from members of the business units that will be participating in the project, and their labor must be considered in the costs.

Once the system has been installed and is running, it will need to be maintained. A properly configured KMS will likely require little if any daily maintenance, but a member of the IT staff will need to contribute at least a few hours a month to backups, system administration, and the occasional restart. Knowledge will need to be input into the system in order for it to be useful, and in most cases this will require a substantial investment of labor capital from those possessing the knowledge to add this information to the system. The costs for the addition of knowledge will be heavy early on, but will steady out in the future, and will be based on the use of the system. In order for employees to be able to use the system, they will need to be trained on its use and the goals of the project. This training will take them away from other productive tasks and should be considered as one of the costs of the KMS investment. Once the employees have been trained, the time they spend using the system should also be considered as a labor cost attributable to the KMS investment.

#### **2.2 Benefits**

Once the costs have been calculated, the benefits of KMS investment either tangible or intangible must also be figured. One intangible benefit that will be gained after utilizing the

rack space in the server room, a universal power supply, and a network connection. Any upgrades to the enterprises network for handling an increased traffic attributable to the

Even if the company chooses to use the current systems and equipment, this equipment will be experiencing heavier loads than in the past, and this should be considered. If e-mail is chosen as a required tool, the mail server should be able to handle the increased traffic. The database server is needed to handle increased loads if it is to host a KM database. If the internet is required as part of a KMS, then the enterprise should be ensured that there is enough bandwidth available to handle all incoming and outgoing traffic and purchase more

Another cost that should be considered, which is easily overlooked especially in the planning stages of a KMS investment, is the cost of programs that will be instituted to encourage employees to use the new system. A KMS is only useful when it is being used heavily, and the use of the system must likewise be encouraged by management. This means that the investment cost of a KMS must include the costs of awards and rewards that will be distributed to employees to encourage adoption and participation. In addition to the material costs involved, this program will also need an employee or group of employees to administer the program, determining the criteria for receiving an award, and determining the employees who are to be rewarded for their levels of participation. Managers will need to make their

employees aware of the rewards program and encourage their charges to participate.

The implementing and maintaining cost of a KMS comes in many forms and all forms must be considered when calculating total costs. One implementing cost that should be considered is the cost for employing a member of the IT staff to install the KM hardware and software on all needed servers and client machines. In addition, the IT staff will need to configure the application to meet the needs of the business. This will require input from members of the business units that will be participating in the project, and their labor must

Once the system has been installed and is running, it will need to be maintained. A properly configured KMS will likely require little if any daily maintenance, but a member of the IT staff will need to contribute at least a few hours a month to backups, system administration, and the occasional restart. Knowledge will need to be input into the system in order for it to be useful, and in most cases this will require a substantial investment of labor capital from those possessing the knowledge to add this information to the system. The costs for the addition of knowledge will be heavy early on, but will steady out in the future, and will be based on the use of the system. In order for employees to be able to use the system, they will need to be trained on its use and the goals of the project. This training will take them away from other productive tasks and should be considered as one of the costs of the KMS investment. Once the employees have been trained, the time they spend using the system

Once the costs have been calculated, the benefits of KMS investment either tangible or intangible must also be figured. One intangible benefit that will be gained after utilizing the

should also be considered as a labor cost attributable to the KMS investment.

KMS should be considered.

**2.1.3 Incentive programs** 

be considered in the costs.

**2.2 Benefits** 

**2.1.4 Implementing and maintaining cost** 

if needed.

KMS is an increased quality of a finished product. Quality, which is delivered by KMS accounts for 20% of benefits (Anderson, 2002). An employee who uses the KMS might be able to obtain knowledge that will reduce the amount of defective finished products or will increase the effectiveness and quality or innovation of the products (Plessis, 2007). Another intangible benefit that will be recognized from the KMS is an increase in employee productivity. Productivity and speed, which is delivered by KMS account for 55% of benefits (Anderson, 2002). Employees, who use the KMS will be able to think creatively, innovatively, and also work faster, because they will find information on the KM environment that allows them to avoid repeating the work of others, such as a snippet of computer code (Chen & Huang, 2009).

The higher-quality product means potential to increase product sale or to decrease customers' dissatisfaction (Berry & Waldfogel, 2010). Consequently, it will improve the company's revenues and profit. Furthermore, an employee productivity and speed are strong related to delivery time of a finished product, while one factor that causes increase order of the finished product is an improved delivery time to customer (Ustundag et al., 2010). In addition, cost saving is also a benefit that can be realized through utilization of KMS. The practices of learning new knowledge, and sharing what is known by individuals, would enhance organizational capabilities and firm performance in terms of cost saving (Law & Ngai, 2008). Cost saving represents approximately one-quarter of benefits from KM investment (Anderson, 2002). The KMS can save in a labor costs and material costs, but the true benefit of cost saving through a KMS is realized when employees discover and share methods for reducing costs on final products.

### **2.3 Related works in cost-benefit analysis of KMS investment**

Benefits might be difficult to measure, because many of the benefits are intangible, and cost savings delivered by KMS investment with an amount of USD*xxx* in the balance sheet will not be immediately illustrated. In addition, it is almost impossible to find metrics that will produce a one-to-one correlation between KM and financial impact (Vestal, 2002). The measurement of intangible benefits such as increased customer satisfaction and increased productivity of an employee, or cost savings is the key to evaluate the attractiveness of KMS investment. Furthermore, an evaluation of financially risk of KMS investment is needed by using objectives and parameters such as revenue, other benefits, capital and operating costs. A suitable investment model needs to be developed in order to estimate the financial outcome of the project and ascertain whether it meets any predetermined financial criteria as to what constitutes an attractive project (Ustundag et al., 2010).

Traditional cost-benefit analysis used in evaluating the value of EIS investment likes KMS relies on cash flow measures. Cost-benefit analysis include: payback period, rate of return on investment (ROI), net present value (NPV), profitability index, and internal rate of return (IRR) (TBC, 1998; Tang and Beynon, 2005). They assume that all costs and benefits are known, and it can be illustrated in a common metric–money. However, these assumptions are rarely met in the real life (K.C. Laudon and J.P. Laudon, 2005). They observed that most of the traditional cost-benefit analysis methods miss out a great deal of strategic considerations in an attempt to quantify and discount monetary units of intangibles. Therefore, this paper introduces an approach that can handle the problem that had defined earlier such as;(1) how to bridging the tangible and intangible benefits for cost-benefit

Fuzzy-Monte Carlo Simulation for Cost Benefit

investment at different certainty levels.

**4. A software house company ABC** 

annual method for final product per unit of USD500.

Simulation).

discussed in Section 2.2.

**3. Cost benefit analysis of KMS investment** 

Analysis of Knowledge Management System Investment 77

The motivation of this paper is the lack of studies in the literature about how the expected revenue increase of KMS investment is determined by using NPV calculations. Therefore, the fuzzy rule-based system is used to calculate the expected revenue increase, and the Monte-Carlo simulation method is applied to determine the expected NPV of KMS

Referring to the limitations of existing cost-benefit analysis as discussed in Section 2, a new mechanism that can solve the problem must be established. This paper proposes framework that able to bridging intangible and tangible benefit for cost-benefit analysis as shown in Figure 1. The framework consists of four main process and one sub process namely benefit identification, knowledge acquisition, determine the probability distribution, modelling of

The proposed framework starts with to identify the benefit of KMS investment (See Figure 1, Benefit Identification process). Once the benefit identification has been done, the knowledge acquisition for handling the intangible benefits by using fuzzy rule-based system (FRBS) is conducted (See Figure 1, Knowledge Acquisition process). Furthermore, the output of knowledge acquisition process and tangible benefit are determined their probability distribution based on the characteristic of data (See Figure 1, Determine the Probability Distribution for Each Benefit). Once a FRBS has been set up, the probability distributions of those intangible and tangible benefits are linked to an economic model (See Figure 1, Modelling of Cost Benefit Impact to KMS Investment). Finally, perform the simulation for forecasting the certainty level of expected NPV (See Figure 1, Performing

In order to illustrate how the proposed framework works, a cost benefit analysis of KMS

An ABC company of software house has three branches in different cities, which meets the demand based on job order. The company plans to integrate KMS in their information and communication technology infrastructure. The management board of the company requests a cost-benefit analysis for the KMS investment. In the cost-benefit analysis, costs is categorized in capital expenditures and operating expenditures. On the contrary, the cost saving, increasing the quality of products, and employee productivity and speed are considered as benefits of the KMS investment. The cost savings contribute to increase the profits, while increasing orders due to the customer satisfaction is defined in expressions of productivity-speed time and quality of product impact. The benefits is identified and

The revenue element of ABC Company consists of total of orders with the yearly amount before KMS adoption is 200 units with standard deviation 18% and the price per unit of USD5000. The investment costs of KMS are structured by capital expenditure (*CXn*) and operating expenditure (*CYn*) as USD200000 and USD20000 per year respectively, while the cost unit for the target of cost savings consists of average of annual direct labor cost per unit product (20 labor) of USD100, annual purchase material cost per unit product of USD800,

investment for a software house company ABC is given in the following section.

risk impact to economic model, and performing simulation for risk analysis.

analysis of KMS investment, (2) how to assess and manage the key factors as a reason the KMS success or failure, which is in uncertainty matters.

Over the years, Artificial Intelligence (AI) techniques such as Artificial Neural Network (ANN), Genetic Algorithm (GA), and Fuzzy Logic (FL) have been studied and employed in such kinds of investment decision making. Fuzzy Logic (Zadeh, 1965) has been widely used because of its obvious advantages of effectively dealing with linguistic expressions and capturing experts' knowledge on a specific problem. One of the key advantages of intelligent systems or such as fuzzy logic, is the modelling of unstructured variables and an attempt to utilize linguistic values in the evaluation process (Harmon and King, 1985). Fuzziness is inherent in many problems of knowledge representation, and the other is that high level managers or complex decision processes often deal with generalized concepts and linguistic expressions, which are generally fuzzy in nature. Modelling of imprecise and qualitative knowledge, as well as the transmission and handling of uncertainty at various stages are possible through the use of fuzzy sets. Fuzzy logic is capable of supporting to a reasonable extent, human type reasoning in a natural form. Examples of intelligent and soft computing techniques utilized in cost-benefit analysis of EIS can be found in (Uzoka, 2009). The framework of Uzoka (2009) is oriented for providing a cost-benefit analysis in EIS investment evaluation. However, cost-benefit analysis still need to provide an approach that not only includes the tangible and intangible benefits, but also provides the relationship among them and how they affect the investment output. All these benefits impact should be incorporated into an economic model with the purpose of informing the decision-maker about the amount of loss, cost saving, or revenue increase with an intention to inform the manager whether investing a KMS is worthwhile or a waste for the enterprise.

Therefore, this paper primarily concerns with providing such a framework for the costbenefit analysis of KMS investment, which is utilized for assessment of the customer sales increase. Fuzzy rule based systems have been the most popular and easiest way to capture and represent fuzzy, vague, imprecise and uncertain domain knowledge. The fuzzy rule based systems (FRBS) uses fuzzy IF-THEN rules to determine a mapping from fuzzy sets in the input universe of discourse to fuzzy sets in the output universe of discourse based on fuzzy logic principles. In recent years, many researchers use the concept of a pure fuzzy logic system where the fuzzy rule base consists of a collection of fuzzy IF-THEN rules for many objectives such as flow time prediction in semi conductor manufacturing system (Chang et al., 2006), and Ustundag et al. (2010) who use FRBS for determining the revenue increase due to the quality of supply chain of companies after RFID implementation. Furthermore, the Monte Carlo simulation is implemented to calculate the expected net present value (NPV) for evaluating the attractiveness of KMS investment. Investment appraisal based on Monte-Carlo simulation of net present value (NPV) is a suitable methodology for KMS investment by which the uncertainty encompassing the main variables projected in a forecasting model is processed in order to estimate the impact of risk on the projected results. It is a technique in which a mathematical model is subjected to a number of simulation runs, usually with the aid of a computer. During this process, successive scenarios are built up using input values for the investment key uncertain variables which are selected at random from multi-value probability distributions. The simulation is controlled so that the random selection of values from the specified probability distributions does not violate the existence of known or suspected relationships among the investment variables.

analysis of KMS investment, (2) how to assess and manage the key factors as a reason the

Over the years, Artificial Intelligence (AI) techniques such as Artificial Neural Network (ANN), Genetic Algorithm (GA), and Fuzzy Logic (FL) have been studied and employed in such kinds of investment decision making. Fuzzy Logic (Zadeh, 1965) has been widely used because of its obvious advantages of effectively dealing with linguistic expressions and capturing experts' knowledge on a specific problem. One of the key advantages of intelligent systems or such as fuzzy logic, is the modelling of unstructured variables and an attempt to utilize linguistic values in the evaluation process (Harmon and King, 1985). Fuzziness is inherent in many problems of knowledge representation, and the other is that high level managers or complex decision processes often deal with generalized concepts and linguistic expressions, which are generally fuzzy in nature. Modelling of imprecise and qualitative knowledge, as well as the transmission and handling of uncertainty at various stages are possible through the use of fuzzy sets. Fuzzy logic is capable of supporting to a reasonable extent, human type reasoning in a natural form. Examples of intelligent and soft computing techniques utilized in cost-benefit analysis of EIS can be found in (Uzoka, 2009). The framework of Uzoka (2009) is oriented for providing a cost-benefit analysis in EIS investment evaluation. However, cost-benefit analysis still need to provide an approach that not only includes the tangible and intangible benefits, but also provides the relationship among them and how they affect the investment output. All these benefits impact should be incorporated into an economic model with the purpose of informing the decision-maker about the amount of loss, cost saving, or revenue increase with an intention to inform the

manager whether investing a KMS is worthwhile or a waste for the enterprise.

investment variables.

Therefore, this paper primarily concerns with providing such a framework for the costbenefit analysis of KMS investment, which is utilized for assessment of the customer sales increase. Fuzzy rule based systems have been the most popular and easiest way to capture and represent fuzzy, vague, imprecise and uncertain domain knowledge. The fuzzy rule based systems (FRBS) uses fuzzy IF-THEN rules to determine a mapping from fuzzy sets in the input universe of discourse to fuzzy sets in the output universe of discourse based on fuzzy logic principles. In recent years, many researchers use the concept of a pure fuzzy logic system where the fuzzy rule base consists of a collection of fuzzy IF-THEN rules for many objectives such as flow time prediction in semi conductor manufacturing system (Chang et al., 2006), and Ustundag et al. (2010) who use FRBS for determining the revenue increase due to the quality of supply chain of companies after RFID implementation. Furthermore, the Monte Carlo simulation is implemented to calculate the expected net present value (NPV) for evaluating the attractiveness of KMS investment. Investment appraisal based on Monte-Carlo simulation of net present value (NPV) is a suitable methodology for KMS investment by which the uncertainty encompassing the main variables projected in a forecasting model is processed in order to estimate the impact of risk on the projected results. It is a technique in which a mathematical model is subjected to a number of simulation runs, usually with the aid of a computer. During this process, successive scenarios are built up using input values for the investment key uncertain variables which are selected at random from multi-value probability distributions. The simulation is controlled so that the random selection of values from the specified probability distributions does not violate the existence of known or suspected relationships among the

KMS success or failure, which is in uncertainty matters.

The motivation of this paper is the lack of studies in the literature about how the expected revenue increase of KMS investment is determined by using NPV calculations. Therefore, the fuzzy rule-based system is used to calculate the expected revenue increase, and the Monte-Carlo simulation method is applied to determine the expected NPV of KMS investment at different certainty levels.
