Information Systems in Organisations: Role, Costs and Benefits

Every decision a manager makes is only as good as the information behind it. A distributor in Ibadan that cannot see which customers pay late, a manufacturer in Agbara that learns of a stock-out only when the production line stops. A bank branch that cannot trace a transaction all have the same problem: the information reaches the right person too late, in the wrong form, or not at all.

An information system is the combination of people, procedures, hardware, software and data that captures data, turns it into information and delivers it to the people who decide and control.

This topic explains what an information system does for management, the qualities that make information useful, what a system costs, what it brings, the Nigerian data protection rules that now sit over every system, and how an organisation decides whether a system is worth buying. The next topic covers the internet, intranet, wireless technology and networks.

The subject builds on Management Information Systems at Foundation level. At Skills level the questions ask you to judge a system for a given business, so every cost and benefit you name must be tied to the facts in the question. The answer must end with a conclusion.

What an information system is and what it does for management

Data are facts that have not yet been given a meaningful structure: a list of invoice amounts, a count of units, a clock-in time. Information is data that has been processed into a form that means something to the person who receives it: debtors grouped by age, the profit on each customer, the hours lost to machine breakdowns.

Managers cannot decide without information, and better-quality information generally leads to better decisions. When information is developed further into knowledge that improves how the business works, it becomes an asset.

An information system is the organised combination of people, procedures, hardware, software, communication links and data that collects, stores, processes and distributes information. A management information system (MIS) is an information system used for decision-making, coordination, control, analysis and visualisation of information within an organisation.

It looks at how people, processes and technology work together, and its main goal is to give managers the information they need to decide well and reach the organisation’s goals.

The role of an information system in performance management

Performance management is the set of activities that make sure goals are met effectively and efficiently. To do this, managers need reliable information to:

• Make decisions: pricing, make-or-buy, product mix, investment.
• Plan: budgets, forecasts and targets for the period ahead.
• Control: compare actual results with plan and act on the differences.
• Review decisions: check what a decision achieved, as a basis for the next one.
• Run routine transactions: order processing, invoicing and payroll.

Planning and monitoring both depend on information that is relevant, reliable and timely. Early management accounting systems drew their information from inside the business, usually from the cost accounting system. Modern systems hold large databases of financial and non-financial data from external as well as internal sources, and analyse it with spreadsheets and models such as activity based costing.

Internal and external sources

A control system must capture all the data management needs. Internal sources include the financial accounting records, the human resource and payroll records, production information, sales information, and staff themselves (for example through the minutes of meetings). External information is needed for strategic planning and control, and often for tactical and operational decisions too. It covers:

• Customers: their needs and expectations and whether these are changing.
• Competitors: who they are, their size, market share, profitability and pricing policy.
• Legal environment: the laws and regulations that must be complied with.
• Suppliers: who can supply key goods and services, their quality and financial viability.
• Political and environmental developments: regulation and conditions that affect operations.
• Economic and financial environment: interest rates, exchange rates, other financial markets and the forecast state of the economy.

Typical external sources are market research, supplier price lists and brochures, trade journals, newspapers and other media, government reports and statistics (for example from the National Bureau of Statistics), and reports from trade bodies. Many can be reached through the internet. External information has limits, and a good answer states them.

It may be inaccurate and hard to check, incomplete, out of date, hard to find, unavailable when needed, not in the form required, too detailed or not detailed enough, or misinterpreted.

The qualities of good information

Four qualities are essential:

• Relevance. The information must help the decision being made. Information that is not relevant to a decision has no value, so the design of a system should start from the purpose of the information.
• Reliability. The data must be accurate enough for its purpose, and complete.
• Timeliness. The information must be available when management needs it.
• Economy. The cost of providing the information must not exceed the benefit it gives. This is what limits the size of most systems: at some point more information costs more than it is worth.

Seven further qualities complete the picture. Completeness: all the variables the decision needs are present. Accuracy: correct and precise for the purpose. Clarity: clear to the user. Consistency: agrees with established norms and frameworks. Comprehension: presented so the reader can understand it easily. Comparability: policies are applied consistently from one period to the next. Verifiability: another person using the same data and assumptions can reproduce the result.

Designing for a purpose: customer profitability

Suppose management wants to know which customers make a profit. The design starts with the purpose: to find which customers contribute most and which lose money, so that prices can be raised or the unprofitable customers dropped. Next comes the data: customers are sorted into categories, and the revenue, cost of sales and directly attributable selling, distribution, administration and finance costs of each category are measured.

Last comes timing: the report is produced when management will review it, perhaps every quarter. Purpose first, then data, then capture, then timing, is the order to follow in an answer.

The costs and benefits of an information system

Costs

• Implementation. Hardware, software, installation, converting old data to the new system and, if the system is built in-house, the cost of development staff.
• Training. Staff must learn the system, and output falls while they do.
• Maintenance. Ongoing support, upgrades, licences and communication charges.
• Data storage and processing. Holding and processing large volumes of data needs hardware and software, and more data is not always more useful.
• Security. Systems are open to cyberattacks and data breaches, so money must be spent on protection, and a breach can cost far more than the protection would have.
• Dependence on technology. When the system fails, operations stop, so back-up and recovery arrangements are needed.
• Job displacement. Some roles disappear and others need new skills, which brings redundancy and retraining costs and may hurt morale.
• Opportunity cost. Money spent on one system cannot be spent elsewhere in the business.
• The cost of information itself. Capturing and processing data costs hardware, software and time. Large volumes can bury the important details, and decisions based on incomplete or misread information can be very costly.

Benefits

• Efficiency. Tasks are automated, processes streamlined and manual effort reduced.
• Better decisions. Timely and accurate data supports decisions at every level.
• Collaboration. Staff, customers and partners communicate and coordinate better.
• Lower costs. Automation lowers operating costs and the need for physical resources such as paper and storage space.
• Better customer service. Orders can be tracked, relationships managed and service personalised.
• Availability. Data and resources can be reached from any place and at any time.

A system can also supply custom data for a particular task, custom formats (a list, a chart) suited to the user, real-time data where fast action matters (a machine fault, for example) and archived data for reports and planning. Benefits are tangible when they can be measured in money (labour hours saved, lower stock holding) and intangible when they cannot (better morale, a better reputation, better quality of decisions).

Intangible benefits can be the largest, but they are the hardest to prove, which is why the methods of justification below matter.

Data protection rules that apply to information systems in Nigeria

Any system that holds information about identifiable people, such as customers, staff or sole-trader suppliers, must comply with the Nigeria Data Protection Act 2023 (NDPA). The Act is enforced by the Nigeria Data Protection Commission (NDPC) and replaced the Nigeria Data Protection Regulation (NDPR) 2019 as the main data protection law.

The Commission issued the General Application and Implementation Directive (GAID) 2025 on 20 March 2025, and it took effect on 19 September 2025. From that date the Act and the Directive govern data protection, and the 2019 Regulation and its 2020 Implementation Framework no longer operate as separate instruments. For data controllers and data processors of major importance (DCPMIs), the Directive requires:

• registration with the Commission;
• an initial data protection compliance audit within 15 months of registration, and an audit every year after that;
• a Compliance Audit Return (CAR) filed with the Commission each year by 31 March, covering the previous year; and
• a trained and independent Data Protection Officer (DPO).

These obligations are costs of owning a system. When a question asks for the costs of a system that will hold personal data, add the officer, the security controls, the audits and returns, the impact assessments and the risk of a breach to the usual list. Check the Commission’s current notices before advising a real client, because thresholds, fees and filing arrangements are adjusted from time to time.

Sources and references

• Nigeria Data Protection Act 2023.
• Nigeria Data Protection Commission, General Application and Implementation Directive 2025, issued on 20 March 2025 and in force from 19 September 2025.

These points are stated as at 6 November 2026.

Justifying the cost: methods of cost-benefit analysis

An organisation should not buy a system because it is fashionable. It compares what the system will cost with what it will bring. The main methods are these.

• Cost displacement and avoidance. The most common and direct method. Compare the cost of the system with the current costs it will displace and the future costs it will avoid. Only costs are estimated, not sales or profits.
• Time saved multiplied by salary. Estimate the percentage of staff time the system saves and multiply it by the staff’s loaded salaries. The saving is real only if the time is turned into cash by removing posts or putting the time to productive use.
• Work value. A refinement of the previous method that recognises that staff do tasks of different value, and that a main benefit of systems is that they change how work is done.
• Break-even analysis. Used when costs can be measured but some benefits are uncertain or intangible. It finds the level of benefit at which benefits equal costs, and management then judges whether that level is achievable.
• Cost-effectiveness analysis. Used to choose between similar systems or components. It finds the best of several options but does not prove that the best option is worth buying.
• Decision analysis. Suited to systems that support routine decisions, especially under uncertainty.
• Structural models. Compare the cost of managing the information with the profit it produces.
• Subjective analysis. The decision maker judges whether the benefits justify the cost. It is used when benefits are intangible, speculative or uncertain.
• Discounted cash flow (DCF) analysis, using net present value (NPV) or the internal rate of return (IRR), plus life cycle cost analysis, incremental cost analysis and sensitivity analysis.

Layouts to use in calculations

1. Time saved. Number of staff × loaded annual cost per person × percentage of time saved = annual value of time saved. State the assumption that the time becomes cash.
2. Net annual benefit. Savings and extra contribution each year − running costs each year.
3. Payback. Initial cost ÷ net annual benefit (when the benefit is level each year).
4. NPV. Net annual benefit × annuity factor for the life and cost of capital − initial cost. The annuity factor is (1 − (1 + r)⁻ⁿ) ÷ r.
5. Break-even benefit. Initial cost ÷ annuity factor = the level annual net benefit at which NPV is zero. Add running costs to find the gross benefit needed.
6. Margin for error. (Expected net benefit − break-even net benefit) ÷ expected net benefit = the percentage by which the benefit can fall before the system stops paying for itself.

Annuity factors in this topic are shown to four decimal places, money is in ₦ million to two decimal places, and each answer is rounded once, at the end.

Worked examples

1. Value of time saved.
   8 clerks × ₦2.40m × 25% = ₦4.80m a year.
2. Net annual benefit.
   4.80 − 1.35 = ₦3.45m.
3. Payback.
   9.00 ÷ 3.45 = 2.61 years, about 2 years and 7 months.
4. Comment. The ₦4.80m is a saving in cash only if the clerks’ time is released, for example by not replacing leavers or by moving staff to work that earns money. Otherwise the benefit is an improvement in capacity, not a saving.

1. Initial outlay.
   18 + 12 + 6 + 4 = ₦40.00m.
2. Net annual benefit.
   (11.5 + 6.0 + 5.5) − 7.0 = ₦16.00m.
3. Annuity factor.
   Five years at 20% = (1 − 1.20⁻⁵) ÷ 0.20 = 2.9906.
4. Present value of the net benefits.
   16.00 × 2.9906 = ₦47.85m.
5. NPV.
   47.85 − 40.00 = +₦7.85m.
   The system earns more than the 20% required, so it is acceptable on financial grounds.
6. Payback.
   40 ÷ 16 = 2.5 years (simple payback, ignoring the time value of money).
7. Break-even net benefit.
   40 ÷ 2.9906 = ₦13.38m a year.
8. Margin for error.
   (16.00 − 13.38) ÷ 16.00 = 16.4%.
   If the net benefit turns out more than 16.4% lower than forecast, the system will not earn 20%.

Examiners vary the facts, so expect variants: benefits that start in year 2, a residual value for hardware, running costs that rise each year, or a choice between two systems. Lay the working out in the same order and show every figure.

Common mistakes

• Listing benefits only. A question on costs and benefits needs both sides, and a conclusion on which is larger.
• Reciting a list from memory. “Training costs” scores little. “Training the eight order clerks in the new system will cost about ₦0.5m and slow output for a month” scores.
• Treating time saved as cash saved. It is cash only if the time is released.
• Leaving out running costs. The initial cost is not the whole cost.
• Confusing data with information. Data is raw; information is processed for a purpose.
• Ignoring intangible benefits. Name them and say how you would test them, for example with break-even or sensitivity analysis.
• Forgetting data protection costs where the system holds personal data of Nigerian customers or staff.
• No conclusion. A “discuss” or “advise” question always needs a recommendation.

Quick revision

• Data is raw facts; information is data processed for a purpose; an information system captures, processes and delivers it for decisions, planning and control.
• Internal sources: accounting, payroll, production, sales, staff. External: customers, competitors, suppliers, law, politics, markets.
• Essential qualities: relevance, reliability, timeliness, economy. Others: completeness, accuracy, clarity, consistency, comprehension, comparability, verifiability.
• Costs: implementation, training, maintenance, storage and processing, security, dependence, job displacement, opportunity cost, cost of information, compliance.
• Benefits: efficiency, decisions, collaboration, lower costs, customer service, availability.
• Methods: cost displacement, time saved, work value, break-even, cost-effectiveness, decision analysis, structural models, subjective analysis, DCF, life cycle cost, sensitivity.
• Nigeria: Nigeria Data Protection Act 2023; Commission directive in force from 19 September 2025; annual audit return by 31 March for organisations of major importance.

How the marks are earned

• State or list: short points, no explanation, about one mark each.
• Explain: each point needs a reason or an effect, so plan about one mark for the point and one for the explanation.
• Discuss: give both sides, apply them to the business, and end with a conclusion. Plan about one well-developed point per two marks, with a mix of costs and benefits.
• Calculate: show the layout and each step, because method marks are given even when an arithmetic slip follows.
• Advise or evaluate: state the decision, then the figures and the non-financial factors that support it.

Practice questions

These are original questions, written in the style of the Skills examination. Work each one before you open the answer.

Recall check: multiple choice

Section B style: written questions

Model answers

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