4 Business Value of IT: Frameworks and Methods Flashcards
- 1 Business Value of IS/IT
- 1.1 Definition & Research
What are Problems when Measuring IS / IT Value?
• IS/IT does create value
o Value can be of different types (financial –ROI, intermediate –process-related, affective –perception-related)
• IS/IT creates value under certain conditions
o Has to be a part of a business value creating process with other organizational factors operating in a synergistic manner (resource-based view, IT capabilities)
• IS/IT-based value manifests itself in many ways
o Different ways (productivity, profitability, consumer surplus, innovativeness) and at different levels (individual, group, firm, industry or process)
• IS/IT-based value and IS-based competitive advantage are not the same
o Competitive advantage stems from creating “differential value”, can be achieved through leveraging (hebeln) IS and complementarities
• IS/IT-based value could be latent (verborgen)
o IS-based value creation is not immediate, there is a time lag (often in the order of years)
• Numerous factors mediate (indirekt) IS/IT and value
o Business-IS/IT alignment, BPR / BPM, IT Usage, etc.
• Causality for IS/IT value is Elusive (trügerisch)
o It is difficult to fully capture and attribute the value generated by IS/IT investments
4.1.1.1 Consequences of IS/IT Value Ambiguity
When we can’t articulate the value, we tend to focus on the cost!
To many executives, the cost of IS/IT appears:
o substantial; even excessive
o never-ending
o not well managed
Creates IS/IT direction toward:
o down-sizing
o under-investment
o outsourcing
4.1.1.3 Benefit and Value Categories of IS / IT Investments (Tabelle)
(Different Manifestations of IS/IT-based value)
4.1.1.4 IS/IT-Potentials and their Organisational Benefit (Tabelle)
4.2.1.1.1 Measures of IS/IT Value
- Process Oriented Measurement
- Production Economic Orientation
Earnings growth
Market share
Customer awareness and satisfaction
• Process Oriented Measurement
o Measures impacts on intermediate processes
o At various levels of aggregation
o Efficiency gain or quality gains are also value gains
• Production Economic Orientation
o Attribute quantifiable gains
o Assess different productivity factors
o IT investment is an input to firm’s production function, output is determined by combining different inputs according to a production function (e.g., Cobb- Douglas production function)
4.2.1.1.2 Methods to evaluate IS / IT Investments
What Methods exist for evaluating IS / IT Investments?
• Total Cost of Ownership
o A cost basis for determining the economic value of an investment
o Includes total cost of acquisition and operating costs
o Popularized by the Gartner group in 1980‘s
• Simple Multi Attribute Rating Technique (SMART)
o A systematic process for decision making
o Based on an identification of the different alternatives, their relevant attributes, assigning weights to each attribute and calculating the weighted arithmetic mean for each alternative
o Sensitivity analysis
• Discounted Cash Flow Analysis / Net Present Value (NPV) Analysis
o Based on the concept of time value of money
o Future cash flows are estimated and discounted to get their present values
o The sum of future cash flows (incoming and outgoing is the NPV)
• Real Options Analysis
o A real option is the right, but not the obligation to undertake a particular investment decision
o Accounts for managerial flexibility
o Suitable under conditions of technological uncertainty o Valuation is done using Black-scholes model
- 2.2 Business Value of IT
- 2.2.2 Major Factors to be Adressed (Bild)
