Chapter 4: Business Value of IT: Frameworks and Methods

Question 1

What we know so far….(based on research findings) about IT value

Answer 1

• IT does create value
  
  • Value can be of different types (financial – ROI, intermediate – process-related, affective perception-related)
• IT creates value under certain conditions
  
  • 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)
• IT-based value manifests itself in many ways
  
  • Different ways (productivity, profitability, consumer surplus, innovativeness) and at different levels (individual, group, firm, industry or process)
• IT-based value and IT-based competitive advantage are not the same
  • Competitive advantage stems from creating “differential value”, can be achieved through leveraging IT and complementarities
• IT-based value could be latent
  
  • IT-based value creation is not immediate, there is a time lag (often in the order of years)
• Numerous factors mediate IT and value
  
  • Business-IT alignment, BPR / BPM, IT Usage, etc.
• Causality for IT value is Elusive
  
  • It is difficult to fully capture and attribute the value generated by IT investments

Question 2

The Process through which IT creates Business Value

Answer 2

• IT Resources (Human & Technological)
• IT and Organizational Complementary Resources
• IT-Strategy Alignment
• Organizational (IT-Based capabilities)
• IT intermediate value
• Output value
• Financial value

Question 3

Business Value can be of different types

Answer 3

• Direct contribution to the corporation’s market position or revenue
• Deliverables and results that support solving customer business needs and challenges
• Financial improvements derived from customer cost savings or benefits
• Examples of technology investment that advance the industry

Question 4

Benefit and Value Categories of IT Investments

(Different Manifestations of IT-based value)

Answer 4

Question 5

IT-Potentials and their Organisational Benefit

Answer 5

• IT-Potential
  
  • Organisational Influence/Benefit
• Automate
  
  • Reduction of Manual Actions
• Inform
  
  • Availability of Huge Quantities of Detailed Information
• Sequential
  
  • Natural Order of Activities or Even Paralleling Processes
• Precise/targeted
  
  • Continuous Process Monitoring
• Analytical
  
  • Complex Analysis of Existing Information
• Integrative
  
  • Pooling of Heterogeneous Activities
• Knowledge creating
  
  • Creation of Knowledge and Expertise
• Simplifying
  
  • Removing of Intermediaries and Business Process Redesign
• Geographical
  
  • Overcoming Space

Question 6

A Taxonomy of IS Business Value Research

Answer 6

Question 7

IS Business Value

Answer 7

• Measuring the business value of IS
  
  • Assessing the business value of current systems and technologies
  • Post-investment

Is the system resulting in some performance gain? Can this gain be measured? How should we measure it?

• Evaluating IS investments
  
  • Assessing the feasibility of making new investments into IT/IS
  • Pre-investment

Should we invest in the new system or technology? How much will it cost? What kind of gains can we expect?

Question 8

Measuring the Business Value of IS

Answer 8

• Process Oriented Measurement
  
  • Measures impacts on intermediate processes
  • At various levels of aggregation
  • Efficiency gain or quality gains are also value gains
• Production Economic Orientation
  
  • Attribute quantifiable gains
  • Assess different productivity factors
  • 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)

Question 9

Measurement of IS Business Value

Answer 9

Question 10

Level of Measurement of IS Business Value

Answer 10

Question 11

Method: Economic Efficiency Calculation WiBe 4.1

Answer 11

Question 12

Methods to evaluate IS / IT Investments

Answer 12

• Total Cost of Ownership (Krcmar, 2010, pp. 529)
  
  • A cost basis for determing the economic value of an investment
  • Includes total cost of acquisition and operating costs
  • Popularized by the Gartner group in 1980‘s
• Simple Multi Attribute Rating Technique (SMART) (Krcmar 2010, pp. 530)
  
  • A systematic process for decision making
  • Sensitivity analysis
  • 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
• Discounted Cash Flow Analysis / Net Present Value (NPV) Analysis
  
  • Based on the concept of time value of money
  • Future cash flows are estimated and discounted to get their present values
  • The sum of future cash flows (incoming and outgoing is the NPV)
• Real Options Analysis (Krcmar, 2010, pp. 534)
  
  • A real option is the right, but not the obligation to undertake a particular investment decision
  • Accounts for managerial flexibility
  • Suitable under conditions of technological uncertainty
  • Valuation is done using Black-scholes model

Question 13

Summary

Answer 13