Management of Information Systems

- Session 10
Agenda

• The Value Of Investing In IT

• The Productivity Paradox

• Case Discussion

• Concluding Thoughts
What is Value?
• The most common meaning of value is monetary worth
though value is not always expressed monetarily
• Value of IT investments can be derived from
• traditional (measurable) monetary returns
• indirect returns that may be hard to measure
The Productivity Paradox
• Organizational IT investments have not shown a significant
impact on national productivity statistics

• What are the Possible explanations?

Possible Reasons for the Productivity Paradox
Information Sector and National Economy
Brynjolfsson and Saunders (2009)

• Sources of value in the economy

• Contribution of information sector in GDP

• Less price doesn’t mean less value

• If the cost of producing a good is zero, then over the time, the
competition should drive the price to zero as well

• GDP measures price and quantities and income statements

measure costs or profits
IT Value
• Obtaining value and ROI from IT investments is critical to
organizations because:
• An estimated 50% of U.S. capital investment is for IT
• For some firms, annual IT budgets approach or exceed $1 billion
The Search for Value from IT Investments

• Not all investments in IT should be expected to show a

measurable return
• Investments can have value to an organization even without
measurable returns
• With some IT investments you cannot expect to obtain a
measurable financial return
 The IT Investment Opportunities Matrix
Investment Example Comments Upside P(return
)
Infrastructure Wide Area Supports current business – Little itself but .2 to 1.0
Network may allow for future allows new (.5)
investments programs
Required - no return reporting A cost of doing business Almost none 0 to .5 (.2)
Managerial control systems, budgets

No other way to do Computerized Enable new task or process, Could gain .5 to 1.0
the job reservation provide better customer more than (.75)
system, ATC service forecast
Direct return from IT Walmart Structured cost/benefit and A little if you .7 to 1.0
NPV appropriate can build on (.9)
the investment
Indirect returns CRS in travel Potential for considerable Could be 0 to 1.0 (.5)
agencies return, but indirect benefits substantial
hard to estimate future benefits
Competitive Bank ATMs, EDI, Need the system to compete Very little if 0 to 1.0 (.2)
necessity E-Commerce in business; opportunity cost following the
industry
Strategic Baxter, Merrill High risk-high potential; A high 0 to 1.0 (.5)
application Lynch CMA returns may be estimated potential
after implementation
Transformational IT Virtual Must be combined with A high 0 to 1 (.5)
organizations; changes in management potential
philosophy; risky; high
potential rewards
Case
• Problem at CSAA
• Aging IT Infrastructure
• Inability to launch or improve emerging IT and e-commerce
projects, such as automated members’ self-service capabilities
and enterprise-level customer service

• The Solution
• Replacing old IT Infrastructure
• Solution ensured that CSAA received the latest security patches
and antivirus updates for its 8,500 PCs.
Case
• How did EDS justify the large IT investment at CSAA?

• Apart from financial reasons, any other reason/method to

justify IT investments
Challenges of valuing IT investments
• Difficulties surrounding the measurement of
intangible benefits, such as improved customer
service

• The time lag between an investment and its payoff

• Redistribution of benefits, such as passing benefits

along to customers
• Relating IT Expenditures to Organizational
Performance
Advanced Methods for Evaluating IT Investments
Business Case Approach

One method used to justify investments in projects is referred to as the business case
approach. A business case is a written document used by managers to garner funding
for specific applications or projects. Its major emphasis is the justification for the
required investment. It also provides the bridge between the initial plan and its
execution by incorporating the foundation for tactical decision making and technology
risk management.

• The business case helps:

• to clarify how the organization will use its resources
• justifying the investment
• to manage the risk
• determine the fit of an IT project with the organization’s mission
Framework for Developing a Business Case
Some Conclusions about Investing in IT

IT Investment Result Direct Impact Second Order Impact

Infrastructure Application Direct savings Consumer surplus
Required of IT Revenue generation Greater market share
No other way Indirect returns New organization
Direct return Major Major strategic advantage
Indirect return organizational None
Competitive necessity change
Strategic Partial success
Transformational Failure
Summary

• IT investments range from competitive necessities to

infrastructure
• First mover returns from competitive applications are likely to
be higher than the returns for responses to competition
• The total impact of IT investments is greater than the sum of
the individual contributions
• Applications of technology enhance each other and become
interwoven into the fabric of the organization