Evaluating IS Investments

31 Oct

Much has been written about how IS investments should be assessed and justified. There is little, if any consensus on how it should be done, but considerable concensus that the methods used are rarely appropriate!

Several surveys have shown that there is virtually no consistency in the practises used. Cooke and Parrish discovered that 70% of organisations had no formal justification and post implementation review process for IS/IT investments. Farbey et al. found that only 50% of IS/IT projects were subject to formal preinvestment appraisal; in less than  half the cases was a recognised financial analysis technique used, and in barely 30% was the outcome of the investment evaluated. They like many others, suggest that given the wide range of benefit types, which can be quantified to greater or lesser degrees, a multiplicity of methods for justifying investments is needed. But, they recognise that selecting the right approach in any situation can itself be fraught with organisational and political problems.

Other analysis by Ballantine et al and Wilcocks and Lester suggest that traditional financial analysis techniques are still commonly in use, but that organisations are finding it increasingly diffcult to use them as the types of benefit become more diffcult to quantify adequately.

Hochstrasser, Peters and Symons all suggest ways in which different techniques can be used to evaluate different types of project. Interestingly, Lincoln and Shorrock found that many successsful ‘strategic’ IS/IT projects had bypassed the normal justification process used in the organisation. Overall, organisations are far from satisfied with the techniques and processes they have for IS/IT investment appraisal-only 36% felt they are adequate in a survey of major UK corporations.

Another point which is peculiar to evaluating IS/IT investments, is the way in  which particular costs and benefits should be treated. Most accounting evaluation practices are conservative, expecting the worst and mistrusting the best. It is important to take a realistic view of the costs rather than a theoretical one. On the other side, identifying and quantifying the benefits of a system can be diffcult.

Parker et al assess  the ways in which information and systems benefits accure and how they can be quantified to help in justifying  investments. They considered three main types of applications:

  1. Substitutive: Technology replacing people with economics being the main driving force, to improve efficiency.
  2. Complementary: Improving organisational productivity and employee effectiveness by enabling work to be performed in new ways.
  3. Innovative: Achieving a competitive edge by changing trading practice, creating new markets, etc.

They suggest ways in which each type of application should be justified and they defined five basic techniques for evaluating benefits: traditional cost-benefit analysis, value linking, value acceleration, value restructuring and innovation evaluation. And by analysing costs and benefits using these techniques, the overall ‘economics’ of an application can be assessed. The ideas are certainly more creative in interpreting information’s long term value than traditional accounting views of systems investment. It is important to base the assessment of application investments on the overall nature of the contribution they are expected to deliver to the business and the portfolio approach can offer help in making such judgements.

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3 Responses to “Evaluating IS Investments”

  1. cmcoughlan October 31, 2012 at 11:22 pm #

    You made a good point there kecky4me about how literature often condemns the tools being used to evaluate Information systems but there is a lot less written about the best ways to measure different types of benefits.

    To be honest though I think a ‘one size fits all’ measurement tool doesn’t actually exist and probably never will. Every organisation is different in its operations and goals and what output or benefits is important to each firm can vary. Thus, it’s probably near impossible to write a piece of literature outlining correct methods to measure the contribution of IS systems… I think each company needs to address this problem individually – Decide what benefits or contribution the firm needs the I.S to make and invent their own way of measuring the output.

    • kechy4me November 4, 2012 at 9:31 pm #

      I agree with you, IS projects are significantly different from each other and IS can lead to different outcomes in 2 different organisations depending on how it is used and the benefits that is important to each organisation. This implies that no single method of investment evaluation will necessarily work across all IS projects.

Trackbacks/Pingbacks

  1. Taking a step back « So Opinionated … - November 2, 2012

    […] (https://sopinion8ed.wordpress.com/2012/10/29/a-continuation-on-formal-and-informal-evaluation/; https://sopinion8ed.wordpress.com/2012/10/31/evaluating-is-investments/). Taking a step back, however, some reasons why the process is so difficult needs clarification. […]

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