Evaluating the risks of information system investments

27 Nov

When a company decides to invest, most often an element of risk is involved. Risk on its own is a complex term therefore we must define it before we can evaluate the risk of IS investments. The meaning of the term risk has been fraught with confusion and controversy (Watson & Hope, 1984). Willcocks & Margetts (1993) refers to risk as being exposed to such consequences as failure to obtain some or all of anticipated benefits due to implementation difficulties. However in order to account for the risks involved in an investment it must be measured/evaluated.

There have been many frameworks formed to assist risk assessment in IT projects. According to Cash et al. (1992) the magnitude of risk involved is influenced by three dimensions within the IT project.

1)      Project size: include costs, number of staff involved, estimated time, the number of company partnerships involved.

2)      Technology Experience: Newer technologies are more prone to failure rather than tested ones.

3)      Project Structure: If a project is well structured and has fixed outputs that are not subject to change acquires less risk.

Another framework that evaluates the risks of IS investments is the Parker framework (1988). It evaluates five risks which including the following:

1)      Organizational risk- how well equipped the company is in terms of implementing an IT project (e.g. experience and skill sets)

2)      IS infrastructure risk- Evaluating the needs required prior to investment in the project.

3)      Definitional uncertainty- Evaluating whether the specifications of the project are known or not known.

4)      Competitive Response- evaluating the risk of not investing in the project (the opportunity cost).

5)      Technical uncertainty- evaluate whether a project is dependent on untested technologies (Willcocks & Margetts, 1993).

Both Parker and Cash et al. frameworks is quiet broad. A more detailed and analytical framework is developed by Pettigrew et.al (2001). The framework highlights the risks involved in the development, introduction and use of IS by examining six conceptual categories.

1)      Outer Context- External factors will have to be evaluated such as political, economic, market and competition factors.

2)      Inner Context- Analysing the structure, management, company relations and human resources.

3)      Content- Evaluating the proposed changes such as the technologies size and its characteristics.

4)      Processes- Calculating the “how” part of implementing a new project or technology and solving perceived issues.

5)      Outcomes- Include both the evaluation of anticipated and unanticipated outcomes assessed in the IS project such as costs, time, utility and the performance of the project.

According to Willcocks and Margetts “computerisation remains a high risk process but the degree and type of risk is influenced considerably by environmental and organization contexts and pressures”. Similar to the methods of evaluating IS investments, there is no one method to evaluate the risks involved in such a decision. When an IT/IS investments involves many risks, there are potentially many “ways to reconfigure the investment using different series of cascading (compound) options” (Benaroch 2002).

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2 Responses to “Evaluating the risks of information system investments”

  1. oconnormatty7 November 28, 2012 at 9:46 am #

    Excellent blog lucid21! Interesting to view the detailed frameworks mapped out.

  2. kechy4me November 28, 2012 at 11:50 pm #

    Yes, the risk assessment process is important and should be driven by the effect of the risks on delivering benefits, based on the nature of the benefits.(Ward and Peppard 2002).

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