8 Feb

Following my last blog about some of the complex issues surrounding an IS investment, one could argued that to evaluate an IS investment at a proposal stage has probably been a difficult task for some time.

Because IS investments involves a large amount of an organisational capital expenditure, it is essential to evaluate an IS investment at the proposal stage. This blog attempt to look at some suggested methods of evaluation at the proposal stage.

To invest in information system is a big task and it has become more compulsory. Information systems are not only used for administrative and decision making. It has also change the ways production processes are being carried out and also enable the development of new products and services.

The recent articles I have read shows that companies are facing several problems in evaluating proposals for an IS investment. A number of courses that were identified could be:

  • It is difficult to establish the boundaries of the systems.
  • And another possible course is how should long term consequences of an IS investment be incorporated e.g. what is the contribution of a database management system to the realisation of data infrastructure in an organisation.

Depending on the type of investment, a method can be limited with respect to the investment. I.e, a firm investment in general or an IS investment in particular. For an IS investment, are we looking for investment to improve performance, competitive edge investments, infrastructure investment or research investment.

Though different authorities have given an overview of the available methods for evaluating an IS investment, this blog distinguishes four basic approaches that can be used in many proposed methods of evaluation, and those approaches are:

  1. The financial approach:  This approach will focus on the incoming and outgoing cash flows as a result of the investment. Methods that can often be used in the approach will involve

1.1.   The payback period, ie the period between the moment that the IS investment is made and the moment that the total sum of the investment is recovered through the incoming cash flows.

1.2.   The internal rate of return, ie the threshold at which after discounting the incoming and outgoing cash flows, the net present value equals zero. If this threshold exceeds the opportunity cost of capital, it is worthwhile to invest in the project.

1.3.   Net present value, ie if the value is larger than zero it is best to go ahead with the investment.

2. The multi criteria approach: Apart from financial consequences, an IS investment has non-financial consequences. This approach could be very useful when investing in advanced technologies. Before using this method, a number of gaols or decision criteria can be designed. Scores will be assigned to each criteria for each alternative considered. The relative importance of each alternative will be considered established by means of weights, and the final scores of the alternative is calculated by multiplying the score on the different decisions criteria with the assigned weight.

3. The ratio of approach: Several ratios have been proposed to assist in IS investment evaluation. Eg, IS expenditures against total turnover and all yielding that can be attributed to Is investment against total profit. It is important to know that ratios do not necessarily take only financial figures into account. IS expenditures can also be related to the total number of employees or to some output measures e.g. product or services.

4. The portfolio approach: This method states that a balance is needed between quality and importance. Information systems are more important if they support important activities and if the activities are more important to the organisation [1]

In my opinion, it is important for top managers and other bodies involved in making the decision regarding the investment of an information systems within an organization to adequately analyze the necessity of making such an investment. If the reasons include a strong competitive advantage or an innovation that can change the way the company conduct business interms of process or business model, then the firm is more likely to get a positive experience. Companies should not invest in IS simply because they want to adopt technology. Doing so might not only affect the firms finance, but also likely to affect their strategic advantage. The final decision to invest in information systems should be in line with the firms strategic plan and their business direction.

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