Chapter 4: Business Value of IT: Frameworks and Methods Flashcards Preview

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Flashcards in Chapter 4: Business Value of IT: Frameworks and Methods Deck (13):

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

  • 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 creatingdifferential 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


The Process through which IT creates Business Value 

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


Business Value can be of different types 

  • 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 


Benefit and Value Categories of IT Investments 

(Different Manifestations of IT-based value) 


IT-Potentials and their Organisational Benefit 

  • 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


A Taxonomy of IS Business Value Research 


IS Business Value 

  • 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? 


Measuring the Business Value of IS 

  • 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) 


Measurement of IS Business Value 


Level of Measurement of IS Business Value 


Method: Economic Efficiency Calculation WiBe 4.1 


Methods to evaluate IS / IT Investments 

  • 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