In an investment situation a decision is made as to whether the benefits of the investment outstrip the costs and by how much, after a careful consideration of the costs of the investment and its anticipated benefits. The benefits, which accrue, are broadly categorized in terms of tangibles and intangibles. An IT investment situation is different from a conventional investment in the content of benefits. In the case of IT investment, the content of intangibles is high in investment payoffs. More so, lot of these benefits are long term and strategic in nature. While benefits in any other investment situation are primarily tangible which can be easily captured in terms of rupee benefits.
Investments in Information Technology:
It would seem that business investment in IT is at the root no different from business investment in any other. The approach taken to economically evaluate an IT system should be the same as that applied to any investment. After a careful consideration of costs in investment and its anticipated benefits, a decision should be made as to whether the benefits of the investment outstrip the costs and by how much. The argument is that an organization can make investments in many things, which can be one or more information systems. The task is to decide upon the set of investments to make, given constraints on the organization’s financial resources in any given time period, which will maximize the overall rate of return. If the benefits in any IT system are competitive with other investment alternatives, then the firm might commit financial resources to the IT proposal. Otherwise, it won’t. The decision making process is at the heart of such capital budgeting where different possible investments are competing neck to neck for funds. The whole argument is in line with traditional financial investments evaluation methods of net present value and discounted cash flow analysis, which require quantitative values to carry out the analysis.
Evaluating investments in IT on these lines poses a number of problems that investing in the traditional assets does not present. The focus shifts from measuring hard and quantifiable rupee benefits that will appear on the firm’s income statement to measuring indirect, diffuse, qualitative and contingent impacts that are difficult to quantify well. Implementation of IT and benefits accruing from it is a continuous process, where the end results are not apparent at earlier stages and the way the system takes shape is often different from what was anticipated. Often the management fails to look through the ambiguity and identify the importance of IT as a strategic business tool. Sometimes management develops a cautious attitude towards emerging IT, which apparently seems a natural and wise reaction on the part of management. However too much caution for too long a time has its impacts in missed revenues and loss of company’s competitive position.
Today IT is judged as a critical success factor for a business organization in today’s global competitive market. There is strong desire to be able to measure the economic viability or contribution of IT related investment projects, as one would do for other business projects. Quantification of strategic payoffs from IT such as improved image, satisfied customers; motivated staff etc. is an opportunity to demonstrate the payoffs in terms of higher profitability, better response and savings in costs in order to receive top management commitment and support to implement the programme. However, measuring the value added due to IT investment is difficult. The inventor of Applied Information Economics Doug Hubbard has called for IT Directors to be more diligent in outlining the returns the company may expect from the large capital they pour into IT. But implementation of such a programme requires special skills, knowledge and understanding of carrying out IT investment payoff analysis. More so it requires highly tasking job of redefining the tenants of measurement of certain items.
Inspite of strong desire to quantify the benefits from IT, professionals and academicians have failed to do so satisfactorily. The reasons can be found in the inherent nature of IT. The characteristics of IT, which make measurement of IT payoff difficult, are given by Mahmood & Szewczak (1999) as follows:
1. Factors related to IT are indirect, diffused, qualitative and contingent
2. IT emerges overtime with a time lag, where the lag cannot be measured exactly
3. Quantifiable figures are subjective and can be arrived at by ‘gut feel’ of manager
4. IT emerges as from a primordial swamp and when it appears, it often is unfamiliar and threatening
5. IT has a lot of intrinsic and intangible benefits