A Case for Using Real Options Pricing Analysis to Evaluate Information Technology Project Investments

This study documents variation across industries in creditors’ perceptions of the risk of information technology (IT) investments. The associations we document between IT investments and both initial bond ratings and yield spreads suggest that credit-rating agencies and bond investors consider IT investments in automate and informate industries less risky than those in transform industries. We document that IT investments are associated with more volatile future cash flows in transform industries than in automate or informate industries. The findings indicate that bond investors prefer IT investments in automate industries, where the cash flow payoffs to IT investment are smaller but more stable than in transform industries. Overall, these findings provide the important insight that bondholders’ perceptions of IT investments vary across industries based on bondholders’ aversion to the riskiness and the lack of collateralizability of IT investments. Senior managers should recognize that IT investments have implications for both operational performance and financing costs (e.g., costs of debt) of the firm, and they should consider the potential financial benefits of increased IT capabilities, such as the willingness of corporate bond investors to accept lower financing costs.

While businesses are investing enormous resources in information technology (IT), there is little evidence linking IT investment to organizational performance. The purpose of this article, therefore, is to increase understanding of the basis for IT investment in firms. Six mini case studies of companies in five different industries address questions of how they define IT for the purpose of determining the level of investment, how they track IT investments, and what other factors influence IT investment decisions. Each organization uses a different definition of IT, but there appears to be an overall trend to broaden the definition. Although companies track IT investment with varying degrees of rigor, they appear to be generally moving toward centralized tracking of all IT investment Political considerations are important and significantly impact investment decisions. In all cases, the effectiveness with which IT investment is converted to useful output is acknowledged to be affected by the implementation process, the culture of the organization, and the skill of management. Three major implications for practitioners responsible for IT investment are: the need to adopt a broad definition of IT and track it over time against a convenient base; the need to separate different types of investment and match them to appropriate organizational performance measures; and the need to take into account factors such as management commitment and previous experience with IT. The latter impacts the effectiveness with which the firm converts it investment into useful outputs.

The evaluation of information technology (IT) investments has been a recognised problem area for the last four decades, but has recently been fuelled by rising IT budgets, intangible benefits and considerable risks and gained renewed interest of both management and academics. IT investments already constitute a large and increasing portion of the capital expenditures of many organizations, and are bound to absorb a large part of future funding of new business initiatives. However, for virtually all firms, it is difficult to evaluate the business contribution of an IT investment to current operations or corporate strategy. Consequently, there is a great call for methods and techniques that can be of help in evaluating IT investments, preferably at the proposal and decision-making stages. The contribution of this chapter to the problem area is twofold. First, the different concepts, which are used in evaluation are discussed and more narrowly defined. When speaking about IT investments, concepts are used that originate from different disciplines. In many cases there is not much agreement on the precise meaning of the different concepts used. However, a common language is a prerequisite for the successful communication between the different organizational stakeholders in evaluation. In addition to this, the chapter reviews the current methods for IT investment evaluation and puts them into a frame of reference. All too often new methods and guidelines for investment evaluation are introduced, without building on the extensive body of knowledge that is already incorporated in the available methods. Four basic approaches are discerned: the financial approach, the multi-criteria approach, the ratio approach and the portfolio approach. These approaches are subsequently compared on a number of characteristics on the basis of methods that serve as examples for the different approaches. The chapter concludes with a review of key limitations of evaluations, suggestions on how to improve evaluation practice and recommendations for future research. This chapter draws on earlier work as published in Renkema and Berghout (1997), Berghout (1997), and Renkema (1996; 2000).

In the last twenty years, firms have witnessed an explosive growth in information technology (IT) investment. This is true both for manufacturing industries and service industries. The existing literature on IT investment and organizational strategic performance, however, provides very little evidence linking IT investment to organizational strategic and economic performance. The present research investigates whether certain IT investment measures are useful in differentiating organizational economic performance among the most effective information technology users. Eight measures were used to represent IT investment. Ten ratios were utilised to measure organizational strategic and economic performance. The sample organizations were analysed using multidimensional cluster analysis. The results of the analysis suggest that a clear distinction exists between organizations in terms of IT investment and organizational strategic and economic performance. This is true even among the most effective users of information technology. The results also suggest that the majority of the organizations that are investing more in IT seem to be achieving superior strategic and economic performance.

The evaluation of information technology (IT) investments has been a recognised problem area for the last four decades, but has recently been fuelled by rising IT budgets, intangible benefits and considerable risks and gained renewed interest of both management and academics. IT investments already constitute a large and increasing portion of the capital expenditures of many organizations, and are bound to absorb a large part of future funding of new business initiatives. However, for virtually all firms, it is difficult to evaluate the business contribution of an IT investment to current operations or corporate strategy. Consequently, there is a great call for methods and techniques that can be of help in evaluating IT investments, preferably at the proposal and decision-making stages. The contribution of this chapter to the problem area is twofold. First, the different concepts, which are used in evaluation are discussed and more narrowly defined. When speaking about IT investments, concepts are used that originate from different disciplines. In many cases there is not much agreement on the precise meaning of the different concepts used. However, a common language is a prerequisite for the successful communication between the different organizational stakeholders in evaluation. In addition to this, the chapter reviews the current methods for IT investment evaluation and puts them into a frame of reference. All too often new methods and guidelines for investment evaluation are introduced, without building on the extensive body of knowledge that is already incorporated in the available methods. Four basic approaches are discerned: the financial approach, the multi-criteria approach, the ratio approach and the portfolio approach. These approaches are subsequently compared on a number of characteristics on the basis of methods that serve as examples for the different approaches. The chapter concludes with a review of key limitations of evaluations, suggestions on how to improve evaluation practice and recommendations for future research. This chapter draws on earlier work as published in Renkema and Berghout (1997), Berghout (1997), and Renkema (1996; 2000).

This paper investigates the impact on productivity of combined changes in information technology (IT) investments and workforce composition of life insurance companies. Workforce composition is defined in terms of three broad classes: clerical, managerial and professional. Hypotheses on the combined impact of changes in IT investments and workforce composition on productivity are proposed and empirically tested on a sample of companies from the US life insurance industry. Companies are clustered based on two main strategy alternatives, focus on a market niche vs diversification. In niche companies, higher IT investments accompanied by a decrease in the clerical and managerial components of the workforce are found to have a positive contribution to productivity. On the contrary, higher IT investments in conjunction with a decrease of the professional component show a negative effect. In diversified companies, increasing IT investments show a positive contribution to productivity when accompanied by a decrease of the professional component and a growth in the clerical and managerial component of the workforce. Findings are discussed in the light of fundamental competitive goals in the industry.

The aim of this research is to propose a model that relates information technology (IT) investments, supply chain governance (SCG) and performance together. For this purpose, a pilot study involving both a qualitative and a quantitative stage was conducted. The qualitative analysis, consisting of an extensive literature review and two case studies conducted in six major, globally-relevant Brazilian companies, led to the development of an initial model. This model was refined during the quantitative stage that involved 38 executives from large national companies. IT was found to be one of the main drivers of SCG influencing companies' supply chain performance. The final model consists of 5 constructs and 26 elements. Regarding the SCG constructs: (a) a new element 'formal contracts', emerged in the 'contractual SCG' construct; (b) the element 'cooperation' was not confirmed in the 'relational SCG' construct; (c) the element 'transparency' was considered an important element in the 'transactional SCG' construct. Five new elements emerged in the 'IT investment' construct. Market aspects were highlighted as being relevant in the 'supply chain performance' construct. Thus, the model includes elements that can be analyzed in order to shed light on how IT investments influence SCG and supply chain performance.

A methodology of constructing a decision path for IT investment

Despite its universal appeal, little has been done in the way of empirical research to probe into the role of formal information technology (IT) investment evaluation practices and its influence on IT governance and performance in African firms. A preliminary survey of 74 firms from South Africa, Nigeria and Zimbabwe, reveal that while firms are generally aware of formal IT investment appraisal techniques and IT value realisation prescriptions, relatively less formality is actually applied to appraising, managing and realising IT benefits. This research unveils many issues in exploiting IT benefits, with a majority of firms acknowledging substantial targeted benefits losses. Addressing how IT investments can be managed more effectively using formal investment appraisal and benefits management practices, to predictably realise intended payoffs remains a top concern for African firms and the continent’s IT researchers. Key words: Information technology (IT), IT governance, IT investment appraisal, IT benefits management, IT performance.

Past information systems research on real options has focused mainly on evaluating information technology (IT)investments that embed a single, a priori known option (such as, deferral option, prototype option). In other words, only once a specific isolated option is identified as being embedded in a target IT investment, does this research call upon using real options analysis to evaluate the option. In effect, however, because real options are not inherent in any IT investment, they usually must be planned and intentionally embedded in a target IT investment in order to control various investment-specific risks, just like financial risk management uses carefully chosen options to actively manage investment risks. Moreover, when an IT investment involves multiple risks, there could be numerous ways to reconfigure the investment using different series of cascading (compound) options. In this light, we present an approach for managing IT investment risk that helps to rationally choose which options to deliberately embed in an investment so as to optimally control the balance between risk and reward. We also illustrate how the approach is applied to an IT investment entailing the establishment of an Internet sales channel.

Abstract. Even during this recessionary era, information technology (IT) expenditure in most organizations continues to grow at a high rate. Because of this increased IT expenditure, more and more senior managers are demanding that IT play a greater role in determining their firm's success by helping them increase organizational efficiencies and perhaps even achieve competitive advantage. The existing information systems literature on IT investment and organizational strategic performance, however, provides very little help to senior managers in making before‐the‐fact IT investment decisions. The present research study puts forth some ‘hard’ evidence relating IT investment to organizational strategic and economic performance by using data envelopment analysis (DEA). Eight IT investment measures were used as inputs and 10 organizational strategic and economic performance ratios were used as outputs for the DEA model. The results indicate that two‐thirds of the organizations in this research study are deemed efficient by DEA. A clear distinction exists between the efficient group and the inefficient group in terms of IT investment and organizational strategic and economic performance. The firms in the efficient group had a much higher return on their information technology investment than the inefficient group. In addition, the DEA results pinpoint the inefficient inputs and deficient outputs for an inefficient firm allowing a senior manager to take corrective actions to compensate for the situation.

Small and medium-sized businesses (SMEs) are essential to South Africa's development and economic progress. Information technology (IT) expenditures have become crucial for SMEs to stay competitive in the quickly changing digital market. The purpose of this study is to examine the variables affecting IT investments in South African SMEs. The paper provides a thorough examination of the literature, the technique used, the findings, and a discussion of the implications through a conceptual study. The study's findings were derived from an analysis of 15 of the best and most relevant journal articles out of a total of 200 that were obtained and evaluated through Google Scholar that are related to factors impacting IT investments in South African SMEs. The objective was to aggregate the views of many scholars on the issues affecting IT investments in South African SMEs from their writings. The study's findings indicates that financial constraints, perceived return on investment (ROI), industry-specific factors, technological complexity and skills, perceived risk, outside influences, organisational culture, and leadership are among the factors that affect IT investments in South African SMEs. With regards to the study's findings, it is recommended that SMEs should work to understand and address the factors influencing information technology investments in South Africa so they can make informed IT investment decisions, and policymakers should foster an environment that encourages the uptake of technology and the expansion of this industry.

Although significant research attention has been directed at understanding the value of information technology (IT) investments for firms, very little attention has been paid to understand the IT investment behavior of firms. This article seeks to fill this void. We introduce the concept of IT investment strategy, defined by dimensions of intensity and proactiveness, to characterize the IT investment behavior of firms. Synthesizing the environmental deterministic and strategic choice perspectives of a firm's strategic decision making, we examine the effects of environmental factors, managerial processes, and the interplay between them on IT investment strategy. Specifically, we examine the impact of environmental factors such as industry clockspeed and information intensity on IT investment strategy. We also incorporate the strategic choice perspective to argue that managerial processes such as frequent chief executive officer—chief information officer communications and collective information systems planning play a critical role in shaping the firm's IT investment strategy. The empirical results show that the environmental variables are related to IT investment strategy. Besides, managerial processes serve as a means to understand the environment and thus moderate the relationships between the environmental variables and the various facets of IT investment strategy. The conceptualization of IT investment strategy and the focus on both environmental determinism and strategic choice should enrich our understanding of firms’ IT investing behavior.

Investing in Lending Technology: IT Spending in Banking

The article addresses the impact of the COVID-19 pandemic on Small and Medium Enterprises (SMEs), focusing on the Information Technology (IT) investments made by these companies between 2020 and 2023. The health crisis generated significant economic effects, particularly in emerging economies, exacerbating pre-existing economic fragility and inequality. The study seeks to identify, through a systematic review of the literature, the investments, contributions, and uses of IT by SMEs located in Latin American, Asian, and European countries during the aforementioned period. It is concluded that, during COVID-19, IT investments in SMEs were not only a response to crises, but also a strategic source of resilience and financial stability. IT investment was highlighted as essential for innovation, digital transformation, and business continuity. Although low employee digital skills persist, the trend towards IT investment is positive, allowing SMEs to take advantage of technological and governmental opportunities to face the challenging economic context.