Return on Investment and Information System Investment

Return on Investment (ROI) is one of the most popular performance measurement and evaluation metrics. ROI analysis (when applied correctly) is a powerful tool for comparing solutions and making informed decisions on the acquisitions of information systems. The ROI sensitivity to error is a natural thought, and common sense suggests that ROI evaluations cannot be accurate. However, the literature review revealed that in most publications and analyst firms reports, this issue is just overlooked. On the one hand, the results of the ROI calculations are implied to be produced with a mathematical rigor, the possibility of errors is not mentioned and amount of errors is not estimated. On the contrary, another approach claims ROI evaluations to be absolutely inaccurate because, in view of their authors, future benefits (especially, intangible) cannot be estimated within any reasonable boundaries.

Assessing the benefits of an information system investment

Determination of the benefits and quantification of their projected value to the organization is a multifaceted task that is still more art than science.

In fact, Ryan et al. (2002) [3] found that there is a tendency for executives to view the post-implementation benefits as being more important than the implementation costs. There is renewed interest in establishing formal processes for managing IT investments due to the history of large capital investments with poor track records for success and perceptions of low return in value to the organization [8]. The ultimate value of IT is how it impacts business processes in line with the strategy of the organization. A good business case for an investment will show the appropriate linkage to this strategy.

There is a variety of methods used to assist in this valuation:

No justification

This includes a summary of operating and capital costs for the project and ongoing use of the system. There is no benefits analysis. This is used, and rightly so, for “cost of doing business” projects. Unfortunately, the real problem surfaces when every information systems investment decision is lumped into the “cost of doing business” group. This is an easy way to avoid scrutiny of the real expected cost or payoff from this investment. Senior general management in the firm must limit projects that fall into this “loophole” in order to accurately assess the costs and benefits of their IT investments.

The total cost of ownership

This method is often used by consulting firms and includes the summation of all costs (purchase, operation, maintenance, and disposal of technology) to compare costs within a product line. Notice again that there is only a focus on costs, not on the organizational benefits to be derived from this investment.

Financial metrics

These methods focus on costs and benefits in financial terms, including interest rate information and the time value of money. Several researchers have stressed the importance of accounting techniques in valuing IT investments [9]. Several key financial indicators, also known as accounting performance measures, should be used in financial analysis. These include the net present value (NPV), return on investment (ROI) and the internal rate of return (IROR) calculations. Real option evaluation includes the notion of uncertainty and risk [10]. The question that is asked with real options evaluation is whether making the investment today has enough net present value to make up for losing the option to delay the investment [11]. Microsoft's Rapid Economic Justification Model, through a five-step process of discernment, attempts to align IT investments with the success of the business by defining critical success factors, assigning probabilities to risks, and so forth. This approach is quite comprehensive but hardly rapid. We tend to believe, because there is a number associated with something, that we are really able to measure the phenomenon quantitatively. While it is imperative that we take a hard dollar approach to these hard to define and difficult to quantify variables, we must not lose sight of the threat to the validity of these results. Just because we cannot do it perfectly, does not mean that we should not do it. The process of such evaluation has a value in and of itself, in requiring us to focus on the business, its goals, and strategies and to break down the components of a project and discern the relationships between the project and the business goals.

Information Economics

This is a scoring method that addresses the value of the information that results from the use of the system. This is difficult to measure since information itself is intangible. Additionally, information itself has no inherent value. Value can be derived only when information is applied to specific organizational processes. If we are, for example, trying to evaluate the benefit of governmental spending on major information systems to track terrorists, then we can easily see the value of the information that might be provided. This is often compounded by that fact that the information already exists in the organization, just not in as convenient a format, or in a way that it can easily be manipulated. At that point, we are really looking at the "value-added" component of this investment.

Balanced Scorecard

This is a sophisticated management framework that translates strategy and vision into operational tactics. Measures and metrics for aligning processes with vision and the initiatives needed to meet the objectives of the business are identified. This complex method requires total organizational support to be successful. However, there is food for thought in just understanding the dimensions that are addressed by this method. We see once again the importance of the overall strategy of the organization in directing the investments made in the information systems arena.