Does ROI matter? Insights into the true business value of IT
Silvius, A.J.G.
AJG Silvius - Electronic Journal of Information Systems …, 2006 - academic-publishing.org
Summary
"Does ROI matter? Insights into the true business value of IT" by Silvius (2006) delves into the enduring "IT productivity paradox" and the complexities of measuring the business value of information technology. The paper distinguishes between two primary approaches to understanding IT value: the "variance approach," which examines the general relationship between IT investments and organizational performance, and the "process approach," which investigates the mechanisms through which this relationship operates. Silvius advocates for the process approach, highlighting its greater utility for corporate decision-makers seeking to understand *how* IT investments contribute to organizational success. The methodology involves developing a framework to assess the organizational impact of IT, analyzing the link between IT impact and overall organizational performance, and critically reviewing existing IT investment evaluation methods. The paper identifies limitations in traditional, financially-focused evaluation models, such as Return on Investment (ROI), noting that they often fail to capture the intangible benefits of IT and the intricate ways these benefits contribute to performance. It emphasizes that the effectiveness of IT investments is not solely an intrinsic characteristic of the technology but is significantly influenced by accompanying organizational and process changes. This implies that identical IT investments can yield vastly different returns across various organizations, making generic statistical "proven" effects less relevant for specific company decisions. To overcome these limitations, Silvius proposes a multivariable value assessment sheet, drawing insights from balanced scorecard theory, to provide a more holistic understanding of IT's true business value. Additionally, the paper suggests enhancing traditional Net Present Value (NPV) calculations by incorporating "Flexibility value" and "Strategic value," derived from real options and game theories, to form an "Expanded NPV."
Key Findings
- - Traditional, financially-based IT investment evaluation methods like ROI are often insufficient to capture the full business value of IT due to intangible benefits and the complex interplay with organizational processes.
- The true return on IT investments is heavily contingent on accompanying organizational and process changes, meaning a single IT investment can have varied impacts across different companies.
- The "process approach," which focuses on *how* IT creates value, is more beneficial for corporate decision-making than the "variance approach" that seeks general correlations between IT spending and performance.
- A more comprehensive assessment of IT value requires a multivariable approach, such as the proposed value assessment sheet based on balanced scorecard theory.
- Evaluating IT investments should extend beyond traditional financial metrics to include flexibility and strategic value, potentially through an "Expanded NPV" incorporating real options and game theories.