Chapter 14: Evaluating AIS Investments

Evaluate IT projects because:

1. Capital resources are limited; IT projects require large amounts of capital
2. Must choose between one project and another
3. IT projects involve change to the business process that will affect substantial portions of the firm
Organizations should create a business case for an IT investment:
1.
2.
3.
4.
5.
6.
7.
8.

Why
How does it address key business issues
Cost? Duration?
Return on investment and payback period?
Risks of doing the project
Risks of not doing the project
Alternatives
How to measure success

Economic Justification Process

Assessing Business Requirements for IT Initiatives

-

IT initiatives should help firms be closer to its desired performance level

Team must explicitly link the proposed technology with performance improvements
IT alone is not sufficient to achieve important changes
Complementary changes: providing training, redefining job descriptions, reconfiguring tasks

For each critical success factor to be addressed by the IT initiatives, the project team identifies:
1.
2.
3.
4.

The specific business processes that affect that critical success factor
Problems with those business processes
Opportunities to address those problems
The specific technology that would enable changes

Estimating Benefits
Benefits should be measurable in financial terms
1. Revenue enhancement: create new sales opportunities
- e-commerce
2. Revenue protection: protect existing revenue streams
- Data encryption system for customer data
3. Cost savings: reduce low value-add activities, reduce errors, improve inventory management
4. Cost avoidance: modify BP avoid cost increase it the future
- Installing current software to accommodate IFRS
Benefits should be measured in comparison to the revenues and costs that will occur if the IT initiative is
not implemented
Approaches to quantify expected benefits:
-

Simulation test impact of a chance in a key performance indicator

Expert Opinion consult with experts to establish the probability of achieving the
benefit
Real option theory using complex financial techniques to compare probability of
achieving and not achieving
External benchmarks using the actual experience of another firm in a similar context