DIPT059 Essentials of IT Sourcing and

Procurement
Week 4: The Business Value of IT
Content
• The business value of IT
➢Value Chain Model
➢Economics of Information
• Measures of IT Business Value
▪ Financial Performance Measures
▪ Business Performance Measures
▪ Strategic Performance Measures
References
• Chapter 3:
• Schniederjans, M. J., Hamaker, J. L., & Schniederjans, A. M.
(2010). Information technology investment: Decision-making
methodology. World Scientific Publishing Company
• Chapter 8
• Piccoli, G., & Pigni, F. (2019). Information Systems for Managers With
Cases, Edition 4.0. Prospect Press, Inc..
What is the Business Value of IT?
• The business value of IT is the contribution it makes to the
organizational performance, i.e. financial, business and strategic
performances (refer to later slides)

• The business value of IT can be understood in many ways. We

examine two common ways:
• Value-Chain model
• Economics of information
Value Chain Model
• A company’s business process can be modelled as a value-chain
(Porter, 1985).
• A business value chain describes a set of value adding activities that
links a firm’s supply’s side with its demand side.
Supplier Customer
Firm
(inputs) (products)

• Every organisation creates value through two main activities:

• Primary Activities and
• Support Activities
The value adding activities are the primary activities with supporting activities

6
• A company has competitive advantage, (i.e. it has an edge over
competitors) if its value chain offers better value in terms of three
generic strategies (Porter, 1985).

1. a cost leader, i.e. a low cost provider (Cost leadership

strategy)
2. a differentiator, i.e. has a unique service/product
(differentiation strategy
3. A focussed/niche company i.e. serves a particular well (a
niche strategy)

• The business value of IT is its contribution to helping the company

realise any of these three strategies. Example using IT to deliver
telemedicine services for the affluent in society is niche strategy.
Assignment/Class discussion
What IT systems can you think of that can contribute to positioning a
firm to be a
1. a cost leader, i.e. a low cost provider (Cost leadership
strategy)
2. a differentiator, i.e. has a unique service/product
(differentiation strategy
Virtual Value Chain Model
• When companies move value-adding activities from the physical to the
virtual space, they exploit a virtual value chain

Physical Value Chain

Data/Info Data/Info Data/Info Data/Info Data/Info

Virtual Value Chain

• The Virtual Value Chain (VVC) builds on the physical value chain model

• In the VVC realm, the products and services exist as digital information.
Example – mobile phone services, airline ticketing system, e-banking, etc
Definition:

• Virtual Value Chain (VVC) is the set of sequential activities that

enable a firm to transform data input into some output information
that, once distributed to the appropriate user, has higher value than the
original data
Economics of Information
Background
• Economics is the study of the allocation of scarce resources among competing
alternatives.
• IT investment decision-making is an economic decision because scarce
resources must be allocated to the best IT investment alternative of creating
an information system

• Economics is also the study of the production, distribution, and consumption

of goods and services.
• Economics of information is the production, distribution, and use of
information. (i.e. information as a good or service)
Economic Characteristics of Information
1) Information as a product has high production cost
• Example a book, an organisational budget

2) Information has negligible replication cost

• The cost of producing the first information copy is high. Subsequent
copy of information has a low cost of production and could be free

3) Information has negligible distribution costs

• With internet infrastructure the distribution cost of information goods
is indeed negligible—free in practice. Information goods are therefore
characterised by high fixed costs and very low marginal costs.
4) Information Is not consumed by use
• Unlike physical goods information be reused multiple times.
Implication of the economic characteristics of information
Firms that produce successful information goods can enjoy vast profit
margins.
• Because of low replication and distribution costs after the initial
high production costs

Example:
• Microsoft Corporation has enjoyed legendary profits over the years
thanks in large part to its two cash cows: Microsoft Windows, the
dominant operating system software for personal computers, and
Microsoft Office, the dominant suite of productivity tools
Concepts and Theories of Economics of Information

• Economics of information can also be understood based on concepts

and theories used to explain the role of information systems in the
design, development, manufacture, delivery and post-delivery support
services of organization’s product and services

• We look at one concept and two theories of economics of applied to IT

are:
• Digital information as a good
• Transaction theory
• Agency theory
 Digital information as a product
• An information good is a product or service artefact that is valuable to
people by virtue of the information it contains.
• Examples: ebooks, media (e.g. movies, music, social media) and
television, news agency website, stock quotes, class lectures, consulting
services that produce knowledge products, advice such as investing
advice

• Digital product is a good or service that exists in either in a full digital

form (pure information) or embedded form (i.e physical objects
embedded with ITs or information)
• Example
• fully digital – ebooks, elibrary,
• Embedded form – smart phone, smart cards, internet of things, etc
Transaction cost theory:
• The theory suggests that investments in IT among other things, help reduce
transactions costs and in turn reduce the size of the firm (i.e., employees,
physical facilities, etc.), making it more productive (Putterman & Kroszner,
1995).

.
Agency theory
• This theory suggests that as firms grow in size, the owners have to increase the
number of employees who work as agents due to the increased activity.
• By investing in IT that saves time and improves management, less agents or
employees are required to manage the firm
Measures of IT Business Value
• Measuring IT business value is one of the most important and yet
difficult tasks for IT managers

Why Measure IT Business Value (or performance)

• 1) To assess value: This allows decision-makers to assess efficiency
and effectiveness of an IT.

• 2) To justify and evaluate, effects of an IT and later to assess its

impact after implementation and use.
• 3) To allocate resources optimally, using the facts provided
• 4) To monitor throughout the lifecycle of an IT asset and at different
levels of the organization
• 5) As a business process enabler to facilitate delivery of goods and
services
• 6) To prioritize IT projects
• 7) To facilitate communication between IT professionals and
management: IT professionals tend to “speak a different language”
than other members of the organization. Performance measurements
helps to establish a common language speak such as profitability,
return on investment, etc
• Generally, measures of business value of IT relate to three
performance areas of organisations:
• Financial,
• Business and
• Strategic
Financial Performance

• Measuring the business value of IT require that information is

collected on the actual amount spent on IT and the potential benefits
(see Week 2 )
• Examples
• IT costs as a percentage of revenue,
• Growth rate of IT budget,
• IT spending by resource,
• IT spending by activity
• Number of personal computers as a percentage of total employees.
Business Performance Measures of IT
• IT may be viewed as contributing to the business performance of an
organization by enabling the business processes that contribute to its
business performance.
• Business performance measures of IT can be considered:
• Using the value chain and economics of information concepts (see
previous slides)
• Balance score card
Strategic Performance Measures of IT
• Strategic performance depends largely on a few key areas that the
organization must excel at to survive and thrive. These areas are the
critical success factors (CSF) (refer to Week 2)
Review Questions
• What is the business value of IT?
• Using the value chain model explain the business value of IT
investments
• Explain the business value of IT from the perspective of economics of
information
• Describe how increasingly goods and services are assuming forms of
digital products and services.
• Explain why measures of the business value of IT is so important.
Describe two examples of such measures.
END OF PRESENTATION