Measuring IT Value, Research Paper Example

Methods used to measure the economic value of an IT department to a company

Majority of organizations have never derived the much needed satisfaction in terms of returns that they get out of investing in the systems of information technology. The only time that the economic value of an IT department in a company is realized is when the entire customer value goes above total customer cost (Mahmood, Kohli  & Devaraj, 2004).  This difference is often maximized through a reduction of the cost that is perceived between the two through a reduction in prize. However, an exaggerated reduction in price is likely to result to a shrink in the market which consequently transmits negative signals to clients. Another option of difference maximization entails improvements in the level of perceived benefit.

The perception of a system of IT in an organization as being a combination of the software and hardware leads to a situation whereby the system value is a summation of distinctive value of the two taken as independent products. On the contrary, the perception of the entire system of IT in the organization as being a service leads to a scenario that the total sum of the two values makes up the entire value of the system and this is attributed to the value that is derived from the service. The occurrence of such a value is attributed to the continued use of the system and its increase with time. The service value may thus imply to the value that is likely to be created as a reduction in cost and creation of opportunities for the business as a result of continued use of the system throughout the entire system lifecycle. The measurements are therefore executed through discounted money flows that are generated after the system is put to use. In cases of high risks, other techniques including real options analysis and Monte Carlo approach are worth consideration (Mahmood, Kohli  & Devaraj, 2004).  In case the business is running, a comparison of a scenario that the IT system is nonexistent is considered with assumptions that the increased revenue is a result of the value created.

Models for assessing the IS value put in place by the IT department

The models used to assess the IS value in IT department play a crucial role in justification of value perspective. The applicable models in this regard include the investment-oriented models, cost-oriented models, environmental or the contextual models and quantitative estimation models (Mahmood, Kohli  & Devaraj, 2004). In investment-oriented models, the Total Value of Opportunity, TVO which was initiated by Gartner is used as a standard metrics-based approach to evaluate the performance of a particular IT system with time. The most important factors in a TVO are:

• The cost/benefit analysis
• The future uncertainty
• The organization diagnostics
• The best practice in measurement

In the cost-oriented models, Economic Value Added, EVA is best used in the assessment of the IS value in IT department through a consideration of investment in IT as being value proposition instead of a cost. Therefore, EVA posits to analyze the prospective of an IT investment in leveraging the effectiveness of the organization (Giga Research, 2006).

The Environmental or the Contextual Models are also referred to as the heuristic models and they are associated with the addition of qualitative as well as subjective elements in to the mix. The objective behind the heuristic models is assignment of quantitative value to the qualities that are intangible such as the contextual and environmental influence. They also address other factors including human relations as well as organizational processes (Mahmood, Kohli  & Devaraj, 2004). The quantitative estimation models incorporate the Real Options Valuation, ROV that attempts to incorporate quantitative value to the operational flexibility thus facilitating for appraisal of an investment in the organization that is likely to create and underwrite an operation that is highly responsive and relevant to the organization. ROV is therefore appropriate model in assessment of IT investment in an organization.

Use of traditional financial ratios and measurements in determining the value of IT

Traditional financial ratios and measurements can be used to evaluate the value of IT investment in an organization. The organization may opt to make comparisons between two distinctive products by taking a ratio of the gross profit against every product and determine what amount of revenue has been generated in consideration of particular expenses. Different calculations may also apply in this regard such as a ration of income on investment to the total value attributed to the resources that have been applicable in the manufacture as well as marketing of the product (Giga Research, 2006). The traditional financial ratios and measurements use in determining the value of IT can be comfortably manipulated to align with the purposes of the user and the findings may be given in a number of ways. However, the use of such metrics requires a comprehensive understanding of all the inputs that have been employed.

References

Giga Research. (2006). “Total Economic Impact of Microsoft’s Software Assurance.” Cambridge, MA: Forrester Research, Inc.

Mahmood, M.A., Kohli, R. & Devaraj, S., (2004). “Measuring Business Value of Information Technology in E-Business Environments.” Journal of Management Information Systems 21, 1 11-16.