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HOW DO ORGANIZATIONS place a value on enhanced customer relationships, improved brand image, quick response to demand for new products, and knowledge of market shifts and competitor moves? Though many organizations attempt to relate these goals directly to revenue, asset deployment, and costs, these are poor surrogates for the real implications. As the song goes, we may be looking for value "in all the wrong places."
While managers struggle to relate IT investments to profit measures, there is growing evidence that IT investments are creating substantial intangible value for companies, such as customer orientation and service, quality improvements, flexibility, and speed to market-all key strategic goals of users' IT investments.
Unfortunately, methodologies that link IT value to accounting measures of performance, such as return on investment, capture only IT's tangible value components, with little consideration for intangible worth. Though these measures may have worked well for typical industrial-age companies, they don't work for new knowledge-based companies, where IT-based processes and services are the primary value drivers.
One problem with the accounting measures: They look only at a company's past performance; they don't consider future profit potential. IT investments, however, are often made with a view to protecting a company's strategic options and to having the flexibility to rapidly introduce products and services in today's hypercompetitive markets. Focusing exclusively on the size of IT investments' returns ignores their more important contribution, namely, their effects on the risk of a company's income stream.
To get a true picture of IT's contributions to the bottom line, managers must focus on risk avoidance, growth potential, and strategic flexibility-all made possible by IT. For example, financial-services and insurance firms often invest in IT control systems that help prevent potential losses from things such as fraudulent claims or other misappropriations. Though these investments may be critical to a company's survival, they're seen only as costs.
To date, IT investment studies have focused mainly on relating IT spending to current profit levels. However, the contribution of capital investments must be assessed by considering their association with the level and risk of current and future profitability.
Because of the substantial learning curve associated with the uses of information systems, IT investments often take years to add value to a company and are more...