Information Technology Investment Decisions and Evaluation in Large Australian Companies: Theory and Practice Compared

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Mia, Lokman

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Campell, John

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2007
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Abstract

Today's business environment is characterised by organisational dependence on information and communication technology. At the same time, this reliance on information technology and systems (IT/IS, hereafter IT) has given rise to concerns about how to evaluate IT investment initiatives. Issues such as the popular 'productivity paradox' and the broader 'value for IT money' (e.g., Brynjolfsson and Hitt 1998; Davern and Kauffman 2000) debate have further fuelled the extensive research in the area of IT investment and assessment. However, a review of current literature reveals a number of differences between IT investment assessment literature and traditional capital budgeting literature, particularly in the way that the entire decision making process is rarely discussed in IT investment decision making research. Instead, much attention has been focused on project justification or evaluation alone. Thus, it was argued for this research that an emphasis on the entire decision making process - from IT planning and analysis to post-implementation evaluation - is important, as potential organisational and other contextual variables that may not be apparent at the evaluation stage, can be better identified and appreciated. Another theme that this research seeks to investigate is the applicability and practicability of current IT decision making theories and evaluation methods discussed in the literature. Considering the breadth and depth of existing research in this area, IT investment decision making is, however, still seen as problematic today (e.g., Mahmood and Mann 2000). In particular, the literature reports a polarisation of empirical evidence towards the use of either over-optimistic or over-pessimistic forecasts of IT performance and return on investment (e.g., Irani et al. 1997). Thus, the usefulness of these theoretical models and techniques cannot be seen as clearly established. As a result, no single theory or technique can be said to be unequivocally successful in helping firms to evaluate IT investment opportunities and to identify where IT value lies. This discrepancy between the desired and the actual outcomes of IT investment decision making highlights a possible gap between what is offered in theory by researchers and what is used by practitioners. Gaining an understanding of the underlying issues associated with this gap is important, as its existence raises questions about the veracity of recent theoretical developments in IT investment decision making methodology. Hence, the research problem investigated in this research is: What is the level of applicability and practicability of the current theories and techniques relevant to IT investment decision making and evaluation, as observed in large Australian companies? To address the research question, this research was conducted by two studies. The first study adopted a survey methodology to establish the specific decision making content and process involved in IT investment. The collected data from this part of the research were used for both descriptive and inferential statistics analysis purposes. The second study consisted of three convergent interviews, which examined the significant institutional contexts that might influence the decision outcome, further adding meaning to the findings of the first study. The key findings of the research are that the planning, evaluation, and post-implementation evaluation activities for IT investments have not been performed widely and consistently. Although sophisticated evaluation methods have been developed over the years, they do not appear to have provided a satisfactory answer to improve IT decision making practice. It appears that the underlying problem with IT investment decision making cannot be explained by the inadequacy of the adopted evaluation techniques alone, and answers must also lie elsewhere. Two potential problem areas were found to be organisations' unenthusiastic attitude towards IT, and a general lack of applicability and practicability of current decision making and evaluation theories. The unenthusiastic attitude towards IT is explained by several factors as identified in this research. Particularly, they were related to: (1) difficulty with forecasting future business needs, (2) lack of time for sufficient IT planning, (3) performance of past IT investments leading to IT conservatism, (4) IT being generally seen as operating costs, (5) budgetary constraint, (6) competitors' imitation leading to undifferentiated or similar technology/process, (7) technologies fast becoming obsolete, and (8) organisation complexity, power structure, and existing policy and procedures all making change difficult. It was suggested that without fundamentally changing the way technology is perceived and treated by the business community, the value of IT will continue to be questioned and IT investment decision making will continue to be difficult. The lack of applicability and practicability of contemporary decision making and evaluation theories was also found to be significant, with very few organisations considering them to be useful. Four key factors impeding adequate system planning and evaluation were also uncovered: (1) business necessity remains a main IT driver, (2) IT is accepted as a cost of being in business, (3) users' IT needs must be met responsively, and (4) IT is inherently difficult to evaluate with any accuracy. As a result, organisations were often found to adopt the following evaluation strategies: (1) situational, rather than systematic evaluation, (2) a cost-management approach to evaluation, often resulting in the use of an excessive discount rate or cost of capital, (3) waiting for the technology in question to mature before investing. The contribution of this research is that it has both theoretical and practical significance. The theoretical significance of this research arises from insights into the existing body of theory and further, from theorising about the decision making practices as adopted by large Australian companies. At the same time, this research also serves as a practical reference for the development of decision making practice and policy. Only with a clear understanding of the important aspects involved in IT investment decision making, can organisations define and approach their investment tasks more successfully.

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Thesis (PhD Doctorate)

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Doctor of Philosophy (PhD)

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Griffith Business School

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The author owns the copyright in this thesis, unless stated otherwise.

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Information technology

Australian companies

business environment

information technology systems

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