Managing the Information Technology Resource Instructor’s Manual
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CHAPTER 14 – ASSESSING THE VALUE OF IT__________
CHAPTER OBJECTIVES
Study of this chapter will enable the student to:
1. Appreciate the importance of assessing IT value
2. Be familiar with the traditional financial measures to show value
3. Be aware of options for applying an improved financial measure
5. Understand activity-based management
6. Understand the difference between showing value and simply measuring it
7. Be aware of how to leverage the asses of IT for competitive advantage
9. Understand how the enterprise can benefit from these processes
CHAPTER OVERVIEW
This chapter discusses the concept of value. In many businesses, IT is underappreciated because the
business managers do not understand the opportunities that IT can provide the enterprise. Traditional
financial measures have contributed to this misunderstanding in that they fail to incorporate intangible
and nonquantifiable measures that have become more important in the new ‘information society.’ This
chapter presents five major value methods to assist in assessing and demonstrating the value of IT. The
strengths and weaknesses of these methods are also discussed.
CHAPTER OUTLINE
I. Traditional Financial Approaches
A. ROI, Residual Income and Economic Value Added of an Individual Investment
B. Discounted Cash Flow Analysis (and Extensions) of an Individual Investment
II. Applying Traditional Approaches in a New Way
A. Real Options
B. Real Option Valuation of an Individual Investment
C. Evaluating a Portfolio of IT Investment Projects
III. Activity-Based Management Measures
IV. Leveraging the Assets of IT for Competitive Advantage
EXAMPLES IN ACTION
• Defining the Concepts of Net Present Value and Modified NPV – p.385
• Defining the Concepts of Activity-Based Costing (ABC) and Activity-Based Management (ABM) –
p.393
• Defining the Concepts of Total Cost of Ownership (TCO) and Total Benefits of Ownership (TBO) –
p.394
Managing the Information Technology Resource Instructor’s Manual
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ANSWERS TO END-OF-CHAPTER REVIEW QUESTIONS
1. How do real options reduce the risk of IT investments?
Real options do a better job of valuing strategic investment proposals having dynamic, strategic
2. Why are return on investment (ROI) financial measures not often good indicators of
performance?
3. Since ROI has always been a main focus of financial analysis, what intangible benefits of
Information Technology are often difficult to quantify for this measurement?
4. How does managing a portfolio of IT investments compare to looking individually at IT
projects? Explain the concept of activity-based costing.
Looking at a portfolio of IT investments enables the realization that the risk-return profile of the
5. What are the differences between activity-based costing and activity-based management?
6. How can total cost of ownership become a subset of activity-based costing? Explain.
7. Would you suggest a company begin to develop/adopt multiple value methodologies to manage
its Information Technology function? Explain.
ANSWERS TO END-OF-CHAPTER DISCUSSION QUESTIONS
1. Why aren’t business and financial measures sufficient to value the effectiveness and level of
contribution that Information Technology provides?
2. Does your company have an effective set of tools to measure the value of Information
Technology? Has it been published or otherwise communicated? What are its main components
and measures?
3. What do you think are Information Technology’s distinctive competencies?
4. Does your IT function have systemic competencies? What are they? How are they measured?
5. What do you think are the main weaknesses in finding value in Information Technology? Is your
company better or worse in evaluating IT?