How to Measure Business Value of Information Systems? Practical Implications of a Literature Review

Abstract: In 2014 IT spending reaches 3,75 billion USD according to Gartner’s forecast, while this years Standish Group report shows that 31% of projects will be cancelled before completion. These facts and the tightening of corporate budgets highlight the importance of IT valuation ex ante and ex post as well. This paper presents an overview of normative research on IT business valuation, while trying to stress practical conclusions supporting future management practice. Research suggests that the concurrent use of the discounted cash flow and real option methodologies can effectively support decisions as they can mutually offset each other’s weaknesses, i.e. DCF’s inflexibility and lack of strategic focus and ROA’s complexity and lack of communicability. Also we conclude that the principal function of ex ante IT valuation lies not so much in determining an exact value as in identifying the key factors of value creation, thus support supporting management during implementation and use.

Keywords: IT value assessment, IT business value, return on investment, discounted cash-flow valuation, real option valuation, intangible valuation