1. Dinesh Mirchandani University of Missouri – St. Louis
Information Technology: Strategic Decision Making For Managers Henry C. Lucas Jr. John Wiley & Sons, Inc
Dinesh Mirchandani
University of Missouri – St. Louis
Copyright 2004 John Wiley & Sons, Inc.

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Copyright 2004 John Wiley & Sons, Inc.

3. Making the IT Investment Decision
Chapter 7
Making the IT Investment Decision
Copyright 2004 John Wiley & Sons, Inc.

4. A Garbage Can Model of IT Value
Portrays the factors most organizations confront when investing in IT
Helps understand why not all IT investments are successful
Copyright 2004 John Wiley & Sons, Inc.

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6. Project Success and Other Outcomes
Some unsuccessful IT investments include:
IRS’s modernization project
Denver airport’s automated baggage handling system
AA Sabre Technologies and Marriott Hotels’ travel supermarket system
The Department of Transportation’s air traffic modernization project
There are many examples of successful IT investments as well
Copyright 2004 John Wiley & Sons, Inc.

7. Conversion Effectiveness
The effectiveness with which investments in IT are converted to useful outputs
The four components of conversion effectiveness are:
top management commitment
experience with IT
user satisfaction
turbulence of the firm’s political environment
Copyright 2004 John Wiley & Sons, Inc.

8. Other Success Factors for IT Investments
Size and scope of the project
Amount of unknown technology involved
Project management
Support and encouragement of managers, sponsorship
The urgency of the problem/opportunity addressed by the technology
Norms in the organization
User commitment and involvement
Technical development environment
Quality of the IT staff
Strength of the project team
Level of expertise of participants
Copyright 2004 John Wiley & Sons, Inc.

9. Success Factors for IT Investments (continued)
Type of technology employed
Type of application
Amount of custom code written
Nature of packaged software included
Use of external consultants
Degree of understanding between users and developers
Presence of a project champion
Senior management involvement
Amount of organizational change required
Threat to existing personnel, vested interests
User’s views of the quality of the system
Copyright 2004 John Wiley & Sons, Inc.

10. The IT Investment Equation
P(Success/Return) = P(Return on Investment Type) * P(Conversion Success)
Type of Investment
Management and IT Staff estimate of probability of return
Estimate of probability of successful conversion effort
Overall probability of a return; S/R index
Budgeting system .5
1.0
JIT/EDI system
.95
.75
.71
Infrastructure network .7
.35
Package tracking system .2
Groupware .9 .8
.72
Web order entry
.63
Web home pages
Copyright 2004 John Wiley & Sons, Inc.

11. Copyright 2004 John Wiley & Sons, Inc.
Estimating Returns
It is difficult to estimate the return from specific IT investments
Managers should also consider the cost of not investing in necessary technology
Copyright 2004 John Wiley & Sons, Inc.

12. Copyright 2004 John Wiley & Sons, Inc.
The IT Value Equation
Expected Return = Estimated Return * P(Return) x P(Conversion Success)
i.e., Expected Return = Estimated Return * P(Success/Return)
Copyright 2004 John Wiley & Sons, Inc.

13. The Investment Decision
Traditional Net Present Value Analysis
The Real Options Pricing Framework
Making a decision solely based on these approaches is not recommended because:
estimates of costs and future returns to be made
neither approach is particularly suited for IT investment decisions
Copyright 2004 John Wiley & Sons, Inc.

14. Copyright 2004 John Wiley & Sons, Inc.
Summary
Senior management support is necessary for new IT initiatives
IT investments have the potential to return tremendous value or fail miserably
Decision makers can use either quantitative or qualitative analysis to approve projects depending on the type of the investment proposed
Quantitative analysis alone (NPV or OPM) may not provide a complete picture to the decision maker
Copyright 2004 John Wiley & Sons, Inc.