Theory
IS/ICT Investments
Every information system
(IS) adopted in an organization must first pass an investment decision-making
process. However, making effective IS/ICT investment decisions still represents
a significant challenge for companies. Only 35% of organizations “have a clear
process for prioritizing IT investments” (Deloitte, 2018), and 68% of companies
are moderately or less effective in “relying upon an overall digital vision to
guide decisions” (KPMG, 2018). These findings indicate that IS/ICT investment
decisions lack long-term orientation and, thus, may not support business
strategy.
The IS investment
process comprises four sequential phases: allocation, adoption, usage, and
appropriation (Salge et al., 2015), and is shown in Figure 1. In the initial
allocation phase, senior managers decide how, and how much financial resources
shall be allocated to the IS function overall. In the second phase, adoption,
managers decide which IS shall be adopted. Therefore, two main cases of the strategic
decision-making process can be distinguished: (1) the rather budgetary decision
(as perceived by, for example, Kobelsky et al. (2008)) about the amount of
overall investment in an organization, which occurs in the allocation phase;
and (2) the decision about what IS shall be implemented, which results in one
particular expenditure and pertains to the adoption phase.
Figure 1. The phases of the
IS investment process (Adapted from Salge et al. (2015))
IS/ICT Decision-Making
Process
Decision-making is a
managerial process and involves different actors. The primary decision-makers
are usually the members of senior management, the board of directors, the IT
steering committee (AbuKhousa and Al-Qirim, 2012), or business division heads
(Salge et al., 2015), specifically a CEO, CIO, CFO, and other top managers
(Ravichandran and Liu, 2011). These managers authorize the investment project
at the end of the process. Other participants in the decision-making comprise
industry professionals, such as physicians, who can initiate the investment
incentive in reaction to their specific needs, and the IT department, which may
prepare the IS investment proposals (Xue et al., 2008).
The decision-making
process consists of multiple stages, which do not necessarily follow in sequential
order (Elbanna, 2006). Most IS decision-making process models build on Herbert’s
(1960) trichotomy of intelligence, design, and choice (Xue et al., 2008), which
he describes as “finding occasions for making a decision; finding possible
courses of action; and choosing among courses of action” (Herbert, 1960).
Later, Mintzberg (1976) refined the conceptualization into six stages, grouped
into three phases. In the intelligence (identification) phase, (1) management
recognizes a stimulus and (2) diagnoses the information about the situation to
find cause-effect relationships. In the design phase, (3) actors develop a
solution or search for ready-made ones. Then, in the choice (selection) phase,
the identified alternatives are (4) screened, (5) evaluated, and the optimal solution
is (6) authorized. Screening reduces the number of alternatives to a few
feasible ones, which are evaluated further. Evaluation has three possible forms
– judgment, bargaining, or analysis – which correspond with an intuitive,
political, or rational form of the process (Tamm et al., 2014). After
evaluation, the selected variant proceeds to authorization (Mintzberg et al.,
1976).
Other conceptualizations,
which are closer to the IS decision-making, perceive a part of the design phase
and the selection phase as justification (AbuKhousa and Al-Qirim, 2012). During
justification, managers set criteria for selection among the variants, evaluate
the alternatives according to the criteria, and decide about the outcome – they
either authorize the proposal, reject it, decide to partially fund the project
(Karhade et al., 2009) or defer its realization (Irani and Love, 2002). As
there might not be only one investment proposal discussed at a time, the
project proposals may be prioritized (AbuKhousa and Al-Qirim, 2012) according
to their position in the investment portfolio. Figure 2 compares
decision-making models with the IS investment process.
Figure 2. Comparison of decision-making process models (Dobešová, 2022)
Some decision-process
conceptualizations include more stages before the initial problem recognition
and after the final investment authorization (see Table 1). For instance, Götze
et al. (2008) mention the development of a capital investment strategy before
problem recognition, and AbuKhousa and Al-Qirim (2012) add procurement,
planning, and implementation after investment authorization. However, these
stages lie outside of the scope of this thesis. Developing a capital investment
strategy pertains to the allocation phase of the IS investment process, and
procurement and implementation follow after a specific solution has already
been decided. Undoubtedly, IS misalignment might arise in these stages as well;
however, both the stages before problem recognition and after investment
authorization present other complex decision-making processes regarding
different objects and are affected by other distinct influences.
IS Justification
The IS investment
justification represents a part of the decision-making process in the adoption
phase (Salge et al., 2015). The IS justification occurs after the investment
problem recognition and starts after finding possible alternative solutions
(AbuKhousa and Al-Qirim, 2012). During the justification, decision-makers
evaluate and prioritize these investment alternatives based on their estimated
business impact (Love and Irani, 2001). The justification stage results in the
selection of the optimal alternative or rejection of the whole investment
proposal. The position of the IS justification in the whole decision-making process
is marked in a darker field in the lower part of Table 1. The process of IS
investment justification is also called appraisal or investment evaluation, and
these terms are often used interchangeably. The term IS evaluation refers to an
assessment of an IS project before (ex-ante), during, and after its
implementation (ex-post) (Song and Letch, 2012).
The term appraisal
traditionally refers to the financial assessment of an investment (Love and
Irani, 2001). Hence, appraisal assigns values to criteria for each alternative
and enables choosing between these alternatives. Lastly, justification labels
the whole rationalization of an investment proposal and leads to the approval
or disapproval of the whole investment project (Ababneh et al., 2017). In other
words, the appraisal determines which IS to select, while justification
determines whether to implement the IS or not. Therefore, IS justification
presents a superset of IS appraisal. In the stages of IS justification,
managers and other actors define and evaluate justification criteria. To do
this, managers first determine the objectives of the investment (Brown and
Wallnau, 1996) and the selection criteria (AbuKhousa and Al-Qirim, 2012), which
involve financial and non-financial costs, benefits, and risks of the
investment (Gunasekaran et al., 2006). These criteria and objectives can be
included in a justification method, which the decision-makers choose or which
might be prescribed by the organization’s IT governance. Subsequently, managers
charge a subordinate, e. g., a project manager, with gathering the data for the
appraisal (AbuKhousa and Al-Qirim, 2012). Based on the data, the alternatives
are evaluated and the optimal solution is selected, or if the justification is
not strong enough, the investment is rejected.
Decision-makers can take an
economic, strategic, or analytical approach to IS investment justification
(Gunasekaran et al., 2006), and they may use corresponding justification
methods. The economic approach associates only financial and quantitative
values to benefits and costs, using methods such as Return on investment,
Payback period, and Cost-benefit analysis (Malichová and Miciak, 2018).
However, research pointed out that assessing only the tangible and financial
aspects of IS investments is insufficient (Koi-Akrofi, 2017). Therefore, the
analytical and strategic approaches consider quantitative and qualitative
impacts. The analytical approach acknowledges more project risk, while the
strategic approach evaluates the long-term impact of the investment and its
alignment with the organization’s goals (Irani and Love, 2002). The most common
strategic methods comprise the Balanced scorecard, Real options analysis, SWOT
analysis, and Critical Success Factors (Purwita and Subriadi, 2019). Nevertheless,
the evaluation of these methods is partly based on managerial judgment and,
thus, subjective (Irani and Love, 2002). Therefore, it is recommended to use a
combination of appraisal techniques to overcome their limitations (Milis and
Mercken, 2004).
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