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).

References:

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