Valuing information technology infrastructures: a growth options approach

Decisions to invest in information technology (IT) infrastructure are often made based on an assessment of its immediate value to the organization. However, an important source of value comes from the fact that such technologies have the potential to be leveraged in the development of future applications. From a real options perspective, IT infrastructure investments create growth options that can be exercised if and when an organization decides to develop systems to provide new or enhanced IT capabilities. We present an analytical model based on real options that shows the process by which this potential is converted into business value, and discuss middleware as an example technology in this context. We derive managerial implications for the evaluation of IT infrastructure investments, and the main findings are: (1) the flexibility provided by IT infrastructure investment is more valuable when uncertainty is higher; (2) the cost advantage that IT infrastructure investment brings about is amplified by demand volatility for IT-supported products and services; (3) in duopoly competition, the value of IT infrastructure flexibility increases with the level of product or service substitutability; and (4) when demand volatility is high, inter-firm competition has a lower impact on the value of IT infrastructure.     

Resolving uncertainty and creating value from the exercise of e‐commerce investment options

This study examines the effect of the resolution of uncertainty on real options exercise decisions with respect to three e‐commerce investment options: scale‐up, stage and joint investment, and the relationship between exercise of these options and firm performance. The results of a study of 172 public e‐commerce investment announcements show that resolution of external (exogenous) and internal (endogenous) uncertainty has a significant effect on option exercise decisions. However, the results also imply that simply waiting without investment in active learning does not create significant value from real options. The key differentiator is how a firm resolves endogenous uncertainty as this endows it with the ability to successfully undertake the information technology investment and exploit the economic opportunity implied by the resolution of exogenous uncertainty. Furthermore, our results imply that different options should be used to manage situations involving certainty of loss on one hand and severity of loss on the other hand. Thus, it is important for firms to make the right choices when using options‐based investing to manage risk. We suggest that, perhaps, managers need to maintain a portfolio of options to manage the two dimensions of risk simultaneously.     

Options analysis and knowledge management: Implications for theory and practice

Real options can be a powerful tool for quantifying the value of strategic and operational flexibility associated with uncertain IT investments. They also constitute a new way of thinking as to how knowledge management (KM) can be implemented and managed to maximize the upside potential while minimizing any downside risk. This paper explored how practitioners can incorporate options analysis into contemporary knowledge management. Options analysis is recognizing real options and then determines how they add value. The main issue here is to manage knowledge so that the theoretical option value is realized in practice. This paper developed a new metric, knowledge management performance index (KMPI), for evaluating the performance of a firm in its KM at any given point in time as follows: knowledge creation, knowledge conversion, knowledge circulation and knowledge completion. The higher the efficiency of the KM process, the higher the KMPI, thereby is enabling firms to become increasingly knowledgeable. To prove the contribution of the KMPI, a questionnaire survey was conducted among 121 firms listed on the Taiwan Stock Exchange Corporation (TSEC). This paper makes five important contributions: (1) it shows that if the KM process improves, the KMPI is enhanced. This finding is based on a survey of the questionnaires. As a result, the KMPI can effectively and efficiently represent the KM process; (2) it shows that when the KMPI increases, a company’s performance will be enhanced in five different areas This indicates a significant relationship between the KMPI and the company’s performance; (3) it also shows that the higher the KMPI, the higher the performance of the organization. This is especially valuable to any organization where knowledge is not being used optimally; (4) it provides an option analysis that may be helpful to managers for making the right decision in an uncertain environment; and (5) it presents the first application of the Black-Scholes model to use an actual business situation involving KM as its test bed. The results proved that the option pricing model can act as a measurement guideline for the entire knowledge of the whole company.     

The valuation of RFID investment using fuzzy real option

Net present value (NPV) and return on investment (ROI) are commonly used to evaluate investment in new technologies. Sometimes, however, measuring the value of investment in new IT becomes very difficult due to its wide scope of application coupled with embedded options in its adoption. Therefore, comprehensive but easily understandable methodologies are needed to solve the complicated problems resulting from the complexity of new technologies. This paper employs a real option analysis to evaluate RFID adoption in the supply chain. Real options analysis should be a better way to evaluate a disruptive technology like RFID. However, the pure (probabilistic) real option rule characterizes the present value of expected cash flows and the expected costs by a single number, which is not realistic in many cases. To solve the problem, this paper considers the real option rule in a more realistic setting, namely, when the present values of expected cash flows and expected costs are estimated by trapezoidal fuzzy numbers. Specifically, it drew out their means and variance and presented a method of calculating fuzzy real options through numerical value examples of RFID investment assuming the current value of expected cash flow and investment costs using trapezoid fuzzy number fuzzy real options. Since advanced information technology such as RFID has very high risk and options such as change, extension, delay and withdrawal, etc., investment valuation using the real options technique should be done, and in the process, in a more realistic and practical approach, the fuzzy real options model presented in this study is judged to be useful.     

Managing information technology investments using a real-options approach

Investments in IT have become a dominant part of the capital budgets of many organizations. While the costs seem readily identifiable, many of the benefits are elusive. In this paper we develop a formal and practical methodology to evaluate information technology infrastructure investments. Our experience in using this approach has shown that it not only impacts the outcome but also improved understanding of how to align operating drivers with business capabilities and investment decisions. Thus, the real value of the real options approach is in how it informs the management process of IT investments.     

Return on Infrastructure, the New ROI

IT executives frequently must be able to communicate IT's value in real economic terms, characterizing how technology infrastructure financially benefits the business relative to the company's financial performance objectives. Traditionally, the approach taken has focused on the capital investment process, with return on investment being the primary metric. However, ROI approaches identify financial results pertaining to a specific project, rather than IT programs as a whole, and can be misleading. A new financial metric, return on infrastructure employed (ROIE), has economic and real practical meaning to senior executive management because it recognizes IT as both an asset and a service. ROIE is a new financial management tool with which to judge the business contribution of IT as a whole; using it can motivate management behaviors and disciplines that are essential for success in the modern-day information economy.     

An exploratory examination of the relationship between flexible IT infrastructure and competitive advantage

Information technology (IT) professionals have discussed the potential value of an organization’s IT infrastructure. Unique characteristics of this infrastructure determine its value to the organization. One characteristic, flexibility, has captured the attention of managers in organizations. A flexible IT infrastructure has even been touted by some as the next competitive weapon. Despite this suggestion, empirical evidence has been sparse. The purpose of this paper is to offer an exploratory analysis into the relationship between flexible IT infrastructure and competitive advantage. A canonical correlation analysis is used to explore this relationship. The findings support the view that there is a positive relationship between flexible IT infrastructure and competitive advantage.     

Proactive or reactive IT leaders? A test of two competing hypotheses of IT innovation and environment alignment

When does it benefit a firm to take a lead in innovation with information technology (IT)? How should a firm align its IT innovation with a dynamic industry? In addressing these questions we present a typology of IT Innovation and Environment Alignment (ITIEA) based on a firm's IT innovation strategic orientation and the industry environment. The traditional ‘fit’ perspective predicts that a firm that matches its IT innovation with a dynamic environment would obtain performance benefits. In contrast, the ‘options’ perspective suggests that a firm that takes advantage of a stable environment to proactively pursue IT innovation and develop IT capability as real options would obtain performance advantage. We employ a quasi-experiment design to test these two competing hypotheses using archival data of IT leaders over a time frame of 6 years. We perform a longitudinal analysis of the performance change trajectories of proactive and reactive IT leaders over time. The results indicate a general support for the ‘options’ perspective that proactive IT leaders that lead in innovation with IT in relatively stable environments are found to consistently outperform reactive IT leaders in overall performance, allocative efficiency, and cost efficiency in management process. However, interestingly, the results also show a partial support for the ‘fit’ perspective that reactive IT leaders that emphasize intensive deployment of IT innovation in dynamic environments are found to obtain a cost advantage in production and operation process over time. The findings offer practical implications for managers to better engage in IT innovations to create and sustain competitive advantage. Synthesizing options thinking and dynamic capability perspective, we provide a framework to better understand IT innovation, dynamic environment, and performance outcomes. The findings also shed useful light on whether, when, and how to innovate with IT for sustained competitive advantage.     

Exploring the perceived business value of the flexibility enabled by information technology infrastructure

We developed a multidimensional definition of IT infrastructure (ITI) and applied it in exploring the perceived strategic payoffs of ITI-enabled flexibility. We began by developing a typology of theoretical approaches that can be used to organize the literature and then developed a multidimensional model by conceptualizing how flexibility can be enabled through technical, human, and process elements of ITI and how these are interrelated. We used a resource-based view of the firm and a dynamic capabilities perspective to account for competitive impacts of the flexibility. Finally, we hypothesized on the moderating effects of organizational size and reporting level of the top IT executive. Data collected from 293 IT managers showed that the range of managerial ITI capabilities, which were positively affected by all areas of IT personnel knowledge and skills, was responsible for the competitive impacts of the ITI-enabled flexibility. Multigroup analyses showed that large organizational size or reporting to the CEO reduced the positive effects of the range of managerial ITI capabilities on competitive impacts.     

How to future-proof your IT infrastructure

Today's tight budgets and the increasing complexity of IT infrastructures place incredible stress on the IT environment. IT managers are working hard to keep up with new technologies while supporting existing infrastructure. As the demands on a business infrastructure grow and expand to new areas, an IT infrastructure must support these new and varied needs. Taking a hard look at ones systems can uncover hidden opportunities for savings and provide funds to help one prepares for future demands.     

Toward more effective management of information technology benefits

A critical issue facing senior executives is how to improve the return on their information technology (IT) investments. The results of numerous studies are inconclusive as they have failed to show conclusively that IT investments produce expected payoffs. The purpose of this paper is to offer an explanation for the perceived lack of IT payoff and show how managers can improve the return on their IT investments. We argue that IT can provide significant benefits, but in many cases these benefits are not captured by the firm that made the investment. Instead, a large portion of the benefits are reaped by a variety of participants or stakeholders. The implications of this for managers is that they need to view IT payoff as a portfolio of benefits across many stakeholders. They must also understand and manage the distribution of the benefits within the portfolio to assure that benefits are transferred to the bottom line. The paper offers a framework for analyzing the nature and distribution of IT benefits among various stakeholder groups and concludes with a set of guidelines for measuring and managing these benefits.     

Bewertung von IT-Investitionen mit dem Realoptionsansatz

Real Options Theory is often applied when evaluating IT investments. The application of Real Options Theory is generally accompanied by a monetary valuation of real options through option pricing models which in turn are based on restrictive assumptions and thus subject to criticism. Therefore, this paper analyzes the application of option pricing models to the valuation of IT investments. A structured literature review reveals the types of IT investments which are valued with Real Options Theory in scientific literature. These types of IT investments are further investigated and their main characteristics are compared to the restrictive assumptions of traditional option pricing models. This analysis serves as a basis for further discussion on how the identified papers address these assumptions. The results show that a great deal of papers do not account for critical assumptions, although it is known that the assumptions are not fulfilled. Moreover, the type of IT investment determines the criticality of the assumptions. Additionally, several extensions or adaptions of traditional option pricing models can be found which provide the possibility to relax critical assumptions. Researchers can profit from the results derived in this paper in two ways: First, is is demonstrated which assumptions can be critical for which type of IT investments. Second, extensions of option pricing models that relax critical assumptions are introduced.     

Information Technology Investments: Characteristics, Choices, Market Risk and Value

The decisions confronting information technology (IT) managers have changed a great deal since the early 1970s. The key decisions three decades ago were related to the management of application development projects and operations centers. Today, the key decisions are quite different. What level of service should the firm provide end-users? Should IT services, development projects and the ownership and management of operations centers be outsourced? IT investments attempt to satisfy specific needs. Because of environmental differences and differences in the cost structure and benefits of alternative ways in which these needs can be met, the answers to these questions may differ across firms. Modern financial analysis can provide insights to help managers deal with many of the problems they currently face. We use modern financial theory to show how the value of IT investments can be affected by some of the choices made by managers. We show how the market risk of demand and the market risk of costs affect the market risk and value of IT investments. We consider three types of investment decisions: outsourcing versus in-house services; investments in interorganizational systems; and determining the optimal level of IT services that should be provided. Our analysis indicates that: (1) as the market risk of demand for operations decreases, firms are less likely to outsource operations; (2) the value of an investment in an interorganizational system increases as the market risk of costs increases; and (3) the optimal level of user service is inversely related to service demand risk and is directly related to the market risk of service costs.     

Managing the Decentralized IT Organization

The growing trend to decentralize the IT function and move applications development to business units is often controlled by top management. A coordinated set of best practices helps IT managers take charge of change, position the IT organization as both a vendor of development services and a provider of vital infrastructure services, and ensure a logical career-enhancing structure for IT professionals.     

IT spending in the midst of the Asian economic downturn: a Singapore perspective

The Asian economic downturn has severely affected the revenue and profitability of companies operating in Asia. This has in turn caused a significant number of companies to reduce their spending on IT, particularly in the countries that have been most affected by the downturn. While IT spending is an immediate and visible effect of the downturn, less visible changes in managerial attitudes towards IT, and approaches to controlling IT spending are likely to have longer term implications to the IT capabilities of companies in the region. In this paper, we examine these issues in the Singapore context, paying particular attention to how companies plan to control and reduce IT infrastructure spending. We found that in the participating firms, managers appear to pay more attention to the links between business strategy and IT after the downturn. We also found that deferring investments in physical infrastructure and outsourcing were the main approaches to IT cost reduction.     

基于ITIL标准的移动变更与配置管理系统研究与实现

With the rapid growth of powerful mobile devices, to improve the speed and quality of customer service, mobilizing their workforce became more and more important to many companies. Consequently, all kinds of enterprise applications, policies and data access are enabled through mobile platforms. However, how to manage such various mobile types and mobile applications and to integrate them with existing enterprise IT infrastructure becomes a great challenge. In this paper, we propose a novel approach to manage the enterprise mobiles through IT service management by using standard ITIL processes. Motivated by real cases of insurance industry mobile solution, firstly, a system architecture named BlueStar is designed which integrated ITIL-compliant mobile management and enterprise IT service management into a uniform platform. Secondly, typical ITIL processes and best practices: Change and configuration workflow are introduced for mobility management. Thirdly, the BlueStar system included device management component is implemented and evaluated by the motivating cases.     

Using jump-diffusion modeling for valuing real options in infrastructure projects

In infrastructure financed projects, in order to attract private investors, host governments often provide some guarantees. This paper develops a value model of minimum revenue guarantee with multiple-exercise real options under the impact of the emergency incident. The model is applied to infrastructure financed projects using the minimum revenue guarantee under simulation. The simulation results indicate that, before quantifying the value of the minimum revenue guarantee, it is necessary to forecast the jump degree and intensity of the emergency incident, as well as prevent and control risks arising from such emergencies. Otherwise, underestimation of the guarantee value will occur and the government will have to bear huge debt in this condition. We also analyze the dependence of the guaranteed value on the minimum guaranteed revenue level, initial revenue and number of exercise rights. For various conditions, the diagrams of the guaranteed value are also presented.     

A critical success factors model for ERP implementation

An effective IT infrastructure can support a business vision and strategy; a poor, decentralized one can break a company. More and more companies are turning to off-the-shelf ERP (enterprise resource planning) solutions for IT planning and legacy systems management. The authors have developed a framework to help managers successfully plan and implement an ERP project     

An R&D Investment Game under Uncertainty in Real Option Analysis

One of the problems of using the financial options methodology to analyse investment decisions is that strategic considerations become extremely important. So, the theory of real option games combines two successful theories, namely real options and game theory. The investment opportunity and the value of flexibility can be valued as a real option while the competition can be analyzed with game theory. In our model we develop an interaction between two firms that invest in R&D. The firm that invests first, defined as the Leader, acquires a first mover advantage that we assume as a higher share of market. But, several R&D investments present positive externalities and so, the option exercise by the Leader generates an “Information-Revelation”, that benefits the Follower.     

Communicating IT's Value in a Modern Business Climate

Multidimensional techniques for IT valuation is the bridge between financial IT value management and the strategically aligned application of IT investments. Portfolio management is one such technique, in which managers categorize various project classes. Even with these methods, however, managers must still rely on financial methods that define IT value in economic terms for individual projects in each category