Information Technology Investments Payoff - Essay Example

Information Technology Investments Payoff Introduction The application of information technology in the modern business environment is an increasingly debatable phenomenon. This is because technology utilization in firms and businesses is perceived as a means of reducing the heavy burden of manual operations (Shea and Garson 143). Information technology investment payoff is a major concern therefore for business managements and information systems. It is progressively generating questionable interests from both the academic world and professionals. Khallaf states that the underlying reasons for IT investments are that there are possibilities of improvement in a firm’s competitive position and economic value addition. Investing in information technology is very important and has great advantages for the organizations and this is what constitutes IT investment payoff. However, business managements and information systems need to measure the payoff because the costs and risks associated with IT investments are high. Heavy financial implications, stiff competition in the business environments, high implementation and operational costs contribute to the risks and costs associated with investing in information technology. The pillars of IT payoff are grounded on the management focus, costs, benefits, technology and the business justification. This paper is a discussion of whether investing in information technology has payoffs. Information Technology Payoff Devaraj and Kohli assert that technology service providers and consultants experience huge confrontation from clients about IT investment payoff (3). This is because they are seeking to know the truth and reality of anticipated benefits arising from these new information systems. This means that clients must be convinced with the strongest possible terms that investing in information technology is worth because there are beneficial outputs from the investment. The IT service providers or the consulting companies have therefore to give the clients possible projected benefits which can justify the IT investment expense. This is to satisfy their quests before they undertake such investments. Businesses considering information technology investments to be at par with highly competitive ones are deeply concerned about the returns on investments (ROI). But the budgetary allocation for this investment is challenging for capitally constrained businesses. Shake ups in some business environments coupled with conflicting findings in IT payoff necessitates continued evaluation of IT investment and the subsequent payoff. Questions are raised if it is worth investing in information technology and if it will make a difference. To this, studies reveal there is a possibility of a positive outcome of investing in information technology. Mahmood and Swewczak argue that effective use of information technology in business organizations present very handsome benefits as the investment payoff (8). This means that firms choosing to apply technology in their operations must ensure they design appropriate technology which fits the task it is expected to perform. Doing this ensures that the expenditures on the information technology are converted into valuable asset for the firm hence the investment payoff. Further studies on the application of information technology depict increased economic value of a firm as it gains the advantage of cost reduction. This is because of the enhanced features that IT investment offers to such firms thereby differentiating their products and services from other competitors (Khallaf 3). This is a plus for such firms because they gain higher competitive edge in the industry. Furthermore, technology investment reduces future uncertainties because firm’s management can predict the future competition and quickly invent ways for curbing such competition (King 285). This is a confirmation of information technology investment payoff because of the upper hand position firms obtain in the competitive business environments. Shin asserts that IT investment payoffs derive from strategic alignment, the absence of which points at the failure of the firm to fulfill its technology obligations (2). He argues that the absence of evidential IT value output is as a result of absence of strategic alignment. IT payoffs and strategic alignment are closely linked together hence without proper strategic alignment not any payoff for investing in Information Technology can be realized. However, some studies sound cautionary warnings to firms attempting to advance their IT payoffs through their strategic alignment. The argument is that if the competition is at an international level then the business strategic and flexibility may lower its IT payoffs. King says that managers make decisions differently. Hence the workable way to ensure good IT investment payoff in such instances is by doing early investments in newly emerging technologies. From this the firm gets first-mover advantages which can be long lasting and powerful. This is especially possible if the firm manages to establish a strong foundation before the arrival of any competition. Failure to this may shorten the advantage hence no investment payoff can be realized. Devaraj and Kohli report that managers are prompted to ask if the IT payoff is measurable and how it can be realized (4). They therefore give four major factors as the justifying reasons for IT payoff measurement. These include competing investments, payoff duration, overall state of the economic environment they operate in and the customer value. It must be noted that competition arises from all the firm’s functions for investment budgetary allocations. And IT being a support function in a firm may lack strength to voice out its need when compared with other revenue generative functions. It is therefore the management’s responsibility to ensure equal, judicious and meticulous financial allocation to every sector. This ensures effective and strategic roles of technology in the firm in order that the investment payoff is realized. Similarly, the second measure of IT investment payoff is the duration it takes to see the returns on the investment. Most businesses focus on the short term benefits such as profitability, risk reduction and tangible IT output features. This makes it hard to justify the IT investments such as developing an infrastructure which seem less apparent and takes considerable longer payoff period. It calls on managers therefore be keen and patient to get the outcome of the IT investment. Usually, the overall economic picture makes managers to think that the payoffs may never be realized and that IT investment may not change anything for the firm. This is because IT returns on investments are directly affected by the economic downturn. Even though IT budgets may not be reduced, closer examination of the payoff can reveal indications of a downward trend. This means that payoff justification and planning should put into consideration the changing circumstances in the overall economic picture. Firms should therefore not roll back the IT investment since no one has control over the fluctuating economic trends and no payoff can be assured if a roll back is taken. However, there is a contrary revelation about customer value as a measure of IT investment payoff. This is because customers benefit from the IT investment irrespective of whether the firm’s profitability and productivity improves or not. Businesses should therefore invest in IT because of customer satisfaction as this ensures their loyalty and longer retention. This is in line with the argument that “it is easier and cheaper to retain the existing customers than to replace them with new ones” (Devaraj and Kohli 9). This shows that the IT investment may favor the customers more than it does to the firm’s productivity and profitability. But this should not make the firms undermine the IT investment payoff. This is because the type and amount of IT investments differ according to the characteristics of each industry and degree of competition among firms. Managers should therefore aim at measuring the economic impact of the IT investment and relate it to the organizational performances to determine the payoff. Circumstances under which Information Technology productivity improves Information technology is a mechanism that upsurges the productivity level and improve the performance of an organization (Smith 17). Technological development is the core basis for a firm’s success in the business industry. The presence of technology enhances information sharing which form the foundation for inventing ways of improving products and services. The application of information technology in the business operation is a replication of past management decisions which aimed at increasing the firm’s productivity (Berman 109). Information technology is used to meet the needs of customers and reduce the cases of dissatisfaction. Hence one of the circumstances under which IT productivity improves is when there is total customer satisfaction such that no complaints arise from the services offered to them. Similarly, cost effectiveness in an organization shows improving productivity as a result of the application of information technology (DuBrin 484). Use of IT in firms enables the slimming down of staffing and general improvement in technical skills. Furthermore, effective technology aided work environments enables easy monitoring and employee surveillance. Information technology also enables investment capital sourcing for organizations which helps to advance productivity. Business managers and owners instead of manually looking for investors can seek for potential investors on online platforms and this is very cost effective. The cost effectiveness is therefore an indicator of an improving IT productivity in a firm. Information technology productivity also improves when there is efficiency and effectiveness in the service delivery. This ensures good coordination which translates to timeliness. Application of information technology in a firm provides employees with self-services which is also time-saving to organizations. Managers can also easily identify discrepancies in the businesses or firms through monitoring and tracking every operation via the system. Also improved IT productivity ensures enhanced living standards and the national wealth creation (Smith 15). These cases are all indicators of the circumstances under which IT productivity improves. Intermediate Effects Mediating the Relationship between IT Investment and Firm Performance Modern business organizations perceive investing in information technology as a means of outweighing competition from other businesses in the market (Devaraj and Kohli 12). The presence of effective technology contributes to firm’s productivity, profitability and improvement in the quality of its operations. Bounfour agrees with other scholars that there exist evidential connection between IT investment and firm’s performance (271). Close analysis of the intermediate steps reveal how organizational processes are integrated with the complementary assets produced as a result of application of effective information technology. However, there are cases of reported mixed outcomes in the establishment of a relationship between IT investment and firm performance. This is due to insufficient sample sizes, inadequate orientation process and analysis methods to establish the viability of the system. Conversely, gaining a better understanding of the connection between IT investments and firm’s performance gives the leeway for increased IT investments. Studies reveal that most firms embracing IT investments in their operations gain high competitive edge in the market since they are unique and innovative. They are therefore able to invent valuable and attractive resources which prove difficult to be initiated by the competitors that have not taken the direction of investing in information technology (Khalaf). Moreover, analyzing firm’s competitive processes form the focal point between IT and the market needs. New products and services, improved organizational processes and presence of new business models form the effects mediating the relationship between IT investment and firm performance. Research by Mehdi reveal an existing link between information technology and firm’s performance in that there is enhanced level in the firm’s profitability (Mehdi 300). More intermediate effects of relationship between IT investment and firm’s performance are evident in improved productivity and customer/market value. Analysts report that announcements by firms to invest in IT impacts positively on their market value. This is because the uncertainty of future earnings compels investors to have a greater demand for investing in technology and seek to attract more customers to their businesses. They can also gather plenty of market information and come up with solutions to curb such uncertainties. Recommendations Information technology investment is a measure of firm’s efficiency. Managers and practitioners should understand that IT investment influences business operations and performances. This is one way of determining payoffs from investing in information technology. For the researchers examining IT investment payoff, the following recommendations can be laid as guidelines. First of all, the IT payoff measurement must be made the business case (Devaraj and Kohli 100). Proving to an organization IT investment payoff is a substance of benefit that is worth its time and money is s challenge to IT vendors and consultants. Employees become skeptical of their organization’s motives when it comes to IT investment payoff measurement. The payoff measurements also cause disruption to the firm’s operational system. Therefore, clear points of payoff measurements should be outlined and expected actions in response to the findings to be well understood (Devaraj and Kohli 100). The actions taken should clearly highlight the end results of the payoff measurement. These could include improved working conditions, increased competitive advantage, more investment opportunities and IT processes redesigning. The potentiality of information technology to promote sustainable development in all areas of business operations is yet to be fully acknowledged (Hanna and Boyson 67). For example in the banking industry, some cases of information technology use majors only on improving planning, policy making and analysis of managerial cases. IT researchers can consider examining how technology can be used in ensuring that firm’s products and processes are friendly to the environment of the targeted population. These have been areas of less concern to researches and exploring them can reveal more benefits to firms considering investing in IT. The IT vendors and consultants can also have an added advantage. This is because consumers can see that investing in information technology is not a waste of time and other resources but something that really pays off when fully exploited. Additionally, IT support to efficient and effective market developments and competitive private sectors are not yet fully exploited. Innovative application of information technology present new infrastructures that can facilitate submission of trade documents electronically. This further enhances adoption of information systems that support other internal management operational issues. Also online information networking forms rich grounds for business enterprises to jointly venture into external investments and exchanges of technology to better the economies. Researchers on IT investment payoffs therefore should focus their studies on these areas to expose other unexploited positive picture of the IT application to the prospective buyers/consumers. The information technology platforms provide participatory approaches, extension programs, development of human resources and social learning facets. This implies that the expansion of IT usage to include these other aspects needs to be sensitive and economically empowering. As a result there is quality in the information technology output and consequently positive investment payoffs. There is a greater need therefore for the IT investment payoff researchers to establish a value-based improvement approaches for the prospective IT users (Hanna and Boyson 67). Conclusion Analysis of benefits arising from the effects of investing in information technology is a point of interest to investors and researchers (Mehdi 136). However, mixed results have arisen from studies examining the effects of IT investments. This is because the public announcement of IT investments partly pause some threats of losing investors due to future market uncertainties. A major concern that continues to generate debates from end user consumers is whether IT investments pay off and under what circumstances. Knowledge of this is likely to increase the deployment of IT investment in organizations and firms to improve their performance. Scholars and researchers should therefore their focus to increasing the consumers’ knowledge of investing in information technology. Also, IT investment impacts on firm’s performance measures may spread over time before any realization on the firm’s market value. IT investment leads to improvements in product quality, innovation, and customer service. Such improvements are sometimes ignored when aggregate statistics are taken leading to under-estimation of IT benefits. No single measure of IT investment payoff can be adequate to establish the contribution to an organization’s strategic and economic performance. Hence other variables like financial and non-financial measures can be applied to give a better understanding of IT investment payoff. Works Cited Berman, Evan M. Performance and Productivity in Public and Nonprofit Organizations. Milton Park: Routledge, 2015. Print. Bounfour, Ahmed (ed.). Organizational Capital: Modeling, Measuring and Contextualizing. Milton Park: Routledge, 2009. Print. Devaraj, Sarv and Rajiv Kohli. The IT Payoff: Measuring the Business Value of Information Technology Investments. Upper Saddle River, N.J.: Prentice Hall, 2002. Print. DuBrin, Andrew J. Essentials of Management. Mason: Thompson Business and Economics, 2009. Print. Hanna, Nagy and Sandor Boyson. Information Technology in World Bank Lending: Increasing the Developmental Impact. Washington, DC: The World Bank, 1993. Print. Khallaf, Ashraf. Explaining the Inconsistent Results of the Impact of IT Investments on Firm Performance – A Research Note. King, William Richard. Planning for Information Systems. New York: M.E. Sharpe, 2009. Print. Mahmood, Adam Mo and Edward J. Swewczak. Measuring Information Technology Investment Payoff: Contemporary Approaches. Hershey: Idea Group Publishers, 1998. Print. Mehdi, Khosrow-Pour. Global, Social, and Organizational Implications of Emerging Information Resources Management: Concepts and Applications. Hershey, PA: Information Science Reference, 2010. Print. Mehdi, Khosrow-Pour. Interdisciplinary Advances in Information Technology Research. Hershey, P.A: Information Science Reference, 2013. Print. Shea, Christopher M. and David G. Garson (ed). Handbook of Public Information Systems. London: CRC Press, 2005. Print. Shin, Namchul. Creating Business Value with Information Technology: Challenges and Solutions. Hershey, PA: IRM Press, 2003. Print. Smith, Jason. Information Technology’s Influence on Productivity. Lincoln, NE: University of Nebraska Press, 2008. Print. Read More