Measuring Value Creation through Information Technology - Essay Example

Measuring Value Creation through Information Technology College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Synopsis The use of Information Technology (IT) in organisations has been on the rise in recent times due to the desire to beat competition. The continued investment in IT shows that IT continues to be considered as a dire means leading to increased organisational value. However, accountants find it challenging to measure the firm value realised for investment in IT. Lack of publicly accessible data, the quicker speed of IT revolution, the probable collaborative effects between IT and human resources, besides the intangible nature of IT competency are some of the hurdles that obstruct an understanding of whether and how IT can generate value for a firm. The lack of standard reporting practises besides the multiplicity of key performance indicators reported by firms also hinder the measurement of IT firm value. Accountants find it hard to apply the traditional financial measures, such as, Net Present Value (NPV) and Return on Investment (ROI) to measure the IT firm value. Studies as well as circumstantial evidence suggest that even where such procedures are used, managers possibly will not totally rely on the results. The OECD (2008) supports the application of narrative reporting through a three framework approach: Balanced Scorecard, the Skandia Navigator and the Intangible Assets Monitor. It also proposes the established of a global framework that auditors can use to make their contributions. Kohli and Devaraj (2004) propose the use of the so-called AIAC framework. Introduction The use of Information Technology (IT) in organisations has been on the rise in recent times. The desire to beat competition has seen a rise in the use of IT as the best tool to gain competitive advantage. The continued investment in IT shows that IT continues to be considered as a dire means leading to increased organisational value. IT has fronted the subject of how knowledge is generated, circulated, reserved and used to realise economic returns. The advancement is linked to a structural change from traditional scale-based manufacturing to innovative-based activities. The activities depend to a great extent on intangible assets including such elements such as research and development (R&D), new organisational structures, patents, human resources and software. These assets have come to be strategic factors used by firms to create value (Fukao et al,. 2007). They are more and more vital in improving productivity and efficiency, and are fundamental in innovations relation to business processes, products and services. Technological advancement has indeed changed the value creation process. In the present day IT has been universally accepted as a strategic driver for forming corporate value. IT continues to account for a growing segment of overall investment. However, functional business managers do not support this argument. Even as heads of IT in organisations every so often grumble that IT is not given the break to shape business strategy, business managers argue that IT managers do not each time comprehend the nature of the business and, in its place, concentrate more on the technology. The main issue of contention has been the measurement of business value realised through IT. It is for this reason that business managers still debate the exact nature of the value generated by IT, how to measure the return on investments in IT, as well as the conditions required to maximise that return (Bismuth, 2007). This paper seeks to find, explain and talk over the challenges in measuring value creation activities through IT. It also offers quite a few reasons why accounting measures of performance offer faulty measures of value creation; and if there are any methodologies for addressing the problem. Measuring Value through IT and the Challenges Any system that ought to be used to measure business value resulting from IT ought to be efficient so as to monitor and underwrite the conversion effectiveness. The measurement system has got to help managers make the most out of organisational resources, forming an IT measurement practice, besides taking remedial action as soon as an IT investment fails to vintage the projected payoffs. A structured measurement process to prove the business value of IT must address the demands for more accountability as the scope of IT investments increases and as other business functions contest for a portion of the total investment share. The ability to excerpt business value from IT investments too proves to stakeholders an essential knowledge asset (Atrostic & Nguyen, 2006). However, lack of publicly accessible data, the quicker speed of IT revolution, the probable collaborative effects between IT and human resources, besides the intangible nature of IT competency are some of the hurdles that obstruct an understanding of whether and how IT can generate value for a firm. Moreover, literature does not conclusively explain the influence of IT on firm value and performance (ICAEW, 2008). The studies do not clearly tell IT investments apart from IT capability, as well as the IT value creation from firm success. More often than not, researchers and professionals accept that IT investment will produce gains in profits as well as productivity, which in-turn creates firm value. Still, this does not appear to be a direct line of thinking. Several empirical studies examining the connection between IT investments and numerous measures of performance show varied results. Another challenge for measuring IT value is that it cannot easily be shown through financial results. Intangible assets are hardly ever revealed as most of them are not accounted for as investments in financial statements (OECD, 2008). This does not mean that value has not been created given that IT creates value in multifaceted ways, hard to separate for measurement purposes. Kohli & Grover (2008) indicates that IT value is an intricate creation that is extremely “contingent and context-dependent.” Many factors intermediate IT and value, but determining the connexion for IT value is abstract. It is this indifference that leads the ongoing problem of measuring financial value from investments. It is thought-provoking to divorce and detach the value created by IT in detail. Besides, it can be hard to foretell what value will in the end be formed by a fresh system. This challenge is manifest at the macro as well as the micro economic level. Even though researchers still find it challenging to pin down and capture the whole economic benefits of IT, individual businesses continue to fight to put on conventional financial measurement methods to IT investments, such as Net Present Value (NPV) and Return on Investment (ROI). However, studies as well as circumstantial evidence suggest that even where such procedures are used, managers possibly will not totally rely on the results. As a consequence, decision making often look as if it is driven by hops of faith or fears of the effects of not investing, rather than assurance in the financial result (PricewaterhouseCoopers, 2008). Furthermore, IT investments are not automatically based on financial proof. They are reasonably time and again driven by other factors, such as anxiety of the costs of not investing and a necessity to keep up with competitors. There can as well be the absence of common or fixed expectations around a new-fangled IT system, with different stakeholders looking for a widespread array of benefits which cannot all be conveyed. This incompatibility of expectancy can lead to a perception of underachievement with IT projects, with costs regularly overrun and benefits felt to be under delivered. The problems of applying financial measures stem mainly from the nature of IT benefits, particularly when the benefits are interlaced with other aspects of the business, such as business processes and relations with customers, suppliers along with others (Giorgio & Haskel, 2006). Another noteworthy challenge bringing down the reporting of intangible assets is the lack of standard reporting practises besides the multiplicity of key performance indicators reported by firms. Approaches to Measuring Value through IT Owing to the failure of financial measures to effectively measure the value created through IT, nonfinancial measures provide an alternative approach. Nonfinancial measures may not be the universal remedy, but a number of these measures can be used and accountants should decide on the most important measures. The OECD (2008) proposes the use of narrative reporting as a way to release supplementary info regarding a company’s intangible assets and tactics for value creation. Firms that publish additional information regarding their assets and value drivers are likely to see an improvement in market valuation, especially for companies with a narrow pool of available capital and that are not sufficiently covered by analysts and sector or branch periodicals. The existence of special segments of stock markets might also improve the relationship between investors and the companies and thereby underpin valuations, innovation and growth (OECD, 2008). Guidelines and frameworks to support narrative reporting have been issued. They boost the disclosure of, sensible, qualitative and progressive information regarding an entity’s value drivers, drifts, risks as well as uncertainties. Currently, there are three key frameworks that have been proposed to buoy up companies to report advances linked to their intangible assets. The first framework was developed from the scorecard set-up. This approach makes available a means for accountants to report an assortment of varied information around the different modules of their intangible assets. The most recognised tools used in this framework are: (1) Balanced Scorecard (Kaplan and Norton, 1992), (2) Skandia Navigator (Skandia, 1994), and (3) Intangible Assets Monitor (Sveiby, 1997). For instance, the Balanced Scorecard framework presents a broad approach to planning and implementing business strategies for realising the mission alongside the objectives of a company. The traditional Balanced Scorecard framework is built around four perspectives: (1) financial, (2) customer, (3) internal business process, and (4) learning and growth. Saull (2000) and Grembergen (2000) stretched the framework to capture IT concepts for effective management of IT. This approach makes available a way to manage the tangible assets as well as the intangible assets that have come to be even more essential than ever in this era of the Internet. Kaplan and Norton (2000) state that by means of the Balanced Scorecard approach, companies can make the most out of framework tries to tie intangible their tangible as well as intangible assets. In this regard, the Balanced Scorecard brings out a general tool that can be used by the management to align their strategy then goals with the objectives and measures that will deliver a monitoring machinery to assess how well the entity is doing as regards the attainment of its goals and objectives. If any deviations are detected, corrective action can be instituted on time. The second framework tries to tie intangible capital quite clearly with innovation and the value creation development through mechanisms such as the Value Chain Scoreboard. And, the third framework is more based on the narrative presentation for intangible capital statements. It originated from Denmark. Several Danish Companies published Intellectual Capital Reports based on the parameters suggested by the Danish authorities in a test conducted in 199. Following the examples of the MERITUM and the PRISM projects at the European Union level, other firms opted to make supplementary disclosures over and above the listing requirements, mainly in Germany and Spain (Corrado et al,. 2006). Introduction of frameworks for auditors is one more approach that can be used to encourage reporting on intangibles. The framework would afford more assurance about disclosure of intangible assets. At present, auditors do not have a framework through which to offer their view on intangibles that cannot be wholly reported in financial statements. Moreover, policy makers can employ international co-ordination to enable cross-country evaluation of firms. Such co-ordination has been reached in integrated reporting through the contribution of the International Integrated Reporting Council (IIRC). Platforms or initiatives such as the World Intellectual Capital Initiative (WICI) that stimulate world-wide exchange of ideas on this subject matter can enable future international co-ordination (Van Rooijen-Horsten et al., 2008). Kohli and Devaraj (2004) put forward a robust measure called the AIAC framework to address the challenges faced in measuring firm value through IT. The AAIC framework has four phases: (1) Alignment; (2) Involvement; (3) Analysis; then (4) Communication. Each phase ends with a feedback loop that provides learning and enhancement of the process of IT application and payoff. In the first phase, alignment, all technological outlay critically assessed to determine its strategic fit between the business strategy and the IT investment supporting that strategy. In the involvement phase, the patrons or users of the IT investment are involved in the payoff process as well as in the selection of the suitable metrics to measure payoff. In the third phase, analysis, the tangible payoff is evaluated. Regrettably, a lot of IT payoff projects are terminated at this point and no learning is gotten from the practice. Lastly, in the communication phase, the outcomes of the breakdown are circulated in a meaningful and practical form to support learning and perfections in realising benefits. Conclusion Today, organisations have taken on it as a business strategy tool used to enhance competition and attain competitive advantage given the increasing level of global business competition. However, accountants face the challenge of measuring the firm value realised through investing in IT. This is because of the difficulty and complexity of IT systems such that the traditional financial measures cannot be applied. It is for this reason that non-financial measures have been fronted as the best methods to use to measure the firm value realised for IT investments. The OECD (2008) promotes the use of narrative reporting through frameworks such as the Balanced Scorecard, the Skandia Navigator and the Intangible Assets Monitor. It also proposes the established of a global framework that auditors can use to make their contributions. Kohli and Devaraj (2004) propose the use of the so-called AIAC framework. References Atrostic, B. K., and S. 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