Evaluation Process: Investment Appraisal Process - Essay Example

APPRAISAL INTRODUCTION The world of contemporary individuals is characterised by two factors which are deemed to be sole attributes of our time – globalization and information technology. Globalization has opened the world market to all the nations of the world. Thereby, engaging every country in a dynamic and complex type of global business competition which in effect necessitates tools and techniques that will give stakeholders protection in their investments while at the same time achieving the goals and visions of the company in particular and of the business community in general. In a scenario like this, it is not astonishing that the utilisation of the advancements in technology is considered as a primary tool in business enterprises. Since, advancements in technology provide and furnish industries with vital information, communications, and processes that ensure not only an even and efficient workflow in the internal organisation of the company, but it also guarantees and secures the position of the corporation in the business world. Being such, it is not surprising that an influx of investments in this area of the organization is being undertaken. In fact, ”The World Information Technology Service Alliance (WITSA) reported that the global information and communications industry surpassed the US $ 2trillion mark in 2000, and predicts it reaching the US $3 trillion on 2004” (Irani & Love, 2002, p 74). With such an aggressive climate in the information and communications industry, plus the truism that most organisations have increasingly IT/IS investments as an “important category of total organizational expenditure” (Fitzgerald, 1998, p 15), surely IT/IS investment requires focus and attention. In lieu with this, the paper intends to take a critical look at some of the theories employed in the appraisal of IT/IS investments with the hope that in the end new insights and even theories may be arrived at. THE APPRAISAL Being an essential and integrated part of the organizational expenditures, IT/IS investments should be undertaken with due care. But over and above that assertion is the belief that only a proper evaluation of IT/IS investments will allow the “organization to benchmark and define costs, benefits, risks, and implications of investing in IT investments and infrastructure (Farbey et al, 1993; Remenyi et al, 2000 cited in Irani et al, 2005). Moreover, an appropriate and suitable investment appraisal in IT investment affords a “justification for investment, enables companies to make a decision [in the midst] of competing projects especially when capital rationing is an issue, it acts as a control mechanisms over expenditure, and the development and implementation of the project [and lastly] it acts as a learning device enabling improved appraisal and systems development to take place in the future” (Ballantine & Stray, 1998, p 3). However, the big question is, ‘do we really have an appropriate means that allow us to conduct a proper appraisal of IT/IS investments?’ The role of financial returns is fundamental and very important in investment decision making. Being such, experts in accountancy, economics and management have created paradigms that are capable of measuring in an empirical way the financial returns of investments, which in turn acts as the gauge for investment success or failure. Thus, they are able to come up with measurement designs like Return on Investment (ROI), Return on Capital Employed (ROCE) and Cost-Benefit Analysis (CBA). However, what should be kept in mind is that these schemes allow the user to measure only direct and tangible results. It does not present means or ways wherein the intangible benefits, which is one of the benefits gained from IT investments, can be measured. With this limitation, some doubts regarding the applicability and effectiveness of the traditional means of appraisal as being applied to IT investments is put to the question. This ‘doubt’ on traditional appraisal is a powerful critique against it. Since, the traditional appraisal methods like economic ratio appraisal, economic discount, strategic appraisal, and analytic appraisal are supposed to be “generic methods in the appraisal of any investment forms” (Irani et al, 2005). As such, the moment that questions or doubts pertinent to the efficaciousness of these traditional methods is forwarded, it also raises at the same time the challenge among the experts in the field of IT/IS to find a method or a procedure wherein data and information necessary for IS evaluation or appraisal maybe gathered or taken. And this task of data gathering needs to be addressed immediately. Since, one of the main problems being encountered in IT/ IS investments is the limitedness of data or information regarding the actual accrued benefits derived from IT (Fitzgerald 1998). In addition, those who are able to see the limitedness of the applicability of the traditional methods of appraisal do not come from accountants or economists. Rather, on a positive point, the question is raised by IT/IS managers and practitioners themselves. Thereby, granting legitimacy and validity to the concerns of IT managers and experts. In fact, in my opinion, the question is valid and undeniable. For how can one indeed use methodologies, which are designed to measure tangible benefits when in fact one intends to measure and know intangible benefits? We are not saying that the traditional methods are inept in themselves and ill equipped in addressing IT/IS appraisal. Rather, what we are trying to point out is the fact that IT investment appraisal needs to go beyond the traditional methodologies for it to be able to give a correct account and prediction regarding IT investments. Further more, the idea of appraisal or ex-ante being the first step in investments, regardless whether it is IT/IS or other forms of investments makes the concern more pressing. Since, appraisal as a stage in investment allows one to predict the probable outcome of the investment itself. In fact during the ex-ante stage the “degree of involvement of financial appraisal should play and the predictive value that should be drawn from such conclusions” (Irani & Love, 2002) should have been made and attained already. Like wise, this first stage - the appraisal or ex-ante stage - is one of the most vital stages, if not the most crucial part, in investments. Since, it is the part of the entire investment procedure that gives managers or investors a feasible and logical manner or technique with which they will be able to assess the worth and validity of the projects. It is not a financial hurdle as some manager may think of (Irani & Love 2002). Rather it is a pivotal step for “the ex-ante evaluation of IS appears to be moving away from a process embedded within capital budgeting to one that is now a matter of consumption and thus necessary for the long-term survival and growth of the business” (Irani & Love, 2002). More over, it should be noted that IT/IS investments are no longer just appreciated as a course of action undertaken in order to reduce manual labour and ‘rationalize routine business processes in the corporate back office” (Renkema, 1998, p 181) but it is an asset in its own right. As such, we have seen that some scholars in IT/IS investments appraisal have already recognised the inherent difference of IT investments with other forms of investments. The fact that IT/IS investments yields intangible benefits while other forms of investments provide tangible and easily measurable benefits clearly points to the limitations of traditional investment appraisals in the context of IT investment (Ballantine & Stray, 1998). In this situation, some scholars have come up with the position that there is in effect a need to develop tools and techniques that will allow users of IT/IS investment appraisal to understand, know and derived prediction from methodologies that recognises IT investment’s inherent characteristic. THE OTHER STAGES The other stages of investment are as follows: the approval and authorisation to proceed with the IT/IS investment, then the development and procurement of the IT/IS investment and lastly the implementation of the new IT/IS within the organisation. In the analysis of the other stages, what comes to the fore is no longer just the logic of investment. Rather, what is needed for a better apprehension and awareness of the authentic worth and value of the entire process is the comprehension, understanding and knowledge of the organisational behaviour, structure, goals and vision. In the same manner, experience in handling IT/IS investments and workers knowledge are also important and key factors that are necessary in the harmonious flow of the stages of investment. This position is supported on the idea that IT/IS investment is not to be seen as separate or different type of asset or expenditure that is removed from the actual business dynamics. In fact, as what we have been saying at the beginning of this paper, the role of information and communication technology of organizations and businesses in the global market has been considered as one of the most fundamental tool in securing the position of business enterprises in a very complex and competitive market. In point of fact, there is a now current trend in the business industry known as knowledge management that recognises the importance of the sharing of knowledge among and between managers and workers as they pursue the goals and aims of the organization. In this process, what is being highlighted is the notion of turning tacit knowledge, which is the personal and specialised knowledge of the individual workers to explicit knowledge, which is common knowledge, assumed to be known to many (Takeuchi & Nonaka, 2000, p 139). These exchanges of knowledge that will transpire among and between workers and management will create a business environment wherein learning is acquired via doing. And as such, encourages “human capital” (Lawton, 2000, p 292) in taking an active participation in all the stages of investment, not only in the investment appraisal part but up to the implementation of the newly acquired IT. Take the case of British Petroleum. Following their motto ‘learn before, learn during and learn afterwards’, the company invested on videos which are placed on oil rigs site so that people who were encountering some problems in the actual rigs site may relay the massage right away via to the people in the base office. Moreover, these videos can in turn be used in video conferencing with the experts who are thousands of miles away from the actual site (Ahmed et al, 2002, p 147). This particular story presents to us not only the fact that such an investment of British Petroleum has resulted into reducing lost time, minimize expenditure on travel expenses of the experts and most importantly has provided ways wherein technology transfer is made easier and more accessible to the future users. What can be learned from this is the notion that investment appraisal and business benefit are interlocked and interconnected in such a way that success in one yields a success in other and that a failure in one generates failure in the other. And that in the centre of all the stages of the investment is the key and integral role of the team effort and teamwork of the upper management, middle management, operations supervisors and the regular employees. The recognition of the significance of the harmonious interrelations between management and employees benefits not only the industry or company but also every members of the organization as well. CONCLUSION Trends and developments in the global market necessitates that the stakeholders, managers, and employees of organisations and industries keep themselves abreast with the current developments in the field of information and communication technology and systems. Being such, organisations have developed appreciation to IT/IS not solely on the basis that it provides rationalization of business processes (Renkema, 1998, p 181) but that in itself is a source and means of capital assets/investment. Thus, the need to further strengthen techniques that will give IT/IS investors’ necessary data that will enable them to make appropriate IT investment decisions is mandatory. The limitation of traditional investment methods as pointed by IT scholars have paved the way for the search of a more comprehensive IT/IS investment appraisal method. The search for appraisal techniques that will recognise the inherent nature of IT appraisal – measure of intangible benefits- is essential and imperative for business success. In light of this, I would like to propose the notion that immediate gathering of data regarding the ‘intangible’ benefits of IT should be embarked in order to establish a database that may be utilised if one intends to invest in IT. More over, the idea that appropriate quantitative and qualitative questions (Irani, et al, 2005) be put together as part of the questionnaires that may be formulated in lieu of the gathering of data. More over, I believe that the most important and fundamental part in the lifecycle of IT/IS investment is the idea that all players or stakeholder take an active participation in the entire process of investment. This proposition is made on the assumption that at the centre of all organisations is the human capital, the true reservoir of company knowledge. And as such, the moment that workers creativity and knack for innovation is affirmed and recognised any implementations of new IT/IS investments will surely be yielding what it is supposed to give – progress and success for the company in particular and achievement and development for the industry as a whole. IT investments presents to us a deconstructed idea of investment wherein financial returns is no longer the decisive authority in investment decision making but the importance of dynamic interaction of all the people involved in the process of IT investments are appreciated as factors in decision making and ‘partners’ in growth. In the end, what really promotes growth, whether it is direct or indirect , tangible or intangible benefits, quantifiable or not, is the idea of mutual development attained by the organisation, and human beings in response to the challenge of the contemporary period for excellence. REFRENCE LIST: Ahmed, P. K., Kwang Kok, L., & Y.E. Loh, A. 2002, Learning Through Knowledge Management, Butterworth-Heinemann, Oxford. Ballantine, J. & Stray, S. 1998, ‘Financial appraisal and the IS/IT investment decision making process’, Journal of Information Technology, Vol 13, Iss 1, pp 3 -14. Fitzgerald, G. 1998, ‘Evaluating information systems projects: A multidimensional approach’, Journal of Information Technology, Vol 13, pp 15 – 27. Irani, Z. & Love, P. E. D. 2002, ‘Developing a frame of reference for ex-ante IT/IS investment evaluation’, European Journal of Information Systems, Vol 11, Iss 1, pp 74 – 82. Irani, Z., Sharif, A. M., & Love, P. E. D. 2005, ‘Linking knowledge transformation to information systems evaluation’, European Journal of Information Systems, Vol 14, Iss 3, pp 213 – 228. Lawton, B. 2000, ‘Evolution through knowledge management: A case study’, in D. Morey, M. Maybury & B. Thuraisingham (eds), Knowledge Management: Classic and Contemporary Works, MIT Press, Massachusettes, pp 289 – 307. Renkema, T.J.W. 1998, ‘The four P’s revisited: Business value assessment of the infrastructure impact of IT investment’, Journal of Information Technology, Vol 13, Iss 3, pp 181 – 190. Takeuchi, H., & Nonak, I. 2000, ‘Classic work: theory of organizational knowledge creation’, in D. Morey, M. Maybury & B. Thuraisingham (eds), Knowledge Management: Classic and Contemporary Works, MIT Press, Massachusettes, pp 139 – 182. Read More