The valuation of IT investments is the process of rationally assessing the value of any IT service which is expected to improve the business value of corporate information systems. Seven financial budgeting methods are used for evaluating capital projects: 1) payback period, 2) return on the investment, 3) cost-benefit ratio, 4) profitability index, 5) net present value, 6) economic value added, and 7) internal rate of return. These methods are based on the calculation of the cash flows inputs and outputs but are limited to valuate IT investments done under conditions of uncertainty and risk in today global economy which requires dynamic capabilities and strategic flexibility.
A press release from Gartner, Inc. of November 15, 2012 revealed that worldwide enterprise IT spending is forecasted to totaling $2.679 trillion in 2013, a 2.5% increase of projected 2012 spending of $2.603 trillion. Compared to the deterioration of global economic outlook in 2012 with a direct implications of IT investments, this is rather good news during this difficult time of the European economic crisis.
The improvement in economic sectors such as banking, communications, media, services, and manufacturing, must however be an opportunity for corporate boards to demand more scrutiny on the valuation of IT investments to face budget deficits and severe austerity measures.
IT managers generally used traditional non-financial budgeting techniques that best fit technical requirements, previous contracts or track records of vendors, new version, or “instruction from senior management” tricks. The current situation requires more than mimetism, guessing, and replications.
Recent applications of the valuation framework for IT investments drawing upon the real options valuation and game theories showed promising results. This framework expands the traditional net present value to include the effects of managerial flexibility and competitive behavior. The flexibility value checks and balances the optionality of the investment which reflects the ability to alter the investment and the timing of the investment based on changes in the competitive environment and conditions of uncertainty.
How many C-level executives understand all these strategic planning concepts? Should they then be fired if they fail to propose an IT strategic plan that tallies with the business objectives during the current European economic crisis? Were they prepared to face current situations? Who should be blamed?
These scenarios raise fundamental (and enduring) questions about the readiness of C-level executives and the quality of executive education programs proposed to them to face ongoing crisis situations, dynamic economies, developing technologies, new business models, and globalization.
Appropriate “crossover” skills such as the IT savviness of the CxO team, management of perceived environmental uncertainty, complexity leadership, knowledge management, IT and businesses strategic planning for the economic crisis are new requirements to be urgently addressed by effective board leadership and university-based executive education as a response to the emerging and contradicting situation of the overall growth in enterprise IT spending and the global economic downturn.