IT Investment Evaluation: A Suitability Analysis of Financial Evaluation Measures

Investments in Information Technology (IT) seem to go without saying. IT is said to enhance organizational capabilities, resulting in improved product quality and variety, increased customer satisfaction, open up new business opportunities and markets and hence contributing to sales increases, to name only a few expectations that arise from IT investments. But at the same time executives cannot specify these benefits or do not know how to quantify them. Improvements, enabled by IT, are often not reflected in improved financial performance or productivity growth, although research and practice come up with many different financial evaluation methods. But how suitable are these methods to evaluate IT investments? To find an answer to this question Uwe Wohlfahrt analyzes the characteristics of IT investments and different evaluations measures (such as ROI, EVA, Tobins q, Real options etc.) in detail and afterwards elaborate if these methods can meet the requirements that arise from IT investments. After showing the status quo of IT investment evaluation in practise and an examination if this is done properly, the author suggests a framework, which assigns evaluation measures to an appropriate IT investment category. Such a framework can support executives in finding a suitable measure to evaluate a certain IT investment.