INVESTMENT DECISION IN IT

Investment Decision in IT

Investment Decision in IT

This paper will discuss the statement that investment in information systems should not be the sole the responsibility of the system providers. This decision should be on the discretion of management. Investments in information technology (IT) approach level of 4% of company revenues and consist of nearly half budget of U.S. capital, process of deciding what, when and how investment IT is critical to survival. In some studies, marginal benefits of investments in IT have been only 80% of their costs. This implies the devaluation of company and, quite possibly, the flawed process of making these investment decisions. (Dennis 2009)

When it comes to creating value in the company, investment decision is most important decision. This decision determines total amount of assets held by company, composition of these assets and personality of business risk of company as perceived by investors. Using appropriate acceptance criterion for investment is critical to investment decision.

Investments in Information Technology (IT) are approaching level of 4% of company revenue (McKeen1993) and are beginning to close nearly half budget of U.S. capital.

This makes process of deciding what, when and how investment in technologies critical to survival of the company.

In some studies, marginal benefits of investments in IT have been only 80% of their costs. This indicates the devaluation of company and involves quite possibly the flawed process of making these investment decisions.

In the 1994 survey of IT industry investment practices of evaluation in UK, just over 50% of organizations surveyed had formal methodologies for managing IT investment process. THE defined process is definitely the poor process and unmanaged one. (Mitch 2008)

Purpose of this paper is to examine process of IT investment decision in relation to other types of investments and proposes alternatives to improve current process.

As mentioned above, investment decision process is most important within the company when it comes to value creation. Investment is defined as allocation of capital to the proposal, benefits are to be conducted in future. Because future is always uncertain, risk of not receiving benefits must also be considered.

This defines main components of decision process as cost of investment, benefits realized, timing of benefits and "uncertainty" at risk of realizing benefits.

Generally accepted financial decision process is based on Herbert Simon process, intelligence, design activities and activities of choice.

1. Generation of investment proposals

2. estimated cash flows of proposal

3. Evaluation of cash flows (NPV, etc)

4. Project selection based on the criterion of acceptance and

5. Continuous reassessment of investment projects after its acceptance. (Erin 2009)

This process involves making decisions. Elements of the good option is defined by Kepner and Tregoe decision making "gurus" as

... Quality of definition of specific factors that must be met, quality

Evaluation of alternatives available and quality of understanding of what these alternatives may produce.

Process described above led economic defines all these elements in an economically oriented.

definition of specific factors or criteria, usually based on average rate of return, payback, internal rate of return and net present ...