The growing need to innovate with IT requires well-founded analysis of IT innovation investments. However, the time lag between such investments and the realization of an uncertain long-term value contribution challenges companies because of a conflict between short-term corporate management and the desire to maximize the company’s long-term company value. Complexity, inexperience, and high outcome uncertainty also make IT innovation investments risky, particularly as the investments relate to existing hardware, software, and human resources, and can affect the processes, products, and services of nearly every business unit in a company. This paper proposes an integrated long- and short-term valuation approach that incorporates an IT innovation investment’s effect on the value of a company’s IT portfolio. The approach simultaneously accounts for risks and interdependencies, and uses sensitivity analysis in the context of an application example to provide research and practice recommendations.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Arrow, K. J. (1971). The theory of risk aversion. In K. J. Arrow (Ed.), Essays in the theory of risk-bearing (1st ed., pp. 90–120). Chicago: Markham.
Asundi, J., & Kazman, R. (2001). A foundation for the economic analysis of software architectures. Proceedings of the 3rd Workshop on Economics-Driven Software Engineering Research, (EDSER-3 2001), Toronto, Ontario, Canada.
Bamberg, G., & Spremann, K. (1981). Implications of constant risk aversion. Mathematical Methods of Operations Research, 25(7), 205–224.
Bannister, F., & Remenyi, D. (2000). Acts of faith: Instinct, value and IT investment decisions. Journal of Information Technology, 15(3), 231–241.
Bardhan, I., Bagchi, S., & Sougstad, R. (2004). Prioritizing a portfolio of information technology investment projects. Journal of Management Information Systems, 21(2), 33–60.
Beer, M., Fridgen, G., Müller, H., & Wolf, T. (2013). Benefits quantification in IT projects. Proceedings of the 11th Internationale Tagung Wirtschaftsinformatik, Leipzig. 707-720.
Benaroch, M., Jeffery, M., Kauffman, R., & Shah, S. (2007). Option-based risk management: A field study of sequential information technology investment decisions. Journal of Management Information Systems, 24(2), 103–140.
Betz, F. (2011). Managing technological innovation: Competitive advantage from change (3rd ed.). New York: Wiley-Interscience.
Buchta, D., Eul, M., & Schulte-Croonenberg, H. (2007). Strategic IT management - increase value, control performance, reduce costs (2nd ed.). Wiesbaden: Gabler.
Buhl, H. U., Röglinger, M., Stöckl, S., & Braunwarth, K. (2011). Value orientation in process management - research gap and contribution to economically well-founded decisions in process management. Business & Information Systems Engineering, 3(3), 163–172.
Chan, Y. E. (2000). IT value: The great divide between qualitative and quantitative and individual and organizational measures. Journal of Management Information Systems, 16(4), 225–261.
Chau, P. Y. K., Kuan, K. K. Y., & Liang, T. P. (2007). Research on IT value: What we have done in Asia and Europe. European Journal of Information Systems, 16(3), 196–201.
Chen, D. Q., Mocker, M., Preston, D. S., & Teubner, A. (2010). Information systems strategy: Reconceptualization, measurement, and implications. MIS Quarterly, 34(2), 233–259.
Copeland, T. E., Weston, J. F., & Shastri, K. (2008). Financial theory and corporate policy (4th ed.). Boston: Pearson/Addison-Wesley.
Daum, J. H. (2007). Innovation management and the role of controlling. Controller Magazine, 6(1), 19–58.
Dewan, S., & Ren, F. (2011). Information technology and firm boundaries: Impact on firm risk and return performance. Information Systems Research, 22(2), 369–388.
Dewan, S., Shi, C., & Gurbaxani, V. (2007). Investigating the risk-return relationship of information technology investment: Firm-level empirical analysis. Management Science, 53(12), 1829–1842.
Dos Santos, B. L., & Peffers, K. (1995). Rewards to investors in innovative information technology applications: First movers and early followers in ATMs. Organization Science, 6(3), 241–259.
Fenn, J., & Raskino, M. (2008). Mastering the hype cycle: How to choose the right innovation at the right time. Boston: Harvard Business School Press.
Fichman, R. G. (1992). Information technology diffusion: A review of empirical research. Proceedings of the 13th International Conference on Information Systems (ICIS), Dallas, Texas, 195–206.
Fichman, R. G. (2004a). Real options and IT platform adoption: Implications for theory and practice. Information Systems Research, 15(2), 132–154.
Fichman, R. G. (2004b). Going beyond the dominant paradigm for information technology innovation research: Emerging concepts and methods. Journal of the Association for Information Systems, 5(8), 314–355.
Fogelstrom, N. D., Numminen, E., & Barney, S. (2010). Using portfolio theory to support requirements selection decisions. Proceedings of the 4th International Workshop on Software Product Management (IWSPM) Sydney, NSW. 49–52.
Freund, R. J. (1956). The introduction of risk into a programming model. Econometrica, 24(3), 253–263.
Fridgen, G., & Müller, H. (2009). Risk/Cost valuation of fixed price IT outsourcing in a portfolio context. Proceedings of the 30th International Conference on Information Systems (ICIS), Phoenix, Arizona.
Garcia, R., & Calantone, R. (2002). A critical look at technological innovation typology and innovativeness terminology: A literature review. Journal of Product Innovation Management, 19(2), 110–132.
Gartner. (2012). Gartner’s 2012 hype cycle special report evaluates the maturity of 1,900 technologies., Retrieved 08/2012, from http://www.gartner.com/technology/research/hype-cycles/
Gottschalk, P. (1999). Strategic information systems planning: The IT strategy implementation matrix. European Journal of Information Systems, 8(2), 107–118.
Graves, S. B., & Ringuest, J. L. (2003). Models & methods for project selection: Concepts from management science, finance and information technology. Berlin: Springer.
Gregor, S., & Hevner, A. R. (2013). Positioning and presenting design science research for maximum impact. MIS Quarterly, 37(2), 337–355.
Grover, V., Fiedler, K., & Teng, J. (1997). Empirical evidence on Swanson’s tri-core model of information systems innovation. Information Systems Research, 8(3), 273–287.
Hanink, D. M. (1985). A mean-variance model of MNF location strategy. Journal of International Business Studies, 16(1), 165–170.
Hevner, A. R., March, S. T., Park, J., & Ram, S. (2004). Design science in information systems research. MIS Quarterly, 28(1), 75–105.
Hurwicz, L. (1951). Optimality criteria for decision making under ignorance. Cowles Commission Papers, 370.
Irani, Z. (2010). Investment evaluation within project management: An information systems perspective. Journal of the Operational Research Society, 61(6), 917–928.
Irani, Z., & Love, P. E. D. (2002). Developing a frame of reference for ex-ante IT/IS investment evaluation. European Journal of Information Systems, 11(1), 74–82.
Jeffery, M., & Leliveld, I. (2004). Best practices in IT portfolio management. MIT Sloan Management Review, 45(3), 41–49.
Kauffman, R. J., & Weill, P. (1989). An evaluative framework for research on the performance effects of information technology investment. Boston, M.A.
Kiessling, M., Wilke, H., & Kolbe, L. M. (2011). An organizational model for managing IT innovations in non-IT companies. Proceedings of the 44th Hawaii International Conference on System Sciences (HICCS), Maui, Hawaii.
Kim, K., Lim, D., Park, H., & Kim, T. (2009). A sensitivity analysis on the impact of uncertainties of the supply and demand of a workforce on a recruiting strategy in an IT service company. Proceedings of the 15th Americas Conference on Information Sytems (AMCIS), San Francisco, USA.
Kivijärvi, H., & Saarinen, T. (1995). Investment in information systems and the financial performance of the firm. Information & Management, 28(2), 143–163.
Kohli, R., & Grover, V. (2008). Business value of IT: An essay on expanding research directions to keep up with the times. Journal of the Association for Information Systems, 9(1), 23–39.
Kundisch, D., Meier, C. (2011). A new perspective on Resource Interactions in IT/IS Project Portfolio Selection. Proceedings of the 19th European Conference on Information Systems (ECIS), Helsinki, Finland, paper 171.
Lee, G., & Kim, Y. (1998). Implementing an interrelated IT innovation in the Korean industry. System Sciences, 1998., Proceedings of the 31st Hawaii International Conference on Systems Sciences (HICCS),Kohala Coast, Hawaii, 261–271.
Lim, J., & Stratopoulos, T. C. (2008). IT innovation capability and returns on IT innovation persistence. Proceedings of the 14th Americas Conference on Information Systems (AMCIS), Toronto, ON, Canada. 1–15.
Lind, M. R., & Zmud, R. W. (1991). The influence of a convergence in understanding between technology providers and users on information technology innovativeness. Organization Science, 2(2), 195–217.
Lyytinen, K., & Rose, G. M. (2003). The disruptive nature of information technology innovations: The case of internet computing in systems development organizations. MIS Quarterly, 27(4), 557–595.
Maizlish, B., & Handler, R. (2005). IT (information technology) portfolio management step-by-step: Unlocking the business value of technology (1st ed.). Hoboken: Wiley.
McAfee, A., & Brynjolfsson, E. (2008). Investing in the IT that makes a competitive difference. Harvard Business Review, 86(7), 98–107.
Merton, R. C., & Perold, A. (1993). Theory of risk capital in financial firms. Journal of Applied Corporate Finance, 6(3), 16–32.
Miller, L., & Miller, R. (2012). Classifying innovation. International Journal of Innovation and Technology Management, 9(1), 1–18.
O’Reilly, C. A., & Tushman, M. L. (2008). Ambidexterity as a dynamic capability: Resolving the innovator’s dilemma. Research in Organizational Behavior, 28(1), 185–206.
Pannell, D. J. (1997). Sensitivity analysis of normative economic models: Theoretical framework and practical strategies. Agricultural Economics, 16(2), 139–152.
Primrose, P. (1990). Selecting and evaluating cost-effective MRP and MRPII. International Journal of Operations & Production Management, 10(1), 51–66.
Probst, F., & Buhl, H. U. (2012). Supplier portfolio management for IT services considering diversification effects. Business & Information Systems Engineering, 4(2), 71–83.
Renkema, T. J. W., & Berghout, E. W. (1997). Methodologies for information systems investment evaluation at the proposal stage: A comparative review. Information and Software Technology, 39(1), 1–13.
Reyck, B. D., Grushka-Cockayne, Y., Lockett, M., Calderini, S. R., Moura, M., & Sloper, A. (2005). The impact of project portfolio management on information technology projects. International Journal of Project Management, 23(7), 524–537.
Robert, R., & Sikes, J. (2010). How IT is managing new demands. The McKinsey Quarterly, (November 2010).
Rose, G., & Lyytinen, K. (2001). The quad-core model of information systems innovation: Identifying and confirming the role of novel technological frames as a supra-innovation core - the case of internet induced IT innovation. Proceedings of the 22nd International Conference on Information Systems (ICIS), New Orleans, USA. 419–424.
Ross, J. W., & Beath, C. M. (2002). Beyond the business case: New approaches to IT investment. MIT Sloan Management Review, 43(2), 51–59.
Saltelli, A., Ratto, M., Andres, T., Campolongo, F., Cariboni, J., Gatelli, D., et al. (2008). Global sensitivity Analysis (1st ed.). Hoboken: Wiley.
Santhanam, R., & Kyparisis, G. J. (1996). A decision model for interdependent information system project selection. European Journal of Operational Research, 89(2), 380–399.
Schober, F., & Gebauer, J. (2011). How much to spend on flexibility? Determining the value of information system flexibility. Decision Support Systems, 51(3), 638–647.
Schryen, G. (2010). Preserving knowledge on IS business value - what literature reviews have done. Business & Information Systems Engineering, 52(4), 233–244.
Stratopoulos, T. C., & Lim, J. (2010). IT innovation persistence: An oxymoron? Communications of the ACM, 53(5), 142–146.
Swanson, E. B. (1994). Information systems innovation among organizations. Management Science, 40(9), 1069–1092.
Swanson, E. B., & Ramiller, N. C. (2004). Innovating mindfully with information technology. MIS Quarterly, 28(4), 553–583.
Sylla, C., & Wen, H. J. (2002). A conceptual framework for evaluation of information technology investments. International Journal of Technology Management, 24(2), 236–261.
Tarafdar, M., & Gordon, S. R. (2007). Understanding the influence of information systems competencies on process innovation: A resource-based view. The Journal of Strategic Information Systems, 16(4), 353–392.
Triantaphyllou, E., & Sánchez, A. (1997). A sensitivity analysis approach for some deterministic multi-criteria decision-making methods. Decision Sciences, 28(1), 151–194.
Ullrich, C. (2013). Valuation of IT investments using real options theory. Business & Information Systems Engineering, 5(5), 331–341.
Verhoef, C. (2002). Quantitative IT portfolio management. Science of Computer Programming, 45(1), 1–96.
Verhoef, C. (2005). Quantifying the value of IT-investments. Science of Computer Programming, 56(3), 315–342.
Walter, S. G., & Spitta, T. (2004). Approaches to the ex-ante evaluation of investments into information systems. Wirtschaftsinformatik, 46(3), 171–180.
Wang, P. (2010). Chasing the hottest IT: Effects of information technology fashion on organizations. MIS Quarterly, 34(1), 63–85.
Wehrmann, A., & Zimmermann, S. (2005). Integrierte Ex-ante-Rendite/Risikobewertung von IT Investitionen. Wirtschaftsinformatik, 47(4), 247–257.
Weill, P., & Broadbent, M. (1998). Leveraging the new infrastructure: How market leaders capitalize on information technology. Boston: Harvard Business School Press.
Weill, P., & Ross, J. W. (2004). IT governance: How top performers manage IT decision rights for superior results. Boston: Harvard Business School Press.
Zimmermann, S., Katzmarzik, A., & Kundisch, D. (2008). IT sourcing portfolio management for IT service providers - A Risk/Cost perspective. Proceedings of the 29th Conference on Information Systems (ICIS), Paris, France.
Zimmermann, S., Katzmarzik, A., & Kundisch, D. (2012). IT sourcing portfolio management for IT services providers–an approach for using modern portfolio theory to allocate software development projects to available sites. ACM SIGMIS Database, 43(1), 24–45.
Responsible Editor: Judith Gebauer
About this article
Cite this article
Häckel, B., Isakovic, V. & Moser, F. Integrated long- and short- term valuation of IT innovation investments. Electron Markets 25, 73–85 (2015). https://doi.org/10.1007/s12525-014-0171-9
- IT innovation investment (valuation)
- IT portfolio (valuation)
- Decision support
- Long- and short-term integrated valuation