Value Determination

Value

IT/IS business value

Value created by IT is—in a business context—usually referred to as IT/IS business value.

IS business value is the impact of investments in particular IS assets on the multidimensional performance and capabilities of economic entities at various levels, complemented by the ultimate meaning of performance in the economic environment. Schryen (2013, 141)

The ultimate meaning of performance refers to what is subsequently derived if the outcome is exploited, e.g.

• impact on performance of a workflow management system: faster business processes
• the ultimate meaning: is dependent on the use of gained time and the extent to which competitors have speeded up their processes

The concept of IT/IS business value extends beyond simple financial metrics. Value is context-dependent and multidimensional:

• Value manifests at different organizational levels: individual, team, department, organization, and ecosystem
• Schryen (2013)’s definition importantly separates direct performance impacts from their ultimate business meaning
• For example, if an IT system reduces processing time by 50%, the business value depends on how that time savings is utilized
• Value is also relative to competitive positioning — if all competitors achieve similar efficiency, the competitive advantage is neutralized
• The multidimensional nature includes tangible benefits (cost savings, revenue growth) and intangible benefits (customer satisfaction, innovation capacity)
• Historical perspective: IT value perception has evolved from “cost of doing business” to “strategic enabler of business value”

Introduction

Challenges

According to Kohli and Grover (2008), organizations struggle to articulate the full business value of IT beyond cost savings.

Challenges of IT value determination and subsequent relization include:

• IT investments are often viewed as cost centers rather than value creators
• Traditional metrics fail to capture full spectrum of IT value
• Stakeholders have different value perceptions as compared to IT professionals

The challenges of IT value determination stem from multiple factors:

• The “productivity paradox” questions IT’s contribution to productivity growth (Brynjolfsson 1993)
• Many benefits are second-order effects: IT enables business capabilities that then create value
• Time lag between implementation and value realization creates attribution problems
• Complementary investments (process redesign, training, change management) are often required but overlooked
• Intangible benefits like improved decision quality or customer experience are difficult to quantify
• “Cost center” perception persists because costs are immediate and visible while benefits are distributed and future-oriented
• Kohli and Grover (2008) found that organizations frequently focus on efficiency metrics because they’re easier to measure, not because they’re more important

Business-focused value definition

CIOs must first understand how business stakeholders define value. Usually it is based on their highest priority business objectives. Cannon (2020)

This implies that

• value is defined from the business perspective;
• technical capabilities must be translated to business outcomes;
• and success depends on alignment with strategic objectives

Changs in the value conversation

The business-first approach to IT value changes the fundamental conversation:

IT departments traditionally defined value in technical terms (uptime, processing speed, storage capacity). However, business executives often don’t care about technical specifications unless they connect to business outcomes.

Value translation examples:

• Technical: “99.99% system availability”
  → Business: “Continuous customer service availability”
• Technical: “Reduced data latency”
  → Business: “Faster market response capability”
• Technical: “Increased automation”
  → Business: “Reduced operational errors and improved customer satisfaction”

Primary business objectives

The three primary business objectives provide a comprehensive framework for categorizing and communicating IT value:

1. Revenue/value creation (tangible value, competetive)

• Most directly connected to business growth and competitive positioning
• Often receives highest executive attention, especially during growth periods
• For commercial enterprises: market share, customer acquisition, and new product development
• Often hardest to attribute directly to IT investments but most strategically important
• Example: Digital customer experience platforms that increase conversion rates

2. Cost optimization (tangible value, internal)

• Often easiest to measure but can lead to short-term focus
• Distinguishing between cost-cutting and value-preserving optimization is crucial
• Automation, standardization, and process efficiency are common approaches
• May include both capital expenditure (CAPEX) reduction and operational expenditure (OPEX) optimization
• Example: Cloud migration that reduces infrastructure costs while increasing flexibility

3. Risk mitigation (intangible value, internal and/or competetive)

• Increasingly prominent in digital business where technology risks directly impact business continuity
• Categories include cybersecurity, compliance, business continuity, and technical debt
• Often undervalued until after a negative event occurs
• Growing board-level interest driven by high-profile breaches and regulatory requirements
• Example: Identity and access management systems that reduce security breach likelihood

Organizational trade-offs between these objectives change based on market conditions, industry trends, and organizational lifecycle stage. Balance is key to sustainable value creation.

Revenue/value creation

IT investments can contribute to firm performance through revenue enhancement mechanisms (Melville, Kraemer, and Gurbaxani 2004).

• Market share growth
• New revenue streams
• Customer acquisition/retention

Metrics to quantify value potential

• Digital revenue percentage: Revenue from digital channel/product
• Market penetration: contribution to market share
• Customer experience: impact on NPS, satisfaction scores
• Innovation rate: new products/services enabled (share of revenue)

Revenue/value creation through IT has evolved significantly over time: early IT value focused primarily on automation and cost reduction, digital transformation has shifted focus to revenue growth and business model innovation:

• IT enables market responsiveness and customer intimacy
• Technology facilitates product/service innovation
• Digital capabilities create new market opportunities
• Information assets provide competitive intelligence
• IT enables business model transformation

Advanced organizations are developing IT value maps that show the causal chain from IT capabilities to revenue impacts with intermediate indicators.

Cost optimization

Strategic IT investments yield cost benefits through process optimization rather than simple cost-cutting (Mithas, Ramasubbu, and Sambamurthy 2011).

• Programmatic reduction of costs (vs. arbitrary cuts)
• Efficiency improvements across business processes
• Resource utilization and productivity gains
• Elimination of technical debt and redundancies

Options to quantify the scope of cost optimizations

• Labor productivity (output per employee or labor hour)
• Asset utilization (server utilization rates, real estate efficiency)
• Process efficiency (reduced cycle time, increased throughput, fewer errors)
• Unit cost reduction (cost per transaction, service, or output)

Cost optimization through IT represents a mature value dimension with established practices:

• Tactical cost-cutting (which can harm capabilities) and strategic optimization
• Cost benefits often emerge from second-order effects, not just direct substitution (Mithas, Ramasubbu, and Sambamurthy 2011)
• Process optimization combines IT changes with business process reengineering for maximum effect
• Resource utilization improvements include both human resources and technology assets
• Technical debt elimination creates long-term cost advantages by reducing maintenance burden

Industry benchmarks provide useful comparisons, such as:

• IT spending as percentage of revenue by industry
• Revenue per employee
• Operational cost ratios (e.g., cost-to-serve)

Risk mitigation

Investments in IT significantly reduce the likelihood and financial impact of risks by enhancing security, compliance, resilience, and operational stability.

• Cyberattacks, fraud, and insider threats
• Regulatory fines and legal penalties
• Supply chain vulnerabilities and disruptions
• Operational downtime and disaster recovery

Options to quantify positive outcomes of IT investments on risk mitigation:

• Expected loss reduction (probability × impact) before and after controls
• Risk transfer valuation (cost of insurance premiums avoided)
• Compliance cost avoidance (fines, penalties, remediation costs)
• Business continuity value (avoided downtime costs)

Risk management value has gained prominence in recent years due to:

• Increased cyber threats and high-profile breaches with business impact
• Expanding regulatory requirements (GDPR, CCPA, industry-specific regulations)
• Digitalization increasing dependence on technology for critical business operations
• Supply chain vulnerabilities highlighted by recent global disruptions

Risk management frameworks like NIST CSF, ISO 27001, and FAIR (Factor Analysis of Information Risk) provide structured approaches to evaluating control effectiveness and residual risk. Many organizations use risk scenarios and simulations to estimate value:

• Tabletop exercises
• Breach cost calculators
• Cyber risk quantification models
• Business impact analyses

Some organizations now maintain “risk registers” with monetized risk exposure and track risk reduction as a value metric for IT investments.

Building a measurement framework

General remarks

Adopting a balanced scorecard approach (Kaplan and Norton 2004), a measurement framework should consider following insights:

• Balanced approach: Covering all three value objectives
• Multi-level metrics: Strategic, tactical, operational
• Leading indicators: Predictive of future value realization
• Lagging indicators: Confirming delivered value

The multi-perspective approach ensures comprehensive value assessment:

• Financial perspective: cost/benefit metrics
• Customer perspective: service quality and satisfaction
• Internal process perspective: efficiency and effectiveness
• Learning/growth perspective: capability development

Multi-level metrics create a value hierarchy:

• Strategic: enterprise-level outcomes (market share, profitability)
• Tactical: business unit outcomes (productivity, quality)
• Operational: process-level outcomes (cycle time, error rates)

Leading vs. lagging indicators form a value chain:

• Leading indicators (capability improvements) predict future value
• Lagging indicators (business results) confirm realized value
• Both are necessary for a complete view of IT value

A key implementation challenge is to create a clear linkage between levels and indicator types.

Critical assessment

Before assessing the business value of IT solutions, following questions should be considered:

1. What assumptions are we making about value?
2. What stakeholder perspectives might we be missing?
3. How can we validate our value hypotheses?
4. What data would strengthen our value assessment?

Critical assessment of IT value requires questioning assumptions and expanding perspectives:

1. Value assumptions to examine:
   • Time horizon assumptions (short-term vs. long-term value)
   • Attribution assumptions (how much value comes from IT vs. other factors)
   • Contextual assumptions (market conditions, competitive response)
   • Causality assumptions (correlation vs. causation in value linkages)
2. Stakeholder perspectives often overlooked:
   • End users (adoption and usage patterns)
   • Customers (experience and satisfaction)
   • Partners and suppliers (ecosystem impacts)
   • Regulators (compliance and risk considerations)
   • Future stakeholders (sustainability and optionality value)
3. Value hypothesis validation approaches:
   • Pilot projects and controlled experiments
   • A/B testing of digital capabilities
   • Reference customer benchmarking
   • Industry comparisons and case studies
   • Post-implementation reviews
4. Data that strengthens value assessment:
   • Baseline metrics before implementation
   • Comparative data from similar initiatives
   • Usage and adoption statistics
   • Customer feedback and behavioral data
   • Performance data across multiple time periods

The critical thinking process should be iterative throughout the IT investment lifecycle, not just at decision points.

Assessment types

Ward and Daniel (2006) advocates for a mixed-method approach to IT value assessment reflected by balanced IT value scorecards.

Quantitative:

• Financial metrics (ROI, NPV)
• Operational metrics (time, quantity)
• Customer metrics (retention rate)
• Risk metrics (incident reduction)

Qualitative:

• Strategic alignment
• Innovation enablement
• Capability enhancement
• Organizational learning

Communicating value

Tailored messages

Value messages need to be tailored to business stakeholders (Peppard 2016), such as

C-Suite:

• Strategic alignment
• Competitive advantage
• Financial impacts
• Risk portfolio effects

Business unit leaders:

• Operational excellence
• User productivity
• Cost/benefit analysis
• Process improvements

End users:

• Usability improvements
• Time savings
• Quality of work life
• Capability enhancement

Recommendations

Built a rich business case based on the insights you have gained:

• Center on stakeholders’ highest priority objectives.
• Provide evidence-based value projections.
• Include both tangible and intangible benefits.
• Address value realization timeline and dependencies.

Ward and Daniel (2006) discusses as set of tools and frameworks that many organisations are using to increase the benefits realised from their investments. These have great potential to enrich the development of IT business cases.

Building effective IT business cases requires a comprehensive approach:

• Benefits identification: Explicitly linking technology changes to business changes to benefits
• Benefits ownership: Assigning clear responsibility for benefit realization
• Benefits categorization: Financial, quantifiable, measurable, observable
• Benefits realization plan: Timeline and actions required to achieve projected benefits
• Benefits review: Post-implementation assessment of actual vs. projected benefits

Evidence-based value projections can come from multiple sources:

• Internal historical data from similar projects
• Vendor case studies and benchmarks (with appropriate scrutiny)
• Industry research and analyst reports
• Reference customer experiences
• Pilot project results

The value realization timeline should recognize:

• Different benefits emerge at different times (quick wins vs. long-term value)
• Dependencies between technology implementation and business change
• Capability development as a precursor to value realization
• Learning effects that increase benefits over time
• The “total cost of benefit” - investments required to achieve projected value

Common business case pitfalls to avoid:

• Overestimating benefits or underestimating costs
• Focusing solely on financial metrics
• Ignoring adoption and change management requirements
• Failing to account for the organizational context

Modern approaches like lean business cases and minimum viable products (MVPs) allow for incremental value validation.

Literature

Brynjolfsson, Erik. 1993. “The Productivity Paradox of Information Technology.” Communications of the ACM 36 (12): 66–77.

Cannon, Jeannie W. 2020. “How to Measure the Business Value of IT: 5 Measures to Consider.” Gartner Research G00723855. Gartner, Inc.

Kaplan, Robert S, and David P Norton. 2004. Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Boston, MA: Harvard Business School Press.

Kohli, Rajiv, and Varun Grover. 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. https://aisel.aisnet.org/jais/vol9/iss1/1/.

Melville, Nigel, Kenneth Kraemer, and Vijay Gurbaxani. 2004. “Information Technology and Organizational Performance: An Integrative Model of IT Business Value.” MIS Quarterly 28 (2): 283–322. https://doi.org/10.2307/25148636.

Mithas, Sunil, Narayan Ramasubbu, and V. Sambamurthy. 2011. “How Information Management Capability Influences Firm Performance.” MIS Quarterly 35 (1): 237–56. https://doi.org/10.2307/23043496.

Peppard, Joe. 2016. “Unlocking the Performance of the Chief Information Officer (CIO).” California Management Review 58 (1): 73–99. https://doi.org/10.1525/cmr.2015.58.1.73.

Schryen, Guido. 2013. “Revisiting IS Business Value Research: What We Already Know, What We Still Need to Know, and How We Can Get There.” European Journal of Information Systems 22 (2): 139–69. https://doi.org/10.1057/ejis.2012.45.

Ward, John, and Elizabeth Daniel. 2006. Benefits Management: Delivering Value from IS and IT Investments. Chichester, UK: John Wiley & Sons.