Prioritizing IT Projects: An Empirical Application of an IT Investment Model
Communications of the International Information Management Association, Volume 3 Issue 2
by Adam D. Denbo and Rand W. Guthrie
Information Technology (IT) projects are organizational investments that anticipate positive returns. When viewed as such, the development of a diversified “portfolio” of projects helps reduce risk from a single project failure, and results in an overall positive return. Positive returns on IT projects are usually indirect, since they have value only insomuch as they enable the accomplishment of larger organizational goals.We present here a model that integrates elements of risk, cost, and internal rate of return that can be applied to individual IT projects.
The model produces a numerical score that can be used to rank potential IT projects. Projects with higher scores return more value to the organization, and therefore should be given a higher priority. We apply the model using the IT project portfolio of a large state-charterd credit union. The results indicated that the Credit Union was prioritizing projects with more visibility but lower returns that other projects with less visibility but that offered greater returns. The implications of applying the model in other organizational settings are discussed.
Organizational leaders have a multitude of factors to consider when prioritizing IT projects. There are a variety of potential tools for project prioritization, however, when leaders must decide which technology investments to allocate funding to it can be difficult to decide what factors are the most important. Organization leaders should include fiscal responsibility, strategic direction, and resource availability when prioritizing projects. Net present value (NPV), internal rate of return (IRR), return on investment (ROI), and other measurement tools are useful, but used separately, provide incomplete answers. When a variety of measurement tools are combined, a more complete measure of value can determined.
In this research we consider information technology projects as investments that an organization makes with expected positive rates of return. This philosophy is not new (Applegate, McFarland, & MCKenney, 1996). We combine NPV, IRR and RIO formulas into a single investment model that can be used to evaluate the expected return from an IT project. When applied to all of the potential projects that an organization might initiate, it produces a numerical score that can be used to rank IT projects.
We have applied our model to the IT portfolio of a large credit union and compared the results to current priority rankings. We discovered that before the model was applied, projects tended to be prioritized by management visibility and knowledge, rather than by less-biased measures of potential returns. Management acceptance of the model seems high, and some projects that were originally slated for completion this year have been postponed or cancelled in favor of projects with greater or more immediate returns.
Information Technology plays an important role in almost every business enterprise. In the early days of business computing, managers had to decide whether a certain process should be “automated” or not. Today, the question isn’t so much whether a process should use information technology as to how information technology can be appropriated use for that process. (Stallings, 2001) refers to this problem of “too many choices” as the “manager’s dilemma”. Traditional investment models are of limited help in making these decisions, because of the difficulty in quantifying the benefits of technology innovation since the benefits may provide “non-traditional” sources of value (Brynjolfson, 1993) (Ives, 1994). As information technologies become more widely recognized as a “strategic necessity”, management decision-making has increasingly focused on choosing information technologies that “align” with overall corporate strategy. These strategic perspectives often fall short of being able to quantify the contribution that a specific information technology will make to organization goals (Boar, 2001) (Cassidy, 1998). (Ahituv, Neumann, & Riley, 1994) state that most of the criteria for prioritizing IT projects are probably intangible. Alternatively, (Applegate et al., 1996) suggests that information technologies are investments just like any other capital expenditure, and that they have costs and expected rates of return. They suggest that an organization’s IT projects should be considered as an investment “portfolio” that balances risk and rates of return. Businesses use a variety of formulaic techniques for justifying capital expenditures. Return on Investment (ROI), Internal Rate of Return and Discounted Cash Flow / Net Present Value are some of the most common methods used (Cassidy, 1998).
We suggest that both the strategic and investment perspectives must be considered when deciding the priority to give different IT projects. This paper summarizes our work to develop a financial costing model that integrates both strategy and investment values to produce a quantitative ranking of IT projects by overall expected contribution to business goals.
The model used to prioritize information technology projects is called the Credit Union Return on Technology (CURT) model, since it was developed to consider those factors most important to a credit union’s business model. This model is designed to prioritize the information technology projects within the organization’s information technology “portfolio.” The result of applying the model to a given information technology project is a number. The higher the CURT number, the higher overall return that the project has to the credit union. In this context, the term “return” has a broader definition than the typical monetary return that is most commonly discussed. “Return” is described as having positive impact in three distinct areas: Financial, Strategic, and Resourcefulness. Except for situations where the project is being driven by emergency and/or regulatory compliance, the higher CURT number projects should be performed first to unleash the largest positive impact to the organization.
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