Beyond the Business Case: New Approaches to IT Investment
When senior managers at United Parcel Service (UPS) first decided more than 15 years ago that package tracking had become a competitive necessity in the package-delivery industry, they discovered that developing the capability was not as simple as writing or buying a package-tracking application. The company needed to develop networks, databases and processing capacity before it could even begin to offer tracking services.1 In late 1997, Delta Air Lines began focusing essentially all its information-technology spending on rebuilding its airport systems and infrastructure, in part to address Y2K concerns. But shortly after Jan. 1, 2000, in what the CIO described as a “land rush,” line managers submitted requests for IT investments that totaled almost three times what Delta could allocate. Each request presented a business case that promised significant positive returns on investment. But combined, they far exceeded the ability of the IT unit to deliver.2
Such experiences are not unusual. In the last 15 years, a tidal wave of IT-enabled initiatives, from business-process reengineering to enterprise-resource planning, has elevated the importance of investing strategically in IT. The Internet alone has created numerous opportunities to reengineer processes, introduce online products and services, approach new customer segments and redo business models.3 But although the opportunities seem limitless, the resources required (capital, IT expertise, management focus and capacity for change) are not.
Traditional approaches to IT investment attempt to identify projects with the best profit potential. Proponents of the investment must “make the business case” to senior management. The heightened strategic importance of IT, however, has forced companies to think differently. They now must weigh the returns on individual investments against demands for organizationwide capabilities. They also must assess opportunities to leverage and improve existing systems and infrastructures in light of opportunities to create new capabilities and test new business models. The complex trade-offs are leading to new IT-investment patterns.
To learn how IT-investment practices are changing, we interviewed business and IT executives at 30 U.S. and European companies about their e-business initiatives and the IT investments that supported those initiatives.4 We found that many executives were abandoning the security of the business case. (See “IT Funding Practices at 30 Companies.”) However, they were unclear as to whether they were establishing a precedent that would shape future behavior or merely taking a temporary detour.
1.This description of the IT investment practices at UPS is based on 22 hours of interviews with senior business and IT executives between January 2000 and February 2001. See J. Ross, “United Parcel Service: Delivering Packages and E-Commerce Solutions,” working paper 318, MIT Sloan School of Management Center for Information Systems Research, Cambridge, Massachusetts, August 2001.
2.Descriptions of Delta’s IT investment practices are based on 20 hours of interviews with current and former Delta senior business and IT executives between June 2000 and July 2001. See J. Ross, “E-Business at Delta Air Lines: Extracting Value From a Multifaceted Approach,” working paper 317, MIT Sloan School of Management Center for Information Systems Research, Cambridge, Massachusetts, August 2001.
3. For more detail on such opportunities, see D. Feeny, “Making Business Sense of the E-Opportunity,” MIT Sloan Management Review 42 (winter 2001): 41–51.
4.The results of the overall study are summarized in J.W. Ross, C.M. Beath, V. Sambamurthy and M. Jepson, “Strategic Levers To Enable E-Business Transformation,” working paper 310, MIT Sloan School of Management Center for Information Systems Research, Cambridge, Massachusetts, May 2000.
5. See P. Weill and M. Vitale, “Place to Space: Migrating to E-Business Models” (Boston: Harvard Business School Press, 2001).
6. This framework was derived from our analysis of the experiences of the 30 companies in the study. Because the framework was an outcome of the study, we did not ask participants about their investments in each category. For validation, we collected additional data from six IT vice-president CIOs whom we found to be particularly thoughtful and creative in their IT-management practices. With the exception of one company that was holding off on experiments, all the companies had plans for investments in each category in 2000 and 2001.
7. J. Ross and N. Levina, “Brady Corporation: Delivering Customer Value Through Multiple Channels,” working paper 315, MIT Sloan School of Management Center for Information Systems Research, Cambridge, Massachusetts, August 2001.
8. See M. Broadbent and P. Weill, “Management by Maxim: How Business and IT Managers Can Create IT Infrastructures,” Sloan Management Review 38 (spring 1997): 77–92.
9. See G. Cokins, “Activity Based Cost Management: An Executive’s Guide” (New York: John Wiley & Sons, 2001) for an explanation of activity-based costing.
10. See E.K. Clemons, “Evaluating Strategic Investments in Information Systems,” Communications of the ACM 34 (January 1991): 22–36; M. Benaroch and R. Kauffman, “A Case for Using Options Pricing Analysis To Evaluate Information Technology Project Investments,” Information Systems Research 10 (March 1999): 70–86; and A. Taudes, M. Feurstein and A. Mild, “Options Analysis of Software Platform Decisions: A Case Study,” MIS Quarterly 24 (June 2000): 227–243.
11. For example, see B.L. Dos Santos, “Justifying Investments in New Information Technologies,” Journal of Management Information Systems 7 (spring 1991): 71–90; A. Kambil, J. Henderson and H. Mohsenzadeh, “Strategic Management of Information Technology Investments: An Options Perspective,” in “Strategic Information Technology Management: Perspectives on Organizational Growth and Competitive Advantage,” eds. R.D. Banker, R.J. Kauffman and M.A. Mahmood (Harrisburg, Pennsylvania: Idea Publishing Group, 1993), 161–178; Taudes, “Options Analysis,” 227–243; and H.S.B. Herath and C.S. Park, “Economic Analysis of R&D Projects: An Options Approach,” Engineering Economist 44 (spring 1999): 1–35.