Literature review

Since this research aims to apply IT portfolio approach to justify IS investment, it is important for us to know why this approach is useful and how we are going to use it. The literature review will focus on two aspects:

1. Tools that are used to evaluate IT investment and develop IT portfolio.

2. The weighting and scoring methods that have been applied to prioritize and rank investments in the portfolio.

2.1. The IT investment evaluation method

To determine what IT investment should be made, two questions are important: (1) “How is the investment decision made?” and (2) “why is the investment decision made?” The first question links to the decision-making methodology and the second addresses the criteria followed in the process (Escobar 1998).

With regard to decision-making process, Renkema and Berghoutb (1997) have distinguished four basic approaches that can be recognized in many methods proposed:

1. The financial approach– focuses on the incoming and outgoing cash flows as a result of the investment made. Examples include ROI, the payback period, the internal rate of return, the net present value, and so on.

2. The multi-criteria approach– begins with a number of goals or decision criteria, and then assigns each with proper scores and weighting to create one single measure for each investment for justifying the priority of IT investments. One famous method in this category is the “information economics method” proposed by Parker et al (1989), which evaluates an IT investment with criteria from three domains: (1) enhanced ROI, (2) business domain, and (3) technology domain.

3. The ratio approach – pays attention to the possibilities to compare organizational effectiveness by means of ratios. Several ratios have been proposed to assist in IS investment evaluation. Examples of meaningful ratios include IS expenditures against total turnover and all yielding that can be attributed to IS investments against total profits. Ratios do not necessarily take only financial figures into account. IS expenditures can, for instance, be related to the total number of

employees or to some output measure (e.g.

products or services) (Strassmann 1990 and NieveIt 1992).

4. The portfolio approach– evaluates IS investment proposals on three criteria simultaneously: (1) the contribution to the business domain, (2) the contribution to the technology domain, and (3) the financial consequences, by means of net present values (NPV) calculation. This approach is very similar to the multi-criteria approach; however it differs in the way that this approach tries to adopt a more balanced perspective to consider the criteria

“simultaneously,” (i.e. displaying the trade-off between variables) not “separately”, giving each criteria a weighting (see Bedell, 1985).

The four approaches that Renkemaa and Berghoutb (1997) have categorized are not exclusive.

Multi-criteria method is widely used in the portfolio approach, and the ratio approach can be viewed as an extension of financial approach with non-quantitative parameters adding to it. In this research, we choose IT portfolio method to develop our methodology for the following reasons. First, it is a methodology that combines different aspects of business considerations, gives attention to all business needs “simultaneously”, and more importantly, incorporates different features of IT investment evaluation method, including financial approach and multi-criteria approach. By doing so, the differences, advantages, and disadvantages between each IT investment approach can partly be overcome (Renkemaa and Berghoutb, 1997). Second, IT portfolio method has been paid attention by corporations (Jeffery and Leliveld 2004). One recent industry survey has shown that 89% of the CIOs polled are very aware of IT portfolio method (ITPM) and 65% believe that the approach yields significant business value (Jeffery and Leliveld 2004).

Past literature has proposed different IT portfolio approaches; however, each with its limitations and focuses only on certain aspects of the portfolio method.

For instance, Verhoef (2002) has presented a quantitative approach for IT portfolio management, which focuses mainly on IT project risks, costs, and duration, lacking considerations among intangible values that IT can offer, such as IT supporting the business strategy. Jeffery and Leliveld (2004) review some best practices in IT portfolio management and specify different maturity levels of IT portfolio management, but their work does not provide necessary criteria for justification. Cao et al (2006) have proposed a solution to align IT investment with business, but their method is mostly based on multi-criteria weighting. Dickinson et al. (2004) present a model to optimize a portfolio of technology improvement projects. Although the model attempts to

balances risk, overall objectives, and the cost and benefit of the entire portfolio, their proposed measures mainly concern technical improvement projects, which in some aspects are different from the IT projects.

2.2. The evaluation criteria and prioritization of IT investments

One important aspect of IT portfolio approach is to ensure that an IT investment in the portfolio should be in pursuit of both: (a) quantifiable net benefits and (b) explicitly planned business objectives (Bacon 1992). In a research done by Escobar (1998), 86.8% of the firms adopted at least one kind of financial criteria, 100% of the firms adopted at least one kind of management criteria, and 92.1% of the firms adopted at least one kind of development criteria. Drake and Byrd’s research (2006) have provided means to assess the health and completeness of an IT portfolio by proposing five project portfolio risks– strategic alignment risks, organization and management risks, cultural and climate risks, project relationship risks, and financial risks.

We conclude three domains of criteria that are needed to be considered when justifying the priorities of IT investments: (1) IT alignment, assessing the accordance between IT goals/strategies and business goals/strategies (supporting literatures are like Irani 2002, Wen and Shih 2006), (2) Business value, including both financial and non-financial criteria, as firms need to know and see the value, the benefit, and the cost of an investment (supporting literature includes Kearns 2004, Reyck et al. 2005), and (3) E-readiness, which concerns risk issues related to new IT investments and indicates whether a business is ready for new IT/IS investments.(supporting literatures can been found in Lin et al. 2007, Reyck et al. 2005).

The three domains of criteria used in the decision of IT investment prioritization are explained and described in detail below.

2.2.1. IT Alignment. IT alignment is generally defined as the alignment of an organization's IT resources with the objectives of its business unit. Weiss et al (2006) have identified three different IT alignment levels, from bottom-line technical resource alignment, to business enabler, and to strategic weapon. The desired state of IT portfolio is to achieve the stage of “strategic weapon,” or namely “strategic alignment” mentioned in other IS literature, focusing on the linkage of the IT investment strategy with the firm’s business strategy.

To achieve this goal, companies should first clearly recognize and indentify their core “business competitive strategy”.

Identifying a company’s business competitive

strategy is not an easy task however, because it denotes a large and sophisticated domain of knowledge. Miles and Snow (1978) have proposed a classification of business competitive strategy, which are widely embraced and paid considerable research attention in both the management and marketing strategy literature (Desarbo et al. 2005). Their typology concludes four basic types of competitive strategies on the basis of different business patterns: (1) Prospector, (2) Analyzer, (3) Defender, and (4) Reactors. Prospectors are technological innovator, interested in seeking out new markets; analyzers tend to prefer a ‘second-but-better’

strategy; defenders are engineering-oriented and focus on maintaining a secure niche in relatively stable market segments; reactors lack a stable strategy and are highly responsive to short-term environmental exigencies (Desarbo et al. 2005). Various past researchers have applied Miles and Snow’s typology to justify the corresponding IT investment strategy. For instance, Tavakolian (1989) has studied the relationship between the firm’s IT structure and its competitive strategy, with respect to Miles and Snow’s classification. Karami et al. (1996) point out each competitive strategy’s corresponding technological concerns. In Sabherwal and Chan’s research (2001), they have justified the suitable IS strategy for each business competitive strategy, concerning the types of IS systems that should be invested.

Although using the Miles and Snow’s classification can help firms develop a clear strategic goal of IT portfolio, it is still not clear about the process through which the IT portfolio can achieve the goal, or in other words, strategically aligned. As mentioned in Luffman’s research (2003), to achieve IT alignment, there’s a need for effective exchange of ideas and a clear understanding of the whole picture of what it takes to ensure successful strategies. IT organizations should demonstrate their value to the business in terms that the business understands that business and IT metrics of value should be the same. Kaplan and Norton (2003) have provided a process for firms to achieve strategic alignment: strategy maps.

Strategy maps is defined as a diagram that describes how an organization creates value by connecting strategic objectives in explicit cost-and-effect relationship with each other in the four Balanced Scorecard objectives: financial perspective, customer perspective, internal perspective, and learning and growth perspective. Kaplan and Norton (2006) suggest that strategy maps can be used as a tool to increase the alignment between IT strategy and business strategy in a sense to convert intangible IT capitals into tangible business values. To make the conversion even more effectively, Kaplan and Norton (2006) has further classified IT investment in to four

categories: (1) transformational applications, systems and network that change the prevailing business model of the enterprise; (2) analytic applications, systems and networks that promote analysis, interpretation, and sharing of information/knowledge; (3) technology infrastructure, the shared technology and managerial expertise required to enable effective delivery and use of information capital applications; and (4) transaction processing applications, systems that automate the basic repetitive transactions of the enterprise.

In this research, we choose strategy maps as our primary tool to aid and ensure IT strategic alignment.

2.2.2. Business Value. The past literature has categorized the business value of IT into two major categories: (1) financial benefits and (2) non-financial benefits. The first category focuses on the financial performance of organizations resulting from investments. Many empirical studies have found support for a positive relationship between IT resources and organization’s financial performance (Santhanam and Hartono, 2003, Sheng et al 2005).

Financial benefits can be measured through tangible metrics, such as cost savings, productivity, market share, and profitability. The second category is concerned with intangible benefits provided by IT, focusing on improved business processes and relationships such as better customer services, increased knowledge about customers, improved coordination with partners, superior product quality, and competitive advantages.

In the past literature, cost-benefit analysis is typically used to assess the business value of IT investments (King and Schrems, 1978). In the cost-benefit analysis, the criteria of costs are usually simply straightforward, calculated by the amount of money that a single investment needed, directly and indirectly. The criteria used in evaluating the benefits of an IT investment, however, are relatively more complicated and include either financial and non-financial criteria, or both. For instance, Salemron (2002) values the benefits from three aspects, with both financial and non-financial criteria: information accuracy, executive support, organization support.

Mashhour (2008) on the other hand, only considers financial benefit in the calculation. In conclusion, the criteria used in cost-benefit analysis today still remains a bit free-willed, depending on the researcher’s own attitude toward what benefits are expected to be brought by IT investments.

2.2.3. E-Readiness. E-readiness is a relatively new concept that has been given impetus by the rapid rate of Internet penetration throughout the world and the dramatic advances in uses of IT in business and

industry. The concept is originated by the intent to provide a unified framework to evaluate the breadth and depth of the digital divide between more and less developed or developing countries during the later part of 1990s. E-readiness assessments can also reveal which bottlenecks are worth the investment of time and money to be removed, and which can be worked around (Mutula and Brakel, 2006). Later on, the concept is being transferred to organizations and private sectors, used in decision along with IT investments, and being described in many research works (e.g., Mutula and Brakel 2006 and Fathian et al 2008).

The framework of E-readiness however, remains a bit diverged. From our study of the past literature, we’ve summarized different e-readiness measurements into three major categories: (1) organizational readiness (Fathian et al 2008, Mutula and Brakel 2006), (2) technological readiness (Fathian et al 2008, Mutula and Brakel 2006, Molla and Licker 2005), and (3) environmental readiness (Fathian et al 2008, Mutula and Brakel 2006, Oxely and Yeung 2001).