The Business Value of IT: A Conceptual Model for Understanding and Selecting Valuation Methods

The Business Value of IT: A Conceptual Model for Understanding and Selecting Valuation Methods

A.J. Gilbert Silvius (Utrecht University of Applied Sciences, The Netherlands)
DOI: 10.4018/978-1-60566-346-3.ch007
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Abstract

The relation between IT and value is a complex and often disputed one. Researchers and practitioners have created numerous models and valuation methods to capture this value, yet the advanced methods they have developed are hardly used. While these sophisticated instruments are based on scientific methods and empirical evidence, managers reject them, preferring to use methods they intuitively understand. What is missing that causes this mismatch? This chapter aims to add to the understanding of valuation methods by providing a comprehensive selection model for selecting the valuation method that fits the characteristics of the investment. The authors provide a categorized overview of valuation method and identify the qualities of and issues with each method or approach. They analyze how these methods can be combined in an investment selection process and identify the characteristics of an investment that determine the applicability of a given method. They conclude the paper by combining these characteristics in a decision tree shaped selection model to select the appropriate valuation method for any given set of characteristics.
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Valuation Methods

The valuation of investments is basically an economic issue for which it is irrelevant whether the investment is in IT or in any other resource. As long as the effects of the investment are understood, calculating the value of it is merely a financial technicality. This sounds almost too good to be true. Indeed, it is not quite that simple. Financial valuation methods all have assumptions and limitations, which caused both practitioners and academics to develop (e)valuation methods that consider more than just the financial aspects. After considering over 50 evaluation methods Renkema and Berghout (1997) grouped these methods into four categories: financial methods, multi-criteria methods, ratio methods and portfolio methods.

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