Business It Value

IT Business Value     Organizations use IT to capture, store, manipulate, and present data in order to support the firm's business processes and value adding activities (ex, think of point of sale system in a retail store) IT is ubiquitous (found everywhere) A sign of a well-functioning system is one you take for granted but how much does this cost? o IT is a very large expenditure which can range from a million to billions of dollars IT spending depends on: o State of Industry o State of Economy o New IT projects o Size of Company (ex. Small company, fortune 500 company) o Nature of Product

IT Spending as a Percentage of Revenue

Limitations of this table:  Size of companies varies in each industry  Changes in revenues and IT spending from year to year  only surveyed companies that are fairly large  Industry determines how much a company will spend on IT  more information content – more spending on IT  IT spending as a percentage → ratio depending on the direction of revenue vs. IT spending (% can be based on increase/decrease of revenue, not IT spending) The Beautiful Hypothesis  IT spending can be used to either reduce costs (expenses) or add value to a product in order to increase sales (Revenue)…either way this makes a profit  This hypothesis, summarized in the above Figure, indicates that when IT spending is `processed' (goes through the black box) within the firm, it leads to higher profits either through higher revenue or lower cost.

The Productivity Paradox  There is no identifiable association between expenditures on IT and profitability  Beautiful hypothesis is not true

Interpretation:  Spending lots of money on IT does not necessarily mean that the return on equity will also increase  This provides support to the Productivity Paradox which states that IT spending and Profitability have no correlation Causality – The relationship between cause and affect Return on Investment (ROI) = (Gains) – (Investments) / (Investments) The