This paper details
early experience in using an approach to the evaluation
of information systems, called Information Economics
(IE). Marilyn Parker and Robert Benson devised
IE some years ago,, from the IBM Los Angeles Research
Center and Washington State University respectively.
It has become extremely popular in the States.
Parker and Benson were researching the highly
topical problem-what is the value of information
systems to an enterprise? In their textbook, they
seemed to see IE only as a way of prioritizing
investments in information systems and technology
(Parker et al., 1988, 121-132). So far, the method
has been used in two different ways: this is unlikely
to have exhausted further possibilities. The approach
can be thought of as a general method for putting
value on information systems.
A range of articles, studies and reports make
the point that organizations will find it extremely
hard to justify their investment in information
system and technology. Some claim that productivity
is improved, yet cannot put figures to it. Many
mention unquantifiable benefits. All recognize
the importance of information technology in business
but find it difficult to talk meaningfully about
the real value of information systems. (Arnott
& Stiglitz, 1988, 383-413)
Information Systems Strategy
The valuing of information systems is linked to
the concept of IS strategy. Ideally, the enterprise
will have worked out a business strategy. Then
it will have decided on the information systems
needed to implement the strategy. Next, it decides
on the technology infrastructure to deliver the
information systems. Then it is a question of
prioritizing the IS projects decided upon, so
that they are developed in the most useful sequence.
Of course, it rarely, if ever, happens quite like
this. (Arnott & Stiglitz, 1990, 91-122)
Typically, there is a wish list of information
systems projects thrust before the IT manager.
Then ad hoc prioritization takes place. Who has
the biggest budget? Who can shout the loudest?
Which is the simplest to do?
IE straddles the area between a true IS and IT
strategy, and the ad hoc decisions on development.
Parker and Benson say that the approach assumes
a strategy, or at the least, that some process
has gone on to produce the wish list. However,
IE itself will certainly raise some very strategic
questions. If there is not already a business
and IS strategy, the use of IE will surely start
people thinking about them.
Information Economics should be seen as an intrinsic
part of the strategic thinking that goes on in
a business enterprise. It is not, in and of itself,
going to produce a strategy. It will demonstrate,
however, that thorough thinking has gone on, so
that decisions on investment in IS are soundly
based. ((Arnott & Stiglitz, 1991, 179-190)
Values and Risks
Information Economics goes beyond traditional
cost-benefit analysis of investment in formation
systems, and introduces the concepts of values
and risks.
That we have to move from usual cost-benefit analysis
is clear. One major reason is that infrastructure
projects (for example, developing a communications
network or putting in office systems) are virtually
impossible to evaluate if one only asks what the
hard cash benefits are. They are unlikely to be
perceptible. Again, a big new relational database
management system may or may not bring hard benefits
to the first major project for which it is used.
It will certainly make a difference to every subsequent
project. How do we bring all this into question
when trying to decide on the investment in the
first place?
Much depends on how the IT budget is allocated.
It is common to have discrete business unites
holding their own budgets, with development tools
and methodologies decided on at the center. How
can one achieve consensus amongst the different
budget holders on thebenefits that may or may
not accrue from major decisions on a new database
management system, or an extension to a network?
(Paul & Mullins, 1986, 61-89)
IE grapples with these problems by offering a
framework within which the total positive and
negative impacts that IT projects can have on
an enterprise can be discussed and evaluated.
It looks at how systems will be developed and
used, as well as what benefits a system may bring.
Thus it encompasses a number of human and management
factors, as well as business factors. Since the
success or failure of a system largely depends
on these human factors, this is a great strength
in IE.
Value or Benefit?
What is the value of an information system to
an organization? Information Economics distinguishes
it from benefits. We do not lose sight of benefits,
but value is a larger concept. One may take the
view that benefits are what one pays for; value
is what one takes risks for. (Blanchard, Lopez-de-Silanes
& Shleifer, 1994, 337-360)
Benefits one may be able to think and talk about
using knowledge and logic. If we install an online
order processing system, we may be able to be
quite accurate in quantifying how many staff we
would need and how much faster things would happen.
This can then be turned into money benefits. We
then write this down and say we have a benefits
statement. But in fact, the system will only be
developed, installed and used as a consequence
of certain human activities. As soon as we do
something, we take a risk. Therefore an approach
is needed which goes beyond the logical benefit
statement to consider real activities and real
risks. One may potentially be able to process
orders 20% more speedily and help the cash flow.
(Alan & Maccini, 1991, 73-96) The really
hard question is, how likely is it that this will
really happen? This will depend on all sorts of
factors, for example, what are the staff attitudes?
How committed is top management? What firm plans
are there for training? At the end of the day,
there could well be the cash benefits plus extra
value. This extra value might be a more satisfied
and competent set of employees and a far better
perception of the company by customers and the
financial sector. But this total value will only
have been gained through taking risks. (Blinder
& Stightz, 1983, 297-302)
Value is not directly related to payment. For
example, we talk of something having sentimental
value. Such an item will almost certainly not
be costly, rather the opposite. It is hard to
say that it brings benefits. But people will probably
fight harder for such an item than for something
they could go out and buy. Of course, information
systems hardly fill one with warm and tender feelings.
But think about removing a system that has been
in place for some years. The company gained the
benefits of it long ago. Yet there are likely
to be strong emotions generated if it is killed
off. It has acquired values: people understand
how to use it and have invested time and effort
in it. It is part of the way things are done now,
which is probably different from when it was first
installed. This comes back to the point that value
develops as people do things. (Carpenter &
Petersen, 1994, 75-122)
However, many still find it hard to separate the
concepts and the terminology of value and benefits.
Go to any seminar and the discussion inevitably
centers round benefits. It is agreed that some
are soft, unquantifiable benefits. One is thus
left with the irritating position that if one
can quantify the benefits all well and good, that
is firm justification. If we cannot then we take
things on trust. Often this is accompanies by
rhetorical flourishes demanding to know, for example,
if we just installing telephones any more.
IE, for its part, offers a means of ascribing
value to certain consequences of installing an
information system, as well as including hard
cash flow, or benefits, analysis. On the other
hand, it must be said that the word value seems
to have at least two meanings in Parker et al.’s
usage of it. (Chevalier & Scharfstein, 1995,
390-396)
Value, in the larger sense, is the total positive
impact of the information systems on an enterprise.
Thus one needs to work out negative impacts as
well. Actual money flowing out is negative; so
also is disruption to the work pattern caused
by introduction of a new information system; also
the time spent in learning new skills and working
practices and accommodating new technology that
does not fit into the old architecture.
But these are necessary risks in order to achieve
the positives. New learning, more effective ways
of doing business, an enhanced technology infrastructure
to support the development of the enterprise,
all these are valuable.
What IE does is to define and label these values
and risks. This means that it offers a clear set
of concepts that people can start discussing.
(Chevalier & Scharfstein, 1996, 703-725)
The 7Cs of Information Economics
At one level, therefore, the IE approach offers
a decision making process. Interested parties,
business managers and technology managers, must
get together to discuss how the proposed investments
do, as far as they can determine, measure up against
the value and risk factors. The process leads
to a number of significant advantages-the 7Cs
of Information Economics.
1) Comprehensiveness – all relevant business,
economic and technical issues are addressed.
2) Consistency – in the decision-making
process.
3) Clarity – of objectives, values and attitudes.
4) Communications – vastly improved across
and between functions.
5) Confidence – that projects have been
thoroughly analyzed and justified.
6) Consensus – between managers from different
business units and functions.
7) Culture – gap closing.
All these Cs are to do with human and management
factors, which are being crucial to the success
or otherwise of information systems.
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