Assessing the Strategic Value of Information Technology

Table of Contents

1 Introduction

2 Analysis

3 Conclusions

Bibliography

1 Introduction

This report aims to take a critical look at an article from Paolo Neirotti and Emilio Paolucci, both working at the Politecnio di Torino Technical University, Department of Business and Production Engineering. The article surveys the strategic value of IT on companies, specifically those who are active in the insurance sector.

Neirotti and Paolucci claim in their work that many IT projects fail, although companies today are aware of the pitfalls of IT investments and that many IT applications have become commodities. Obviously IT has a strategic value to firms but they have not determined how IT management capabilities and IT governance schemes explain commonalities and differences in their use of IT (Neirotti & Paolucci, 2007, p. 568). They analyzed the insurance industry in the US and Europe through 20 case studies and also made an analysis on 30 Italian firms (panel study).

This report is going to throw light on the conclusions made in that article and evaluate them from a new perspective.

To understand the methodology used by Neirotti and Paolucci, the differences between case study and panel study must be made clear. A case study is an intensive study of a single group, incident, or community. Rather than using samples and following a rigid protocol to examine limited number of variables, case study methods involve an in-depth, longitudinal examination of a single instance or event, a case. A panel study or cohort study is one type of study design and should be compared with a cross-sectional study. A cohort is a group of items who share a common characteristic or experience within a defined period (e.g., people who are born in a year).

In order to evaluate Information Technology, firstly, we need to know what a technology is and how its value is measured. Technology has been defined as "created competence as manifested in devices, procedures, and acquired human skills" (Van Wyk, 1999, p. 16). This definition implies that technology exists to be used for some purpose. It is not just passive knowledge. However, it usually takes some kind of investment to develop or implement a technology. To make intelligent decisions about implementing and managing a technology, managers must be able to estimate the value of the technology. If it is going to be of practical use, any overall theory of technology must include methods for estimating and measuring the value of technology. While some of this value is tangible and relatively easy to estimate and measure, much of the value is intangible and difficult to estimate and measure (Howey, 2004, p. 44).

According to Carr, "It remains difficult if not impossible to draw any broad conclusions about IT's effect on the competitiveness and profitability of individual businesses... companies continue to make IT investments in the dark, without a clear conceptual understanding of the ultimate strategic and financial impact." (Carr, 2003). Assessing the value of IT investments has stumped managers and academics for years. If viewed as a commodity input, however, IT should be measured in the context in which the investment takes place (Thatcher & Pingry, 2007, p. 41). The capabilities required for managing investments in IT have become complex, due to the pervasiveness of IT in the organization, its rapid evolution, and the multiplicity of fields now under the control of IT managers (Neirotti & Paolucci, 2007, p. 568).

In the next part, the methodology of Neirotti and Paolucci is briefly introduced. Besides that, further conditions to validate their results and conclusions are discussed.

2 Analysis

The article from Neirotti and Paolucci shows that the major differences among firms in their use of IT for developing new business capabilities can be traced back to the way that IT projects were managed and to the governance systems used to allocate decisions and responsibilities for IT investment.

The case studies carried out between 1998 and 2003 resulted to a conclusion that technological and business path dependencies, along with time compression diseconomies, resulted in diversities in IT adoption dynamics due to their differences in IT governance and management practice (Neirotti & Paolucci, 2007, p. 568). Their emphasis was thus on identifying similarities and differences in the firms' changes driven by IT. More specifically, they focused on the effect that IT spending, IT management systems and the quality of the decisions had on the firm's] accumulation of IT resources.

The article shows furthermore that most of the firms in the Italian insurance sector increased their productivity through IT regardless of their IT management capabilities. It also shows that competitive advantages were not correlated with IT spending levels or with the kind of IT investments. However, the competitive advantages made general productivity growth in the industry possible. Data on Italian companies were focused on the relationships between investments in IT, the organizational changes driven by IT and performance. The authors developed 3 hypotheses and tested them, as described in table 1.

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Table 1. Hypotheses tested by Neirotti and Paolucci. Source: based on (Neirotti & Paolucci, 2007).