How Investments in

Information Technology
Influence Performance of Firms

Submitted to: Hamida Akter;

Lecturer
Department of Management Information Systems
University of Dhaka

Submitted by: Mohammad Mushfiqur Rahman;

ID #029-12-057

Submitted on: 5th October, 2020.

Overview
The results of experimental studies concerning Information Technology (IT)
investments have been mixed, despite researchers encouraging further inspection
on the contributory relations between IT investments and a firm’s efficiency. This
is to a certain degree due to the elimination of IT business strategic alignment.
Strategic alignment has truly grown to be one of the most vital aspects concerning
business and IT managers worldwide. Hence, the objective of this paper is to
present a thorough literature review that can be used to recognize the factors
necessary to realize the potential values of their IT investments. Providing a
review of the IT and IT-business literature on a firm’s business activities can
accomplish this. Hopefully, the paper will stimulate helpful insight on the
advantages of continuous analysis of IT investments.

Introduction
In order to increase their efficiency, firms spend a lot of money on IT components
such as hardware, software, network, and data. Nonetheless, some researchers in
the Management Information Systems (MIS) department bring attention to IT
business alignment as an idea that can help businesses to improve the benefits of
IT on structural performance based on the varied results of the linkage between IT
expenditure and firm efficiency.
The role of Information Technology (IT) has become more significant in
consolidating a firm’s ability to compete in the markets with the changing
environment of work. Hence, firms are increasing their investments on IT as it is
needed by the management not only to save overheads but also outline business
outcomes in this time of constant economic slump. Researchers have made many
efforts to measure IT investment from a business perspective due to this pressure.
There has been the fastest technological development in recent years and
technology itself is getting more fundamental to the private and public sectors. A
business needs to be conscious of advancements within all regions of technology
with regards to running an effective business; everything from the internet of
things (IoT) and artificial intelligence to 3D printing, renewable energy, and
remote working prospective. The company risks lagging behind the others if it isn’t
up to speed on the latest improvements in these sectors. The above-mentioned
factors can assist firms to improve their total performance and compete with
potential rivals by having a competitive advantage over them in the long run.

What is IT Investment?
An Information Technology Investment (IT Investment) is the spending on IT
resources to deal with mission delivery and management support. An IT
investment may include a project or projects for the development, modernization,
enhancement, or maintenance of a single IT asset or group of IT assets with related
functionality and the subsequent operation of those assets in a production
environment. While each asset or project would have a defined life-cycle, an
investment that covers a collection of assets intended to support an ongoing
business mission may not.

How to invest in IT?

Firms are spending billions of dollars on computer systems. However, there have
been claims that firms fail to benefit from these investments and suggestions that
firms are making poor information technology (IT) investment decisions.
Information technology investment decisions are often based on intuition, fear and
following what other firms have done. Only infrequently are these decisions based
on financial analysis.
The previous financial analysis of IT investments can provide useful insights to
managers faced with investment choices. The key problems facing IT managers
have changed over time – previously they stemmed from the management of
development projects and operations centers, but today they focus more around
what level of service to provide end-users and the outsourcing of IT services,
development projects and the ownership and management of operations centers.
Widespread adoption of Internet standards is making it easier for firms to develop
inter-organizational systems that link a firm to its customers and suppliers. Firms
investing in inter-organizational systems are faced with many decisions that affect
the cost and benefit structures of these systems. For example, firms must decide
whether charges for these systems are based on use, a fixed fee, or whether charges
are built into the price of the goods and services provided. These decisions affect
the cost structure and benefits of the system and thereby affect the market risk and
value of the system. Market risk is the risk to a project’s returns that result from
adverse movements in the level or volatility of markets. Investors cannot eliminate
market risks by holding a diversified portfolio. The market risk of an investment
should be reflected in the rate used to discount cash flows from the investment.
Hence, market risks affect the projected value of an investment.
Managers must understand how alternative ways of meeting needs affect the
market risk and value of a system in order to make sound investment decisions. An
increasingly important IT management decision involves determination of the level
of IT services that the firm must provide. For example, IT services aimed at
educating end-users and helping them deal with problems that they encounter are
important, making it necessary to determine the level of support for these services.
The optimal service level is affected by the characteristics of a firm’s products and
services, and its operations. The nature of a firm’s products (or services) may
determine how demand for these support services is affected by general economic
conditions. The sales of some products are more sensitive to economic conditions
than are others, and this sensitivity can affect the demand for IT services. Other
service-related decisions also require considerations such as how priorities should
be set for different groups of users of a centralized resource or a network
environment.
Modern finance theory is used to show how different choices available to
managers making certain IT investment decisions affect the market risk and value
of these investments. Much of the theory of IT investment focuses on the
evaluation of cash flows, based on the time value of money, and using discounted
cash flow (DCF) techniques. DCF techniques reduce all projected cash outflows
and inflows associated with a given investment or project back to point zero (i.e.
the present) so as to express everything in present money values. This way, cash
flows in different periods and in different projects have a common basis of
comparison. The analysis focuses on three different IT investment decisions:
 Firstly, a decision is made involving a choice between outsourcing the operations
function and housing this function within the firm, and it is shown that
outsourcing the operations function is a more viable option as the market risk of
demand for the services provided by the operations function increases.
 Next, some of the issues that must be addressed when developing an inter-
organizational system are considered. Many decisions that affect the cost
structure and benefits of the system have to be made during the development and
implementation phases. It has to be shown that the value of such systems
increases as the market risk of variable costs of the system increase.
 Finally, service level decisions are made. It is illustrated that the optimal service
level is inversely related to demand risk and directly related to the market risk of
periodic fixed costs.

Why do businesses invest in IT?

Since many firms have strengthened their core competencies by using information
technology, it is important to understand how IT investment contributes to the
achievement of business objectives. IT investments attempt to satisfy specific
needs. Because firms face different environments and the cost structure and
benefits of the investment choices available to firms differ, the answers to such
questions may differ across firms. Different firms invest in IT for different reasons
but the benefits are common:
 Investing in IT boosts staff morale and can make way for a firm’s employees to
be more productive. Staff include the IT environment when evaluating their
position within a business. The IT environment is where the majority of office-
based workers spend their days. If the equipment and/or systems are dated then it
does play a factor when comparing their role to their peers, in terms of morale.
 A lot of time can be saved through the use of advanced technology, and hence the
production process becomes more efficient. New technology delivers efficiency
and productivity; it’s what IT and computing was created to do – automate and
improve manual processes and operations. Businesses should be frequently
measuring where they are and what a new system could deliver.
 It reduces the pressure on the information systems due to an increased number of
employees, technical advancements or market pressures.
 If the IT upgrade program isn’t operated within the business, there will be a
buildup of technical debt that will often cost much more to fix in the long run.
 IT improves customer and supplier engagements on the front-end of the business.
Technology and systems is a key differentiator and definitely an area which
potential customers look at when choosing between companies.
 Technology plays a key role in providing a business with the ability to respond to
changing business needs in an ever-complex world. It goes hand in hand with
collaboration, which leads to streamlined processes and more efficient projects.
Other areas to consider are IT platforms built around mobility, cloud, big data,
artificial intelligence, block-chain and social networking which can play a
transformational role in a growing business.
Investing in IT brings numerous benefits to the business and must be recognized as
a real return on investment. It reduces the overall risk to businesses. Up-to-date
systems, with IT security as a priority, provide a peaceful environment to work and
increased functionality that can help the employees work better. Overall, IT costs
can essentially be lower when a business conducts regular yearly examinations of
their critical systems and makes any necessary investment, avoiding the need to
spend much larger amounts when systems are long overdue for an upgrade.
Businesses should realize the profits of investing in their IT systems and the
difference it can make for their employees and ultimately in seeing the positive
impact on their business. Having a strategic IT roadmap to help a business plan its
IT budget several years in advance to fit in with medium-to-long term business
objectives and financial plans is the first thing to do for a business.

Actively investing in IT environment will increase staff productivity, enhance the

data security, and expand storage capacity of business. All of these elements will
naturally contribute to higher revenue and profits as the business becomes more
efficient and streamlined. However, the key is to make the right investments as
technology trends come and go. So it is necessary to seek out the advice of an
experienced technology consultant when considering an investment.

Impact of IT Investment
Determining whether investments in information technology (IT) have an impact
on firm performance has been and continues to be a major problem for information
systems researchers and practitioners. Examining the impact of investment in
information technology (IT) on organizations has had a long tradition in
information systems (IS) research and includes questions that are vital to
management information systems (MIS) researchers, managers, and investors. At a
fundamental level, the question of whether the benefits of IT investments are
realized and measured has been extensively examined.
IT investments have an impact on the cost effectiveness of any firm in developed
or developing countries. These investments aid in enhancing growth and
development of a firm. At present, various sizes of businesses are operating in the
market. Large firms sometimes substitute their current or outdated information
technology infrastructure with modern information systems. Small and medium-
sized businesses also update or improve their current information system
framework to increase efficiency and create new markets for businesses.
Information technology presents a great level of advanced capacity and illustrates a
steady trend towards modernizations by means of developing upon present ones.
Connecting the firm’s growth levels with modern IT and exploring whether
innovation tactics vary over the firm’s life-cycle stages is vital to the firm’s
efficiency.
Businesses make a list of the daily problems regarding their operations by using
IT. Information Technology directs toward reinforcing the policies which will
boost economic growth and development. It also provides very significant
foresight for the rule regulators working on the field of specific development.
Product quality standards continue to increase regularly with the usage of IT. The
computer-aided designing models improve the function of machines, products or
services by using advanced virtual reality systems. It also decreases the levels of
endurance during production process through effectively arranged response
mechanisms. The manager of a business has to deal with the most important task of
decision-making as the survival of the firm depends on the decisions made by the
manager.
Information technology (IT) can be accepted as a unique resource in a firm in the
ends of the 20th century and 21th century. IT- based resources can be classified as
tangible resources that include the physical IT infrastructure components; human
IT resources that comprise the technical and managerial IT skills; and intangible IT
resources, such as knowledge assets, customer orientation and synergy. The long
term survival of firms is closely related to their ability to successfully manage
information technologies (IT) in the harsh and rapidly changing business
environment of today.

Conclusion
Studies of IT investment and its relationship to organizational performance have
had contradictory results. The findings of these case studies suggest a way to
include and operationalize formerly ignored variables in a model. Findings of
interest relate to the definition of IT, the importance of political considerations, the
concept of an industry-based threshold investment, the conversion effectiveness of
IT investment, and the concept of productive capacity. The most important finding,
however, relates to the separation of the different types of IT investment and the
logical linking of these types to particular performance measures.
Currently, firms are regularly investing and hoping that real returns will occur. In
the unlikely event that an optimum IT investment level exists, knowledge of it
would greatly assist managers with these difficult investment decisions. Any
optimum investment level is likely to be industry-specific and unstable over time.
Information technology investment provides further asset and support to the
management. Investment in information has an impact to improve the decision-
making process of the organization. These investments can be used to detect effects
and take corrective actions for the improvement by the management. Businesses
will face lesser risks and the efficiency of performance will rise. As IT investments
add values to the customers, the organization can gain competitive advantages over
its rivals and enjoy overall growth and performance of the business.

Reference and Citation

Raymond and Croteau, 2009
Johnson and Lederer, 2010
Oana, 2010
Henderson and Venkatraman, 1993
Luftmanet al., 1993
Luftman and Brier, 1999
Luftman, 2000
Croteau and Bergeron, 2001
Chan et al., 2006
Chan and Reich, 2000
Dong et al., 2008
Masa’deh et al. 2008
Chan et al., 1997
Sabherwal and Chan, 2001
Tallon et al., 2000
Kearns and Lederer, 2001
Tallon and Kraemer, 2003
Brynjolfsson and Hitt, 1996
Dos Santos, Peffers and Mauer, 1993
Benaroch and Kauffman, 1999
Dos Santos, 1991
Keen, 1981
Kauffman and Kriebel, 1988
Strassman, 1988
DeLone and McLean, 1992
The Common Approach to Federal Enterprise Architecture