On the Ex Ante Valuation of IT Service Investments

Abstract

The paradigm of service orientation and its incarnation in the form of service-oriented architecture (SOA) and information technology (IT) services play a crucial role in enabling companies to achieve considerable competitive advantages. However, to be able to leverage the opportunities of SOA and IT services, companies need to gain a thorough understanding of the business value of IT service investments. Nevertheless, research on IT services has focused mainly on technical questions so far; the economic perspective largely has been neglected. Therefore, the authors aim to contribute to the ex ante valuation of IT service investments from a decision theoretical point of view. Using decision theory as a theoretical base, the main aim is to identify and discuss specific challenges regarding the financial ex ante valuation of IT service investments, which arise from the inherent flexibility of IT services and the various interdependencies within a company’s IT service portfolio. The authors thereby emphasize that the application of common methods from financial theory for valuating IT service investments has to be treated with caution, as these methods are often tied to rather restrictive assumptions based on the specifics of capital markets. By analyzing different clusters of IT service investment decision problems using decision theory, the authors identify and discuss pitfalls that might occur when applying financial valuation methods to capture the flexibility and interdependencies of IT service investments. The decision theoretical considerations are intended to help build a solid basis for future multi-criteria valuation approaches, of which an essential component is a theoretically well-founded financial valuation

Real Option Exercise Decisions in Information Technology Investments: a Comment

“…It is thus implausible to assume that the cash flows associated with real options can be (fully) replicated [18][19][20]. Therefore, literature points to the adverse consequences of undue simplifications [21] and calls for a preference-based valuation of real options [22,23].…”

Un acercamiento a las metodologías para la valoración financiera: análisis bibliométrico y revisión sistemática de literatura

“…En el desarrollo del estudio se identifican metodologías de valoración financiera, donde los autores más representativos han empleado métodos de valoración que permiten estimar el valor de empresas y proyectos futuros con el uso de métodos como el flujo de caja descontado (Buhl et al, 2016;Marfori et al, 2019;Svetlova et al, 2013;Torchio & Surana, 2014;Thorn et al, 2011), la valoración por múltiplos (Drăpgoi al., 2016), el valor económico añadido (García & Montes, 2018;Nikoloudis et al, 2017;Salazar Araujo et al, 2018), el método de opciones reales (Marfori et al, 2019;Pérez-Vas et al, 2021;Rodrigo-González et al, 2021;Tyler & Chivaka 2011), VAN (Espinoza & Morris, 2013;Pérez-Vas et al, 2021;Rodrigo-González et al, 2021). Además, una de las bases de los métodos es el uso de indicadores financieros, donde destacan el WACC, Retorno sobre Activos (ROA), Retorno sobre Patrimonio (ROE), Tasa Interna de Retorno (TIR) y Pay back (Drăpgoi et al, 2016;Nikoloudis et al, 2017).…”

Delaying investments in sensor technology: The rationality of dairy farmers' investment decisions illustrated within the framework of real options theory

“…The real options theory is a method of option pricing from financial theory (Buhl et al, 2016). In corporate investment decisions and strategic management under uncertainty, real options theory can be used to clarify the problem structure (e.g., the different options, management decisions, and their timing), to appraise the options [i.e., estimating the net present value (NPV) of each option] and to plan the implementation (i.e., a strategic timeline that defines at which moment what option should be executed) (Trigeorgis and Reuer, 2017).…”

“…Previously, the real options theory has been used to determine the timing of investment in information technology (IT) solutions. The real options theory was very well suited for this problem because the future developments in IT solutions are highly uncertain, and therefore timing of investment is complex (Buhl et al, 2016). Investing in sensors on dairy farms can be seen as a specific example of IT investment decisions.…”