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.