Understanding the Impact of Business Cases on IT Investment Decisions

Understanding the Impact of Business Cases on IT Investment Decisions

Taking as a starting point the perspective that having a good business case is a fundamental requirement for any solid (and subsequently successful) IT investment, the authors set out to formulate an answer to the following two research questions:

1. What are the constituent elements of required to assist in the development of rich business cases for IT investments; and
2. Do these elements add value to IT investment decisions (to the point that they contribute positively to the subsequent success of these investments).

To derive an answer to the above question, the authors reviewed existing business case development methodologies and by comparing and contrasting their proposed components they identified a super-set of components, the validity of which they then verified against actual business cases (collected from e-government projects from 38 Dutch municipalities) with a view to confirm the level of correlation between the incorporation of these components and the level of initial cost estimate’s accuracy attributed to these business cases.

The literature review revealed nine business case constituents components that are pertinent to the evaluation of IT investments; and these were subsequently grouped into three categories: organizational constituents, technological constituents, and project constituents; as shown in the diagram below:

The characterization for each of the analyzed business case constituents is defined in the table below:

Constituents of business cases and their corresponding characterization

Having analyzed the inclusion of these constituents in actual business cases, and determining the correlation between the incorporation of each of these constituents and the level of accuracy of the initial cost estimates for each of their associated projects, the authors conclude that:

Our empirical findings indicate a significant, positive relationship between the number of business case elements and the ‘Initial Cost per Citizen’ for the e-government projects. This implies that the inclusion of additional business case elements from our developmental framework translates to improved cost estimates for IT projects. Conceivably, it is advisable to develop detailed business cases because they will safeguard against overoptimism on the part of decision makers and provide a more precise picture of the costs to be incurred…

The authors further determine that while there are nine general constituents that are prevalent (to various degrees) in the various methodologies, some have a greater impact on the accuracy of the initial cost estimates than others.

We further discovered that different categories of business case elements have distinct impacts on the initial cost estimates of IT projects. Of the three categories (i.e., organizational constituents, technological constituents and project constituents), business case elements associated with project governance (i.e., ‘Project Planning and Governance’, ‘Cost Appraisal’, ‘Risk’ and ‘Stakeholders’) exert the strongest influence on the initial cost estimates. Conversely, organizational and technological business case elements do not affect initial cost estimates..

What the above means is that while there are a number of contributing factors to the creation of a successful business case, not all directly impact or affect the accuracy or correctness of the initial cost estimate.

Some Final Thoughts

The conclusion that a robust business case is a positive contributor to a positive realization of IT Investments is not a revolutionary idea. Nevertheless it is a valuable reminder that an up front investment in producing a rich business case, consisting of a relevant set of supporting information is, at the very least, a precursor and a pre-requisite to an early (and more accurate) estimation of the expected costs. Considering in the context of public debates surrounding the validity and usefulness of producing project estimates, this study makes an unequivocal observation that while the long-term success of IT Investments is closely tied with its initial cost estimates, the determination of these estimates requires some up-front work and, should that work be carried out, it is likely to result in positive results.

Think about it!