Information Technology and Management

, Volume 16, Issue 2, pp 153–172 | Cite as

Technology investment decision-making under uncertainty

Article

Abstract

Innovations involving information technology (IT) provide potentially valuable investment opportunities for industry and government organizations. Significant uncertainties are associated with decision-making for IT investment though, a problem that senior executives have been concerned about for a long time. The uncertainties include consumer, market and regulatory responses, IT-driven changes in operational and transactional performance, technology standards and competition, and future market conditions. All these things have an impact on organizations’ willingness to adopt. As a result, traditional capital budgeting, investment experience, and intuition have not been very effective in IT investment decision-making. We propose a new option-based stochastic valuation modeling approach for IT investment under uncertainty that incorporates a mean reversion process to capture cost and benefit flow variations over time. We apply the proposed approach in two industry settings: to a large-scale IT investment in the consolidation of data marts at a major airline, and to a mobile payment system infrastructure investment on the part of a start-up. The applications supported the evaluation of the proposed methods, and offered some illustrations about the kinds of managerial insights that can be obtained. We also report on several extensions that demonstrate how the creation of useful management findings from the modeling approach can be supplemented with project value sensitivity analysis and the use of simulation-based least-squares Monte Carlo valuation. The findings are useful to assess the power and value of the approach.

Keywords

Decision-making under uncertainty Economic analysis IT investment Mean reversion process Mobile payments Real option analysis Technology valuation 

Notes

Acknowledgments

We acknowledge the following people who offered comments at the conferences and workshop, including Eric Clemons, Juan Feng, Kim Huat Goh, Kunsoo Han, Sangpil Han, Kailung Hui, Eric Johnson, Mei Lin, Holger Schrodl, Avi Seidmann, Richard Shang, Hock Hai Teo, Kanliang Wang, Sunil Wattal, Thomas Weber, Yinping Yang, Byungjoon Yoo and Jennifer Zhang. We also benefited from discussions with Zhiyong Cheng, Ying Ding, Ming Gao, Jianfeng Hu, Jianhui Huang and Peiran Zhang. We also appreciated comments from the co-editors, Ray Patterson and Erik Rolland, and anonymous reviewers at Information Technology and Management.

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.School of Information SystemsSingapore Management UniversitySingaporeSingapore

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