Market sees value in IT

Until now, CIOs have been flying blind when it comes to empirical, comparable evidence of how the market views IT investments by publicly listed organisations. But new research changes that.

From Hindsight to Knowledge -- the power in knowing the past when investing in the future, looks at the market's assessment of the returns to IT investments in Australia. Co-authored by Dr Ronan Powell, a senior lecturer in finance at the School of Banking and Finance within the Australian School of Business, and Dr Foaud Nagm, who completed his PhD in information systems at the School of Information Systems, Technology and Management at the University of NSW, the research paper takes an 'event study' approach -- going back over two decades of market data, correlating it with company IT investment announcements and extensively interviewing about 100 senior executives.

The findings: IT investments add value to shareholder wealth. Preliminary results indicate the market responds positively to announcements. It generally manifests as a spike in risk-adjusted returns on the announcement day -- 3.15 per cent on average.

"It is very difficult to apply valuation metrics to IT projects," Powell said. "So we thought, 'let's try and give CIOs a different perspective. As a CIO, if you make an announcement that you are going to spend $200 million on a project, you want to know whether the market liked it.

"Analysts go through [stock exchange] announcements in extreme detail, but it is sometimes very difficult to work out exactly where the value is coming from. This research gives CIOs an idea of how they're doing in terms of metrics."

Powell considers IT in the same vein as research and development (R&D) which has long been considered a yardstick for economic health.

"And, on a dollar basis, organisations can generate comparable or even higher rates of return through IT investments than R&D investment," he said.

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Historically, for every dollar invested in IT, organisations receive back $1.95, the research found, even with such sensitive issues as the dot com boom and bust.

The research also found significant differences in the returns across IT investment groups, suggesting the market discriminates between IT investment types. It allows CIO to drill down into, for example, specific industry sectors and even specific investments within individual organisations, see the gains or losses for an IT investment, and, importantly, benchmark their own organisations against the market.

"It provides a little bit more accountability," Powell says. "We can tell the market sentiment towards different types of announcements. If the market reacts negatively to an announcement, perhaps the organisation has been overly optimistic in terms of in terms of projected cash flows or its cost of capital, for example."

Several key issues emerged from the interviews conducted as part of the study, such as the difficulty in comparing IT with other investments and justifying IT investments for corporate funding.

"This research means you have the information early on in the decision making process," Nagm said. "The downstream benefits is looking at this research can reduce the project failure rates and increase project success."

Download the paper.

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