Title

Valuing Information Technology Infrastructures: A Growth Options Approach.

Publication Type

Journal Article

Publication Date

1-2007

Abstract

Decisions to invest in information technology (IT) infrastructure are often made based on an assessment of its immediate value to the organization. However, an important source of value comes from the fact that such technologies have the potential to be leveraged in the development of future applications. From a real options perspective, IT infrastructure investments create growth options that can be exercised if and when an organization decides to develop systems to provide new or enhanced IT capabilities. We present an analytical model based on real options that shows the process by which this potential is converted into business value, and discuss middleware as an example technology in this context. We derive managerial implications for the evaluation of IT infrastructure investments, and the main findings are: (1) the flexibility provided by IT infrastructure investment is more valuable when uncertainty is higher; (2) the cost advantage that IT infrastructure investment brings about is amplified by demand volatility for IT-supported products and services; (3) in duopoly competition, the value of IT infrastructure flexibility increases with the level of product or service substitutability; and (4) when demand volatility is high, inter-firm competition has a lower impact on the value of IT infrastructure.

Keywords

Business value, Flexibility, IT investments, IT infrastructure, Middleware technologies, Real options

Discipline

Numerical Analysis and Scientific Computing

Research Areas

Information Systems and Management; Data Management and Analytics

Publication

Information Technology and Management

Volume

8

Issue

1

First Page

1

Last Page

17

ISSN

1385-951X

Identifier

10.1007/s10799-006-0006-2

Publisher

Springer Verlag (Germany)

Copyright Owner and License

Info. Tech. and Mgmt.

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