IT Alignment helps increase value from IT investments. IT investments strive to improve the financial performance of an enterprise. Improvement of enterprise performance means increasing the profitability by lowering costs and/or revenue growth. Enterprise performance refers to manifold numeric indicators such as sales growth, returns on sales, returns on investments, return on assets, reduction of costs, increase in revenues, profits. IT valuation can also apply quantitative methods that are founded on financial theories such as net present value or payback period.
However, financial data do not reflect all kinds of value that IT may provide. For example, process improvements, supplier relationships, value of information, and knowledge, are types of intangible IT value. These kinds of IT value are non-monetary value and not reflected in financial performance data.
Most IT valuation approaches in practice do not cover intangible value and therefore ignore a significant part of IT value.
According to the latest research and the IT Alignment Framework, the value from IT investments consists of two complementary types: organizational value and customer value.
Organizational value includes intangibles and is needed for production (e.g. flexible IT infrastructures, intellectual assets). Organizational value is non-monetary and a prerequisite for customer value.
Customer value results in cash inflows from product/service delivery of an enterprise. Customer value is a monetary value in terms of the price paid by the customer. It has an direct effect on the financial performance of an enterprise, whereas organizational value indirectly impacts the enterprise performance.
Categories of customer value (Treacy & Wiersema, 1995):
- Product leadership provides functional benefits characterized by superior products/services, high quality, novel features, innovative functions, and early market launch.
- Customer intimacy provides benefits from relationships characterized by specific solutions to customer problems, responsiveness to customers, and customization.
- Operational excellence provides economic benefits characterized by lowest costs, process efficiency, organizational effectiveness, and high productivity.
Categories of organizational value:
- Strategic planning/informed decision-making: data and process flows for strategic planning and informed decision-making, including business development (i.e., growth opportunities), artificial intelligence, and IT Alignment.
- Flexibility/agility: ability to quickly adapt resources and capabilities to change the product/service offering (e.g., as a response to changes in the environment (flexibility) and/or the competitive position (agility).
- Strategic alliances/supplier relationships: business linkages to other firms that are part of the value chain (inbound and outbound).
- Enhanced skills and capabilities: increased skills among human resources or improvement of organizational capabilities.