Adapted from the Management Accounting Guideline, “Evaluating Performance in Information Technology” by Marc Epstein and Adriana Rejc Buhovac. This Guideline was developed for the AICPA, CIMA and CMA Canada.

Senior information technology (IT) executives are convinced that IT investments create value for their organizations. In fact, nine out of 10 executives agree that IT can create significant competitive advantages (Source: “Management Tools and Trends,” Bain and Company, 2005). However, while there is widespread agreement about the strategic value and role that IT plays as a key business driver, it’s not always easy to measure the true costs and benefits of IT investments. Since companies do not have the information needed to make good decisions about this critical strategic asset, IT investments are typically not evaluated with the same rigor as other corporate investments. As a result most companies seem to focus on reducing the cost of IT rather than maximizing its potential to create value.

The incremental benefits of technology solutions today are much lower and more difficult to realize. While the cost of computing power has declined significantly, the sophistication of enterprise systems and other company-wide technology solutions has increased dramatically. Along with the resulting high basic sticker price, costs of conversion are oftentimes the greater consideration. Companies need to take into account the costs of disruption to personnel, operations and the revenue stream of the organization. These costs are often far higher than anticipated, and the list of disappointments, frustrations and unfulfilled promises about benefits is often far longer than expected.

However, the IT story is not all about doom and gloom. Today’s technology solutions offer significant opportunities for organizations to increase revenue and reduce costs. IT investments can pave the way for reaching new customers with new products, and perhaps more importantly, for increasing sales to existing customers. The increasingly strategic role of IT also creates opportunities for other, albeit more intangible, long-term benefits, such as better organizational agility and communications, enhanced employee performance, more flexible working conditions, safer environments and higher job satisfaction. These longer-term benefits may stem from enhanced management performance through better and timelier information, improved decision support capability or a reduction in the number of meetings due to better information.

Integration of IT systems, enhanced security and improved supplier relationships are also drivers of more indirect, longer-term benefits for an organization. As with any potential investment, the key to making good decisions is to capture and evaluate, and attempt to quantify all attendant costs and benefits.

Kenneth W. Witt, CPA, serves as Technical Manager on the AICPA's Business Industry and Government team supporting CPAs practicing the profession in business and industry. Ken served as project leader for the development of the AICPA Audit Committee Toolkit: Not for Profit Organizations and as a task force member for the COSO Internal Control Over Financial Reporting — Guidance for Smaller Public Companies.