Evaluation Of It Investment Proposals Accounting Essay

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For evaluation of IT investment proposals, or achievement of ongoing IT investments, we should first determine appropriate criteria. We should consider the criteria that managers feel they are most important, and also we should check the feasibility for providing and availability of these kind of information. It is also important that data be complete and not redundant. This information should be connected to the short- and long-term objectives of the organization.

Increasing use of BSC framework in many recent researches and various management field like (Chang, 2009, Bhagwat and Sharma, 2007), R&D projects (Eilat et al., 2008, Asosheh et al., 2010), E-Business (Chang and Graham, 2010), ERP (Zhou and Zhou, 2010), E- commerce (Peide and Zhengwei, 2008) have several reasons, University Performance evaluation (Wu et al., 2011).

To determine the criteria set evaluation of IT investment, we use a model based on the BSC approach.(Eilat et al., 2008)

At the selection phase,

When we are evaluating IT investment proposals, the BSC simplify and translate the vision and strategy of the organization, to determine the appropriate criteria for that Proposal's benefits and attractiveness.

Measures in this case should represent what is expected from these IT investments in return.

At the planning phase,

BSC set targets and align IT investments with the organizational strategy. BSC also allocate resources within and among IT related tasks in the organization.

At the execution phase,

BSC provides a relative measure of performance. It evaluates the value of the IT investment with considering changing circumstances and priorities of the organization. The measures in this case would be a combination of forward-looking measures for the future tasks and backward-looking measures for what has been done already.

Finally, at the closing phase,

BSC for IT investment experience identify best practices, and advance continuous learning for the organization in at the closing phase of IT investment.

Managers have extremely complex optimization problem with BSC. This complexity rises usually from the large number of variables often included on a BSC. For example larger organizations should try to track hundreds of measures in BSC (Rickards, 2007).

Above that, the lack of a common scale of measurement causes more complexity arises.

Moreover, in BSC, We may have dimensionless ratios and index numbers. Luckily, data envelopment analysis (DEA) can help us to deal with this kind of complexity(Rickards, 2007).

With our presented method, while we are working with the Balanced Scorecard method, at the same time, we should evaluate the performance of the organization. Business performance is described unclear and vague for most of the times. But it can be in certain clear numbers or words. the Data Envelopment Analysis Method (DEA) can do this objective for us and generate the objective performance indicators(Kuang-Hua, 2005).

Kuang-Hua (Kuang-Hua, 2005) have found that many organization have lost the non-financial aspects for assessing the performance or efficiency. He indicates in his paper that traditional performance indicators have three major drawbacks.

First, usual performance indicators only focus on the operational results and they don�t pay enough attention to the processes.

When we are designing a strategic performance assessment system, we should consider both financial and nonfinancial indicators. We should also take into consideration the organizational hierarchy effects on organization�s performance. Different levels of the organization have their own unique goals to achieve. Because of these different goals, they need different standards and baselines to measure their performance(Kuang-Hua, 2005).

(Hoffecker and Goldenberg, 1994)believe that performance assessment system should have both long term and short term objective of organization.

Many researchers have criticized the overemphasis on short-term financial results that can cause a bias towards investing in tasks. It can cause the insufficient IT investments with long-term benefit for organization. It can be harmful in intangible and intellectual property of organization that usually IT investment produces. To defeat this difficulty, the BSC presents four other perspectives.IN this way, we can be ensured to have a more balanced evaluation of the organization.(Eilat et al., 2008)

The BSC is a collection of measures, arranged in cards. The measures are related to four major managerial perspectives, and have a comprehensive view of the business.

BSC merge financial and operational measures. It also focuses both on the short- and long-term objectives of the organization. traditional financial measures by themselves are inadequate in providing a complete and useful overview of organizational performance.(Eilat et al., 2008)

During the studying h of evaluation of organizational performance, (Kaplan and Norton, 1996) introduced the concept of �Balanced Scorecard� as the foundation for strategic management system.

Balance Scorecard includes four perspectives:

� Financial perspective

� Customer perspective

� internal business process, perspective

� learning and growth perspective

The balanced scorecard has the following four perspectives:

6.1 The financial perspective

The financial perspective is concern with contribution of the IT investment in terms of financial and money. It reflects the issues like the budget, cost, profitability, maintaining liquidity, cash flow, both short term as well as long-term monitory objectives, maximizing wealth of shareholders and etc. The financial are the center of objectives and measures in the other scorecard perspectives. The other perspective in BSC should have cause-and-effect relationship to improve financial performance (Kaplan and Norton, 1996).

This perspective links organization to its shareholders. The main question in this financial perspective is : �How do we look to our shareholders and those with a financial interest in the organization?� (Bhagwat and Sharma, 2007).

The measures in this perspective show that execution organization strategy, has improved the financial results. Execution of organization strategy is detailed through financial perspective�s measures.

6.2 The customer perspective

This is the second perspective that considers the organization�s customers. Customers are the crucial factor for financial success. By buying products and services, they generate revenue for organization. According to Bhagwat and Sharma ,The question in this perspective is: ��How do our customers perceive us in term of products, services, relationships and value-added activities?�(Bhagwat and Sharma, 2007)

For choosing Customer perspective�s measures, organizations must first specify that who are our target customers? And then organization should evaluate its proposition in terms of value that it create in serving the customer?

IT investment provides responsiveness, timeliness, quality and service that the customer is interested in. Customer perspective includes measures that take customer surveys, complaints, focus groups, delivery reports, etc. The question in this perspective is �from the point of view of the customer, how successful are the IT investment?� Time, quality, performance, treating the customer and customer satisfaction are the issues for evaluation of the IT investment.(Eilat et al., 2008)

6.3 The internal-business processes perspective

This perspective is focused on contribution of the IT investment to the main competencies of the organization. It specifies the level of support that the IT investment provides for the organization's mission and strategic goals. The top management should already determine the strategic view of the organization.

When the fit of Strategy and IT objective is poor, IT investment's proposal must be rejected or the strategy must be revised. the fit level must influence the total measure of the IT investment 's attractiveness.(Eilat et al., 2008)

The question in this perspective is �what should the organization excel at?� In the Internal Process perspective, the firm must excel at the key processes at in order to add value for customers and shareholders. In order to reflect expansion of range of core capacities into a new field, organization must establish specific measures.

Measures of internal processes have the greatest impact on customer satisfaction and organization�s financial. Management of the organization should decide what processes and competencies they must excel at, then they should indicate the appropriate measures for each of them.(Bhagwat and Sharma, 2007)

6.4 The learning and growth perspective

In today's business competitive environment, organizations try to improve performance to have the power in the competition. This requires capabilities for delivering value to customers and shareholders.

The measures in the Learning and Growth perspective have the role of enablers of the other three perspectives. This perspective is the groundwork on which this entire Balanced Scorecard is built on.

The objective of this perspective is to supply the infrastructure for enabling the objectives of the above three perspectives. Bhagwat and Sharma define The question in this perspective as: ��To achieve our future vision, how will we continue to improve and create future value for our stakeholders?�(Bhagwat and Sharma, 2007)

When the evaluation of organization efficiency is only considered on the short-term financial perspective, it is difficult to carry on investments to improve the human resources capability and organizational processes. Hence, learning and growth perspective looks at the long-term impact of the IT investment on growth and improvement of organization. The measures are defined to determine whether the IT investment is a platform for growth or not. These measures usually consider durability of IT effects.(Eilat et al., 2008)

Balanced Scorecard has the benefit to fill the gap of traditional performance evaluation for concentrating only short-term financial effects.

It introduces four management processes to join short-term activities with long-term strategic goals. (Kuang-Hua, 2005)

First, clarifying visions and reach consensus is the duty of vision transformation.

Second, communication and connection should clarify objectives, and also join compensation with performances.

Third, operation planning has several roles; setting goals, unifying strategic motives, distribution of resources, and setting benchmarks.

Forth, feedbacks should create and modify visions. It should be a base for facilitate strategic learning and auditing.

In summary, balanced scorecard merge business strategies in management systems. According to Harvard Business Review, Balanced Scorecard is the most influential managerial concept in 75 years.(Kuang-Hua, 2005)

In general, the traditional performance assessment methods are partial. They do not comply with operational strategies. Thus they lose their strategic managerial and decisional function.

Accordingly, many other performance assessment methods had been introduced to surmount the shortcomings of traditional performance assessment system. Balanced Scorecard not only possesses performance assessment function but also strategic management function.

7 Implementing a Balanced Scorecard

The implementing a Balanced Scorecard is a several step process. To set the baselines for goals, It requires a have set of performance indicators. These performance measures should be in a company with well-made organizational system.

Moreover, for making the performance indicators, we should consider the following two problems. (Kuang-Hua, 2005)

First, we have to consider the limitation of resources. Resources should be used to their greatest extend.

Second, we must reach an agreement from the targeted work teams concerned while we are trying to set the performance indicators. Thus these work teams should work as expected from them in the agreements.

7.1 Creation and use of a BSC

Quantitative measures in balanced scorecard can give management a comprehensive view of a firm�s goals both in its financial and operational performance. Thus, organization�s progress toward meeting its goal becomes transparent. This transparency helps managers drive the organization in the planned road for its development(Rickards, 2003).

To further explain the four perspectives of BSC, Kaplan and Norton (Kaplan and Norton, 1996) state that BSC turned business strategies into measurable indicators.

To create measurement indicators that are closely connected with business strategies, management must consider the following three factors:

� Cause and effect

� Outcome and driver

� financial connection

With consideration of cause and effect, we should use �What if� to design performance indicators and consider and communication between them.

Challenges in creation and using a BSC based on (Rickards, 2003) are;

First, it is necessary to decide how many units within a given organization really require one. Observation suggests firms typically allow every strategic business unit to have its own BSC.

The second challenge has to do with the number of variables reported in each area of a BSC.

With consideration of outcome and driver, Kuang-Hua believe that we can separate the performance indicators into two categories: the leading indicators and the lag behind indicators.(Kuang-Hua, 2005) in the efficiency assessment process, we have a general result as the outcome, but in details we should be able to identify differences amongst performance indicators.

A cause-effect association between the three aspects and financial aspect can help the organization to accomplished its goal more easily(Kuang-Hua, 2005). So lastly, in financial effect, we try to connect the indicators from all the other perspectives (the customer aspect, organizational process aspect, and learning and growth) with financial goals as a view of inputs and out puts.

7.2 Need for combination to DEA

There are three main reasons that indicates the need of BSC for a complementary tool

1- One of the challenges in BSC is having the baseline or benchmark which performance is measured against. Evaluation is impossible without a baseline or benchmark. First a baseline for evaluation should be determined and then the evaluation should be done against the benchmark. However, baselines and benchmarks are hard to determine and can be ambiguous. Because DEA is based on relative comparison, the DMUs are evaluated against each other. By combining the BSC with DEA we can answer important challenge of BSC, namely, the need to determine baseline and benchmark(Eilat et al., 2008).

2- Furthermore, BSC does not have a mathematical model or a weighting scheme. So, it is difficult to make comparisons within and among the organizations .as a result, the inefficient use of resources may be unrecognized(Banker et al., 2005, Chien-Ta and Dauw-Song, 2004, Kuang-Hua, 2005). Rickards (Rickards, 2003) argues that DEA is suitable for measuring the efficiency based on of the BSC indicators. The efficiency frontier of DEA can be used to calculate the efficiency of DMUs .The slack can be used as organization�s inefficiency to solve the recognition of inefficiencies in BSC.

3- However, BSC confronts managers with an extraordinarily complex optimization problem. It is because the complexity of BSC and the interrelated nature of the BSC indicators. Fletcher and Smith (Fletcher and Smith, 2004) state that BSC lacks a single index for accountability. What BSC do not provide one comprehensive index to summarize the interaction between these measures of performance.

DEA can be a helpful tool to deal with this complexity. Rickards, (Rickards, 2003) suggested that DEA can help in how to objectively determine BSC indicators.