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Many organisations are changing both in content and outlook with an ultimate aim of increasing productivity at the least possible cost in order to maximize profit. The effectiveness of operational efficiencies has a direct correlation on profits. Firms tend to take advantage of investment in information technology (IT) in achieving the needed efficiencies. When discussing IT related issues it is important to delineate an IT investment. IT-investment is an organisational investment employing or producing IT or IT-related assets. Each investment has or will incur costs for the investment, has expected or realised benefits arising from the investment, has a schedule of project activities and deadlines, and has or will incur risks associated with engaging in the investment. (http://www.hhs.gov/ocio/about/terms/index.html#ITINV). IT evaluation could be defined as a process of collecting and evaluating evidence to ensure all costs and benefits are identified and analysed, enabling justification of a system. IT evaluation borrows much of its theory and practice from the wealth of knowledge and experience of traditional auditing.(http://www.irishscientist.ie/2001/contents.asp?contentxml=01p124b.xml&contentxsl=IS01pages.xsl). Many firms in Ghana have embarked on IT projects to boost performance and/or efficiency. Golden Star (Bogoso/Prestea) Limited (GSBPL) is no exception.
GSBPL is one of the major mining firms in Ghana, a subsidiary of Golden Star Resources (GSR) with headquarters in Denver Colorado, USA. GSR is a multi national company with two mine sites at Bogoso and Wassa and the global exploration office in Ghana. They have exploration interests in Sierra Leone, Cote d'Ivoire, French Guyana, Suriname and Brazil. GSBPL has increasingly embarked on expansion programmes.(www.gsr.com) GSBPL has, since it's mine expansion, been experiencing rising total cash cost due to continuous below target production, rising cost of production and high cost of power. As a result of these problems, the management of GSBPL invested in IT to safeguard against certain cost of production. The primary expectations of these strategies were to reduce cost and improve productivity to arrest the unsustainability of the operations. The use of IT for some of GSBPL operations has been the norm since 2004.
The cumulative effect of IT on any firm cannot be underestimated though there are numerous perceived drawback in their achievements. IT investment can provide significant organisational improvement and competitive advantage. However, IT investment does not always translate into monetary rewards. Reports of project failure, budget and timescale overruns, and limited or negative returns are not uncommon. IT evaluation is important in determining and improving an investment's performance and enabling corrective measures to be taken. Most people agree that IT is an essential part of the daily operations of any establishment. However, research shows that 70 to 80 percent of all IT-investments fail to fulfill its financial benefits (Svarvarsson, 2005).
IT evaluations have been performed just as with other projects. They have been treated in isolation without considering the other areas they impact. IT investments are primarily introduced to support other areas of operations of the firm. Thus if these areas of operations are neglected in it's evaluation and treated in isolation, the evaluation process can be said to be incomplete. The benefits in the other areas can be classified as 'hidden'.
Davern and Kauffman (2000) indicate that few companies do evaluate their IT-support in terms of hidden costs and benefits. The complexity in IT-investment makes companies avoid evaluations of IT-investments. Some companies see hidden elements in IT investment as abstract, and thereby hard to evaluate.
Coffey and Twommey (2001, pp.1-2) states that to enable justification of IT projects, the so-called 'hidden elements' must also be examined. Sometimes, the hidden elements have the potential to exert greater impacts than tangible ones. This view has been supported in the work of Coffey and Twommey (2001, pp.2). The most reason why most practitioners are interested in evaluating tangible elements is that they are easily identifiable and a financial weight can be assigned to them. However, intangible elements are not easily identifiable and are difficult to identify and measure. It is the intangibility of some hidden elements that makes IT investment difficult to justify. There is a great need for evaluations in order to make the IT-support more effective. This research study was prompted by the need to consider of intangible elements regarding the evaluation of IT portfolios in GSBPL.
The central aim of this study is to investigate the extent to which the IT investment decision making activities of GSBPL, criteria and techniques adopted by organisations cover hidden elements.
1.3 Research Questions
The research questions for the study will be the following:
1. Are there existing policies at GSBPL regarding appraisal and evaluation of potential IT investments?
2. What are the criteria employed by GSBPL to evaluate IT portfolios?
3. What are the intangible costs and benefits associated with IT investments at GSBPL?
4. What are the difficulties in evaluating the intangible costs and benefits associated with IT investments at GSBPL?
1.4 Justification of the Study
In mining sector, the notion of IT investment evaluation has received limited research attention. Moreover, no formal research has been carried out to evaluate intangible elements of IT investments. Therefore, it is believed that this research has great significance in creating awareness intangible benefits and costs of IT investments to mining firms.
On the record, the IT department hardly considers qualitative IT evaluation. The research could help management of GSBPL to look into all aspects of the investment in a holistic approach. This could help management of GSBPL to take a second look at the intangible elements of the IT investment.
In the academic front, most studies fail to put value on total investment in IT. Thus, there is a need to evaluate IT investments thoroughly. The results of this study would help to establish mining industry-wide benchmarks and best practices in IT investment appraisal that can be applied across other mining industries, thereby assisting firms to make more informed decisions for future investments. If a satisfactory explanation can be developed, it could provide a basis for evaluation of IT investment management and allow an understanding as to the likely success of IT investment in a particular firm.
The results of this study would help to establish mining industry-wide benchmarks and best practices in IT investment appraisal that can be applied across other mining industries, thereby assisting firms to make more informed decisions for future investments. The results of this study present to IT professionals and other researchers a snapshot of hidden elements in IT evaluation. Lessons learned collectively from study could help them navigate the complexity and hidden costs and elements associated with IT investments.
1.5 Organisation of the Study
This study is organised into five chapters. The first chapter covers the introduction to the study in which the background information to the research is provided. The objective and significance of the study is also discussed in this chapter. Chapter 2 focuses on literature reviews on IT investment. Chapter 3 focuses on the methodology adopted in the study. Here, the model employed to analyse the problem, instruments for data collection, and technique for analysis are presented. Chapter 4 presents the findings of the research. The final chapter summarises the findings of the study. The implications of the findings are also discussed here. The chapter also draws conclusions and makes recommendations for the problems raised.
This chapter reviews literature on IT investment activities. The chapter discusses studies on IT evolution, taxonomy of IT investment, difficulties inhibiting evaluation of IT investment.
2.2 IT Investment
IT capital investment has been defined as any acquisition of computer hardware, network facilities, or pre-developed software, or any in-house systems development project, that is expected to add to or enhance an organisation's information systems capabilities and produce benefits beyond the short term (Bacon, 1992).
IT investment appraisal has also been defined as weighing up process to rationally assess the value of any acquisition of software or hardware which is expected to improve the business value of an organisation's information systems (Grembergen, 2001). It is believed that advances in IT in recent years have rapidly revolutionized the operations of businesses. IT is one of the powerful tools used in firms now. This view has been supported in the work of Grembergen (2001, pp.23-24).
On the writing of IT investment Irani and Love (2001, pp.162) state that IT facilitates a firm's ability to revamp their business processes, improve customer relationship management, and create new business models. They believe that IT is one of the vibrant tools used by information-intensive business organisations to create new knowledge, manage existing knowledge, distribute information, and facilitate inter- and intra-organisational collaboration.
2.2.1 Definition of IT Evaluation
Evaluation is the point where the value of the potential system is examined. Evaluation ascertains the quality of the undertaking IT investment. Once a project is implemented and in operation, evaluation represents an assessment of its performance and impact on the organisation. In this sense, evaluation takes on the multiple roles of project assessment, quality control and benefit management throughout the investment cycle (Irani and Love, 2001).
Presently, evaluation is often referred to as the process of identifying and establishing the potential benefits of an investment opportunity by quantitative and/or qualitative means. It is believed that this particular definition of evaluation is much centred on project assessment alone. Consequently, evaluation is often treated as a process for project justification.
An explicit distinction between project justification and project has been made. According to Verhoef (2002), evaluation is the process of assessing the value of a specific aspect of an investment opportunity for which project selection may or may not be of relevance. Justification, on the other hand, implies eventual selection among alternatives. The danger with taken the justification view to technology adoption is that justification tends to be a one-off activity (Verhoef, 2002).
2.3 Taxonomy of IT Investment Appraisal Approaches
2.3.1 Evaluation of IT Investment Costs and Benefits
Assessing IT investments is one of the difficult task for companies both before the undertaking the investment and after new systems have been secured and implemented. According to Small (2006, pp.486-7), the development and use of suitable justification approaches and techniques is critical in ensuring that IT projects are assessed to reflect all the strategic, operational and economic gains IT provide and all the necessary costs associated with their purchase and operations.
Although most organisations have employed more complex methodologies in assessing IT investments, most firms are not using these complicated techniques developed by academicians as a means of justifying IT investment decisions. This supports the work of Small (2006, pp.489). He thinks that the difficulty may be due to the complexity in assimilating and applying these methodologies, which continue to grow along diverse paths and are very complex to balance or otherwise synthesize, in instances where efforts are made to do.
Ward, De Hertogh and Viaene (2007) describe that IT evaluation methodologies propounded by scholars to support IT investment decisions were designed for consumption by business executives, and concentrate on predicting the potential returns on IT investments. Despite the availability of these formal approaches and other investment appraisal methodologies, researchers have discovered that executives frequently rely on techniques which are not within the boundaries of formal investment appraisal methodologies, thus more often than not, such investment decisions are made based on individual perceptions about probable investments.
On the topic of prioritization of a portfolio of IT projects Bardhan, Sougstad and Bagchi (2004, pp.33) state that:
'Such judgments are based on 'acts of faith', 'blind faith' or 'gut instinct'. No one 'best' method exists to justify IT investments. Managers continue to use multiple methodologies in assessing investment in order to overcome the limitations of using only one technique'.
According to Ward (1994, pp.81), measures such as cost-benefit analysis, return on investment, payback analysis, and internal rate of returns are most techniques employed for decisions on IT investments. The conventional way IT investment evaluations are derived from the 'usual' procedures employed by firms in other investments evaluations such as purchase of machinery. This idea supports the work of Ward (1994, pp.81). he contends that the most evaluation techniques are based on financial considerations, using techniques such as payback period, net present value (NPV), internal rate of return (IRR), return on investment (ROI) or some form of financial savings analysis.
Lucas and Weill (1993, pp.45) argues that one key facet of IT investment is that it regularly provides 'hidden' benefits that are, by definition, hard to quantify, and often it is these 'hidden' benefits that are the key to many decision of IT investment. Decidedly, IT projects regularly have benefits that are not tangible in nature. As a result, most academics and practitioners ignore their significance in IT investment decisions. Presently, no attempt has been made to identify whether hidden costs exist (and if so) in the mining sector in Ghana, and the proper method of accounting for them. The only elements considered in IT evaluations are the tangible, which are clearly identifiable and measurable outlays. Consequently, conventional techniques employed for IT investment's evaluation has been stated to be only appropriate for cost saving projects and not for evaluating complicated IT investments. The critics believe that the evaluation techniques do not quantify benefits that are considered to be intangible.
On the topic of Information technology in small Scottish hotels Bick (2003, pp.243) states that:
'Another key criticism is that users of IT investments still often ignore the import of qualitative benefits when evaluating IT projects. Sometimes IT projects simply include checklists of intangible benefits such as 'higher accuracy of data', 'improved customer service' among others, with minimal description. Under conventional techniques, the benefits are fundamentally ignored since they are not properly quantified. Notwithstanding these old remarks, they are still valid today'.
The risk of exclusion or improper emphasis on qualitative benefits is the neglect or rejection of many potential new systems offering high returns from intangible benefits.
Benefits such as improved decision making, customer satisfaction, and enhanced employee productivity, among many others, contribute significantly to most businesses (Hallikainen and Chen, 2005).
However, these benefits are not recognizable in the decision-making model. It is crucial that such benefits are included in decisions of IT investments. Suwardy, Ratnatunga, Sohal and Speight (2003) state that:
'The purpose of evaluation is to decide whether an investment is able to meet the specific requirements as identified in the analysis and planning stage of the decision making process. It is concerned with assessing the financial impacts, potential business value and risks involved. It is at this sage that organisations evaluate the investments against their defined strategic, financial and technical goals, and compare them to the available investment opportunities'.
Nonetheless, while evaluation in theory presents an opportunity for firms to measure the worthiness of the IT initiatives, some people have reported that evaluation is in fact often negatively viewed as a budgetary and justification process that needs to be overcome (Farbey, Land and Targett, 1992).
According to Irani and Love (2002, pp.162), such attitude often leads to a casual, informal evaluation process, and allows project champions who are totally committed towards project success to search for non-existing potential benefits and to minimize possible project costs. It is often only after implementation that the realization comes that what was seemingly a good investment is unable to live up to expectations.
In order to address these concerns, different evaluation approaches have been developed. A finer classification of IT benefits as quantitative, quasi-quantitative or qualitative has been given. However, most evaluation methods can be simply characterized as either quantitative or qualitative. Quantitative evaluation methods, primarily based on accounting theory, place emphasis on the determination of the return of IT investment in dollar terms and on specific financial goals.
2.3.2 IT Evaluation Methods in Use
There are two main evaluation methods or techniques namely quantitative or qualitative. In other words, an evaluation method can also be categorized as either a financial (quantitative) or a non-financial (qualitative) technique.
18.104.22.168 Quantitative Appraisal Techniques
According to Simmons (1994, pp.78), quantitative methods for IT evaluation widely employed by firms are Discounted Cash flow (DCF), Return on Investment (ROI), payback and their variants. The underlying principles of these techniques are grounded in finance and accounting discipliners. DCF is a discounting technique that aims at estimating future cash flow with the consideration of the time value of money, whiles payback is the length of time required to recover the cost of an investment. This view has been supported in the work of Simmons (1994, pp.78). These techniques and their variants are often labeled as 'financial', economic' or traditional' methods as the results of such analysis are often expressed in financial terms.
Suwardy, Ratunatunga, Sohal and Speight (2003, pp.326) contend that conventional measures such as cost-benefit analysis, return on investment, payback analysis, and internal rate of returns are most techniques employed for decisions on IT investments. It is believed that these evaluation techniques are based on financial considerations.
Cost-benefit analysis (CBA) and return on investment (ROI) are frequently mentioned evaluation techniques for deciding upon IT investments. The underlying force which drives firms' investment in IT indicates that reduction in cost and profit improvement was one of the significant driver, followed by improved process efficiency (Lubbe and Remenyi, 1995). Nevertheless, one common problem associated with these evaluation methods were their inability to account for the full range of potential benefits for most especially intangible gains. The method's main attraction appears to be their simplicity but strong foundation based on conventional accounting theory.
The emphasis on the bottom-line impact allows organisations to quickly identify benefits in more objective and tangible terms (Irani, 2002). Technology adoption is of little value if its impact on bottom-line cannot be proven or at least argued forcefully. This particular notion appears to be understandable, as the eventual purpose of IT investment, even strategic ones, is aimed at profit maximization and firm expansion (for the private sector at least). This view has been supported in the work of Irani (2002, pp.12).