Activity-based justification of IT investments

Abstract

Ever since investments in IT moved from operational to decision support, academics and practitioners have been looking for ways to justify the costs. Traditional approaches, such as NPV, have been shown inadequate in capturing qualitative and quantitative benefits, and techniques developed to address the issue have proved limited in their ability to link investment justification with impact assessment. Recent literature has called for the use of business processes to assess the impact of IT and the same processes can be used to justify investments in IT. The activity-based costing (ABC) approaches in the field of accounting were developed to relate investments to product profitability by allocating the burden to those that receive the most benefit. Thus, this paper uses the ABC approach to relate investments to activities, so that it can be used to justify IT investment. The paper provides a model to determine when the approach, referred to as activity-based justification, is most appropriate and its value is illustrated using a case study.