Managing an IT portfolio on a synchronised level, or: The costs of partly synchronised investment valuation

Abstract

Information technology (IT) investments are usually risky by nature and account for a considerable part of annual investment budgets. Though value-based information technology portfolio management (ITPM) aims at sustained economic growth and long-term value creation regarding IT investments, companies often fail to implement a synchronised ITPM approach that considers all relevant risk-/return components within IT investment valuation. In this paper, we compare a synchronised and an only partly synchronised valuation of IT investments within a company’s ITPM by means of an optimisation model. We show that an only partly synchronised IT investment management leads to sub-optimal investment decisions as especially stochastic interdependency structures are neglected. Furthermore, we analyse how different risk-/return structures of IT investment opportunities affect the valuation error resulting from an only partly synchronised IT investment valuation, and conduct a comprehensive simulation study to further validate our findings.