Measuring the Return on Information Technology: A Knowledge-Based Approach for Revenue Allocation at the Process and Firm Level

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Journal of the Association for Information Systems, Vol: 6, Issue: 7, Page: 199-226

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Pavlou, Paul A; Housel, Thomas J; Rodgers, Waymond; Jansen, Erik
Association for Information Systems
Return on IT; Business Value of IT; IT Productivity; Knowledge Value-Added; IT Theory; Knowledge-Based View; IT Investments; Thermodynamics; Learning Time
article description
This paper proposes an approach for measuring the return on Information Technology (IT) investments. A review of existing methods suggests the difficulty in adequately measuring the returns of IT at various levels of analysis (e.g., firm or process level). To address this issue, this study aims to develop a method for allocating the revenue and cost of IT initiatives at any level of analysis using a common unit of measurement. Following the knowledge-based view (KBV), this paper proposes an analytic method for measuring the historical revenue and cost of IT investments by estimating the amount of knowledge necessary to generate a common unit of output from any business process. The amount of required knowledge is operationalized using the ¡®average learning time' measure. The proposed operationalization is illustrated with a practical case example. The proposed KBV approach is extended specifically for IT resources, allowing us to assess the Return on IT (ROIT) using a typical productivity ratio (similar to ROI or ROA) that accurately captures the true business value of IT (despite any complementarities) at virtually any level of analysis.