Planning technology investments for high payoffs: A rational expectations approach to gauging potential and realized value in a changing environment

The importance of distinguishing between potential and realized value for information technology (IT) investments has been recognized by senior managers and information systems (IS) researchers since some time in the 1980s, when it became apparent that not all IT investments were likely to achieve equivalent levels of return on investment (ROI). This chapter explores a new perspective for potential and realized value, specifically noting the importance that rational expectations of IT strategic planners and investment managers play in conditioning decision making by senior managers. The key insights that we offer are as follows: (1) Since organizational, operational, and market contexts will tend to vary around different kinds of IT investments, it is only natural that such heterogeneity in outcomes should be reflected in the different expectations of the managers who make the investments; (2) with this in mind, it should also be apparent that understanding heterogeneity in both potential and realized value should be a matter of arriving at an appropriate set of expectations, based on the acquisition of relevant updated information over time that will permit adaptive learning to occur on the part of senior managers; (3) no matter what the process is that enables managers to update their expectations (and achieve rational expectations in the process about their IT investments), the planning process that leads to new estimates of the payoffs from specific IT investments should be tuned to encourage the tracking of a trajectory of values for potential value. This view is analogous to what an investor would do in tracking the value of stocks held in an investment portfolio, subject to value changes based on a variety of forces that are likely to affect the future cash flows of the firm and the present value of its growth opportunities. We develop this IT investment planning perspective in terms of the underlying theory and offer a number of new conceptual and methodological ideas that will enable managers to think through their IT investment processes with a more effective understanding of the rational expectations that are likely to be inherent in them.