An IT investment outcome can be defined as the total cost of ownership (TCO) and return on investment (ROI) for a given IT project. Financial performance is the ability of a company to generate earnings and control expenses to provide long-term sustainable growth.
This article will describe the impact of an IT investment outcome on the financial performance of an organization.
How does IT investment impact financial performance?
There is a significant amount of debate and disagreement over the impact of information technology (IT) investment on financial performance.
The assertion that IT investment does not directly impact financial performance. Others argue that IT investment directly affects financial performance, which can be quantified using a formula called Return on Investment (ROI).
The overall financial impact of an IT investment depends on the nature and size of that investment and how it impacts revenue or costs. The impact will usually be positive (if it’s revenue-generating), but many factors can influence this outcome.
Suppose a company is taking on too much debt or invests in technology before it has reorganized its workforce to take advantage of the new technology. In that case, IT investments will have negative financial effects.
On the other hand, if a company invests in new equipment that reduces employee turnover and increases productivity, then IT investments will likely have positive impacts.
Using Cost-Benefit Analysis
Due to the fast rate of technological advancements in the market, organizations face challenges, especially in their IT infrastructure. Organizations are still determining whether or not it is worth it to upgrade their current systems or if it will be more cost-effective for them to install new ones.
In a business, the money spent must yield the value and benefits gained from an investment. This is where cost-benefit analysis comes into play. Cost-benefit analysis determines how much investment costs and benefits an investment can provide in return.
Cost-benefit analysis is used to determine whether an investment in IT is worthwhile. It can be used to analyze either capital investments, such as buying new hardware or software, or operational expenditures, such as outsourcing certain departmental functions.
This method involves calculating projected revenues and costs for each potential investment, then comparing them to determine which option leads to the most significant profit for the company. The positive financial impact of an asset can be determined by the difference between revenue projections and costs; however, this calculation can only be made by first understanding the cash flow associated with each investment option.
IT investments seek to add value to the organization.
The outcome and impact of such investments on financial performance are often a result of various factors and hence, vary from case to case. IT investments can be grouped into two categories:
- Capital investments (plant and equipment).
- Operating expenditures.
Capital investments involve spending money to acquire plants, equipment, and property. These types of investments have a long-term impact on the financial performance of an organization. For example, a company might spend money on buying new software or technology that would improve its ability to perform tasks at faster rates and hence help it improve its overall productivity.
Investments in information technology have a long-term positive impact on financial performance because they provide better business intelligence to an organization which helps it make essential decisions regarding sales & marketing strategies or production processes (usually time-consuming). This allows the company to make quick & better decisions to achieve its strategic goals.
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Every organization has its strategy, goals, vision, and mission statement. The objectives of each organization vary depending on the size and type of the firm. Small firms are more concerned with shorter-term goals, while larger firms are usually more concerned with long-term goals. To further clarify what short-term and long-term objectives mean, we must understand that a short-term purpose can be measured within one year and a long-term plan over three years or more.
To achieve its objectives, an organization invests in various tangible and intangible resources, including Human Resource Development, Processes, Technology, etc., to become more efficient in its operations. Embedded within every process is some form of technology. Hence technology can also be considered an intangible resource for every organization.