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

JAIS 7, 4, 199-226, 2005

30 Pages Posted: 18 Jan 2014

See all articles by Paul A. Pavlou

Paul A. Pavlou

University of Houston - C.T. Bauer College of Business

Thomas Housel

Naval Postgraduate School

Waymond Rodgers

University of California, Riverside

Erik Jansen

Government of the United States of America - Naval Postgraduate School

Date Written: 2005

Abstract

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.

Keywords: Return on IT, Business Value of IT, IT Productivity, Knowledge Value-Added, IT Theory, Knowledge-Based View, IT Investments, Thermodynamics, Learning Time

Suggested Citation

Pavlou, Paul A. and Housel, Thomas and Rodgers, Waymond and Jansen, Erik, Measuring the Return on Information Technology: A Knowledge-Based Approach for Revenue Allocation at the Process and Firm Level (2005). JAIS 7, 4, 199-226, 2005. Available at SSRN: https://ssrn.com/abstract=2380286

Paul A. Pavlou (Contact Author)

University of Houston - C.T. Bauer College of Business

Houston, TX 77204-6021
United States

Thomas Housel

Naval Postgraduate School ( email )

1522 Cunningham Road
Monterey, CA 93943-5201
United States

Waymond Rodgers

University of California, Riverside ( email )

900 University Avenue
Riverside, CA 92521
United States

Erik Jansen

Government of the United States of America - Naval Postgraduate School ( email )

1 University Circle
Monterey, CA 93943-5001
United States

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