A BUSINESS CASE METHOD FOR LOCAL GOVERNMENTS: A CASE STUDY AT THE MUNICIPALITY OF GRONINGEN

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A BUSINESS CASE METHOD FOR LOCAL GOVERNMENTS: A CASE STUDY AT THE MUNICIPALITY OF GRONINGEN

By

Joost Oenema

University of Groningen – Faculty of Economics and Business Master of Science in Business Administration

August, 2011

E-mail: j.oenema@student.rug.nl Student number: 1786660

Supervisor: Prof. dr. E.W. Berghout

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ACKNOWLEDGEMENTS

This thesis forms the final step to be graduated for the Master of Science in Business Administration

— specialization Business & ICT at the University of Groningen. In the courses of this master study, many academic topics within the field of ICT and business were covered. During the orientation phase for finding a suitable thesis subject, these different topics were all possibilities for research.

In this phase, I became aware that within government and public sector organizations many interesting challenges in the field of business and ICT could be investigated. The Municipality of Groningen offered me the opportunity to study one of these challenges.

This thesis could not have been written without the help and input of various people; therefore a word of gratitude for them. First of all, I would like thank the Municipality of Groningen for offering me the opportunity to do research on this topic, especially G. Hylkema who provided me with the necessary supervision, advice and comments during the study. Secondly, the case study could not have been successful without the additional input and work of the project group; B. Kleersnijder, T.

Maas and H. Korblet. Furthermore, I thank those that provided input and feedback on the business case method during the case study. I would also thank my academic supervisor, Prof. dr. E.W.

Berghout for his guidance, feedback and valuable suggestions.

Finally, I sincerely thank my family and friends for their support and motivation during my entire study.

Joost Oenema

Groningen, August 2011

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ABSTRACT

The demand for methods and tools to make the “right” IT decisions among managers in local governments is greater than ever before, because of cost reductions as a result of the economic decline. Although many IT evaluation methods exist, in practice these are not always effective for public sector organizations. This thesis contains a proposed business case method for local governments that assist with justifying and evaluating IT investments more effectively.

First, this research reviews scientific literature on private– and public sector characteristic differences, general IT evaluation methods and existing business case methods. The findings of the literature review provided a theoretical foundation of various aspects and information (e.g. strategic alignment, stakeholders) that are considered important in existing IT evaluation— and business case methodology.

The second part of this thesis describes a case study that was conducted at the Municipality of Groningen during a period of six months. In this period, 11 managers were interviewed and 10 additional documents (PIDs and board notes) were examined. Furthermore, new knowledge about IT business cases was developed through discussions and collaboration with a project group. The findings of the case study provide information about the applicability of an IT business case and its relation to the context of a local government organization.

The final outcome of this research is a business case method proposal that includes essential aspects and criteria for the evaluation of IT investments for both the Municipality of Groningen and other local governments. In addition to the conclusions, various recommendations are provided for practitioners at local governments and future research.

Word count: 23.607

Keywords: business case, Information technology (IT), local governments, public sector, municipality, IT investment, IT justification and IT evaluation.

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I. INTRODUCTION

In this introduction chapter, the background and purpose of the study are presented. In the final paragraph of this chapter, the outline of this thesis described.

1.1 Background

In the field of Information Technology (IT) and business research, many studies show that investments in IT have grown rapidly and continue to do so (Brynjolfsson & Saunders 2009). The result of this growth is that IT investments already takes up a relatively large proportion of an organization’s capital and operational budgets (Nagm & Cecez-Kecmanovic 2008). This development is not only visible in private organizations, however also for non-profit and public sector organizations (Rosacker & Olson 2008). According to Gunasekaran (2005) public sector organizations still fail to comprehend the benefits from IT investments, despite the increasing IT expenditures. The lack of understanding includes poor justification– and evaluation processes in these public sector organizations (Hall 1998). Therefore, as a result of increased importance, costs and risks have led to an organization’s need for these processes to support and justify IT investments (Lin & Pervan 2001; Murphy & Simon 2002).

Although there is a great amount of scientific literature on IT evaluation methodologies, there is insufficient evidence to be found about the evaluation process itself and the core issues that influence successful IT evaluations (Bannister & Remenyi 1999; Nagm & Cecez-Kecmanovic 2008; Irani & Love 2008). Furthermore, many studies have focused on IT evaluation methods that are applicable for private organizations, whereas IT evaluation for non-profit and public sector organizations is largely uncovered. Braaksma et al. (2006) argue that most IT evaluation techniques are not easily applicable for non-profit organizations, because of major internal and external differences (e.g. the influence of politics on decisions). As stated previously, there are many IT evaluation methodologies for justifying IT investments to be found in various literatures. This study focuses on IT business cases which can be used as an ex ante IT evaluation method for IT investments in public sector organizations. The necessity of this thesis research originated from an initial proposal written by the Municipality of Groningen to develop a business case method that would assist with evaluating and justifying their IT investments. In this study, a business case method can be regarded as “a set of guidelines to analyze both financial and other (nonfinancial) consequences that result from the execution of intended action.

The purpose of a business case is to justify the intended action or to evaluate the execution of it”

(Braaksma et al. 2006, pp.6-7). Moreover, “business cases provide structured and extensive justification of intended IT projects, incorporating and enhancing approaches of various IT justification methods” (Terpstra 2009, p.6). In practice, organizations use business cases to work out initial project

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ideas and to make a detailed estimation of project outcome (Schuurman & Berghout 2006). Business cases are often part of project management practices that are commonly used in both profit and non- profit organizations (Braaksma et al. 2006). However, some studies argue that current business case methods are less useful for non-profit or public sector organizations because of specific characteristics of these types of organizations (Bannister 2001; Speckbacher 2003). In research conducted by Braaksma et al. (2006) a business case model is provided that incorporates these specific characteristics. In the case study at Municipality of Groningen this model was applied and used as a theoretical basis in to addition to other business case methods found in the literature.

1.2 Research purpose

The purpose of this research is to analyze and to determine the applicability of a business case method within the context of local government organizations. The findings of this research offer the Municipality of Groningen a business case method for evaluation of their IT investments. Furthermore, the results provide other local governments valuable insights in the suitability and usability of business cases for IT investments decisions. Lastly, findings also give incentives for researchers and practitioners for further exploration and adoption of business cases in public sector organizations.

1.3 Outline of this thesis

The outline of this thesis is the following. First, the research design is presented in Chapter 2; it includes the problem definition, the research questions and describes how this study is conducted. In Chapter 3, the literature research on business case methods and related topics is covered. Chapter 4 describes a case study performed which covers the development of a business case method at the Municipality of Groningen. In Chapter 5, a business case method is proposed, and the final chapter is dedicated to the overall conclusions of this study.

Figure 1 – Thesis outline Research

methodology

Literature research

Observations

Findings &

Conclusions Interviews

Business case methods

IT justification &

evaluation methods

Case study Business case

method proposal

Research progress

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II. RESEARCH DESIGN

This chapter introduces the research design and includes the problem definition, the main research question and related sub-questions. Furthermore, the research method used in this study is described and the relevance of this research is determined.

2.1 Problem definition

Information Technology (IT) has emerged as one of the most dominant forces that can change business, and society, today (Curley & Delaney 2010). This also applies for the Municipality of Groningen, where the use and importance of Information and Communication Technology (ICT) have grown rapidly in the last decade (BOIA 2008). However, just as many other organizations are experiencing, controlling and sustaining the effectiveness of an IT investment is becoming more difficult. According to Bowen et al. (2007) and Scheepers (2008) this is a direct consequence of increasing complexity and interrelatedness of IT projects. In addition to this issue are economic reasons to cut and control unnecessary costs of IT projects. In recent year(s), the Municipality of Groningen has developed tools to govern and prioritize IT investments better, such as the project portfolio management tool (Kleersnijder 2010). However, many investment proposals are still being submitted without a rationale for the necessity of these investments (Dekleva 2005). Moreover, internal research at the Municipality of Groningen (BOIA 2010) showed that the finding of Dekleva (2005) is also inherent to its own organization. As a result of the internal research, a project group was formed and an initial research proposal was created which is the reason of this thesis research. Based on these findings, the following problem definition is used for this study:

Within the Municipality of Groningen the general opinion is that there is no adequate use of business cases for the support of IT investment decisions. In the organization, there are currently insufficient guidelines or business case standards which subsequently influence the quality of IT investment decisions.

2.2 Problem statement

Based on the above-mentioned problem definition, the following problem statement is defined:

Develop a business case method that provides a local government (Municipality of Groningen) the ability to justify and evaluate IT investments more effectively.

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In order to support the answer on the problem statement, the following research sub-questions were defined:

1) What are characteristic differences between public and private organizations?

2) What business case methods and guidelines are currently available?

a. What types of criteria and components are included in these business case methods?

b. Which components of these business case methods can be used in a public or non- profit organization context?

c. Is a business case method the best solution for supporting and justifying IT investments in public sector organizations?

3) Which other factors influence IT investment decisions in public sector organizations?

a. Which of these factors drive effective and efficient deployment of business cases in public sector organizations?

b. What is the role and relationship of business cases with other IT governance mechanisms?

4) Is it possible to determine the quality and effectiveness of IT decisions?

The next sections describe how the research is performed in order to find answers to support these research questions.

2.3 Scientific relevance

The problem defined in this study is a common problem for public sector organizations. However, this field is still largely uncovered in scientific research. Therefore, findings and results of this study offers incentives for academics to do further research in this field. Furthermore, these findings offer public sector organizations valuable insights in usability and suitability of business cases for the IT investments.

2.4 Scope of research

The main research objective is to deliver a valuable and effective method for business cases for public sector organizations. However, due to limitations, the implementation and actual use of the business case method within the organization is not covered in this study. Furthermore, the business case method in this study excludes investment proposals that do not have IT as a major component.

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2.5 Research method

The research method applied in this thesis research is generally referred as Action Research or Participatory Research. This approach aims to solve practical problems and generate theory simultaneously (McKay & Marshall 2001; Frisk 2011). The Action Research approach is based on two underlying cycles, the first cycle is related to the researcher’s interest to solve a problem and the second cycle is related to the research interest in conducting research itself (Frisk 2011). The outcome of an Action Research should enhance the skills and competences of both the researchers and practitioners (Coughlan & Coghlan 2002; McKay & Marshall 2001; Frisk 2011). The essence of Action research is to collaborate and provide people with the means to take action in order to solve specific problems (Berg 2008; Frisk 2011). According to Frisk (2011) outcomes of the Action Research are not always the ones that are desired and/or the solutions to solve immediate problems. In contrary, it is more likely that important knowledge from both intended and unintended outcomes is created and shaped to the desired contribution to scientific knowledge (Coughlan & Coghlan 2002). According to Berg (2008) the role of the researcher in Action Research is to objectively observe, collaborate and contribute to expertise of the group involved in the study.

For this study the practical approach in Action Research was chosen, as first a mutual understanding of the problem situation was established by both the practitioners and researcher. Through literature research and a single case study at the Municipality of Groningen findings and new knowledge were derived for both practitioners and researcher. The gathering of relevant theory was done through literature research on IT evaluation, and business cases methods that can be used in either profit or non-profit organizations. In order to find the appropriate literature for this study effectively, the literature search structure of Arviansyah (2008) was adapted. The findings of the literature search offer an overview and comparison of characteristics of different business cases. Furthermore, this study addressed the internal knowledge base and documents made available by the Municipality of Groningen. The results of literature findings provide a theoretical basis for the case study within the Municipality of Groningen. The purpose of this case study is to validate the outcomes of the literature research with the assistance of the practitioners.

Finally, an Action Research is based on an epistemological foundation that includes positivist, interpretive, or critical assumptions (Klein & Myers 1999). This research is conducted from an interpretive assumption, build on the assumption that comprehending the reality is considered to be influenced and constructed by the context in which a problem evolves (Walsham 1993; Klein & Myers 1999). Therefore, underlying theories and method in this research is more used in a way of making

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2.6 Literature review

The literature research consists of findings obtained from various sources, most of which are academically (figure 2). In order to structure the literature research, the model of Arviansyah (2008) was applied (figure 3). The primary sources of this literature study were books that have been found at the University of Groningen library facilities and e-books that were available through Google. In addition to this, different academic journals and articles have been used to find relevant literature.

Lastly, additional information was collected from internal documents and knowledge base of the Municipality of Groningen.

Figure 2 - Literature sources (Arviansyah 2008)

2.7 Literature search strategy

To identify and locate relevant literature that covers both business case practices and the public sector organization context, a preliminary search was performed to determine related factors that should be included in literature search. The preliminary search was performed with the use of Google search engine and academic research databases (e.g. EBSCO, ScienceDirect and IEEE), the keywords included in this search were: business case OR cost benefit analysis OR business case model OR business case method (with quotation marks).

Furthermore, academic journals that seemed to have articles about the research topic were examined, the following were included: European Journal for Information Systems, Journal of Strategic

Books

- Library of faculty Economy & Business / Spatial Sciences (PiCarta) - Google Books

Periodicals

- EBSCO / Econlit / Business Source Premier

- Elsevier Science direct - Emerald / Google Scholar / IEEE

Other

- Google (Search Engine)

- Documents Municipality of Groningen

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and The Electronic Journal of Information Systems Evaluation. The academic research databases and journals provided only a few relevant results and were an indication to broaden the search scope for the literature research. Although the preliminary search results were limited, keywords as IT evaluation, IT assessment, IT justification and IT valuation show that these topics are interrelated in this field of study.

Based on these preliminary search conclusions and findings, the literature search strategy was established to conduct a systematic review of relevant literature. The search strings were entered in EBSCO Host Research Database, including Business Search Premier – an online database with references and abstracts of articles on all disciplines of business.In addition, the search strings were entered in Elsevier Science direct – an online database with references, abstracts and journals on various areas like technology, and information – and Emerald – an online database with journals on various areas like information science and management. The search results were limited to publication data starting from 1985 until 2011, scholarly (peer reviewed) journals and academic journals.

Since the aim of this literature search was to find business case methods that can be applied in public sector organizations, the first search string included the keywords business case AND IT investments OR IT projects. In the second phase, keywords used in the search string were: (local) government OR non-profit OR public OR municipality to find specific results in this area. The third phase was needed to further address the interrelated topics that were found in the preliminary search, therefore the search string consisted of the keywords: IT evaluation OR IT justification OR IT valuation OR IT assessment OR IT appraisal.

In order to find literature that relates to information technology, the results were narrowed down by setting a search string for abstracts which included the keywords; Information Technology (IT) OR Information system (IS) OR Information and Communication Technology (ICT). The first phase of the literature search provided 154 results that were found in the academic host research database. As noted previously, these results were only partly relevant for this study and therefore only a limited set could be used. The keywords added in the second phase provided seven results in any of the databases. However, the third phase provided more relevant results for this study and additional results were found from forward and backward search of references and authors (Levy & Ellis 2006).

Finally, it should be noted that the literature search through Google search engine was different from the normal search strategy. The results in Google provided more practical examples, standards and guidelines of business cases. These findings are valuable in terms of usability for analyzing the components and formats of business cases.

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2.7.1 Inclusion and exclusion criteria

In order to make use of appropriate articles in this research, some restrictions were applied to address specific content. The restrictions were needed to establish the scope of the literature search. Given that the subject of this study is a business case method for IT investments justification and evaluation for local governments, each term should be clearly defined.

First, preliminary literature search suggest that there is no general accepted definition of business case, according to deSouza (2010, p.160) a business case represents “a well-argued and logically structured document that puts forward the business rationale for investing in a course of action”, moreover Remenyi (1999, p.6) defines a business case as “the justification for pursuing a source of action in an organizational context to meet stated organizational objectives and goals” and Schmidt (2003b, p.2) states “a business case is a decision support and planning tool that projects the likely financial results and other business consequences of an action or decision.” In this thesis the definition of Braaksma et al. (2006, pp.6-7) is applied, namely: “a business case is a set of guidelines to analyze both financial and other (non financial) consequences that result from the execution of intended action. The purpose of a business case is to justify the intended action or to evaluate the execution of it.”

Second, this research uses the term IS/IT investments according to the widely accepted definition of Bacon (1992, pp.335-336); “any acquisition of computer hardware, network facilities, or pre-developed software or any ‘in house’ systems development project that is expected to add to or enhance an organization’s information systems capabilities and produce benefits beyond the short term.”

Third, the definition of IS/IT evaluation in this research is derived from the definitions used by Smithson

& Hirschheim (1998, p.136) “the assessment or appraisal of the value, worth or usefulness of an Information System” and that of Remenyi et al. (1997, p.46) suggesting that IT evaluation should be understood as “a process or set of activities to the measure and assess IT aiming to establish the value of, or the contribution made by a particular situation.” Farbey et al. (1999, p.191) state that IS evaluation is “for searching and for making explicitly, quantitatively or qualitatively all the impacts of an IT project and the program and strategy of which it is a part.” The term IS/IT evaluation is closely related to the popular term IS/IT justification applied in this field of research. The similarity can be found within the position of the decision process. Often IT justification is performed ex ante and evaluation ex post (Nijland 2004). However, evaluation can also be performed ex ante for justifying IT investments (Stefanoue 2001).

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Fourth, the term ICT refers to technologies that provide access to information through telecommunications and is similar to Information Technology (IT), with the emphasis to the fact that computing in the twenty-first century is highly dependent on data communication (Arviansyah 2008;

Remenyi et al. 2007).

Lastly, the context of local government should be addressed. The term local government is according to the Oxford dictionary: “the administration of particular country or district, with representatives elected by those who live there”. The term local government is interrelated with the terms municipality and public administration organizations. Whereas, a non-profit organization defined by Doyle (2001) is an organization whose prime goal is non-economic. However, in order to achieve that goal it possibly adopts profit-making activities.

In sum, the articles included in this literature research should address at least one or more of the following restrictions; IT/ IS related, concern investments, include appraisal or justification aspects or topics and take place in the appropriate organizational context. The results of the literature search strategy are shown in figure 3.

2.8 Data collection

In addition to the literature research, more qualitative data was collected during the case study at the Municipality of Groningen. The data was collected through semi-structured interviews and discussions with important stakeholders and actors within the organization of the Municipality of Groningen, including information managers, project managers and business managers. The purpose of these interviews and conversations was to get additional insights and perceptions towards the business case method. In total, eleven interviews were conducted which provided valuable input to improve the proposed business case method. The set of respondents were chosen from the different public services of the organization, each of the respondents had different experience and knowledge levels on business cases and valuating IT investments. For data processing, no specific methodology or tool was used; as Walsham (2006, p.325) stated “I believe that researchers’ best tool for analysis is his or her own mind, supplemented by the minds of others when work and ideas are exposed to them” and therefore a coding tool is not always necessary as it can draw too much attention itself.

Furthermore, the research was conducted with the help of a project group that discussed developments, issues and practical implications of the business case method within the organization. These meetings took place every two weeks during the whole case study.

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Figure 3 – Literature search strategy for systemic review (Arviansyah 2008)

- EBSCO host research databases - PiCarta search

Key words

IT investments OR IT projects AND business case

Information technology OR Information system OR IS / ICT /IT

Government OR non- profit OR public OR municipalities

Science Direct (Elsevier)

Limiters set

Peer reviewed journals, publication type: academic journals, available as full text

Results: 158

Abstracts reviewed on relevance, removal of duplicates

Articles included: 96

Business Source Premier &

EconLit

Science Direct (Elsevier) Google Books/ Scholar

results

Emerald &

IEEE

Knowledge base

Municipality of Groningen

Books included: 21

KB articles included: 5

Total: 122 Business Source

Premier (BSP) EconLit

(EL)

Emerald / IEEE (e)valuation OR

assessment / appraisal OR justification

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III. LITERATURE REVIEW

This chapter includes the findings of the literature research. The literature research gives valuable insights in the different topics that are related to business case methods. The results of this literature study supported two purposes; first results are a theoretical basis for findings in the case study, and improvement of proposed business case method.

3.1 Organizational theory

In the field of business and management sciences, an organization is regarded as a system that coordinates people and resources to achieve set goals, which are to create value for its stakeholders (e.g. shareholders, employees, citizens) and is deliberately coordinated and structured (Daft 2006).

Organizations can be categorized in a variety of types, such as for-profit corporations, governments, non-governmental organizations, non-profit organizations, charities and universities (Jones 2007). A term closely related to organization is management, which is regarded as a “function concerned with assigning tasks, grouping tasks into departments, and allocating resources to departments” (Daft &

Samson 2008, p.8). An organizational management is also responsible for designing and setting organization goals, objectives and its strategy (Daft & Samson 2008). In order to effectively control and organize resources, organizations are often horizontally and/or vertically structured in different functions, teams and departments (Daft 2006). A structured organization has many benefits, such as the specialization of employees, more efficient and effective use of resources, and the reduction of costs (Daft 2006). According to Jones (2007) the effectiveness of an organization is also determined by its ability to find and gain scarce resources, the speed in which an organization is able to respond to its environment, the capacity of organizational management to make right decisions, and the extent to which an organization is able to achieve its goals. An environment of an organization consists of forces (e.g. technological, social, political and economical) that affect the way an organization operates and acquires resources (Jones 2007). A well-known theory in management sciences is the contingency approach, which is based on the idea that there is no best way to set up an organization because it depends on contingencies of a particular situation (Daft 2006). In modern contingency theory, organization effectiveness is influenced by the ability of achieving a balance between strategy, structure, technology, the involvement of employees and the external environment (Jones 2007;

Cummings & Worley 2005).

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3.2 Private— and public organization characteristics

In previous paragraph a background in organizational theory was provided. However, the aim of this study is to develop a business case method specifically for local governments. Therefore, the differences between public sector and private sector organizations are discussed in order to assess specific characteristics for the business case method. In literature, the term local government is often used a synonym for a public sector organization. According to Rainey & Bozeman (2000) researchers have had difficulties identifying criteria that distinguish between private– and public sector organizations. Moreover, Rainey & Bozeman (2000) claim that some researchers in organization theory have attached less importance to the private– and public sector differences. However, other findings suggest that out of the four or even eight types of organizations, the public– and private sector organizations constitute the most distinctive types (Hooijberg & Choi 2001). Additionally, researchers referred private sector organizations as for-profit enterprises; and public sector organizations to government agencies (Hooijberg & Choi 2001). Speckbacher (2003) argued that especially these types of organizations differ from each other in various aspects. According to Cilek et al. (2004) most public sector organizations are not structured to be efficient, rather need to be transparent, open and accountable due to legislations or financial constraints. Although, private sector organizations can perceive similar issues, these are much more binding for public sector organizations. Moreover, many public sector organizations face difficulties in efficiency, as these organizations have conflicting (heterogeneous) interests and goals (Cilek et al. 2004; Speckbacher 2003).

Heeks & Bhatnagar (2001, p.11) found that “public sector organizations also tend to place less emphasis on financial cost information and more emphasis on broader performance indicators than private sector organizations due to different regulatory requirements”. In addition, Heeks & Bhatnagar (2001) note that many private sector organizations are able to comprehend their core strategic information better because many adapt its business based almost only on the understanding in terms of what customers demands. Whereas organizations in the public sector often need to deal and process information on almost every aspect of society (e.g. civilians, healthcare, education, and business, etc.)

Baldwin (1987) suggested that organization goals in public sector are more ambiguous than those of private sector organizations, because public sector organizations often pursue multiple goals simultaneously. For example, public sector organizations are forced to make IT investments by legislations and/or National Government policies, as result decision-makers do often not consider any economic or strategic aspects (Graham & Scarborough 1997; Lin 2008). While in private sector

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organizations most IT investments are internally generated and based on the match with the organization’s strategic context and greater economic value (Burnes & Anastasiadis 2003).

According to Heeks & Bhathnagar (2001, p.11) “public sector organizations tend to have a more limited and older technological infrastructure than that found in private sector organizations. Technology also tends to be viewed more negatively in the risk-averse public sector and more positively in the private sector where competition forces innovation”. Furthermore, Lin & Liu (2008, p.90) claim that “although both the public– and private sector organizations face the similar problem of limited ability to use unused capacity for introducing newly developed products or services, the private sector organizations have an overriding goal of profit maximization”. In contrast to private organizations, public sector organizations are often forced to operate in much narrower scope of organizational value in terms of efficiency and effectiveness (Burnes & Anastasiadis 2003). Whereas, private organizations can do almost anything to improve effectiveness and efficiency, the public sector organizations cannot due to the responsibilities to public values.

Previous arguments show some of the specific differences between private– and public sector organizations. However, many issues result in the difference in the way organizations perceive value and benefits, which also effects how IT investments are evaluated (Castelnovo 2007). To address specifically how value is perceived by public sector organizations, Braaksma et al. (2006) proposed a public value framework based on the “taxonomy of IT value in public administration” (Bannister 2001) and “terminology of financial and nonfinancial consequences” (Renkema & Berghout 1997). This model considers public value as source to create value for non-profit organizations and addresses the importance of understanding non-traditional economic methods. As other researchers suggests this aspect is essential to determine how value for local governments is created, and therefore the next paragraph is dedicated to give a better understanding of traditional methodology of IT valuation.

3.3 The valuation of IT investments

In literature there is evidence to be found that information technology (IT) investments are growing and will continue to do so (Ballantine et al. 1996; Bannister & Remenyi 2000). However, many organizations still have concerns about the business value derived from IT investments, and whether they are achieving an acceptable pay off from these IT enabled investments (Willcocks 1996). Furthermore, many organizations often struggle to gain benefits and value from IT investments (Thorp 2003; Ward et al. 1996; Frisk 2011). Traditionally, many justifications of IT investments were based on an approach that relied mostly on economic or financial metrics. These metrics included capital budgeting methods such as: return on investment (ROI), pay back (PB), internal rate of return (IRR), net present value (NPV).

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Brigham & Daves (2003, p.410) describe these methods as “the process of analyzing the potential capital investments and deciding which ones the firm should accept”. The economic approach is criticized in various studies (e.g. Farbey et al. 1999), as the value from IT investments was becoming more associated with benefits and revenues rather than as a focus on cost displacement or avoidance (Keen 1991). In addition, Willcocks (1996) and Nagm & Kautz (2007) concluded that many of IT evaluation methods differ considerably and therefore their overall quality is ambiguous.

Furthermore, Fitzgerald (1998) suggests that the benefits are more based on beliefs than attempts to actually measure these benefits, whereas Frisk (2009) argues that capital budgeting methods are to summative and give no indication on how to follow-up an investment along its lifecycle. Nijland (2004) noted that the traditional approaches only focus on the project level while other levels, for example the IT portfolio (considering coherence of IT projects) are being neglected. The relationships between different IT investments or developments are not considered as an inherent part of these traditional methods (Nijland 2004; Farbey et al. 1999).

In order to overcome disadvantages of traditional methods, improved approaches were introduced that understood the requirements for evaluating and measuring the benefits of IT investments. These approaches included identification of qualitative and intangible assets (Brynjolfsson & Hitt 2000; Farbey et al. 1993) which were not considered as part of IT investments before. Benson & Parker (1988) criticize earlier approaches on neglecting nonfinancial and intangible costs and benefits. Additionally, the researchers Borenstein & Betancourt (2005) suggest that justification decisions should consider aspects of IT investments that can be both tangible and intangible. Renkema & Berghout (1997, p.12) suggested that “independent variables can be reduced by focusing research on a specific type of investment (e.g. infrastructural investment) or on a line of business (e.g. financial services or public service)” and recommended using a combination of features from the various approaches.

Furthermore, some researchers argued that economic terms are too one-dimensional for justifying or evaluating complex IT investments since human and social aspects are left out (Hirschheim &

Smithson 1999). Another approach to evaluate IT value is that from a user perspective, the IS Success Model of DeLone & McLean (2003) is a widely accepted model. In the IS success model, interdependent variables for achieving IS success are taken in consideration, and include variables such as information quality, system quality and service quality which have influence the user’s satisfaction and intentional use that in turn affect the expected net benefits (DeLone & McLean 2003).

Walsham (1999) suggests that the focus of evaluation should be placed in a much broader perspective, shifting the focus from the concentration from merely technology itself to an organizational intervention

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as a whole, of which an IT project is just a part of. The suggestion of Walsham (1999) is quite similar as one of the most discussed approaches; the interpretative IT evaluation approach (Berghout & Remenyi 2005; Frisk 2009). This approach considers IT systems as both technical and social constructs and as the basis for evaluating stakeholder’s perception of reality (Stockdale & Standing 2006). The purpose of the interpretative approach is to achieve a broader contextual understanding and to generate motivation and commitment among stakeholders (Walsham 1999).

The perspective of measuring outcomes of different aspects equally led to the introduction of comprehensive multi-criteria approaches in the research field of IT evaluation. The multi-criteria approaches define one single measure for each IT investment based on different set of consequences, such as financial and nonfinancial aspects (Renkema & Berghout 1997). The outcome of these methods suggests that IT investments proposals that have the highest scores are the ones that yield the highest value for an organization (Nijland 2004).Benson & Parker (1988) developed the Information Economics method that focuses on the technology domain as well as the business domain. The business domain includes value factors such as return on investment (ROI), strategic match, competitive advantage, management information and competitive risk (Benson & Parker 1988; Benson et al. 2004). In the technology domain there is only one value factor, namely strategic IS architecture (Willcocks 1994;

Benson & Parker 1988; Benson et al. 2004).

Other multi-criteria models to evaluate IT value, include: balanced score card (Kaplan & Norton 1996;

Martinsons et al. 1999; Huerta & Villanueva 2004) and the real options theory (Taudes et al. 2000;

Benaroch & Kaufmann 2002). However, Nijland (2004) criticizes that these multi-criteria methods are hardly used for formal evaluation ex ante and are never performed ex post. This conclusion is supported by survey findings of Seddon et al. (2002) where approximately 20% of response carries out a post-implementation evaluation. Taking this into consideration, business cases need to be regarded as a comprehensive method that includes criteria for both ex ante and ex post evaluation. The multi- criteria approaches often apply scores and weights to derive a single result. However, the use of weighting and scoring is conceptually a critical process, because scores based on a nominal scale are used as values on a ratio scale (Mercken 2005). Moreover, according to Mercken (2005) scores mostly belong to domains that are completely different, but are added as if these are interchangeable. As result, it can be questioned whether a single score yields the right information for decision-makers.

Although shortcomings of this approach should not be neglected, the advantage is that many evaluation criteria can be used by translating these into a single overall score.

In a study by Bannister & Remenyi (1999) three basic approaches of IT evaluation are classified:

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Balanced Scorecard and portfolio methods) and meta evaluation (defining an optimum set of measures for a context or set of circumstances, whereas the process of IT evaluation is not predefined). Each of the above evaluation types can be applied in two different ways: a positivist or a hermeneutic approach (Bannister & Remenyi 1999). In the positivist approach, the methodology is considered as an objective measure of evaluation by the decision-maker. The hermeneutic way assumed that the decision-maker applies a combination of different measures and information when making an evaluation. “The attitude of the decision-maker determines what types of evaluation approach and what kind of information will be used” (Frisk 2011, p.2). The basic measures are frequently used by the decision-makers when evaluating IT investments (Ward & Daniel 2006). In the study of Frisk (2011) this is explained by the fact that these types of measures are regarded as common knowledge of many decision-makers.

There are many other IT evaluation methods and criteria to be found in literature (Irani & Love 2008);

however there is not a single method that is accepted as best practice (Mirani & Lederer 1998;

Andresen 2001). Moreover, the research about IT evaluation topics is very fragmentary (Berghout &

Remenyi 2005). The existing approaches include various factors and criteria to evaluate IT investments (Frisk 2009). Although, combinations of methods and criteria to evaluate and justify IT investments are common practice in organizations (Nijland 2004), a generic method to support IT decisions effectively is yet to be introduced. According to Ward & Daniel (2006), existing combinations are largely based on dominant economic and financial factors. Furthermore, IT evaluation is often perceived from a technical system perspective (Kling & Lamb 1999) and therefore the evaluation is directly related to the system itself. In contrary, findings of Ward & Peppard (2004) suggest that managerial skills and competencies are likely to be more important than technology itself to create organizational value and therefore important in managing and organizing IT investments.

In conclusion, through the review of earlier research important requirements and components can be derived which can be applied in basic methodology for the process of IT justification (Frisk 2011;

Schmidt 2003a). In this research, the IT business case is regarded as a multi-criteria method for justification and evaluation of IT investments. Moreover, a business case method is considered to an instrument for both ex ante and ex post evaluation, and should include criteria that relates to an IT investment full lifecycle. Although, many criteria can be derived from other evaluation and justification methods, it is important and essential to reflect on the criteria that are currently being used in existing business cases.

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3.4 Existing business case methods and guidelines

This section provides valuable insights on criteria and elements that currently are applied in business case methods. The sources of each business case method differ, because only a few specific business cases for IT can be found in academic literature. According to Remenyi (1999) IT investments exhibit some characteristics that are different from other business investments, and therefore needs to be accommodated. In order to address these specific characteristics existing guidelines and formats have been assessed. The analysis is concluded by an overview that addresses the various criteria of methods and guidelines found in literature.

3.4.1 Remenyi (1999)

Remenyi (1999) developed a business case model, consisting of the combination of qualitative and quantitative components. According to Remenyi (1999, p.6) a business case is a “justification for pursuing a course of action in organizational context to meet stated organizational objectives or goals”, and include a focus on the alignment between the strategic context and the intended IT investment. The business case model further incorporates widely accepted aspects such as the value of stakeholders, technology risks and the value of financial analyses. Furthermore, Remenyi (1999) states that technology component can be omitted when it is not applicable. The business model itself model consists of five elements, namely: Business outcome, Stakeholders, Risks, Technology and Strategic alignment. Each of these five elements requires detailed analysis and should be analyzed in six steps (Remenyi 1999; Braaksma et al. 2006).

Business outcome

Remenyi (1999, p.42) defined business outcome as “the desired effect of an intervention or change to a business process or practice. It is a business result, which has a measurable impact on the performance of the organization. The output of an IT investment is the physical change to a business process or practice which will lead to the business result as required in the outcome.” According to Remenyi (1999) the business outcome should be the core of every IT business case and therefore outcomes should be associated with financial calculation as often as possible. Furthermore, Remenyi (1999, pp.42-43) suggests that the business outcome can be divided in three levels: “a comprehensive statement or set of statements of business outcome will need to be thoroughly developed and will thus consist of three distinct levels or components. These components are referred to as the macro model, the meso model and the micro model.”

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Stakeholders

Remenyi (1999) also emphasizes the importance of determining stakeholder’s knowledge and involvement related to the intended IT investment. Remenyi (1999, pp.57-58) noted that “stakeholder knowledge and stakeholder management is central to the preparation of a comprehensive IT investment business case. It is also central to the management of the IT project itself.” According to Remenyi (1999, p.59) three major groups of stakeholders can be defined: the users/owners, the IT professionals and the finance and administration staff. A stakeholder’s analysis should assess stakeholder relations, level of commitment and identify possible resistance of stakeholders.

Strategic alignment

Alignment is of key importance for any organization that wants to achieve its goals and deliver value.

According to Remenyi (1999) and several other researchers, lack of alignment often leads to non-value delivering projects. Remenyi (1999, p.73) notes that “strategic mismatches or misalignments are major causes of IT project failure and any professionally produced IT business case needs to rigorously address this subject.” Therefore, strategic alignment is seen as an important component of a IT business case. Although Remenyi (1999) addresses the importance of this component, no single strategic analysis is proposed. However, according to Remenyi (1999) valuable insights on strategic analysis can be gained by using accepted theories such as Porter’s value chain (1985). An important remark is made that the alignment of the intended action should be quantified as much as possible or otherwise be described qualitatively.

Technology

No matter how sound the proposed IT intervention is from a business perspective, it is necessary to take a careful look at the technology issues to verify the viability of the project. To do this it is necessary to develop a technology feasibility statement that outlines the various technology platforms and components required i.e. hardware, software, communications, etc. (Remenyi 1999).

Risks

Remenyi (1999) gives the possible risks associated with the intended action a central place in his business case model and defines risk as the propensity of the actual costs and outputs of the IT development to vary from the original business case. Remenyi (1999) elaborates on a risk framework in which he distinguishes three risk categories: business, development and architecture risks. For each of the categories three individual risks are discussed.

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3.4.2 Braaksma et al. (2006)

Braaksma et al. (2006) developed a non-profit business case model that is based on previous model of Remenyi (1999). The non-profit business case model consists of five components, namely: strategy alignment, technology, stakeholder cooperation, financial and risk analysis. The model differs from that of Remenyi (1999) in terms of interpretation and how the components are being implemented.

Strategic alignment

In the non-profit business case model the strategic alignment is the most important element, therefore the business case model is build around a solid strategic analysis (Braaksma et al. 2006). The strategic analysis should be based on defined value drivers (such as cost reduction) and the IT investments contribution to these values. Braaksma et al. (2006) specifically developed this model for non-profit organizations; suggesting that the values drivers should be defined on basis of the public value framework.

Stakeholder cooperation

According to Braaksma et al. (2006), stakeholder analysis is considered to be of key importance. The analysis is not only important for determining stakeholder’s interests and their level of cooperation;

moreover stakeholders influence how the value and costs can be perceived (Braaksma et al. 2006).

Furthermore, Braaksma et al. (2006) notes that benefits and burdens should be defined from the perspective of the stakeholders.

Technology

The technology component is included in the non-profit business case model, as technology itself has become an important enabler of public value creation (Braaksma et al. 2006). The technology component should be focused on measurement of the alignment of current and future architecture policies, and IT planning.

Financial analysis

Whereas Remenyi (1999) defines the financial analysis as the outcome of a three level analysis, Braaksma et al. (2006) suggests applying the financial analysis on only one level which allows easier comparison of different business cases and scenarios. In the non-profit model six measures are calculated in the analysis; structural cash flows (expenditures), project cash flows, labor productivity changes, reduction program costs, net present value (NPV) and the payback period.

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Risks

Similar to the model of Remenyi (1999) risks take a central place in the non-profit business case model.

Braaksma et al. (2006) suggests that many risks will become apparent through the analysis of previous components, however specific risks should be mentioned in any situation and not be regarded as unnecessary.

3.4.3 Schmidt (2003a)

Schmidt (2003a) provides insights in various key essentials that should be included in an IT business case. Although Schmidt (2003a) does not provide a business case model itself, important checkpoints for business cases are specified. Schmidt (2003a) builds the business case around a strong financial analysis and emphasizes the importance of analyzing different scenarios, namely a baseline ‘As-Is’

scenario and the proposed ‘To-Be’ scenarios.

However, Schmidt (2003a) notes that “good IT business cases have many elements and characteristics in common, but it is not possible to prescribe a single outline or template for all cases” (p. 1). This is confirmed by Cresswell et al. (2000) arguing that “there is no one-size-fits-all business case” (p. 9) for every type of investment. The aim of an IT business case is basically structuring the process of decision-making through evaluation of various business issues related to new information systems.

Schmidt (2003a) proposed the following components to be included in a business case.

Introduction and Overview

The purpose of the ‘introduction and overview’ is to identify and elaborate on the intended action, outcomes, business objectives and the general nature of the investment analysis. Schmidt (2003a) argues that these parts should be clear and completed first, before continuing with adding additional information to the business case.

Assumption and Methods

The ‘assumptions and methods’ section supports information on the financial requirements of the intended investment. This information is based on methods used to measure estimates and assumptions of expected cost and financial benefits. The measurements can be presented by applying a scenario design that assesses future contingencies in explicit financial details.

A BUSINESS CASE METHOD FOR LOCAL GOVERNMENTS: A CASE STUDY AT THE MUNICIPALITY OF GRONINGEN