Valuation of digital transformation programmes

Basic research project

In the age of digital transformation, the majority of all companies are implementing digital transformation programmes, which typically have a long planning horizon and consist of a large number of IT investment projects (ITIPs) that build on each other. At the same time, about 25% of all ITIPs fail and 50% do not achieve their goals within the planned budget and/or time. These figures illustrate that companies often unfavourably invest their available IT budget due to inadequate profitability analyses for planning and selecting ITIPs, among other things. An important aspect in the valuation of ITIPs is the correct consideration flexibility to change course available to project management, which they may or may not exert throughout the project lifespan. Such flexibility to change course is also referred to as real options, e.g. to postpone or cancel an ITIP or to extend it to a follow-up project. In the academic literature, standard models of financial option theory are often used to valuate real options in ITIPs. However, these standard models simplify the complexity of real options analyses (ROA), as the underlying assumptions cannot be transferred to real investments, such as ITIPs. In a previous project funded by the FWF, we have critically analysed these assumptions and adjusted them to better reflect the fundamental characteristics of ITIPs. In doing so, we found that the assumptions of the ROA approaches existing in the literature do not adequately represent the fundamental properties of ITIPs and that the ROA approaches thus lead to incorrect valuations.

The aim of the proposed follow-up project, which falls into the interdisciplinary field of business informatics, is therefore the development and prototypical implementation of a novel ROA approach that enables an adequate valuation of digital transformation programmes (VaDiTraP).

Methodologically, the planned work is based on the Design Science Research approach. Accordingly, we design, implement and valuate an ROA approach that adequately maps the characteristics of ITIPs. With this approach, we not only augment academic knowledge in several disciplines (i.e. business informatics, finance, economics), but also generate the prerequisite for a better planning and selection of ITIPs in companies. Although ROA approaches are considered highly relevant in practice today, they are not currently used for two reasons: (1) Decision makers are dissatisfied with the results of currently available ROA approaches; (2) Currently available ROA approaches are too complex for application in business practice. Our proposed research project addresses both points.

(1) We develop an ROA approach that leads to better valuation of IT projects in the context of digitisation programmes.

(2) We develop a prototypical implementation with a graphical user interface and test the prototype for usability and user acceptance in workshops with experts from the business community.

In this way, this research project helps to improve both the results of ROAs and the acceptance of ROAs in the valuation of digitisation programmes.

Funding body: FWF - Austrian Science Fund

Project period: November 2019 - October 2023