An Industry-Level Analysis of the Potential and Realized Value of IT

IT investments are typically evaluated by weighing the potential benefits and actual costs of the investments. Potential benefits of IT investment, however, do not always translate directly to actual payoffs due to a variety of impediments in the value creation process. There often is a gap between the potential and realized value of IT investments which needs to be defined and measured. We explore the methodological tools available to measure potential and realized value of IT investments and address the gap between them by developing a measurement model grounded in production economics. We adopt the Malmquist productivity index to model the potential and realized value of IT and apply data envelopment analysis (DEA) techniques to solve the model. Using this model, we examine IT investments in industries in the United States during the 1992 to 1997 period. We also examine the impact of within-industry competition. The methodology that we use to address the research questions has two stages. First, we develop a measurement model for computing potential and realized value, and then we apply it to examine and explain the impact of competition. There are five main findings. (1) Less than half of the industries that we examined realized more than 70% of their potential value. Over time though, the industries improved their capacity to realize potential value. (2) Firms in industries that face high levels of competition invest in IT assets with higher potential value. (3) Industries experiencing low levels of competition in their industries invest in IT assets with lower potential value. (4) Despite having IT investments with higher potential value, highly competitive industries are less likely to realize potential value compared to industries in less competitive environments. (5) Finally, industry competitiveness does not impact overall IT efficiency gains over time due to countervailing effects.