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Business & Information Systems Engineering
Published in: Business & Information Systems Engineering 2/2015

01-04-2015 | State of the Art

On the Sound Financial Valuation of Flexibility in Information Systems

Author: Christoph Sebastian Dorsch

Published in: Business & Information Systems Engineering | Issue 2/2015

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Abstract

Flexibility often represents the key area of value added by investing into an information system (IS) but also carries significant costs. Therefore, its quantitative financial valuation is of vital importance to make economically informed decisions about flexibility. This is challenging due to varying flexibility definitions and the complexity of the flexibility construct in itself. To address this challenge, this paper analyzes the scientific literature concerned with the financial valuation of flexibility in information systems (FIS). In the first part, it introduces fundamental requirements for a proper financial valuation, discusses the characteristics of FIS that are driving its economic value and identifies suitable financial valuation approaches. In the second part, a structured review of literature focusing on the application of FIS valuation analyzes to what extend the existing literature supports economically informed decisions within flexibility design. Further research is indicated with regard to dependencies between flexibility and the existing IS landscape as well as to a more structured and comprehensive approach to examine all interacting features of an IS enabling flexibility in the first place. In summary, joining the theoretical basis and the application of FIS valuation, this paper gathers all necessary fundamentals for a sound financial valuation of FIS and reveals the need for further development within this stream of BISE research.
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Appendix
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Footnotes
1
In addition, qualitative, non-financial evaluation criteria can be considered (Hirschmeier 2005, p. 4; Kohli and Grover 2008, p. 33). The paper at hand focuses on the financial ex ante valuation of FIS as a specific challenge. Concerning other dimensions of business value (Schryen 2013) of FIS, cf., for example, Kumar and Stylianou (2014) and Wagner et al. (2011).
 
2
Concerning the example of the flexible online ordering system, implementing scalability causes cash outflows. Cash inflows attributable to flexibility arise from both, avoided idle costs through scaling (when demand is low) and additionally processible jobs (when demand is high).
 
3
To facilitate readability, "valuation" or "value" here and in the following means "financial valuation" or "financial value".
 
4
These sources discuss a larger number and/or more restrictive requirements that take account of specific focuses than those presented in this paper. The requirements listed here present a comprehensive and general intersection in terms of a quantitative financial valuation.
 
5
IS include "[t]he entire infrastructure, organization, personnel, and components for the collection, processing, storage, transmission, display, dissemination, and disposition of information" (ATIS 2013). These numerous elements of IS are usually organized on architectural layers (Aier and Winter 2009, p. 178; Buhl and Kaiser 2008, p. 47; Krcmar 1990, p. 399; Winter 2003, p. 94). A definition/description of flexibility, based only on single elements or individual layers of an IS must therefore be regarded as limited, especially since existing dependencies cannot be or are only partially accounted for in the analysis.
 
6
Concerning the example of the flexible online ordering system again: a scalable IS can be adapted to a widely fluctuating demand. Modularization, however, does not allow an adaptation to this particular change. If the IS is able to scale but with certain restrictions, the adaptation is only partially possible.
 
7
See corresponding literature for further information. The scopes of action of FIS can be interpreted as special intertemporal dependencies, which are already captured by the application of DTA or ROA.
 
8
As in all valuation approaches, there are critical questions about the applicability of DTA and ROA. With DTA particularly the status-dependent return rate poses a problem (Perridon et al. 2012, p. 148). This does not apply to ROA due to a valuation free of preferences. However, the necessity for a portfolio, continuously traded on the market, which perfectly duplicates the cash flows of the real option to be valued shows its limitations (Buch and Dorfleitner 2007, p. 142; Kruschwitz 2011, p. 420). These fundamental difficulties affect the value to be determined. See Hommel and Pritsch (1999, p. 130) or Perridon et al. (2012, p. 132) for procedures to handle these difficulties.
 
9
Evans (1991) discusses various terms, often used as a synonym for the term flexibility and aligned them in the three groups according to their various meaning. For this paper, the terms summarized in the group "Capacity for new situations" have been chosen, because this definition comes closest to the meaning of flexibility used here.
 
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Metadata
Title
On the Sound Financial Valuation of Flexibility in Information Systems
Author
Christoph Sebastian Dorsch
Publication date
01-04-2015
Publisher
Springer Fachmedien Wiesbaden
Published in
Business & Information Systems Engineering / Issue 2/2015
Print ISSN: 2363-7005
Electronic ISSN: 1867-0202
DOI
https://doi.org/10.1007/s12599-015-0371-7

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