Information Technology Reference
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uses quantitative risk analysis at all, it is usually
for routine operational decisions. The largest, most
risky decisions get the least amount of proper risk
analyses” (Hubbard, 2007).
The metrics by which IS are evaluated are
divided into cost and benefit analyses and risk
analyses. The metrics for cost and benefit analy-
ses include: payback period, ROI, net present
value, internal rate of return et cetera. And the
risk analyses metrics include: sensitivity analysis
(e.g. gross sensitivity analysis and stress testing),
brainstorming, scenario planning, Monte Carlo
simulation et cetera (Ballantine & Stray, 1999).
In fact, cost and benefit analyses under risk
and uncertainty are the ones that embody the
real value behind the estimation process since,
without any quantification process concluded
beforehand, some of the risk analyses can be
valueless. Therefore, risk analyses are generally
considered as a valuable extension of the estima-
tion process (Stæhr, 2006).
Hence, several of the cost and benefit analy-
sis as well as risk analysis metrics are analyzed
thoroughly in the following points.
Currently, there is still limited academic research
on appraising the value from ITIL implementa-
tions (Tiong, Cater-Steel & Tan, 2008). For this
reason, ITIL estimation metrics are adapted from
different investment analysis approaches which
use financial metrics and other non-financial ap-
proaches, which are discussed in the following
subsections.
investment Analyses
The value of ITIL implementations can be es-
timated by using general investment analysis
techniques because, likewise any investment,
ITIL implementations still require an executive
decision and financial numbers to support that
decision. Thus, ITIL implementations are no
different from other investments since they are
treated as business decisions subject to the same
investment thresholds as every business invest-
ment (Harvard Business Review, 1999).
In this manner, investment analyses provide
executives with useful insights when faced with
difficult investment decisions as financial metrics
rank investment options against each other accord-
ing to their economic value and, therefore, the
decision-making process is supplied with valuable
information. Another reason to calculate the value
of ITIL implementations using financial metrics
is due to the fact that finances and accounting
practitioners still insist that every investment
should be backed by verifiable metrics (Harvard
Business Review, 1999).
In addition, cost benefit analyses estimate
the attractiveness of an investment opportunity.
However, these types of analyses have long been
criticized for its inability to determine the risk
and percept the value of investments of strategic
nature and, therefore, are the reason for short-
term decision-making focus and lack of adequate
funds for large-scale IT investments. The “risk
paradox” mirrors this reality: “if an organization
Cost and Benefit Analyses
It is important to analyze several financial metrics
in terms of their main advantages and disadvan-
tages, so as to identify which situations are more
favorable to one financial metric in detriment of
the others. Table 1 corresponds to the outcome
of this comparison.
In summary, NPV, ROI and IRR should be
used if CIOs want to understand how profitable
an investment is. Likewise, EVA can also be used
but only if the organization is publicly traded and
the share value is an important factor for execu-
tives (as it should be). The PBP metric is good
to determine how long a project will take until it
compensates the initial investment.
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