ERP Investment Evaluation Based on Options Theory
Resource
Journal of Information Management 13 (Special): 1-16
Journal
Journal of Information Management
Journal Issue
13
Pages
1-16
Date Issued
2006
Date
2006
Author(s)
Abstract
ERP investments are costly, lengthy, and risky, replete with complex organizational factors such as initially unknown requirements, unexpected user adoption contingencies, and rapidly changing IT environments. Previous knowledge reveals that the ERP investment is a phased process. Companies do not invest all their resources until the pre-investment phase is finished. To justify ERP investments, it is necessary to consider the value of this deferral option value under uncertainty. Traditional ERP evaluation methods such as NPV, require a ”now-or-never” decision, which does not take this managerial flexibility into account; thus important opportunities may be missed. Given this background, we view ERP investments from a deferral options perspective, rather than as ”now-or-never events”. Our contribution is twofold. 1) We evaluate costly and risky ERP investments under uncertainty. 2) We investigate the value of managerial flexibility offered by the deferral option, which is the unique feature in the pre-investment phase of an ERP investment.
Type
journal article