The Evaluation of Investments in Electronic Commerce

The decision to adopt inter-organisational Electronic Commerce (E-Comm) applications may have unforeseen consequences for the firms involved. It should therefore be taken only after careful consideration of possible implications and pitfalls. In this paper we present a real-life case study of E-Comm investment evaluation, where computer-based models of the business processes to be supported by E-Comm were developed. The models were then dynamically simulated to assist the companies involved in gaining insight on the real benefits and dangers associated with the planned business change. Introduction Despite the E-Comm market’s steady growth over the last years, existing practical applications have not always been able to deliver in practice the business benefits they promise in theory. This has naturally resulted in lower adoption rates than initially expected. One of the main reasons that may explain the reluctance of organizations to adopt E-Comm may be the significant amount of organizational change required for the successful employment of radically innovative ways for carrying out business operations. Indeed, E-Comm applications have been identified as bearing a close resemblance to Business Process Reengineering (BPR) efforts. Organizations cannot be expected to embark upon such programs of radical change without first establishing a sound business case for the investments involved. E-Comm applications may account for significant expenditure, especially for small and medium firms (hardware, software, telecommunications, training, etc.). The primary thesis of this paper is that the main benefits an organization can gain from E-Comm are inherently qualitative and cannot be easily assessed a priori and be expressed in monetary terms. There exists a need for developing mechanisms that will help organizations realize the real business value of E-Comm applications and overcome this problem of measurement. We will report on a real-life case study where discrete-event simulation models of business processes were developed to assist two companies in realizing the expected impacts of EDI on key business performance indicators. Although the study focuses on EDI evaluation, there is no reason to indicate that the same approach cannot be employed for other E-Comm applications as well (e.g. WWW-based applications). Indeed, the principles of the approach and the methodology can be used for evaluating any type of inter-organizational Information System investment. E-Comm Investment Evaluation In order to evaluate their Information Technology investments (including E-Comm applications), most companies will use simple accounting techniques, notably cost-benefit analysis (CBA) or Return on Investment (ROI). However, when trying to apply any of these financial techniques for assessing E-Comm, one of the main problems will be the difficulty of assigning monetary estimates to the intangible, indirect, and strategic benefits typically associated with E-Comm. One way to overcome this problem of measurement is to employ some quantitative technique that will allow for studying the business processes affected by E-Comm. The underlying notion behind this argument is simple. E-Comm investments do not usually constitute an end in themselves, but are generally part of a wider business reorganization in which E-Comm plays a specific role (significant or otherwise). In such cases, it is important that the investment in the wider business change is evaluated and not the IT investment alone. Discrete-event Business Process Simulation (BPS) offers a theoretically attractive mechanism for modeling and studying complex phenomena in quantitative terms. Simulation of business processes constitutes one of the most widely used applications of operational research. Indeed, simulation models have been used in various practical BPM applications, even for E-Comm and multi-organizational modeling. Taking the idea of BPS a step further, we propose the design of business simulation models that will incorporate the effects of IT applications (such as E-Comm) in models and will allow for experimentation with and analysis of alternative investments. The research hypothesis tested in this paper is that “dynamic business process models can effectively support informed evaluation of E-Comm investments by providing decision-makers with quantitative data on the expected impact of a given investment on business performance. ”