What IT investments and gambling have in common

Don't let your CEO read this. A study of Fortune 1000 companies shows that investments in information technology carry higher risk than other capital investments.

The study is in Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS).

The authors find that IT investments are substantially riskier than ordinary capital investments, and that IT risk is associated with a substantial risk premium. This risk premium is driven in part by the lost option value of making irreversible capital investment decisions.

A key implication of the findings is that managers should apply a substantially higher discount rate when evaluating IT investments relative to other types of less risky capital investments.

Source: “Investigating the Risk–Return Relationship of Information Technology Investment: Firm-Level Empirical Analysis,” by Sanjeev Dewan, Charles Shi, and Vijay Gurbaxani of the University of California at Irvine.

Reminds me of a point that Michael Gentle makes in his new book "IT Success!," which argues that ROI calculations don't make sense for IT projects because they're simply different from other sorts of investments. "From a purely financial perspective, an IT project is arguably one of the worst investments you could make," Gentle says.

As IT investment manager John Spanenberg at ING Bank put it:

"In terms of gambling, first there is horse racing, then there is poker, and then comes software development."