Will the real IT cost please stand up? -How firms identify and allocate IT cost

Abstract: Background and problem: Recent research has raised several questions regarding IT costs and benefits that must be addressed (Grover & Kohli, 2012). Carr (2003) argues that firms have spent too much on IT and overestimated the strategic value of IT. Xue et al. (2012) explains the “productivity paradox” of IT investments. Furthermore, the investment made in IT puts increasing pressure on management to justify the outlay by quantifying the business value of IT (Mukhopadhyay, Kekre, & Kalathur, 1995). Barua et al. (1995) states that an important management question is whether the anticipated economic benefits of IT are being realized. Researchers explain that the business value of IT is gained from synergies through cost savings and more flexible business solutions (van den Hoven , 2006; Cho & Shaw, 2009) but research has also highlighted that it is hard for firms to keep control of the IT costs (Brynjolfsson & Hitt , 2000) and it becomes even harder to keep control (Dyche, 2012). Purpose: The purpose is to contribute to earlier research by answering the following research question: how do firms identify and allocate IT cost? Methodology: Qualitative research is conducted. An initial literature review was made to establish a conceptual model for the semi-structured interviews. The result was then analysed according to a content analysis approach. Small sequences of the data were analysed at a time to be able to get in depth analysis. Results and conclusions: There is a clear spread from no classifications of IT costs to several different categories corresponding to strategy and responsibility. There exist differences regarding the identification of direct IT costs throughout the firms, but the primary method of identification is made through invoices received. In traditional IT cost models indirect costs are often overlooked. Firms with an innovative IT cost model use several steps and methods for identifying IT costs to specific resources whereas traditional models only identifies such costs when there is an associated invoice. Allocation to cost centres involves several different important aspects to take into account and firms have incentives for increasing the IT cost transparency. A best practice model was developed to assist firms in their work. Suggestions for future research: Future research may focus on the wider extent of the process of identifying and allocating IT cost. The proposed framework for categorizing firms regarding the maturity level of their IT cost model may provide an avenue for future research to explain differences in IT cost controlling performance.