Using IT fashion investments to optimize an IT innovation portfolio’s risk and return

Abstract

Information technology (IT) fashions are new emerging IT innovations that are going through a hyped phase. Consequently they are on the rise and their proponents claim they are a fundamental improvement offering solutions to real or perceived problems with IT. Naturally, IT fashions are characterized by both high risk and high expected returns. Hitherto, suitable methodologies to quantify the impacts of IT fashions have been virtually absent. Decisions on IT fashion engagements (ITFE) are often made following a gut feeling or jumping on the bandwagon. Research within this area provides mainly empirical or argumentative results emphasizing the importance of academic engagement with IT fashions. To support business decisions on IT innovations and to demonstrate the importance of steady ITFE within an IT innovation portfolio, this paper aims at a model that provides the optimal share of ITFE within an IT innovation portfolio under risk/return aspects. Using a real-world example from the financial industry, we obtain first results and recommendations for the role of ITFE within an IT innovation portfolio. We find that engagement with risky IT fashions can be used not only to maximize the value of an IT innovation portfolio but even to minimize its overall risk.

Keywords:

• IT fashion
• IT innovation
• adoption of IT
• risk
• return
• optimization model
• portfolio theory
• IT portfolio management