ISM 6121

1
ISM 6121

• Justifying IT Investments

2
Productivity Paradox(Roach, 1987)

• Delivered computing power in the U.S. has
  increased by more than two orders of magnitude
  since 1970, yet productivity, especially in the
  service sector, seems to have stagnated
  (Brynjolfsson, 1993)
• Returns to IT investments are solidly positive
  some have spent vast sums on IT with little
  benefit, while others have spent similar amounts
  with tremendous success (Brynjolfsson and Hitt,
  1998)

3
Technology Issues for Financial Executives (Just
released!)

• A small minority, about 10 , believed they were
  getting a high return on their technology
  investments.
• 33 technology was a source of competitive
  advantage but also a core competency of the
  organization.
• 33 technology was neither a source of
  competitive advantage, nor a core competency.
• 33 viewed IT as a competitive advantage, but
  didnt find it a core competency.

4
Productivity

• Amount of Output Produced per Unit of Input
• Old Economy
• Output has been measured in terms of Quantity
• Input has been measured in terms of Labor Hours
• New Economy
• Output should be measured in terms of Value Added
• Input should include quality of equipment,
  training, supplier relationships, investment in
  new processes

5
Level of Observation

• Aggregate IT Spending
• Economy Level
• Industry Level
• Findings No Productivity Improvements
• Aggregate IT Spending
• Firm Level
• Mixed Results
• Disaggregate IT Spending (Rai 1996, 1997)
• Software
• Hardware
• Budgets, etc.
• Mixed Results
• Application Spending
• Mixed Results

6
Can IT decrease productivity

• Your work will expand according to the time
  allotted to do it (Grauer, my entire UG
  edcuation!)

7
Possible Paradox Explanations

• Mis- measured / Wrong Definitions
• Benefits might be redistributed
• Intra- or Inter- Organizationally
• Passed on to Consumers
• IT does not exist in a Vacuum
• IT spending ALONE may not create Productivity or
  other Performance gains
• Costs and/or Benefits are Hidden from analysis
• Sociotechnical and Technical Systems are not
  Jointly Optimized

8
Encouraging Signs

• Brynjolfsson and Hitt (1998)
• Firm Level Data

9
Firm Level Analysis

• Increased Sample Size
• Allowed for proxy measurements of Intangibles
• Revenue Increase
• Results
• Spent on IT -gt Revenue

10
Lets Analyze the Results

• Revenue Increase is NOT just a result of IT
  investment
• IT does not exist in a vacuum
• Training
• Process Re-Design
• Organizational Changes
• 50 of IT Effect was firm specific
• Due to Unique Firm Characteristics
• Some have it
• Some Dont

11
Organizational Factors

• Costly Time Consuming
• Is NO Instant Gratification
• Returns are not just from IT but
• Systems of IT and Organizational changes
• in IT invested, in Organizational changes

12
Summary

• IT Linkage with Firm Productivity
• Computer Investment is Coupled with
• New Strategies
• New Business Processes
• New Organizations

13
Mixed Encouragement

• Rai, Patnayakuni Patnayakuni (1997)
• A look at Disaggregated IT Investments

14
Measures of IT Investment

• Overall IT
• Capital Stock
• IT Budget
• Client/Server
• IT Infrastructure
• Hardware
• Software
• Telecommunications
• IS Staff

15
3 Measures of Productivity

• Firm Output (traditional measure)
• Labor Expense
• Total Sales
• Business Results (ROA ROE)
• Intermediate Performance
• Labor Productivity
• Labor Expense / Total Employees
• Administrative Productivity
• Labor Expense / IT Budget

16
Results

• All IT Investment Types were related to Firm
  Output (Labor Expense Total Sales)
• Only IT Capital and Client/Server were related
  to Business Performance (ROA)
• Cumulative Investments may be reaching critical
  mass
• Knowledge of use of IT is catching up
• Overall most IT Investments were related with
  Labor Productivity
• Thus IT reduces Labor Costs and leaves workers
  more productive
• Overall Most IT Investments were related to
  Administrative Productivity
• Bad Managers or Bad Decision Making are not
  helped by IT
• Automated Dysfunctional Management Processes
• Reduce Management Flexibility to Change
• Key
• Redesign Management Processes in Conjunction with
  IT Investment

17
Wrong Definition

• Thatcher and Oliver (2001)
• Productivity has been confused with
• Production Efficiency
• Improving Product Quality
• Increasing Productivity

18
Production Efficiency

• IT enables production of a given product or
  service (of given quality) with fewer resources
  (Thatcher and Oliver, 2001)

19
Quality Improvements

• IT leads to the creation of new products, or new
  features for existing products, which directly
  increase human desire to consume those products
  (Thatcher and Oliver, 2001)

20
Productivity Improvements

• IT leads to an increase in the ratio of output
  value to its related input value (Thatcher and
  Oliver, 2001)

21
IT improving Productivity Scenario

• Some Definitions (over simplified)
• Demand Price Quality
• Firm chooses PQ to maximize profits
• Cost Indirect Costs Direct Costs
• Indirect Costs (Fixed)
• e.g. Leases, acquiring, implementing, maintaining
  IT
• Direct Costs
• Design and Development Costs (Fixed)
• RD, prototyping, usability testing
• Manufacturing Costs (Fixed)
• Variable Costs (e.g. labor)
• To Produce a product requires
• Fixed costs supporting general business
• Cost to design Develop product at some quality
  level
• Per unit cost to manufacture to meet demand

22
Costs and Production Capability

• Technology Investments which decrease
• Design Development Costs
• Unit Manufacturing Costs
• Enhance Production Capability
• Technology Investments which decrease
• Overhead / Business Support Activities
• No Effect on Production Capability

23
More Definitions

• Revenue Price Demand
• Moderated by Market size, Price Sensitivity and
  Quality Sensitivity
• Profit Revenue - Cost
• Productivity Revenue / Cost

24
Production Efficiency

• Automation of Overhead (Indirect Fixed Cost)
• Payroll System
• Increases Profits
• No Effect on Price or Quality (i.e. Demand)

25
Production Efficiency

• Automation of Design and Development (Direct
  Fixed Cost)
• CASE Tool
• Increases Quality leads to Increased Demand
• Causes Increased Price creating Increased Revenue
• Increased Demand leads to Increased Production
  Costs
• Finally if RgtC (assumed), Increased Profits

26
Production Efficiency

• Improvement in MFG or Service (Direct Variable
  Cost)
• On-line Support (reduced variable cost)
• Increases Quality leads to Increased Demand
• Causes Increased Price creating Increased Revenue
• Increased Demand leads to Increased Production
  Costs
• Finally if RgtC (assumed), Increased Profits

27
Technology Investment Productivity

• Automation of Overhead (Fixed Cost)
• Since Revenue Increases and Costs decrease
• Productivity Gain (Efficiency Productivity)
• Automation of Design and Development (Direct
  Fixed Cost)
• Improvement in MFG or Service (Direct Variable
  Cost)
• Productivity Gain, if Overhead are Large
  (relative to market size), otherwise
• Productivity Loss

28
Summary

• Greater Production Efficiency from Decrease in
  Overhead leads to Lower Costs, Unchanged Revenue,
  therefore Increased Productivity
• Greater Production Efficiency from Decrease in
  Development or Manufacturing Costs, Leads to
  Greater Quality (Higher Demand), Increased Price,
  Increased Revenue and Greater Production Costs.
• If Revenue Increase is gt Production Costs
  Productivity Gain
• If Revenue Increase is lt Production Costs
  Productivity Decrease
• Depends of Size of Firms Fixed Overhead Costs
  relative to Market Size

29
Another New Measure

• Lin and Shao (2000)
• Examining Productive Efficiency

30
Production Efficiency

• Production Function
• Maximum Quantity of Output based on
• Combination of Outputs
• Production Efficiency
• Distance between Actual and Maximum

31
Productivity Growth

• PG Efficiency Change Technical Change
• Increase in PG Does NOT Necessarily mean
• Increase in Efficiency
• PG could be because of Technical Change
• PG could Decline While Efficiency Increases
• Technical Change is Mismanaged

32
Results

• More Spent on IT
• More Productive Efficiency
• Gap Between Actual and Maximum is Reduced

33
IT and Top Management

• Tallon, Kraemer and Gurbaxani (2000)
• Examines IT investment from a process perspective
  and IT value from Executive Perceptions

34
Process Perspective
Management Practices
Strategic Intent for IT
Focused Goals
Firm Performance
Value Chain
Unfocused Goals
35
Executive Perceptions

• Instead of Actual Performance/Production Measures
• Use Executive Estimates
• IT Value Creation

36
Corporate IT Goals
High
O PE R A T I O N A L E F E C T I V N E S S
Low
High
Strategic Positioning
37
Hypothesis

• Executives with more focused goals will have
  perceive gt IT business value
• Higher levels of strategic alignment gt IT
  business value

38
Results H1

• Across all Value Chain Activities
• Process Planning and Support
• Supplier Relations
• Production Operations
• Product/Service Enhancement
• Sales Marketing
• Customer Relations
• Dual Focus gt Market gt Operational gt Unfocused
• Perceived IT value

39
Results H2

• Significant Positive Correlation between
• Strategic Alignment
• IT Value (for all Value Chain Activities)

40
Summary

• IT Execs have different Goals
• Is this surprising after last weeks readings?
• Level of Perceived IT Payoffs is Directly Related
  to these Goals
• Value Chain Activity most related to Goals are
  expected to have the Highest IT Payoff
• e.g. Market Oriented Customer Relations
• Operations Oriented ProductionOps
• Firms that used Evaluation techniques and
  post-implementation reviews had higher perceived
  IT Payoffs

41
Social Costs and Benefits

• Ryan and Harrison (2000)
• Examines the hidden costs that might explain
  the Productivity Paradox.

42
Sociotechnical Subsystem

• Employees and their
• Knowledge
• Skills
• Interrelationships
• Attitudes
• Needs

43
Technological Subsystem

• Devices
• Tools
• Techniques

44
Optimization

• To maximize an Organizational System
• Sociotechnical and Technical Interdependency must
  be recognized
• Each Subsystem must be designed to fit the
  requirements of the other
• Small Problems can have big negative Results
• Intervention in one system WILL impact the other
  system
• Steve Alter()

45
IT Valuation

• Usually includes TANGIBLE Technological Subsystem
  C/B
• Needs to include often INTANGIBLE Sociotechnical
  Subsystem C/B

46
Research Question

• Are there IT Types that maybe more or less
  impacted by Sociotechnical factors?
• Does the degree of process change from the IT
  have differential impacts related to
  Sociotechnical factors?

47
Innovation Types

• IT Innovation/Investment Type
• Type I Information Core
• support of IS Work
• DBMS or CASE Tools
• Type II Administrative Core
• Business Functions
• Payroll
• Type III Technical Core
• Embedded in IT for producing Goods/Services
• CAD/CAM, ERP

48
Degree of Process Change

• None/Low
• Incremental
• Some/Moderate
• Incremental
• High/Great Degree
• Radical
• Extreme/Total
• Radical

49
Interview Results

• Social Subsystem Benefits Identified
• Productivity Improvement (69)
• Few attempted to Quantify this (15)
• Quality (25)
• Intangible Benefit vs. Cost of Quality or
  Customer Satisfaction indices
• Improved Decision-making ability (17)
• Impossible to Quantify
• Labor Savings
• Tangible Benefits usually included in
  Cost-Benefit analysis

50
Interview Results

• Social Subsystem Costs Identified
• Training Costs (59)
• Vendor, Materials, External Purchases
• Time Lost (generally not considered We had no
  idea what it would be)
• Change Management (17)
• Planning, Overseeing, Communicating to E-Us
• Learning Curve / Lag (14)
• Amount of Time Until
• rather than Lost Productivity

51
What was Missing? or Managerial Issues

• Increased Role Conflict
• Greater Employee Empowerment
• Better Communication
• Enhanced Interaction
• Employees feelings of Loss of Power/Control
• Employee Morale / Job Dissatisfaction

52
Research Question Results

• A clear pattern emerged showing an
  Interdependency between
• IT Type and Amount of Change
• Greater Weight is given to Social Subsystem C/B
  as we move from Type I to Type III
• Variation within Type is Explained by Degree of
  Process Change
• Greater Process Change, Greater Weight given to
  Social Subsystem C/B

53
Other Findings

• Positive Relationship Between IT and Productivity
• Large Variation Amongst Firms
• Some Spend a lot and get a little
• Some Spend a little and get a lot
• Greatest Benefits Realized when IT Investment is
  done in Conjunction with Other Investments
• New Strategy
• New Business Process
• New Organizations