Role of It in an Organisation

INFORMATION TECHNOLOGY IMPACTS ON ORGANIZATIONS: ERP PROJECT CASE STUDIES BY: MAX ARO MASTER OF SCIENCE THESIS IN ACCOUNTING SWEDISH SCHOOL OF ECONOMICS AND BUSINESS ADMINISTRATION 2005 HANKEN – Swedish School of Economics and Business Administration Department: Accounting Author: Max Aro Type of Work: Master of Science Thesis Date: 22. 12. 2005 Title of Thesis: INFORMATION TECHNOLOGY IMPACTS ON ORGANIZATIONS: ERP PROJECT CASE STUDIES Abstract: Recognizing information technology (IT) impacts on organizations has proven to be difficult to perform. Several researches have engaged in performing the task.

Due to the complex nature of IT and business organizations, results have varied significantly. The topic requires further study as several organizations are currently implementing large scale IT systems for business performance support. The research objective is to distinguish IT impacts on the business process level, which correlates to organizational performance. The focus is on the set objectives for an IT business project and its outcomes. Factors such as goal setting and other project enabling factors are paid special attention to. Measurement procedures and detail are attended to.

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The above mentioned factors determine IT business success. The research is conducted utilizing the multiple case study method. An in-depth study permits thorough recognition of the study focus. The results distinguish automational, informational, and transformational IT impacts on organizations’ business processes. Important IT business success enabling factors include clear goal setting and change management. Business performance metrics are required to be utilized in the pre- and post-implementation phases for result comparisons in order to determine IT business success.

Keywords: information technology, enterprise resource planning systems, information technology impacts, objectives, enabling factors, measurement metrics, IT business success TABLE OF CONTENTS 1 INTRODUCTION ……………………………………………………………………………………………………. 1 1. 1 Research Objective………………………………………………………………………………………………. 2 1. 2 Structure …………………………………………………………………………………………………………….. 2 IMPACT OF INFORMATION TECHNOLOGY ON BUSINESS ……………………………… 5 2. 1 Productivity Paradox of Information Technology…………………………………………………….. 5 2. 2 Overview of the IT Field ………………………………………………………………………………………. 6 2. 3 Overview of the ERP Field …………………………………………………………………………………. 10 2. 3. 1 Reasons for ERP………………………………………………………………………………………….. 11 2. 3. Financial Impacts of ERP……………………………………………………………………………… 14 2. 3. 3 ERP Benefits ………………………………………………………………………………………………. 17 3 IT BUSINESS SUCCESS ……………………………………………………………………………………….. 19 3. 1 Measurement Metrics …………………………………………………………………………………………. 19 3. 2 Success during the ERP Lifecycle………………………………………………………………………… 1 3. 2. 1 Optimal Success ………………………………………………………………….. ……………………… 22 3. 3 Variables Enabling IT Implementation and Integration Success ………………………………. 24 3. 4 Business Process Reengineering ………………………………………………………………………….. 28 3. 5 Literature Analysis …………………………………………………………………………………………….. 30 4 RESEARCH DEVELOPMENT, METHOD AND DATA ………………………………………… 34 4. Research Development……………………………………………………………………………………….. 34 4. 2 Methodology …………………………………………………………………………………………………….. 36 4. 2. 1 Process Oriented Framework ………………………………………………………………………… 36 4. 2. 1. 1 Business Value Measurement …………………………………………………………………. 38 4. 2. 1. 2 IT Effects Increasing Business Value ………………………………………………………. 9 4. 2. 1. 3 Process Based Business Value Metrics …………………………………………………….. 40 4. 2. 2 Multiple Case Study …………………………………………………………………………………….. 41 4. 2. 2. 1 Case Study Research ……………………………………………………………………………… 41 4. 2. 2. 2 Criticism and Benefits ……………………………………………………………………………. 42 4. 2. 2. 3 A Valid Multiple Case Study Research…………………………………………………….. 43 4. Data Analysis ……………………………………………………………………………………………………. 45 4. 4 Theoretical and Empirical Linkage ………………………………………………………………………. 46 5 EMPIRICAL RESULTS ………………………………………………………………………………………… 48 5. 1 Company Descriptions ……………………………………………………………………………………….. 48 5. 1. 1 Company W………………………………………………………………………………………………… 9 5. 1. 2 Company X…………………………………………………………………………………………………. 49 5. 1. 3 Company Y…………………………………………………………………………………………………. 49 5. 2 Data Gathering ………………………………………………………………………………………………….. 50 5. 3 Case Results ……………………………………………………………………………………………………… 50 5. 3. Case W ………………………………………………………………………………………………………. 51 5. 3. 1. 1 IT Impacts on Business Processes……………………………………………………………. 55 5. 3. 1. 2 Factors Enabling IT Success …………………………………………………………………… 56 5. 3. 1. 3 Utilized Measurement Metrics ………………………………………………………………… 57 5. 3. 2 Case X ……………………………………………………………………………………………………….. 7 5. 3. 2. 1 IT Impacts on Business Processes……………………………………………………………. 61 5. 3. 2. 2 Factors Enabling IT Business Success ……………………………………………………… 63 5. 3. 2. 3 Utilized Measurement Metrics ………………………………………………………………… 63 5. 3. 3 Case Y ……………………………………………………………………………………………………….. 64 5. 3. 3. 1 IT Impacts on Business Processes……………………………………………………………. 67 5. 3. 3. Factors Enabling IT Business Success ……………………………………………………… 68 5. 3. 3. 3 Utilized Measurement Metrics ………………………………………………………………… 68 5. 4 Result Analysis………………………………………………………………………………………………….. 69 5. 4. 1 Business Performance Projects ……………………………………………………………………… 69 5. 4. 2 Objective Achievement ………………………………………………………………………………… 71 5. 4. Measurement Metrics …………………………………………………………………………………… 73 5. 4. 4 Enabling Factors………………………………………………………………………………………….. 77 5. 4. 4. 1 Change Management ……………………………………………………………………………… 78 5. 4. 4. 2 Clear Goal Setting …………………………………………………………………………………. 79 5. 4. 4. 3 Enabling Factors in Previous Research …………………………………………………….. 1 5. 5 Validity, Reliability, and Generalizibility ……………………………………………………………… 81 6 CONCLUSIONS…………………………………………………………………………………………………….. 84 6. 1 Main Findings……………………………………………………………………………………………………. 84 6. 2 Striking Issues …………………………………………………………………………………………………… 87 6. Contribution to the General Trusted Knowledge ……………………………………………………. 87 6. 4 Future Research…………………………………………………………………………………………………. 89 REFERENCES …………………………………………………………………………………………………………. 91 APPENDIXES ………………………………………………………………………………………………………….. 95 Appendix A: Interview

Questionnaire ……………………………………………………………………….. 95 LIST OF FIGURES Figure 1 Study Core ……………………………………………………………………………………………………… 3 Figure 2 Framework for Evaluating Research on the Benefits of IT Investments………………….. 8 Figure 3 IT Capabilities and Business Process Reengineering ………………………………………….. 29 Figure 4 A Process Oriented Model of IT Business Value ……………………………………………….. 6 Figure 5 Typology of Processes ……………………………………………………………………………………. 38 Figure 6 Change Management ……………………………………………………………………………………… 78 LIST OF TABLES Table 1 Reasons for Adopting Enterprise Systems ………………………………………………………….. 12 Table 2 IT Business Value Dimensions and Examples…………………………………………………….. 40 Table 3 IT Business Value Dimensions for Case W ………………………………………………………… 6 Table 4 IT Business Value Dimensions for Case X…………………………………………………………. 62 Table 5 IT Business Value Dimensions for Case Y…………………………………………………………. 67 Table 6 Set objectives compared to achieved outcomes …………………………………………………… 72 Table 7 Utilized Operational Measurement Metrics ………………………………………………………… 74 Table 8 Technical Measurement Metrics Utilized …………………………………………………………… 75

LIST OF APPENDIXES Appendix A: Interview Questionnaire …………………………………………………………………………… 95 1 1 INTRODUCTION Recognizing and measuring benefits of information technology has proven to be a complex task. However, it is a topical subject. The concept of information technology impacts on organizational performance and productivity has been a highly studied matter. Various results have illustrated the complexity of the task. Results have varied enormously on whether or not information technology (IT) provides organizational or financial benefits for companies.

As current development increases and expensive IT systems are spreading in organizations, the topic has reached even greater importance. Organizations’ desire to see proof of the benefits these systems provide. Successful IT implementations are essential for business accomplishment and continuance. The study utilizes the term IT business success for successful organizational business performance generated by IT. The current study focuses on the organizational process view and process improvements enabled by IT. It has been noted by several studies that IT does not directly benefit financial performance, only indirectly.

IT benefits are realized in increased efficiency in business processes creating improved business performance. IT impacts and its relationship towards performance has proven to be difficult to measure in quantifiable terms. The factors, which are missing in many studies, are the initial position of an organization and the objectives for the IT business project. In addition, firm-level strategy and management role have been disregarded in most cases. However, several studies recognize that these factors play an important role in the success of IT implementation and its effect on business performance.

IT business success comparisons among organizations are cumbersome to distinguish by disregarding initial organizational factors and most importantly objectives, as it is objectives which set the benchmark to aim for in an IT business project. Moreover, objectives define the outcome success. The current study concentrates on IT process impacts and its enabling business performance in consideration of goal setting and other organizational factors. 2 The study focal point is on large scale IT systems aimed to support business performance.

Features that the systems provide include business process efficiency, automation, information transparency, and process integration. In the current study, the IT concept includes enterprise resource planning (ERP) systems, which are widely implemented and utilized in the modern business world. Distinctions of the two are made further on in the study. However, both ERP and other IT systems are grouped together and referred to as IT in the study continuance. 1. 1 Research Objective The research objective is to recognize IT impacts on business processes taking into consideration an organization’s initial situation.

IT impacts on organizations and IT business success are not the same for each individual company, as IT strategy, objectives, and organizational resources and capabilities vary greatly. The initial status of an organization plays an important role in studying IT impacts and comparing IT success. IT business success is to be defined according to the achievement level of set goals for the new IT system and thus business performance for the organization. Defining success requires initial business performance measurement and comparisons of the results to the measured outcomes. Without comparisons, success is not feasible to define.

Moreover, comparing organizations’ IT success with different IT and business performance objectives is misleading, as outcomes may vary drastically. Comparisons of organizations with similar objectives shed light to their true IT business success. The following figure illustrates the study core. 3 IT Impacts Measurement Objectives Organization and Business Processes Business Performance Organizational Factors Figure 1 Study Core (Source: Author) The figure above demonstrates the main issues attended to in the current study. The main concern is IT impacts on the organization and business processes.

However, special attention is paid to IT business objectives as they define the aimed outcome for business performance. Furthermore, organizational factors enable and affect the IT integration outcome. Business performance is focused on by comparing its IT pre- and post-implementation performance transformations. Initial performance measurement metrics are utilized in the postimplementation phase in order to discover business performance alteration in detail. The current study is conducted as an in-depth study on the firm-level. A multiple case study methodology is executed in order to perform a comprehensive research.

The results are exploratory in nature distinguishing detailed empirical evidence. A business process framework is utilized in order to understand how IT impacts business processes. Furthermore, factors enabling IT impacts are scrutinized. These include most importantly objectives and other organizational factors. The measurement metrics utilized to discover objective achievements are paid special attention to. The general research questions to be answered by the study are the following. 4 1. How IT impacts business processes and why? 2. What are the enabling factors for IT impacts affecting business performance? . What measurement metrics are utilized to discover objective achievement? The research questions consider IT impacts on business processes and business performance as well as enabling factors and measurement procedures. Many studies have examined financial performance and productivity after an IT system has been implemented without considering other factors affecting business performance. Furthermore, it has been shown that IT has direct impacts on mainly processes. Therefore, financial performance indicators provide a rather vague picture about business performance improvements provided by IT.

Thus, the current study focuses on process impacts provided by IT while taking into consideration both objectives and organizational factors. 1. 2 Structure The study commences by introducing the subject matter. Previous research is described and current issues are presented. Terms are explained in detail. Secondly, the IT business success research is illustrated in the core of the current study. Thirdly, the methodology for the empirical research is presented and explained. The process framework utilized for the empirical research is illustrated. Fourthly, empirical results are presented and analyzed.

Finally, conclusions from the current study are drawn and suggestions for further research are explained. 5 2 IMPACT OF INFORMATION TECHNOLOGY ON BUSINESS The problem of valuing information technology has always been a great predicament. It is difficult to measure the impacts IT has on profit, productivity, organizations, and performance. Thus, it is complex to distinguish the organizational business value IT provides, making IT investment decisions extremely problematic. These are issues many business managers have been pondering for several years.

A conclusive answer is yet to be determined due to the complex nature of IT and the measurement difficulty of various IT attributes. 2. 1 Productivity Paradox of Information Technology Brynjolfsson (1993) built a basis for discussion on the negative correlation between IT and productivity. His research studied various sources of information on IT productivity. The common conclusion was that IT has no positive relationship to productivity or profit (Brynjolfsson, 1993). However, a window was left open for opposite results due to the limited amount of research in the area and the inadequate quality of previous research.

The fact that IT does not produce productivity or profit benefits raises many concerns as the opposite is quite widely assumed. Brynjolfsson (1993) presented four reasons for his findings. These reasons are commonly found in more recent research (Lee, 2001; Melville et al. , 2004, Poston and Grabski, 2001). The first reason is the research miscalculation of outputs and inputs. The IT benefits are commonly intangible in nature. They relate to matters such as increased quality, customer service, and increased processing efficiency, which are matters very difficult to measure in quantifiable terms and thus are not statistically reliable.

The second reason is IT benefits can take several years to provide evidence. The third reason for the productivity paradox is that IT may be beneficial for one organization but not the whole industry. In other perspectives, IT may be useful for example to the marketing department, 6 although not supporting the company as a whole. The fourth reason is mismanagement of IT. If the IT concepts and attributes are not understood and managed properly, the impact is not beneficial on corporate output (Brynjolfsson, 1993).

Not long after Brynjolfsson’s (1993) conclusion of the productivity paradox, together with Hitt he found evidence of significant IT contribution to firm level output (Brynjolfsson and Hitt, 1996). The explanation for the rather opposite results compared to the paper in 1993 was due to three reasons. Firstly, the examined sample was from a later time period than previous researches have been. Therefore, IT users have had time to adapt to new procedures and significantly more post-implementation data was available. Secondly, a different data sample was used and more accurate firm-level information was acquired.

Thirdly, the new sample consisted entirely of “Fortune 500” firms. Consequently, larger companies are more likely to illustrate positive impacts of IT spending. (Brynjolfsson and Hitt, 1996. ) Since the publishing of The Productivity Paradox of Information Technology (Brynjolfsson, 1993), several articles have been published on the subject matter with various results. Like Brynjolfsson and Hitt (1996), other research have found evidence of positive correlation between IT and organizational performance (Melville et al. , 2004) and others have not (Poston and Grabski, 2001).

Conflicting results have been produced because of several IT attributes measured and the lack of a universal model to distinguish IT business value. 2. 2 Overview of the IT Field The following section presents an overview on the research conducted on the subject matter concentrating mainly on IT. Both financial and performance based research is illustrated. Dehning and Richardson (2002) have acknowledged the large research array on the topic of return on investments from information technology. The aim in their study is to synthesize 7 previous research and provide a model for future evaluation of information technology.

The authors recognize that in general IT investments are measured in three ways: 1. Differences in the amount of money spent on IT (spending) 2. The type of IT purchased (strategy) 3. How IT assets are managed (management) However, Dehning and Richardson (2002) expand the IT investment valuing methods by including accounting and market measures of firm performance, process measures, and contextual factors in their study. Thus, the authors present the following framework for evaluating research on the current topic. 8 Impact of IT on the Firm Direct Effects IT Indirect Effects As Measured by Researchers 1 2 Process Measures e. . gross margin, inventory turnover Business Processes Firm Performance IT Measures: 1. Spending 2. Strategy 3. Management or Capability 3 Firm Performance Measures A. Market B. Accounting 4 Contextual Factors e. g. industry, size 5 Figure 2 Framework for Evaluating Research on the Benefits of IT Investments (Source: Dehning and Richardson, 2002) The framework by Dehning and Richardson (2002) illustrates IT effects on business performance and thus on overall organizational performance both directly and indirectly. Accordingly, the framework distinguishes various easures used to distinguish IT business impacts explained in the previous paragraph. Path 1 explains the relationship between the three general IT measures towards firm performance. Path 2 explains the relationship between the three general IT measures towards process measures, which act as intermediate measures towards overall firm performance, thus path 3. In addition, the authors illustrate contextual factors in their framework, which affect both process measures and firm performance measures. The following section takes a more thorough accounting based aspect towards paths 1 and 2, which affects path 3 as well. Dehning and Richardson (2002) have reviewed several studies examining paths 1 and 2 of the proposed framework. Financial indicators used in their study include return on assets (ROA), return on equity (ROE), return on sales (ROS), cost of goods sold (COGS), and selling, general and administrative costs (SG&A) to mention a few. The results they acquired are quite controversial. Some of the reviewed studies indicate positive relation with the above mentioned indicators and IT, and some do not. The puzzling matter is that opposite results may occur when using the same data but in different studies.

Furthermore, variances occur with different samples. The review confirms very few evidence of researches supporting one another. The discontinuance is striking when examining the studies. Dehning and Richardson (2002) conclude after revision of numerous studies that the positive relationship between IT spending and financial performance (path 1) is vague. However, evidence of productivity and output increases can be distinguished. Concerning studies based on the other two IT measures (strategy and management), not enough research has been completed for generalization.

However, evidence is seen that higher IT management and capability increases organizations competitiveness (Dehning and Richardson, 2002). In addition to rates of returns and pure financial figures, Brynjolfsson and Hitt (2000) have studied IT relationship to organizational transformation and business performance. Their arguments include that IT enables organizational investments such as business processes and work practices, and the investments lead to productivity increases by reducing costs and increasing outputs (Brynjolfsson and Hitt, 2000).

Furthermore, they argue that financial contributions may only be measured at an aggregate level. The authors conduct their study on the firm-level. The conclusions are the following. IT does not cause unproductive performance for an organization. Rather, IT enables economic growth. IT supports new business processes, skills, and organization structures. Brynjolfsson and Hitt (2000) argue that the above mentioned assets being of higher value than the initial IT investment. In other words, IT provides benefits of intangible nature, making it difficult to quantify and therefore distinguish 10 concretely.

However, it is estimated that the benefits are of significantly greater value than previously believed (Brynjolfsson and Hitt, 2000). Dedrick et al. (2003) have continued to study the subject matter further concentrating on economic performance. The authors evaluated 50 studies concentrating on IT and economic performance. Their study examines results on country, industry, and firm-level. For both country and industry level, evidence is recognized on productivity increases in relation to IT investments. Results are more varied on the firm-level. The reason for variance is due to the varying nature of organizations.

Resources among other vary between organizations leading to inequality in capturing all the benefits provided by IT. Furthermore, Dedrick et al. (2003) recognize that IT provides benefits in management practices such as decentralized decisionmaking, job training, and business process reengineering. 2. 3 Overview of the ERP Field The following section presents an overview on the research conducted concentrating mainly on ERP. Both financial and performance based research are illustrated. Enterprise resource planning (ERP) systems are included in the IT concept.

ERP systems are business process supporting systems. Common features include organization wide integration, information transparency, and process automation (Chand et al. , 2005). Several organizations are currently implementing and utilizing ERP systems in order to support their business. With the evolvement of ERP systems, the interest in the impact these systems have on organizational performance has risen. Billions of dollars have been spent on these systems worldwide (Kalling, 2003). Yet, conclusive results on the true benefits are still to be proven.

Managers provide various reasons for ERP implementations. These include improved productivity, reduced costs, greater operational efficiency, enhanced customer relationship 11 management, and better supply chain management (Beard and Sumner, 2004). The same issues as with IT productivity rest upon ERP systems. The matters of acknowledging the above mentioned benefits and distinguishing the effects ERP poses on profits or organizational performance are complex in nature. Consequently, the purpose of the following section is to find support for these issues by examining the results of previous research.

The ERP field is rather contemporary. Numerous researches have been conducted on ERP implementation. A significantly fewer amount of research have been performed on the realized ERP benefits. This is primarily due to the fact that it may require up to five years before benefits of ERP projects are realized (Poston and Grabski, 2001). As these systems are new, this type of data is not seemingly available yet. However, this research does review researches on financial and value-adding benefits and cost reductions of ERP and its impacts on organizational performance. 2. 3. 1 Reasons for ERP

In theory ERP systems should provide several benefits for an organization. The ERP benefits promised by vendors attract mangers to consider implementing and integrating an ERP system into the organization and strategy. Markus and Tanis (1999: ch 10) have divided ERP benefits into technical and business benefits. 12 Reasons for Adopting Enterprise Systems Small Companies/ Simple Structures Technical reasons Large Companies/ Complex Structures Most small/simple company reasons plus • Consolidate multiple different systems of the same type (e. g. , general ledger packages) • • • • • • • • Business reasons • • • • • • •

Solve Y2K and similar problems Integrate applications crossfunctionally Replace hard-to-maintain interfaces Reduce software maintenance burden through outsourcing Eliminate redundant data entry and concomitant errors and difficulty analyzing data Improve IT architecture Ease technology capacity constraints Decrease computer operating costs Accommodate business growth Acquire multilanguage and multicurrency IT support Improve informal and/or inefficient business processes Clean up data and records through standardization Reduce business operating and administrative expenses Reduce inventory carrying costs and stockouts Eliminate delays and errors in filling customers’ orders for merged businesses

Most small/simple company reasons plus • Provide integrated IT support • Standardize different numbering, naming, and coding schemes • Standardize procedures across different locations • Present a single face to the customer • Acquire worldwide “available to promise” capability • Streamline financial consolidations • Improve companywide decision support Table 1 Reasons for Adopting Enterprise Systems (Source: Markus and Tanis, 1999: ch 10) According to the table by Markus and Tanis (1999: ch 10) many reasons for adopting ERP systems are due to integration both technically and business wise. In technical matters integration occurs in the sense of having a single system, architecture, and interface. It allows more ease to the user, as it is not necessary to work with several different systems.

Moreover, a single ERP system is simpler to maintain once running properly, as no new integration is necessary and the technology is the same all over the organization. In business matters integration occurs as orders, transactions and inventory may be managed and traced more 13 easily, data and processes are standardized, and information is acquired in various forms as needed allowing improved decision making. To conclude the benefits and reasons for ERP, the key issue is integration. Organizations may benefit from ERP both technically and strategically. Furthermore, organizations may be tempted to implement an ERP system for only a few reasons, after considering the strategical necessities and objectives. The driver towards ERP systems must benefit the organization in some matter.

The reasons mentioned in Table 1 stimulate organizations towards ERP in hope for functioning ease and improvements in business performance. In considering ERP implementation projects Markus and Tanis (1999: ch 10) recognize the reasons for adopting an ERP system should be linked to project outcomes. In other words, as an organization defines the objectives for an ERP business project, they should include and aim for the issues mentioned in Table 1. Setting business goals an ERP system cannot support leads to failure in project outcomes. Goal setting is further discussed in coming sections. Markus and Tanis (1999: ch 10) recognize reasons for organizations not to acquire an ERP system. The three main reasons are high costs, risk of losing ompetitive advantage, and resistance to change (Markus and Tanis, 1999: ch 10). The above mentioned reasons for not implementing ERP are rather rational except the risk of losing competitive advantage. Gaining competitive advantage is a reason for ERP, therefore the risk of losing it is somewhat interesting. However, ERP systems are complex and successful implementations are realized far less than unsuccessful ones (Legare, 2002). Therefore, organizations must carefully analyze the risks of implementing an ERP system. As noted before, a successful ERP implementation provides organizations with several improvements, but an unsuccessful one may cause an organization to lose business in the worst case.

Therefore caution is required when considering these complex systems. 14 2. 3. 2 Financial Impacts of ERP Stakeholders are keen to learn the financial impacts of investments in their organization. Especial attention is paid on costly investments such as an ERP system. Good examples of ERP financial impact researches have been conducted by Poston and Grabski (2001) and Hunton et al. (2003). The following section presents the main findings of the two researches. Poston and Grabski (2001) investigated the impact of ERP system implementation on organization performance. They examined 50 companies adopting ERP over a three year postimplementation phase.

Additionally, the authors concentrated on three major areas, which they presumed would illustrate ERP effects on economical performance. These include internal coordination costs, decision information costs, and external coordination costs (Poston and Grabski, 2001). All of them are included with more detailed cost categories. Poston and Grabski (2001) formulate four hypotheses related to the cost areas mentioned in the previous paragraph. All of the hypotheses state that the following ratios or performance indicators have improved after ERP implementation: • • • • Selling, general and administrative costs/Revenues Cost of Goods Sold/Revenues Residual Income Number of employees/Revenue

The results demonstrate a limited and insignificant positive correlation with ERP and firm performance. Neither the first nor the third hypotheses are supported with the results. Poston and Grabski (2001) found no significant evidence of selling, general and administrative costs divided by revenues or residual income would decrease. The relationship to cost of goods sold divided by revenues was slightly supported. A significant decrease was discovered on the third year of research. The ratio of staff number to revenues showed a significant decrease for all three years of the examined time phase. Thus, it was the only hypothesis fully supported. 15 The results are somewhat concerning.

Companies are investing millions of dollars on ERP systems, which consequently fail to deliver any financial benefits. Poston and Grabski (2001) identify a few reasons for the outcome of their research. Firstly, as mentioned before, the ERP benefits on an organization may realize only after four to five years after the implementation phase. As the time frame in this research was only three years, it might have not been sufficient. Secondly, Poston and Grabski (2001) suggest that the true value of ERP systems are realized only after add-on packages such as customer relationship management systems are utilized. Apparently the research does not include features such as customer relationship management (CRM).

Thirdly, it is identified that many companies reengineer their business processes while implementing ERP making it difficult to compare previous performance with ERP post-implementation performance (Poston and Grabski, 2001). Therefore, referring to the first limitation, a longer time frame might be sufficient in ERP financial impact research. Fourthly, macroeconomic or contextual factors were not considered in this study (Poston and Grabski, 2001). Thus, companies of the similar size and industry, which have not implemented ERP, should have been included. Finally, organizational control or initial objectives were not managed (Poston and Grabski, 2001).

Factors affecting organizational change should be distinguished and measured in order to identify the true success of the ERP implementation. It could be that all of the 50 companies failed in ERP implementation with little financial impacts. However, it cannot be proven as the organizational factors are unknown. Hunton et al. (2003) recognize a sixth reason for the results acquired by Poston and Grabski (2001). It is noted that a research in 1996 discovered that financial gains encountered with ERP adoption is passed through to customers with lower prices. This notion is supported by various other researches Hunton et al. (2003) had examined. Hunton et al. 2003) aim to extend the study by Poston and Grabski (2001) and examine ERP benefits from a wider and different perspective. The objective of the study is to demonstrate whether or not the financial performance of a non ERP adopter is significantly lower than one of an ERP adopter. The study uses four different measures of financial performance. The first 16 one is the return on assets (ROA), which is a common measure of performance and widely used in research. The two second measures are parts of ROA. These are return on sales (ROS) and asset turnover (ATO). The last performance indicator is return on investment (ROI). The study by Hunton et al. 2003) examines 60 companies from which it was possible to acquire performance information before and after the ERP implementation for a sufficient amount of years. The companies were chosen from a previous study and information was acquired from Compustat. The sample includes in addition companies, which have not implemented ERP in order to compare and contrast results. The results by Hunton et al. (2003) indicate similar results as with the Poston and Grabski (2001) study. No significant difference in ROA is recognized between pre- and postimplementation performance of ERP companies. The difference among the two studies is illustrated in that non-ERP adopting companies show a great decline in ROA.

Similar results were acquired with the other financial performance indicators (ROI, ROS, and ATO). However, it is noted that the decline in financial performance figures for non ERP adopting companies is significant only for ROA and ROI. Apparently the study by Hunton et al. (2003) does not shed light to the ERP paradox and their impact on organizational financial performance. Thus, it could be possible that these complex systems that companies spend millions of dollars on are implemented only to sustain an already acquired market position and not improve overall financial performance. The research contributions by Poston and Grabski (2001) and Hunton et al. (2003) seem to reflect upon this theme.

However, various other researches have identified other types of ERP benefits (Laughlin, 1999; Plotkin, 1999; Mabert et al. , 2001), but recognized that these benefits do not occur until ERP systems have been successfully implemented and integrated into business processes (Markus et al. , 2001). The following section examines these ERP benefits. 17 2. 3. 3 ERP Benefits ERP provides other benefits than financial ones. These are benefits, which are more related to efficiency and process flow. These benefits are characterized as value-adding benefits (Beard and Sumner, 2004), which may be divided into two dimensions of technical and human (Markus and Tanis, 1999: ch 10).

Value-adding benefits are difficult to measure and thus research utilizing accounting measures on value-adding benefits does not exist. However, as the following section illustrates, value-adding benefits have been examined. In technical aspects, the value-adding benefits are all related to problem removal due to legacy systems (Beard and Sumner, 2004). With an ERP system all systems are integrated with each other and information is stored in a database, which can be accessed by authorized personnel. This eliminates the problems of various different systems not connected together and endless search of vital data. The ERP key benefits managers have stated are most often related to performance measures such as quality, timeliness, and efficiency (Beretta, 2002).

In more precise matters these performance measures are due to improvements in inventory accuracy, decrease in time cycles in various processes, faster and cross-functional information flows, language sharing, improved financial management and more important decision-making (Mabert et al. , 2001; Beretta, 2002). This is all related to the essential point of the ERP system: business processes are standardized and integrated throughout the organization. Therefore, business processes are efficient, costs are reduced, opportunities for sales increase, quality and customer service improves, and results are measured continuously (Beard and Sumner, 2004). Plotkin (1999) has noted ERP productivity benefits as well.

ERP systems include the ability to calculate new prices instantly, to make more accurate forecasting, to remove process bottlenecks, and identify duplicate processes. These numerous ERP attributes provide companies advantages. Although not all of the value-adding benefits relate to higher profits, competitive advantages may be gained. For example with supply chain integration a company may gain competitive advantage over its competitors although it might not immediately lead to financial gains (Markus and 18 Tanis, 1999: ch 10). Therefore, one might state that value-adding benefits create business performance efficiency and competitive advantage. 19 3 IT BUSINESS SUCCESS

The objectives of an IT system project are introducing, implementing, and integrating an IT system into an organization in order to benefit from them in some matter. The objectives are part of the overall organizational strategy. In order to measure IT success, the initial and intermediate objectives must be reflected upon the IT system outcome and the impacts it offers (Mooney et al. , 1996). Due to the IT benefit nature, the outcome and impacts are best recognized and are more meaningful at the local performance level and its effect on overall performance (Mooney et al. , 1996; Beretta, 2002). Attention must be paid towards IT systems, the organization, and their interaction (Mooney et al. 1996).

With this perspective the IT role in organizational performance improvements may be recognized. This is important, as it has been difficult to distinguish organizational aspects IT impacts on. The main reason for the IT impact recognition difficulties are due to the functional view of organizations. Most company managers and studies view organizations as several functional units (Beretta, 2002). In light of a functional view it is complex to understand the IT influence on processes and activities. The IT business value is more straightforward to distinguish with a process view. Furthermore, business processes link value generating strategies with actions and decisions (Beretta, 2002).

Organizational change is restricted when an organization is viewed as several functional units and an IT system is implemented module by module (Beretta, 2002). Process reengineering and organizational change are key issues in realizing IT benefits (Mooney et al. , 1996; Lee, 2004). 3. 1 Measurement Metrics Numerous studies have pondered about whether IT success has been achieved or not after a new system has been implemented. Success however depends on numerous factors such as stakeholder perspectives, measurement units utilized, initial resources, initial and intermediate 20 goals to mention a few. In ERP implementation projects success is determined n the outcome of the project or the outcome of the business results achieved (Markus and Tanis, 1999: ch 10). When measuring project success, the measurement units are project costs and time. In order for a project to be successful, it has to be completed within the set schedule and budget. On the other hand, if the project success is measured according to the achieved business results, organizational performance in respect to set business goals is compared. (Markus and Tanis, 1999: ch 10. ) The measurement problem however remains, as it is not clear which metrics should be utilized. Moreover, the nature of ERP benefits is both tangible and intangible.

Lucid figures are complex to provide, as grasping intangible and indirect benefits is cumbersome. Furthermore, Markus and Tanis (1999: ch 10) recognize the complex nature of ERP systems and projects, and the necessity to measure success in several points in time. In order to solve the prevailing ERP measurement problems Markus and Tanis (1999: ch 10) suggest a balanced scorecard outlook. The balanced scorecard measurement orientation allows success metrics to be measured from different dimensions and in several points in time. The measurement dimensions include financial, technical, and human proportions (Markus and Tanis, 1999: ch 10). Their suggestion for measurement metrics includes the following. • • •

Project metrics – performance compared to set schedule, budget and functionality Early operational metrics – business and ERP metrics relating to process efficiency and quality Longer-Term Business Results – organization performance at different points in time when normal business operation is attained (Markus and Tanis, 1999: ch 10) The measurement view by Markus and Tanis (1999: ch 10) is highly conclusive. It takes into consideration the whole time scale during which ERP has an impact on an organization. Longer-term business results take into consideration the notion by Brynjolfsson (1993) and Poston and Grabski (2001) that ERP benefits are realized only after a long period of time (4-5 years) after the implementation phase. Numerous studies have measured ERP success early in 21 the post-implementation realizing insignificant or negative correlation with performance.

The metrics suggested by Markus and Tanis (1999: ch 10) resolve this measurement flaw. Moreover, both project and business result units are included in the metrics. The suggestion by Markus and Tanis (1999: ch 10) considers important aspects in measuring realized ERP impacts providing a very convincing measurement layout. Chand et al. (2005) have taken a thorough approach in considering ERP impacts from a balanced scorecard viewpoint. They have created a framework, named ERP scorecard, in order to distinguish the various impact types ERP provides an organization. The framework is based on the IT process impact framework by Zuboff (1985) later utilized by Mooney et al. (1996).

It concentrates on automational, informational, and transformational IT impacts. Chand et al. (2005) extend the framework into a 12 cell table by introducing process, customer, finance, and learning and innovation dimensions in substitute for operational and management dimensions presented in previous research. The authors conclude that often the original three dimensions are initial organizational objectives for an IT business project. However, in order to achieve them, the four introduced dimensions require acknowledgement. It is recognized that new dimensions create the link in achieving automation, information, and transformation (Chad et al. , 2005).

However, the authors acknowledge the immaturity in the framework, yet its strong potential when developed further. It is acknowledged that ERP may have even more impact dimensions on an organization. Furthermore, it is not clearly distinguished, which dimensions should be included in the ERP scorecard. 3. 2 Success during the ERP Lifecycle Markus et al. (2000) propose three stages of the ERP lifecycle and different success attributes, which may be achieved during each phase. The three phases are the following: 22 1. Project phase (Implementation) 2. Shakedown phase (‘Going live’) 3. Onward and Upward phase Markus et al. (2000) present three success factors for each phase to be achieved.

Especially the goals to be achieved mentioned in the shakedown phase indicate that organizations are not expected to experience at this stage yet, as one of the goals is stated as follows: Length of time before key performance indicators achieve ’normal’ or expected levels. This phrase clearly indicates that performance is expected to be lower than ‘normal’ after initial implementation, and during the shakedown phase problems are to be solved in order to achieve expected performance as soon as possible. Furthermore, Markus et al. (2000) conclude that ERP benefits are realized only after successful implementation and business process integration. In the three phases proposed, benefits would occur in the onward and upward phase. 3. 2. 1 Optimal Success

Due to ERP system complexity, macroeconomic issues relating to the ERP impact measurement must be considered. ERP systems provide benefits for organizations. Organization size and function determine the different types and scopes the benefits are realized in. Therefore, Markus et al. (2000) propose the optimal success criterion. This criterion stated the best possible outcome an organization could achieve. The optimal success criterion can be different for different types or sizes of companies thus achieving different benefit types and in various scopes as mentioned above. The criterion acts as a benchmark for each individual organization’s achievement level. It defines the realistic goals an organization may aim for. 23

Comparing success and failure in IT projects among companies requires the acknowledgement of the initial situation of each individual organization. Objectives, resources, and market situation may all lead to a different outcome for the IT project. Though an organization may have the same resources, capabilities and a similar IT project, the project success may vary enormously as the business objectives might be different. Markus and Tanis (1999: ch 10) recognize an example in their study where this phenomenon occurs. Two organizations with similar improvements in inventory carrying costs differed in their success metrics. The objective for the first organization was to replace its legacy systems and for the second organization to increase market share.

The first organization succeeded in achieving its goals but the second one did not. (Markus and Tanis, 1999: ch 10. ) Moreover, organizations of different scope may have different objectives and capabilities to perform an IT project. Most often small organizations concentrate on replacing legacy systems or implementing only few modules of a large IT packet. Thus, it would be incorrect to compare a small organization with a large SAP implementing organization. The resources, capabilities and most probably objectives for the two IT project implementations would be quite different as well as the success the organizations consider achieving from them.

Therefore, it is crucial to concentrate on the initial factors mentioned above as they have a significant impact on the IT project outcome. Only after considering the initial circumstances for an organization and organizations clustered in respect to these factors may IT project success levels be compared among organizations. The initial circumstances define the optimal success organizations may achieve and according to what organizational factors should be clustered when compared. However, business evolvement defines the optimal success nature as dynamic (Markus and Tanis, 1999: ch 10). Circumstances may change at each stage during the IT project and therefore organizational factors as well.

Thus, success measurement and comparison should be performed at different IT project stages while taking into consideration organizational circumstances. 24 3. 3 Variables Enabling IT Implementation and Integration Success Though numerous studies have been performed on IT success and IT impacts, very few studies consider crucial variables enabling IT implementation, integration, and measured results. As discussed earlier, every organization cannot gain the same benefits out of IT. Much depends on the market position, competition, industry, objectives, management capabilities, and organizational resources to name a few on IT benefits produced. Kohli and Devaraj (2003) have investigated how different structural variables affect the outcome of IT impact results.

The following illustrates the important enabling factors in measuring IT benefits. Firstly, industry is an important variable in how beneficial IT is for an organization. It is shown that non-profit sectors gain more IT benefits compared to financial and manufacturing sectors. Secondly, studies utilizing firm-level data obtain more positive results than secondary sources. Thirdly, it is noted that profitability measures are not the best measure for IT payoff. It is suggested that productivity-based measures are better suited for IT payoff measurement as it is closely related to processes and less likely to be affected by external variables (Kohli and Devaraj, 2003).

Careful attention must be paid towards the results by Kohli and Devaraj (2003) as their study aims to distinguish variables, which are positively correlated to beneficial IT impacts. However, the case might be that these variables are not the ones shedding true light towards the IT payoff measurement problem. On the other hand, industry, primary data, and process measures are all variables, which common sense advises to utilize when conducting a study of this type. In light of common sense and previous literature it may concluded that these variables indeed have a crucial effect on the IT payoff measurement. Kearns and Lederer (2004) examined at the industrial level how environmental uncertainty and information intensity affect IT focus and IT utilization.

The results by Kearns and Lederer (2004) indicate that industries with high information intensity and environmental uncertainty show significant positive association with IT focus and IT utilization for gaining competitive advantage. In other words, industries with high competition and pressure for rapid strategic 25 decisions illustrate positive association for employing IT to extent of resources available and developing systems to organizational requirements. Moreover, Kearns and Lederer (2004) suggest that major investments in IT for organizations in moderately competitive and information intense industries might be inappropriate, as generally performance in these cases has decreased.

From the results by Kearns and Lederer (2004) one may consider that IT employment and its development extent are greatly affected by industrial conditions. Organizations in highly competitive and information intense industries are greatly motivated to implement and integrate a widespread efficient system into their organization and strategy. The motivation rises from the organizations requirements to acquire information rapidly and follow standardized efficient business processes. In other words, the organizations are dependent on their IT system and therefore are motivated to integrate and implement an efficiently functioning and information providing system.

As the system is functioning accordingly with the organizational strategy, organizations in competitive and information intense industries utilize the system for gaining competitive advantage. In addition to industrial factors, organizational factors have a great enabling force on IT implementation and integration success. Legare (2002) emphasizes creativity as an important factor in various levels inside the organization. According to Legare (2002) successful IT implementation and integration requires organizational change or process reengineering, which is enforced by creativity. Creativity should be recognized in various forms and levels employing more efficient process visions as. Legare (2002) concludes that successful information system enabled process reengineering is only possible when creativity is current.

Furthermore, risk-taking performance reward structures, interorganizational communication exchanges, and alignment of organizational structures with horizontal processes are key factors in enabling IT success driving organizational culture (Legare, 2002). 26 Legare (2002) emphasizes creativity as an important factor in IT implementation and business reengineering. More precisely Legare (2002) is referring to change management, which includes creativity as a motivating factor for personnel to become involved in the IT implementation project. As an IT project concerns the whole organization, motivating the organization is vital for the project success. Motivation creates commitment to the project and its goals.

Management has great responsibility in communicating goals, motivating and involving personnel, and committing them in the project. The IT project lays on a strong basis only as strong and successful change management is achieved. Somers and Nelson (2001) have studied critical success factors (CSF’s) within an organization during the IT implementation phase. The results could be applied to any project. Some important factors include top management support, clear goals and objectives, project management, and communication. Though these results are significant, their importance is often neglected and left uncontrolled in both academic studies and in practice.

The conclusive study by Somers and Nelson (2001) viewing over 100 companies, distinguish critical success factors or success enabling factors during an IT implementation phase as an issue clearly influencing an IT business project outcome and profitability. From a managerial perspective the authors emphasize the planning stage in an implementation project. Acknowledging organization requirements and setting objectives and choosing the best suitable software are critical issues. Building a solid foundation with careful planning enables strong commitment and involvement inside an organization. Furthermore, project team competence and employee training and communication are matters of high priority.

Somers and Nelson (2001) conclude that in order for the above mentioned factors to be taken into consideration and enabled, top management must be involved and committed to the project. Though the authors focus on the implementation phase and the current study on the post-implementation phase, these factors are of great importance as the implementation has a direct linkage to the gained outcomes in an IT business project. Akkermans and van Helden (2002) have continued the study by Somers and Nelson (2001) on critical success factors. The authors present a case study to recognize the critical success 27 factors enabling ERP project performance.

The focus is on the top ten critical success factors presented by Somers and Nelson (2001). The conclusions are the following. Firstly, the top ten critical success factors have a strong effect on the success or failure of an ERP implementation project. Secondly, the critical success factors are fundamentally related to each other. They reinforce each other in a positive or negative manner. Thirdly, communication and collaboration throughout the organization is essential for a successful implementation. The following factors have a strong influence on collaboration and communication. • • • • • Top management Project team Project management Project champion Package vendor (Source: Akkermans and van Helden, 2002)

In case the above mentioned factors are not performing in manner yielding to success, reinforcing changes in presence or attitudes is necessary in order to create an environment yielding to a successful outcome (Akkermans and van Helden, 2002). A crucial matter, which should be considered thoroughly as a variable in IT impact studies, is IT integration into strategy and the IT objectives determined by management. As King and Xia conclude, IT value is created through its integration into strategy and its enabling features in processes. According to their study, specific attention must be paid towards the improved process efficiency enabled by IT and their impacts on firm performance (King and Xia). This view is in accordance with Mooney et al. (1996) and Dehning and Richardson (2002).

The above implications may be driven down to management capability. Firstly, management must understand the organizational needs and requirements from both inside and outside the organization. Secondly, management must have the knowledge of the available technology and its possible empowerment. Thirdly and most important, management must have the capability to integrate organizational needs and requirements with the available technology. In other 28 words management must have the competence to integrate new technology with organizational strategy creating IT value for the organization. It consists not only of supporting IT integration but involving management in the process.

Management involvement and support has been identified by several studies as a key issue in successful IT implementation, integration and development (Kearns and Lederer, 2004; Legare, 2002; Somers and Nelson, 2001; Markus and Tanis, 1999: ch 10; King and Xia; Kalling, 2003; Beard and Sumner, 2004). After management has set the objective for the IT implementation and integration, risks must be evaluated and plans set. The goals and plans must be communicated throughout the organization. Communication must occur both from and to management in other to activate personnel involvement. Furthermore management must be up to date on changes in plans and the project proceeding. 3. 4 Business Process Reengineering Business process reengineering and IT system implementation has been stated to be dependant of each other for successful IT project outcome. As rganization processes are recognized to be inefficient, timely or costly, the need for a new business process design is often integrated into strategy. At the planning stage managers view IT capabilities as a resolving issue for improved business processes. However, it is also acknowledged that IT in itself does not design or enable improved processes, but managers must design them according to IT capabilities and organization strategy. The following figure illustrates the relationship between IT capabilities and business process reengineering. 29 How can IT support business processes? IT Capabilities Business Process Redesign How can business processes be transformed using IT? Figure 3 IT Capabilities and Business Process Reengineering (Source: Davenport and Short, 1990)

Davenport and Short (1990) illustrate that IT should support new strategically reengineered business process when taking into consideration IT capabilities as well. Furthermore, managers should view organizations as a set of cross-organizational processes rather than individual functions (Davenport and Short, 1990). The process view enables the organization to perform as a single unit instead of individual function maximizing organizational performance. The key issue is to keep in mind strategical objectives in designing new

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