2. A PROCESS PERSPECTIVE Pertemuan 9-10 Matakuliah: A0814/Investment Analysis Tahun: 2009

3. Theory Variance theory proposes that in measuring IT payoff we should look for conditions that are “necessare” and sufficient.” –Necessary conditions are those that are required for the payoff to happen. –Sufficient conditions are those that explain most IT variances in payoff. Bina Nusantara University 3

4. Theory The variance theory proposes that we examine the change, or variance, between net profit before the investment with the EDI implementation and training after the investment, after controlling other factors such as unit sales, seasonal adjustments, and general economic condition, which can also influence net profit Bina Nusantara University 4

5. Theory The process theory proposes that we examine how the investment is made and the sequence of events that lead to the change in net profit. Bina Nusantara University 5

6. Advantage of Variance and Process Approaches It is based in statistically rigorous methods to assess the impact. Provide the quantitative models for forecasting the impact of IT investment and the resulting payoff. –Quantitative models of the variance theory also advance theory by establishing a mathematical relationship between variables as well as the size of the affect Bina Nusantara University 6

7. Advantage of Variance and Process Approaches If the focus of the payoff examination is once company or a small number of organizations, the process approach is better suited to provide a detailed case- based analysis. Such analysis enables studying the context of the IT investment, the expectation for its success, and other, less obvious factors that might influence the outcome. Bina Nusantara University 7

8. Advantage of Variance and Process Approaches Another advantage of the process approach is seen in cases when there is little or no payoff observed. –A variance approach might indicate that there was no payoff from the investment but provides no further clues, whereas a process approach might possilby identify at what point in the process there was a misfit or misdirectionl Process approaches are also useful for understanding the causality linkage in IT spending. Bina Nusantara University 8

9. Process Approach Bina Nusantara University 9 IT ExpenditureIT AssetsIT Impact Organizational Performance The IT Conversion Process The IT Use Process The Competitive Process IT Management and Concersion Activity Appropriate Use Competitive Positioning and Industry Dynamics Process approach to IT organizational impact. Source: Soh and Markus (1995)

10. Process Approach : A Discussion Soh and Markus summarize the differences between the two approaches and build upon past frameworks that implicity propose using the process approach in measuring IT payoff. They suggest that IT expenditures combined with propoer management create IT assets, the appropriate use of which leacds to IT impacts. It is only after such IT impact are realized that one should expect payoff to the organization Bina Nusantara University 10

11. Process Approach : An Application Business Process Reenginering (BPR) –Does BPR benefit the organization? –Based on Kohli and Hoadley research : Companies defined BPR in different ways ranging from incremental improvement to radical change in the process, therefore, an apples- to apples comparison could not be made The expectations from BPR results varied significantly within organization, therefore, what was success in one organization could be considered a failure in another. The metrics for measurement varied vastly among processes and organizations, ranging from measuring customer satisfaction to retun on investment (ROI) to reduction in clycle time. Bina Nusantara University 11

12. Combining Process and Variance Approaches Tridas Mukhopadhyay and his colleagues at Carnegie Mellon University examined the payoff from implementing EDI at the Chrysler Corrporation –They concerned whehter inventory reduction was achieved at the cost of higher transportation costs between Chysler and its suppliers. They collected and analyzed premium freight in addition to regular transportation and inventory costs through the variance approach, thereby accounting for the true improvement. –The study estimated the dollar benefits of improved information exhanges between Chrysler and its suppliers, resulting from the use of EDI. –How Chrysler shared information with its suppliers to achieve reduced inventory levels. Bina Nusantara University 12

13. Combining Process and Variance Approaches Anitesh Barua and his colleagues at the University of Texas at Austin refer a similar approach at the two stage model trough which intermediate variables at the application level can be studied, prior to the impact at the firm level. –They suggest that the process approach in measuring IT payoff becomes more meaningful when combined with the complementary intermediate variable. –BPR is also one of the complementari initiatives facilitating IT payoff.. Bina Nusantara University 13

14. Barua research result –Altough proper IT investment is likely to pay off, its impact in enhanced when the investment is complemented with carefully planned BRP –BPR plyaed a role is not just amplication of IT’s impact on profitability but alos on the quality of the services –Barua argues that much of the literature has focused upon doing the BPR “right”, as opposed to doing the “right” BPR. The “right” BPR includes investing in and tracking the right intermediate variables such as customer lead times and satisfaction, and percentage of rework, which in turn will improve the bottom line. Bina Nusantara University 14

15. What is the benefit of learning about the process and variance theories in the IT payoff context? When would one approach be more appropriate? The benefit of understanding these approaches is to decide how to measure the payoff so that true benefits can be measured Measuring processes that show impact but do not benefit the organization can be a waste of time. Bina Nusantara University 15

16. IT Investment Process Quetions: What factors lead to the IT investment? What assumptions were used prior to the investment? What was the working relationship among the responsible people? Were measures of success outlined? What assets were created? What complementary changes in training, rewards, reporting, and so on, were made? What intermediate variables were affected? How were the intermediate variables linked to the organizational impact? Was there an impact at the intermediate level? Were there competitive factors that affected the impact at the organizational level? Bina Nusantara University 16