Matakuliah
Tahun
: A0814/Investment Analysis
: 2009
A PROCESS PERSPECTIVE
Pertemuan 9-10
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.
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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
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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.
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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
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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 casebased 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.
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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.
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Process Approach
The IT Conversion
Process
IT Expenditure
The IT Use
Process
IT Assets
IT Management and
Concersion Activity
The Competitive
Process
IT Impact
Appropriate
Use
Organizational
Performance
Competitive Positioning
and Industry Dynamics
Process approach to IT organizational impact. Source: Soh and Markus (1995)
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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
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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 applesto 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.
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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.
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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.
.
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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.
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• 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.
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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?
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