In this article, we first discuss the effects of ITenabled BPR on firm productivity by providing both empirical and theoretical evidence from the literature. We then highlight past experiences of several major firms in the United States with the IT-enabled BPR implementations. Finally, we comment on expected future trends in this area.
In this section, we provide a detailed survey on two main streams of related research from the literature: the work on the business value of IT and the more specialized literature on the value of IT-enabled BPR implementations.
Business Value of Information Technology
The roots of the literature on the business value of IT can be traced back to 1990’s when available data from 1980’s failed to show evidence of improved firm productivity from investments in IT in the manufacturing sector (Morrison & Berndt, 1990). This result, later called the “productivity paradox of IT,” was found to be even more pronounced in the service sector which had used over 80% of IT products during 1980’s (Roach, 1991). Researchers attempted to resolve the paradox by pointing out that the inability to show significant returns may be because of (1) measurement errors of outputs and inputs due to rapid price and quality changes in IT equipment, (2) the time necessary for learning and adjustment, and (3) mismanagement of IT resources by firms due to insufficient expertise to take advantage of using IT in traditional business environments.
Most researchers rejected this paradox by presenting empirical evidence that shows a positive relationship between IT investments and firm productivity (Bharadwaj, Bharadwaj & Konsynski, 1999; Brynjolfsson & Hitt, 1996; Kudyba & Diwan, 2002). Brynjolfsson, Malone, Gurbaxani, and Kambil (1994) showed that the effects of IT on firm productivity are substantially larger when measured over long time periods. This is because long-term returns represent the combined effects of related investments in organizational change.
Not all studies were able to show a clear payoff from IT investments. For example, Barua, Kriebel, and Mukhopadhyay (1995) found that even though IT spending improves intermediate variables of firm performance such as capacity utilization, inventory turnover, or relative price, it does not necessarily lead to improvements in higher-level productivity variables such as Return on Assets (RoA) or market share. Devaraj and Kohli (2003) emphasized the importance of actual usage in driving the impact of IT on firm performance. Consequently, researchers still debate on how the relationship between IT investment and firm productivity can be measured and analyzed (Anderson, Banker, & Ravindran, 2003).
Compared to the general effects of IT investments on productivity, however, much less is known about how value is actually created within the firm. In search for an answer, Kohli and Devaraj (2003) recommend that academic studies explicitly report which complementary changes in business practices have accompanied IT investments, including IT-enabled BPR and Enterprise Resource Planning (ERP). Such analyses are believed to isolate and identify the effectiveness of complementary changes leading to IT payoffs.
Key Terms in this Chapter
Information technology (IT): A very broad term that refers to the products, services, methods, inventions, and standards that are collectively used for producing, storing, and disseminating information. Most of the time, the term is used in its more restrictive form to describe only the tangible infrastructure comprising hardware and software.
Extensible Markup Language (XML): A simple yet powerful computer communication language developed in 1996 by the World Wide Web Consortium (W3C) as a more flexible markup language than Hypertext Markup Language (HTML) for creating Web pages. While HTML is limited to describing how data should be presented in the form of Web pages, XML can perform presentation, communication, and storage of data easily.
Outsourcing: In its most succinct form, outsourcing is defined as the process of hiring another person or organization to perform a service. In the Information Systems field, it refers to the practice of contracting computer center operations, telecommunications networks, or software applications development to external vendors. Goals of outsourcing are to decrease costs and free up management time by focusing on core competencies.
Change Management: A structured managerial approach to guide individuals, teams, and organizations in evolving from a current state to a desired state. Change management processes usually emerge from the needs caused by other enterprise-wide initiatives such as reengineering, mergers, or restructuring. The field of change management inherits many tools and methodologies from psychology, sociology, business, and engineering.
Enterprise Resource Planning (ERP): A complex information system that allows for organization-wide coordination and integration of key business processes. Essentially, ERP systems provide a single comprehensive information repository to collect operational data from various business processes in manufacturing, finance, accounting, human resources, sales, and marketing. Through the use of ERP systems, managers can access more precise and timely information for coordinating the operations of their organizations. Currently, SAP and Oracle are the biggest ERP software vendors in the world.
Risk Management: Refers to a continuous process of identifying, assessing, and reducing a risk factor to an acceptable level, and implementing the right mechanisms to maintain that level of risk. Established risk management strategies include avoiding the risk, reducing the negative effect of the risk, accepting some or all of the consequences of the risk, or transferring the risk to another party through insurance.
Productivity: A measure of a firm’s efficiency in converting inputs into outputs. Essentially, it refers to the rate at which outputs are produced per unit of input (labor and capital). Productivity can be considered as either minimizing the use of inputs for a given output level (e.g., reflecting efficient production processes that minimize waste) or maximizing output for a given input level (e.g., reflecting the use of resources in the production of goods and services that add the most value).