The Impact of Organizational Slack and Lag Time on Economic Productivity: The Case of ERP Systems

The Impact of Organizational Slack and Lag Time on Economic Productivity: The Case of ERP Systems

Terry W. Mason (Department of Accounting, Kansas State University, Manhattan, KS, USA) and John J. Morris (Department of Accounting, Kansas State University, Manhattan, KS, USA)
Copyright: © 2017 |Pages: 15
DOI: 10.4018/IJEIS.2017070103
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Abstract

Much like research on the productivity paradox of the 1980s, empirical research has not provided a clear association between investments in enterprise resource planning (ERP) systems and improved productivity, even though these systems were designed, developed, and marketed as productivity improvement tools. This paper explores the relationship between organizational slack and productivity improvements resulting from investments in ERP systems. The authors provide support for the proposition that during the period of time surrounding implementation, firms build organizational slack; and following implementation organizational slack is absorbed and productivity increases. Furthermore, the authors find that even though manufacturing firms drive the decrease in organizational slack during the post-ERP period, the magnitude of the increase in productivity is significantly larger for non-manufacturing firms.
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1. Introduction

Enterprise resource planning (ERP) systems erupted as one of the more significant IT investments of the past twenty years. This industry is projected to grow to over $40 billion by 2020 (Allied Market Research, 2015), and is listed as third out of fifty-one global technologies and applications in a 2011-12 survey of senior IT executives from over 750 organizations located in the United State, Europe, Asia, and Latin American (Luftman et al., 2013). While these systems were marketed as tools to improve productivity by integrating business processes across functional areas, research on ERP systems generally found no association between spending on ERP systems and improved productivity. This paper examines this relationship further by exploring the concept of organizational slack.

Organizational slack (Cyert and March, 1963; 1992), provides an operational model to explore the lag effect offered by Brynjolfsson (1993) as a possible explanation for the productivity paradox. Many ERP projects require a major commitment of both capital and human resources over a time period that can span months or even years depending on the size of the organization and the number of modules implemented. During that time, the behavior of the firm can change significantly, as organizations often reengineer their business processes to meet the needs of the new system.

This paper explores the proposition that implementation of an ERP system initially leads to an increase in organizational slack rather than an increase in productivity; and that once the implementation process is completed, this organizational slack is absorbed, leading then to increases in productivity. To test this proposition, data was collected from LexisNexis, resulting in 125 sample firms announcing the implementation of ERP systems. Both the slack and economic productivity measures were regressed on the decision to implement an ERP system. The results provide strong support for the proposition that during implementation, slack increases; and that in the time period following implementation slack decreases while economic productivity increases.

These results suggest that Brynjolfsson’s (1993) time lag explanation for the productivity paradox of the 1980s may also apply to the ERP paradox of the 1990s. In other words, firms do realize improved productivity as a result of investments in ERP systems. However, the improvement lags behind due to the behavior of the firm during the implementation process, which in turn creates organizational slack.

The remainder of this paper is organized as follows: Section 2 develops the theory and hypothesis, Section 3 presents the research design and methodology, Section 4 presents the results, and Section 5 provides a discussion of the results and final conclusions.

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