Redefining IT Performance and IT Effectiveness

Performance refers

to the ability to acquire resources necessary for organizational

survival. Organizational

performance results from a combination of industry or environmental

conditions, the strategy that an organization’s decision makers

choose, and the structure in place to support the strategy. Performance is a proxy measure

that indicates legitimacy by resource suppliers and perceived

organizational effectiveness. Performance measurement consists of an assessment tool

to measure effectiveness, provides information to

managers for decision-making, and helps them to analyze

organizational efficiency at the operative and strategic levels.

Performance issues relate

to the disciplines of general systems theory elaborated by Ludwig von

Bertalanffy in the 1920s.

This theory included various disciplines such as behavioral

science (sociology), economics (management accounting), information

technology, mathematics (operations research), and organization

theory. These core

disciplines for agency and management theories form a suitable

umbrella for HR management, public administration, and management

control systems. The literature on management philosophies provides

an examination of these disciplines with an emphasis on corporate

culture and power, Taylor’s scientific management, Mayo’s humanistic

management, or quality

management.

From a

performance standpoint, three major components relate to management

and agency theories: analysis, evaluation, and measures. Several methods facilitate a

performance analysis: expert systems, data mining, factor analysis,

geographic information systems, ratio analysis, statistical

regression, structural equation modeling, and productivity theory

(data envelopment analysis, total factor productivity, and stochastic

frontier analysis). Whereas

performance measures result from various frameworks such as the

balanced scorecard and performance pyramid, performance evaluation

includes strategic management issues that cover the alignment between

incentive means of knowledge workers and corporate strategic goals

and processes.

Early

traditional frameworks of organizational performance such as Du

Pont’s pyramid of financial measures (1920s) were a single all-

encompassing approach. Du Pont’s framework for example, only focuses

on financial performance. In contrast, emerging tools integrate the

complexity and dynamic aspects of organizations by considering

various dimensions of performance.

In this line of reasoning, performance measurement covers

processes, system dynamics, and strategies that characterize

business.

Even though the overall performance of the information

systems function seems to be difficult to conceptualize and measure,

two approaches can be distinguished in research into the business

value of IT investments: variance and process approaches. The

variance approach focuses on the relationship between IT investments

and organizational performance by considering financial measures such

as lower costs, higher revenues, and improved market share. The variance approach examines

the “what” question: What is the relationship between IT investments

and organizational performance? In contrast, the process approach

focuses on the “how” question: How do IT investments improve

organizational performance?

The process

approach combines the returns

on investments with process and organizational changes. The process approach

analyzes the impact of IT on organizations from efficiency, effectiveness, and strategic IT alignment

standpoints. IT efficiency

is the IS function highlighting the relationship between IT

expenditures (or IS capabilities) and IT assets (or IS function

outputs such as systems performance, information effectiveness, and

services performance). IS

capabilities are inputs such as hardware, software, human skills, and

management processes that serve to translate IT expenditures into IT

assets. Researchers use

various metrics to assess IT efficiency: availability of systems and

applications, number of help desk tickets, mean time between failure,

and license usage. These

metrics comment on efficiency of systems, applications, and networks,

unlike other performance variables that focus on engineering

performance.

Prior scholars pointed out the limitation of IT

efficiency measurements to assess IT effectiveness. The influence of IT on organizations moves

gradually from an efficiency production factor toward the

maximization of the business value of IT investments (or IT

effectiveness).

Enterprises generally invest on IT for two reasons: (a) to

capture information to support corporate processes, and (b) to enable

business change. These scholars advised that the

contribution of IT is to be specific (by supporting defined business

processes) and generic (by enabling undefined business change). They added that the measurement models of the IT

business value should differ from performance models but close to

capability models.

Within the context of strategic IT planning, some

of the prior research attempted to investigate the linkages between

IT investment projects and the associated business value using

selected financial measures related to performance and

productivity. Some other

studies attempted to measure the business impact of IT in organizations by

market expansion, cost avoidance, customer value, efficiency, and

profitability. Some other research compared two

analytical models (linear and nonlinear) and two conceptual

(contingency-based and resource-centered) frameworks to assess the

business value of IT using both financial objectives (expense and

revenue) and perceived measures (firm’s perceived

profitability).

Drawing upon the theoretical

input-output model, Chang and King (2005) developed an instrument

that explored the role of the IS function on business process

effectiveness and organizational performance. Silvius (2006) proposed

a multivariate value framework to assess the impact of IT on an

organization. Yeniyurt (2003) proposed a performance measurement

framework for global corporations drawing upon methods involving both

financial and non-financial variables such as Skandia navigator,

economic value added, and balanced scorecard. Yeniyurt’s non-

financial variables for the organizational performance and

effectiveness construct are customer satisfaction, innovation,

internal processes, and organizational culture and climate.

The research on IT

project planning process can be subdivided into strategic and

operational perspectives. Some research on IT project planning

explored the strategic aspects and the identification of projects

that match with corporate objectives. Some other studies focused on

the analysis and selection of a project from several capital

expenditures’ alternatives (or capital budgeting of IT investments).

The traditional capital budget methods are based on the calculation

of the cash flows input and outputs. Seven traditional budgeting

models are used to evaluate capital projects: (a) payback method, (b)

return on investment, (c) cost-benefit ratio, (d) profitability

index, (e) net present value, (f) economic value added, and (g)

internal rate of return.

These

traditional capital budget methods are limited to valuate IT projects

because of (a) their inability to cope with risk, uncertainty, and

flexibility, (b) they overlook the cost to train users, the learning

curve to adapt to new technologies, and the socials subsystems costs

and benefits of the IT projects, and (c) their inability to quantify

intangible benefits such as improving knowledge, customer service, or

decision making. These shortcomings are especially clear with IT

investments done under conditions of uncertainty in today’s global

economy which requires dynamic capabilities and strategic

flexibility. The real option approach have been proposed as an

alternative to the deterministic capital budget methodologies and the

extension of the financial option theory to the options on real

(non-financial) assets.

Some

References:

Chang, J. C.,

& King, W. R. (2005). Measuring the performance of information

systems: A functional scorecard. Journal of Management Information Systems, 22(1), 85-

115.

Silvius, A. J. G. (2006). Does ROI Matter? Insights into the

True Business Value of IT. Electronic Journal of Information Systems Evaluation,

9(2), 93-104.

Yeniyurt, S. (2003). A

literature review and integrative performance measurement framework

for multinational companies. Marketing Intelligence & Planning, 21(3), 134-142.