1.
Introduction
Achieving business value from
Information Technology (IT) and e-Commerce investment at the same time
is probably one of the more common organisational concerns of (CEOs)
today (Lubbe and Pather, 2002). IT and e-Commerce are the growing areas
of investment in most organisations; in fact many organisations will not
be able to function without IT or digital commerce. The role of IT has
also been redefined by some organisations to include attempts to embark
on e-Commerce operations. The role of IT in organisations is not merely
a tool for processing communication, but a strategic weapon that can
thus affect an organisation’s competitive position (Weill and Olson,
1989; Lubbe and Pather, 2002).
Some of the variables that will
be discussed include IT, e-Commerce, investment and achieving value from
IT investment. The contribution of this article is significant as it
will contribute to the understanding of managers that the impact of
e-Commerce may change the way organisations handle their total IT
investment. The article will, however, review only South African
organisations and aims to improve on the topic’s understanding off IT
and digital investment by managers and academics.
2.
Review of past research
Mason et al. (1997) argue
that Information Systems (IS)
as a discipline has not yet developed a tradition of historical
research. This historical analysis by them broadens the understanding of
the processes and designs during which IT is introduced into
organisations and the forces the shape IT investment uses. They argue
that a dominant design for this shape could be manifested in several
ways; a new organisational infrastructure, new functionality, new
products, new services, new production functions or new cost structures.
The problem with historical analysis is to discover why some
organisations led their respective industries in the use, design and
application of IT, and why other organisations, having spent millions of
dollars achieved modest success rates.
Hu and Plant (2001) argue that
the promise of increased advantage was the driving force behind
large-scale investment in IT since the 1970’s. Current debate continues
amongst managers and academics with reference to the measurable benefits
of IT investment. Return on Investment (ROI) and other performance
measures in academic literature, indicates conflicting empirical
findings. They also submit that it would be convincing to infer
causality if IT investment in the preceding years is significantly
correlated to the performance of the organisation in the subsequent
year. Hu and Plant (2001) used the Granger causality model with three
samples of organisations and discovered that there was no increase in
the level of financial performance. Rather, it is the other way round –
increased financial performance lead to increased IT investment.
Li and Johnstone (2002) argue
that a manager can use the framework within which the appropriateness of
using real options theory in strategic IT investment by systematically
justifies the use of IT. They classify IT costs and provide some insight
about the relationship between technology standardisation and IT
investment decisions. Research by Lubbe and Pather (2002) also reflects
that managers of organisations are concerned whether their organisation
is achieving IT and e-Commerce value from their organisation’s IT
investment (Figure 1).
Figure 1: Number of
top managers and IS managers concerned about achieving value from IT and
e-Commerce
Bui et al. (2003) argue
that technology and societal changes are moving the global market
rapidly towards a new economic order rooted in e-Commerce. They
investigate some factors including macro economy, ability to invest,
access to skilled workforce, cost of living and pricing. The authors
also state that many organisations face a chronic shortage of resources
(including funding). Management should be aware that e-Business is part
of the complex and general economic structure and the success of
organisations depend on that structure as well as the optimum allocation
of resources.
Dykman (2003) notes that
Information Systems (IS) represents a significant investment for many
organisations. Managers need to know that the decision made to spend
money on IS should be analysed like any other major purchase. She argues
that general management often gives in to the expert power of the
technologists, both internal and external to the organisation to invest
in IS. The ROI on an IS acquisition may not be quite as simple or
straightforward as other capital expenditure. She, however, states that
it is still possible to do the financial analysis for the investment.
Dykman (2003) argues that it
would be of great benefit if there were a general recipe that could
assist to ensure success. Ideally all the strategies (e-Commerce, IT and
organisation), including the framing of all investments, could be
aligned around business requirements, rather than on technology
requirements. She further argues that managers should be measured
against the accuracy of their financial projections for IS investment.
Every investment should be justified with benefit and expense
commitments. A Dykman (2003) note that managers should aim to do good
job assessing benefits associated in proposed IS investment in tangible
and financial terms. Executives demand this when evaluating the
approval, or denial, of any other capital expenditure. IS investment
decisions are business decisions and therefore not technology decisions.
Moodley (2003) argues that
e-Commerce technologies are becoming increasingly important to South
African apparel producers as they are integrated into global value
chains. Moodley (2003) suggests that the empirical evidence emanating
appears that e-Commerce is still in its infancy but there is potential
for growth. The problem is to ensure that there is sufficient financial
support to sustain success of e-Commerce. Moodley (2003) argues that
South African organisations should increase their investment in
e-Commerce.
Quayle (2003) notes that the
awareness and level of implementation of e-Business in European Small
and Medium Enterprises (SME)’s differ in some aspects from larger
organisations. He argues that the issues of highest importance are
leadership, time to market, marketing and financial management and a
narrow vision of business survival. He further states that small firm’s
perception of quality, price, production reliability, service
reliability and capability to provide support are normal buyer’s
demands. Nowhere is the aspect of value from IT investments reflected.
The idea is that the cost to execute transactions be reduced. He states
that developing e-Business expertise is essential to sustain the
competitive advantage. SME’s must be aware that some aspects such as
financial management could impact on their future plans.
It is also argued by Santhanam
and Hartono (2003) that the resource-based view can be used to
investigate the impact of IT investment on organisational performance. A
strong IT capability can support improved organisational performance.
Furthermore, their results indicate that organisations with superior IT
capability, exhibit current and sustained organisational performance.
They note however, that previous performance must be taken into account
while doing these calculations.
Kearns (2004) states that while
IT investment has the potential of providing competitive advantage,
actual returns on such investment vary widely and a majority of CEO’s
rank past IT investment disappointing. There are many methods for
investment evaluation, but traditional methods do not adequately account
for the intangible benefits that characterises strategic investments.
They also lack other features of portfolio selection. He describes a
model based on the analytic hierarchy process that could possibly
overcome the deficiencies associated with traditional approaches to
economic evaluation of IT investment. This approach reflects both on
tangible and intangible methods and links IT investment to business
strategies.
3.
The research questions and research
methodology
3.1
Research questions
3.1.1
The relationship between profitability
(operating expense ratio) and IT investment (IT ratio)
Lubbe and Pather (2002) noted
that a relationship exists between profitability and IT expenditures in
South African e-Commerce organisations. Quayle (2003) notes that no
relationship exists between organisational performance and the relative
portion of resources allocated to IT. He argues that the measure of
performance will not capture all factors that contribute to the
organisation. Using case studies, Weill and Olson (1989) reveal the
importance of converting IT investment into productive inputs with
different levels of effectiveness, depending on the organisation. There
is also empirical evidence that the use of IT results in lower cost (Santhanam
and Hartono, 2003). The first research question can thus be formulated
as:
Is there a negative correlation
between IT investment and profitability in e-Commerce intense
organisations?
3.1.2
The relationship between profitability
(financial ratios) and Computerisation Index (CI)
Weill and Olson (1989) argue that
two key factors are emerging: determining the return on investments (ROI)
on IT is difficult; and investment in IT alone is not sufficient.
Dykman (2003) suggests that IT investment reduces the cost of revenue
generation. IT investment intensity is the level of infiltration of IT
into the organisation. Santhanam and Hartono (2003) suggest that
evidence indicates that organisational performance is linked to the
level of IT investment intensity. This research question specifically
compares the overall performance of the organisation with the CI index
(another measure of how the organisation computerised their operations)
and not the IT Expense (ITEX) ratio as used previously in Question1.
The second research question can
thus be stated as (based on the study of Santhanam and Hartono (2003)):
Is there a positive correlation
between IT investment intensity and organisational profitability?
3.1.3
The relationship between profitability
(return on assets and return on equity) and IT/e-Commerce strategic
management integration with organisational strategic management
(business management processes)
The third research question is
formulated as:
Is there a positive correlation
between IT investment and strategic management of IT and e-Commerce
operations?
3.2
Research methodology
The author had decided to use
qualitative research because it is designed to help him understand the
people and the social and cultural contexts within which the
organisation operates. To establish the best design it was decided to
collect the data needed to answer the research questions discussed above
using a structured questionnaire. The population consisted of all IT
intensive organisations that have just started an e-Commerce operation
during the period 2001/2002. From this list a number of companies were
selected who indicated their willingness to cooperate with the
investigation. They were mailed a copy of the questionnaire with a
request to include financial statements for the period covered
(2001/2002).
The completed questionnaires were
analysed to extract the data. The CI was calculated from data collected
using the questionnaires. Financial Ratios were calculated using data
from the statements and the questionnaires. Data showing the
relationships between the CI and measure of financial performance were
plotted on graphs using Microsoft Excel.
3.3
Limitations of the study
It is acknowledged that there are
other factors could affect the research but the author has decided to
limit the study to the papers that were available to him. It was assumed
that the organisational financial and other figures, as rendered, were
accurate and complete where they could be verified with audit/working
papers. Additionally it was assumed that the respondents completing the
questionnaire did so accurately. However, a possible source of error
lies in the respondents’ interpretation of the terminology used in the
questionnaire, although it was pre-tested.
Furthermore, some data given by
the respondents could not be verified fully, owing to its sensitivity.
Also, it was not possible to check the method of accounting and it is
acknowledged that this could have influenced some financial ratios.
However, given these limitations, it was still possible to use the
models to answer the research questions since these sources of error did
not differ from those evident in other studies (e.g. Lubbe and Pather
(2002) and Weill and Olson (1989)). It was also possible to interpret
the results based on the data obtained as no statistical technique could
show them to be unreliable.
4.
The results
4.1
Information Systems in South Africa in context
South Africa is a medium sized
country, 471,000 square miles at the southern tip of the African
continent with a population of some 45 million people. Relative to the
rest of Africa, South Africa is substantially industrialised. South
Africa is a wealthy country from an industrial and agricultural point of
view and computers have been actively in use in South African business,
education and industry since the early 1960s when both IBM and ICL
opened offices in Johannesburg. Today South Africa employs computers in
every aspect of industry, business and government as well as having a
relatively high percentage of home computers among the middle class. All
the major vendors are present and there is considerable interest in
hi-tech.
The business and industrial
sectors in South Africa are as sophisticated as anywhere in the world in
the use of information systems. South Africa leads the world in deep
level mining and supports this activity extensively with computer
systems. The country also has a substantial financial services sector
that has won international recognition for its excellence in information
technology. For example the First National Bank (FNB) of South Africa
was named one of the world's top 100 computer users by ComputerWorld
Magazine in May 1995 and in July 1996 the same bank also won the
prestigious Smithsonian Institute prize for the innovative application
of biometrics in their Information Technology.
4.2
Discussion of the results
In order to test the validity of
aspects of the questionnaire respondents may have had difficulty
understanding when answering, a pilot study was conducted using some of
the companies in the sample. This was done to ensure that it was
possible to collect all data required for the ratios. Ambiguities were
removed in order to reflect a concise research instrument.
4.2.1
Research question 1: The relationship
between profitability (operating expense ratio) and IT investment (IT
ratio)
The data needed for this section
was gathered from financial returns provided by the organisations.
Figure 2 illustrates a profile of both, the turnover and operating
expenses for the organisations in the sample (2001/2002). Turnover
exceeds the operating expenses in 2001 as can be seen from Figure 2.
However, in 2002, the effects of a low growth rate in South Africa
manifests in the turnover slumping to a low. One organisation spent
additional resources to expand their operations affecting the overall
picture.
Figure 2:
Turnover versus Operating Expense
Operating Expense Ratio (OPEX)
and Information Technology expense ratio (ITEX)
were the two ratios used in this instance. These were calculated and
presented in Table 1.
Table
1: Operating Expense
Ratios (OPEX) and IT Expense Ratios (ITEX)
|
|
2001 |
2002 |
|
Co |
OPEX |
ITEX |
OPEX |
ITEX |
|
1 |
0.152 |
0.119 |
0.157 |
0.128 |
|
2 |
0.128 |
0.037 |
0.148 |
0.053 |
|
3 |
0.162 |
0.117 |
0.180 |
0.145 |
|
4 |
0.257 |
0.160 |
0.427 |
0.180 |
|
5 |
0.172 |
0.483 |
0.252 |
0.820 |
|
6 |
0.422 |
0.139 |
0.374 |
0.232 |
|
7 |
0.783 |
0.118 |
0.718 |
0.099 |
|
8 |
0.916 |
0.002 |
0.933 |
0.003 |
|
9 |
0.991 |
0.002 |
0.963 |
0.001 |
|
10 |
0.987 |
0.003 |
0.980 |
0.003 |
|
11 |
1.009 |
0.062 |
0.860 |
0.082 |
|
12 |
0.093 |
0.001 |
0.963 |
0.000 |
These ratios were calculated and
averaged over the period under investigation, to negate the effects of
seasonal and abnormal influences as indicated. Finally the organisations
were sorted in ascending order using the OPEX ratio as a primary key in
and grouped in quartiles (Table 2). This was done partly to disguise the
data and to neutralise the effect of seasonal and other influences.
Table
2: Quartile
groupings for organisations (2001/2002)
|
Quartile |
OPEX |
ITEX |
|
I |
0.155 |
0.100 |
|
II |
0.317 |
0.336 |
|
III |
0.734 |
0.037 |
|
IV |
0.965 |
0.076 |
As stated before, Table 2 is the
result of sorting the organisations (OPEX as the primary key) in
ascending order and grouped together in quartiles; the first three
companies were used for quartile I, the second three for quartile II,
etc. Although all the above-mentioned operations were used to negate the
effects of seasonal and economic fluctuations, the results of a loss by
one organisation could be seen in the second quartile. There is a
negative correlation of 0.5425 between the Operating expense ratio and
the IT ratio. This provides evidence that there is a link between the
two ratios and supports statements by authors such as Weill and Olson
(1989) and Lubbe and Pather (2002).
4.2.2
Research question 2: The relationship
between profitability (financial ratios) and Computerisation Index (CI)
Table 3 compares the operating
expense ratio, IT expense ratio and CI.
The CI indicates and supports the second research question noting that
there is a link between computerisation and organisational performance.
The better an organisation performs, the higher the CI. From a
statistical point of view, the Spearman ranking indicates a high
negative correlation of 0.8842 between the CI and the OPEX, while only a
positive correlation of 0.4126 was measured between the OPEX and ITEX
ratios. CI is therefore a better measure for the intensity of
computerisation in an organisation. Lubbe et al. (1992) indicated
that the CI applies to other industries as well and this further
supports this finding.
Table
3: Relationship
between CI and Operating and IT ratios
|
C |
CI |
OPEX |
ITEX |
|
1 |
73 |
0.155 |
0.124 |
|
2 |
47 |
0.138 |
0.045 |
|
3 |
13 |
0.171 |
0.131 |
|
4 |
10 |
0.342 |
0.170 |
|
5 |
7 |
0.212 |
0.652 |
|
6 |
6 |
0.398 |
0.186 |
|
7 |
5 |
0.751 |
0.109 |
|
8 |
5 |
.0925 |
0.003 |
|
9 |
5 |
0.977 |
0.002 |
|
10 |
5 |
0.983 |
0.003 |
|
11 |
8 |
0.934 |
0.072 |
|
12 |
6 |
0.528 |
0.000 |
Further statistical analysis
indicates an F-Ratio of 3.89 and squared mean deviation of 0.384485
between the CI, OPEX and ITEX ratios. The correlation matrix used to
estimate the coefficients produced a correlation-coefficient of -0.8778
between the CI and OPEX ratio and a correlation-coefficient of -0.675
between the CI and ITEX ratio. The correlation was in both instances
negative and high. There was also a weak correlation between the CI (the
constant, level of computerisation) and the ITEX and OPEX ratios (the
variables). It thus helps to answer the second question by delivering
proof that there is a relationship between profitability and
computerisation. Figure 3 below illustrates the link between CI and OPEX
clearly.
Figure 3:
CI versus OPEX ratio
4.2.3
Research question 3: The relationship
between Profitability (return on assets and return on equity) and
IT/e-Commerce strategic management integration with organisational
strategic management (business management processes)
A positive correlation of 0.54
was calculated which led the researcher to accept the fact that there is
a relationship between profitability and IT/e-Commerce strategic
management integration at the 95% level. A problem that all the
respondents mentioned is that they still get the same amount of funding
but that top management expects more from them. In real terms, this
means that top management expects e-Commerce to stem naturally from the
IT department. All the responding organisations placed e-Commerce as
part of the IT department.
5.
Discussion and conclusion
The relative high correlation
that is evident from Figure 3 may be attributed to the strategy employed
with IT investment decisions and is supported by Dykman (2003). The
strategic importance of IT investment should be emphasised and the
importance of IT investment decisions needs to be considered by business
managers. The reason being stated is that it may affect their e-Commerce
and other commercial operations. Organisations also need to ensure that
e-Commerce is not part of the IT department but a department on its own
with an own strategy.
It is important to note that the
more integrated IT and e-Commerce investment decisions become the better
chance for full alignment with the overall organisational strategy. This
will help businesses in the long run. Although the study does not
conclusively deliver proof of a positive or negative correlation in one
instance, it shows that in the sample used, a strong tendency exists
that:
§
Organisational
performance is correlated with IT investment intensity.
§
IT investments will
be correlated to IT and e-Commerce intensive organisations with their
profitability.
It should be noted that to find
organisations just embarking on e-Commerce is extremely difficult and
explains the reason for the small sample size.
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