Benefits Management

By John Ward

John Wiley & Sons

Copyright © 2006 John Ward
All right reserved.

ISBN: 0-470-09463-X

Chapter One

The Challenge of IS/IT Investments

Managers considering the current role and value of IT within their organizations can be forgiven for feeling they are at a crossroads and being given very little help with which direction they should go, either from their colleagues or from outside commentators and experts.

The demand from colleagues within the organization for new systems, improvements to existing systems and increased support seems to grow continuously. Such demands will be supported by descriptions of the expected improvements, either claiming cost savings from improved efficiencies or increased revenue generation from the creation of new services or capabilities. Many of these arguments will be well founded. However, these demands must be set against the reality that IT budgets are finite and in many cases these budgets are being reduced. Although for many organizations budgets are linked to the prevailing trading climate, this also suggests that senior managers are not as convinced of the positive outcomes from IT spending as those further down the organization. This may also be a reaction to the overblown expectations that accompanied the boom of the late 1990s, when many claims were made for how internet-based initiatives would change organizations and even create a 'new economy'.

Equally, commentators appear to have conflicting advice on the subject. Articles in the press and respected management journals constantly describe how organizations have improved their operations, generated new business opportunities and outperformed their competitors by means of well-selected and deployed IT. In their discussion of IT investment approaches, Ross and Beath (2002) describe how United Parcel Service (UPS) invested $11 billion over a 10-year period to create a centralized data repository, built a global network, implemented enterprise-wide applications and shared databases and implemented disaster recovery operations. This has resulted in UPS being able to exchange 88% of all transactions and package information electronically, significantly improving the efficiency and hence the cost base of its operations, while also being able to pursue new business opportunities. This, they state, has allowed UPS to reassert its leadership in its industry, with Fortune magazine naming it the most admired mail, package and freight company in 2000.

In contrast, the provocatively titled article, 'IT doesn't matter' (Carr, 2003), suggested that the considerable investments organizations continue to make in IT are wrong headed. The author argued that the decreasing costs of IT, be that processing power, data storage or data transport, coupled with the significant sums that organizations have spent on these capabilities, have resulted in ubiquitous powerful IT-something that every organization can own. He therefore reasoned that, since all organizations can tap into this capability, it cannot provide competitive advantage to any one firm. Carr developed his argument by likening IT to earlier broadly adopted technologies that have shaped modern-day industry, from steam engines and railways to the electricity grid and telephone networks. These technologies he referred to as 'infrastructural' and observed that, unlike the results of most company proprietary R&D work, these developments are more valuable when shared with other companies rather than kept private.

He continued that such infrastructural developments initially result in standard technology becoming available to all firms, but after time, even the way that technology is used becomes standardized, with best practices being well understood and even built into the technology. This reduces the possibility for competitive advantage for any one firm even further. In the case of software, because many business processes and activities have become embedded in software, those processes are replicated as standard across organizations. As any IT manager is well aware, customization of packages is expensive and often results in reduced interoperability, but without which there is little distinction between organizations. The ability to deliver software over the Internet, as standardized web services, Carr argued, will exacerbate the standardization and commoditization even further. The growing use of the term 'utility computing', where the leading vendors will rent their applications rather than sell them, further underlies this move to commoditization.

A study by a group of US academics (Mata et al., 1995) explored the issue of sustained competitive advantage from IT. They concluded that many issues related to IT, such as technology, access to capital and technical IT skills could not provide sustained competitive advantage. The only factor that could provide this was IT management skills, described as 'the ability to conceive of, develop and exploit IT applications to support or enhance other business functions'. Skills required to achieve this include the ability of IT managers to understand the business needs of other functional managers and to work with these managers to develop and exploit appropriate systems. The authors concluded that these IT management skills were often tacit, composed of many hundreds of small decisions and had a strong social element to them. They were therefore difficult for competitors to imitate and hence could, if developed, provide a source of sustained competitive advantage.

The Development of IS/IT within Organizations

As the competitive pressures on organizations have changed over the last four decades, so the expectations from IT in helping to meet those challenges have changed. As shown in Table 1.1 (Farbey et al., 1993; Renkema, 2000), the early days of IT adoption within organizations were characterized by the automation of routine activities to improve efficiency. As IT adoption became more widespread, the emphasis began to shift from using IT solely to reduce costs to also using it to improve the quality of firms' operations and products.

In many industries, the 1980s saw a movement away from production being determined by raw materials and production capacity, to production being set by customer demand. Fluctuations in this demand caused firms to focus on the flexibility of their operations. The advent of the PC in this era, allowed a more distributed application of IT, for example at individual workstations within factories, within warehouses and in smaller regional offices. This application closer to the point of need, both enabled and further encouraged the increasing demand for flexibility.

The New Economy

The 1990s, and the dawn of the new century, has seen the dramatic growth in the networking of PCs, supporting increased communication between individuals, thus spawning the whole domain of IT-enabled knowledge management. In addition to human-to-human interaction, increased networking, through the increased adoption of standards, has improved the integration between applications addressing the issue of localized adoption of IT that often resulted in unconnected 'islands of automation'.

The 1990s saw the commercial adoption of the most notable of these networks, often described as a 'network of networks', the Internet. This spawned the whole domain of e-business and its associated emphasis on innovation, both in the products and services supplied to business customers and consumers, and also in the business processes supporting this product and service delivery.

Despite the downturn in sentiment towards the companies in April 2000, e-business continues to be a strategic imperative for many businesses. Firms recognize that e-business can assist with numerous objectives, such as enriching the dialogue with customers, streamlining internal business processes and developing deeper relationships with key suppliers. However, this domain also poses many challenges such as the entrance of new competitors, the blurring of market boundaries and the emergence of new business models.

A number of researchers have suggested that in such environments competitive advantage is transient, rather than sustainable and hence the emphasis for today's firms is on innovation. Managers must therefore concentrate on renewing rather than protecting their sources of competitive advantage. No longer can they rely on the assets, staff, products, IT and other resources that they have assembled to provide their present competitive position. The dynamic nature of the current business environment requires them to be able to combine these resources in new ways and to develop new resources, and to do this repeatedly, if they are to compete successfully.

Productivity Gains from IS/IT

Farrell (2003) explored the link between productivity, at both industry and organizational level, and the expenditure on IT. Her study focused particularly on the 1990s and sought to see if the considerable expenditures on IT that were witnessed during that decade resulted in corresponding increases in productivity. She found that the latter half of the 1990s saw an increase in labour productivity, particularly in the USA, which coincided with a dramatic increase in the spending on IT. However, she also found that those gains in productivity were not evenly spread across industries, despite all industries increasing their IT spending. Indeed in the US, just six sectors accounted for 76% of the country's net productivity gain. From this she concluded that 'IT is of great, but not primary, importance to the fate of industries and individual companies'.

From her study, Farrell concluded that the prime cause of the increased productivity witnessed is intensifying competition within an industry and hence on the individual firms. This increase in competition, she stated, causes managers to increase innovation, which in turn increases productivity. IS/IT is just one way, although if used well, a very powerful way, in which such managers can innovate in order to either meet or exceed the increased competition. In considering where and how IS/IT has been used most effectively to improve productivity, she observed certain patterns. These include the application of IS/IT to those areas or levers in the business that matter most (see Box 1.1). These will vary from industry to industry, for example in consumer retailing, systems that improve distribution and logistics, merchandising and store management will have the greatest effect, whereas in banking it is systems that can automate lending and process large-scale back office transactions. This suggests that it is more specialized applications, tailored to particular sectors that will have the greatest impact on productivity. Indeed, she found that general-purpose applications, such as CRM systems, have to date tended to yield poor results. Interestingly, and consistent with the approach suggested in this book, she also found that IS/IT adoption had most impact on productivity within organizations when it was accompanied by managerial and organizational changes.

The Generic Benefits of IT

In their book exploring evaluation methods for IT, Farbey et al. (1993) present a generic list of benefits that may be expected from IT investments. Their book, which is based on an empirical study of project evaluation in 16 organizations spanning a range of industry sectors, presents a list of benefits drawn from those projects and is augmented by benefits identified in the then existing literature. While the authors stress that the nature and scope of benefits is obviously dependent on what the project is trying to achieve and will vary by particular organizational or market context, they note that such a generic list of benefits would be welcomed.

The resulting list of benefits is categorized according to Mintzberg's view of the structure of an organization described in Structure in Fives (1983). In this view of an organization, Mintzberg's intention was to differentiate the elements of a firm according to the people contained in each and the activities they undertook. This people-centric view of the organization is a valuable starting point for considering the benefits that arise from the use of IS/IT, since an assumption that underlies the whole benefit-centred approach described in this book is that IS/IT delivers benefits when it allows individuals or groups to improve the performance of their roles or tasks within the organization. Use of the Mintzberg framework underlines that the benefits arising from the adoption of IS/IT cannot be considered in isolation from those individuals who are making use of the new systems.

A version of the Farbey et al. framework, updated to reflect current developments in IS/IT is shown in Figure 1.2.

The meaning of each of the five elements of the organizational structure is shown in Table 1.2. The first three organizational elements shown in this table are relatively easy to understand, even if there may be a discussion about where the boundary should be drawn between them, and remain current today. However, it would seem to be difficult to distinguish between the last two categories. Mintzberg, from whom the underlying model is taken, described the functional component of the organization as containing staff whose role is to influence the way in which people work. Such individuals would originally include operations researchers and work-study teams and more recently systems and business process analysts, change managers and, in some firms, internal audit staff. As shown in Table 1.2, he describes the support element of the organization as those staff whose work lies outside the direct production of the products or services of the firm. While a distinction can be drawn between IS/IT support for this activity and that for the functional area of a firm, in practice the distinction is slight. Increasingly the provision of new and improved infrastructure within an organization is intended to improve the way in which staff work. For example, the provision of email within an organization is to allow richer, faster and lower cost communication among staff, which will impact how they work with their colleagues. For this reason the benefits arising from application of IS/IT in the functional and support activities will be discussed together.

While a detailed examination of any of the individual benefits would require a consideration of the context of the project, the organization and even the industry in which it operates, Figure 1.2 illustrates a number of generic benefits that can be realized from IS and IT. The figure, and the structure chosen by the authors, clearly shows that IS/IT can generate benefits in all areas of the organization. Many of the benefits continue to be operational gains, such as the reduction in the time taken or costs incurred to complete a task or process or an improvement in the accuracy of an activity. These benefits are consistent with the early uses of IT within firms in the 1960s and 70s, and are often where firms commencing their use of IS/IT focus their efforts. However, Figure 1.2 shows there are also a significant number of benefits that can be linked to the management and strategic development of an organization.

Strategic Benefits

The opportunity for organizations to realize strategic benefit from IS and IT has been possible ever since its early use for business applications, back in the 1960s. However, the advent of e-business in the 1990s caused a particular focus on the use of IS and IT to define or redefine strategy. Many organizations developed new business models, often where IS or IT was not simply a support to the existing organization, but was the organization (Amit and Zott, 2001). Well-known examples where IS effectively defines the strategy of the organization include organizations born during the era, such as Amazon and However, a number of firms that preexisted that era have made such significant use of IT to run their internal operations and to work with suppliers and customers, that IT is now key to their existence (see Box 1.2).

In other organizations, where IS/IT has not been adopted to such a significant level, it can still offer significant strategic benefits. For example, it may allow the organization to provide a unique service to its customers, differentiating them from the competition and, ideally, 'locking their customers in'. Many e-business developments sought to generate such unique customer value propositions, often by opening internal systems up to customers to provide them with an improved service.


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