It's been over 10 years since corporate America embraced ERP systems, but hard evidence on the financial benefits that ERP systems have provided has been elusive. This debate has spilled into the mainstream media, as America's two largest ERP vendors regularly advertise that their customers have benefited financially by using their products; some of these ads even cite studies that discredit the other's claims of financial superiority.
Investments in IT are typically justified by the productivity and profitability improvements that follow their implementation. It seems intuitive that IT will help streamline existing business processes, which should lead to a more efficient and ultimately more profitable company. Organizations of all types and sizes have invested heavily in IT based on this simple rationale, but the associated financial benefits have been difficult to nail down. While managers struggled to value their firms' IT investments, researchers tried to better understand the factors that made it so difficult to value corporate investments in IT. Among the factors that have been suggested, three may be especially useful. They are:
• Firm-specific resources and capabilities that meaningfully impact the success of IT implementations;
• External forces that exert themselves on the firm; and
• The nature of the financial indices used to value IT investments.
Much of the early research on the value of IT investments was based on industry-level data that masked the effects of important firm-specific resources and capabilities. When researchers finally examined firm-level data, they realized that differences in, for example, IT expertise and management, the quality of a firm's leadership and other human resources, and the uniqueness of its operations affected the success of IT implementations. Companies with firm-specific advantages generally out-produced their competitors.
The success of IT implementations also depends on the unique set of unwieldy external forces that exert themselves on the firm. For example, Melville etal. suggest a host of external forces that may affect the impact of IT implementations on organizational performance, including the degree of competition within an industry, the impact of the firm's trading partners, and country characteristics. Unfortunately, studies of the relationship between IT and organizational performance are plagued by disagreements about the external constructs that should be examined, how these constructs are operationalized, and the nature of their interrelationships. There have also been concerns expressed about the financial indices used to measure the affects of IT implementations on corporate performance. Foremost among these indices are measures of corporate productivity and profitability.
Productivity is associated with how efficiently a firm manages its business processes to produce a dollar of sales. For example, employee productivity is often calculated as the dollar level of sales generated per dollar paid to employees (net sales/employee cost). Firms usually have substantial control over their business processes, and this makes them potentially easier to measure and value financially. For example, firms often use proprietary processes to more efficiently manage their inventories in order to generate a higher level of sales. Therefore, measuring how efficiently a firm manages its inventory can be calculated using inventory turnover (net sales/inventory).
On the other hand, profitability is an organizational performance measure that can be affected by factors unrelated to the IT investment. These factors include, for example, the number and quality of the firm's competitors and trading partners, intra-firm shifts in spending, and macro-economic changes in interest rates, exchange rates and inflation; many pundits would argue that even the formal recognition as a success by their trading partner should provide a competitive advantage that eventually shows up in measures of organizational performance. However, the ability to measure the impact of an IT implementation on organizational performance depends on the extent the impact both ripples through to the firm's bottom line and can be accurately differentiated from a host of confounding business factors.
Thus, IT implementations that enhance a firm's ability to better manage business processes are more likely to have an impact that can be both accurately measured and valued credibly. Although IT implementations should also have an impact on organizational performance, accurately measuring their impact has proven to be difficult. The very mixed results regarding the post-adoption profitability of firms implementing ERPs may be an example of this. We suspect that the impact of ERP and other IT implementations on organizational performance will be easy to value financially if we can ever measure them accurately (that is, absent the distortions created primarily by hard to control business factors).
Based on what we've described above, we would expect to see significant improvements in both productivity and profitability after the SAP implementation period for SAP successes themselves (SAPPROD and SAPPROF). And we would expect SAP successes to improve versus their competitors (DIFPROD and DIFPROF). However, as also noted above, we believe that the inability to accurately measure the component(s) of profitability directly related to the ERP implementation is likely to compromise the profitability results.
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