How Investments in

Information Technology
Influence Performance of Firms

Submitted to: Hamida Akter;

Lecturer
Department of Management Information Systems
University of Dhaka

Submitted by: Khadiza Sharmin;

ID #029-12-116

Submitted on: 5th October, 2020.

 Overview
 Although Information Technology (IT) investments are very important
for a business, managers do not have sufficient IT knowledge to
articulate an IT investment strategy for the firm. In this paper, the
literature reviews the factors that influence the IT investment strategy.
The concept of IT investment tactic so far considered two domains –
intensity and engagement; this concept is enriched by adding the domain
of investment focus. This review attempts to answer three tactical
questions related to IT investments: (i) level of investment that a firm
should make in IT, that is, investment intensity; (ii) areas of firm where
these investments should be more focused, that is, investment focus; and
(iii) timing of investment, that is, whether to be an early mover in
adopting IT or whether to invest relatively late compared to competitors.

 Introduction

Information Technologies (IT) Investments by businesses have increased

rapidly over the past three decades. These investments have affected the
products, services and internal processes of firms. It is certain that
information technologies (comprising of computer hardware, software
and communication technologies) are extremely significant to the
smooth operation of most businesses. Firms (in the banking and airline
industries for example) would be seriously affected if their IT-based
systems stopped working even for a short while.
Hence, it is understandable that managers and researchers have made
reasonable claims about the important strategic consequences of IT
investments on a firm: IT investment decisions have the ability to either
give a firm competitive advantage or to allow it to become more
susceptible to competitive forces. This literature illustrates that IT
investments have a noteworthy impact on firm’s efficiency and hence,
add value to the firm.
 What is IT Investment?

Information technology investment means an expenditure on

information technology resources to address mission delivery and
management support. This may include a project or projects for the
development, modernization, enhancement, or maintenance of a single
information technology asset or group of information technology assets
with related functionality, and the subsequent operation of those assets
in a production environment. These investments shall have a defined life
cycle with start and end dates, with the end date representing the end of
the currently estimated useful life of the investment, consistent with the
investment’s most current alternatives analysis if applicable.

 Reasons for investing in IT

Technological innovation is advancing faster than ever and technology

itself is becoming more essential to the private and public firms. To be
able to run an effective business, a firm needs to have knowledge about
changes in all fields of technology, such as Expert Systems,
Communication Technology, Additive Manufacturing, Sustainable
Energy, and potential for Telecommuting. The company will fail to keep
up with other firms if it doesn’t keep its systems up-to-date with the
latest facilities in those fields.
The lives of people have been totally changed by the extensive
incorporation of the internet into day to day activities, improved network
across the globe, and greater usage of smartphones. It is reported in a
research by American Express that 19% of business expenditure now is
in the IT sector. So much of the business operations depend on IT, like
how to operate businesses, how employees interact with customers, how
consumers buy goods/services, and how data is managed. Many
businesses have either risen or fallen in recent years based on whether
they welcomed or failed to utilize this facility. A report shows that
businesses that have gotten hang of the digital world have four times the
revenue growth than less digitalized companies, which proves that
upgrading the present technology can provide great returns for both
small and large firms.
Firms expect to maintain their business sustainability by maximizing
profitability and increase sales revenue by improving their business
processes. IT deployment can contribute to these goals by improving
employee productivity and collaboration among employees, partners,
and customers. By strengthening their IT, companies can better
communicate with and provide responsive services to their customers,
ultimately positively influencing business.
The reasons why it is beneficial for firms to invest in IT are:
 Save Time – Investing in technology is a great way to save time by
taking a process the firm already undertakes and making it more
efficient. It can also help with automating, simplifying or even
eliminating repetitive tasks. Moreover, if the business requires
steadfast and swift communication between employees and clients,
investing in laptops for telework or mobile technology could be a
productive move. On the other hand, if the business has a small
budget, most of the employees will be likely to own such devices
anyway. Hence, setting up an online content management system
which they can access via the internet rather than a completely
separate device could be a good solution. There is a reason why cloud
storage companies and team management apps like Asana, Pipedrive,
and Trello do so well. One report suggests that investment in such
technology can increase productivity by 20% and that employees who
spend 60-80% of their time working remotely have the highest
workplace engagement.
 Improve Security – Investing in information technology security is
important for any successful company. Data breaches will render the
public opinion as untrustworthy and could potentially put the firm out
 of business altogether. A firm should invest in the same way when it
comes to the security of their IT systems as one would lock their cars
when they go shopping and secure their front doors when they head
out to work, so. Investing in this area will keep all the employee and
customer information safe and protected from unauthorized access.
Businesses should install security software or maybe have an IT
specialist on site if they have the ability.
 Stand out from the Crowd – Technology and innovation go hand in
hand. If you don’t keep ahead of the curve, you run the risk of being
outperformed by your competitors. You want to set yourself apart and
by using tech as an integral part of your business. With new
technology, you'll be more likely to succeed, surpass your
competition, and provide the best products or services to your
customers. Plain and simple.
 Better interaction with customers – Customers are getting smarter
by the day. They love and are updated with technology and a business
needs to be on the same level to interact and connect with them. For
instance, if customers use Instagram to send complaints and order
queries but the company checks its Instagram account once a week,
they’re going to push away current and future customers. The business
has to keep up the pace with everyone else. In fact, 84% of small
businesses in the U.S. use at least one social media platform to provide
information to customers, and 80% of small enterprises use digital
technology, such as instant messaging apps, to communicate with
vendors and customers. Chatbots on company websites are a hit with
younger generations too, with 60% of millennials having interacted
with a Chatbot at least once in their lives. For many people, waiting on
hold and then trying to explain an issue to someone takes far longer
than an instant message which can be picked up in seconds and
addressed. The Chatbot market is expected to undeniably reach $1.23
billion globally by 2025. On the other hand, businesses that ignored
the internet at the beginning of the 21st century had a hard time
 keeping up with the competition. The same holds true today when it
comes to technology. A startup or an established small business
should always be on the lookout for the next big innovation, not just to
stay in the game but to build the foundation for the expansion of their
business.

 Impacts of IT Investments on Organization

Previous researchers have attempted to find a direct relationship between

IT investment and business performance, with inconsistent results –
some find IT to have a positive impact on business performance while
some find a negative impact. However, no study examines the impact of
specific technologies on business performance after investment.
The claim that operational, financial, strategic, operational quality and
maintenance productivity were positively affected by information
technology adoption was found to be significantly supported. The
relationship between maintenance productivity and IT usage deserves
special attention. Furthermore this and operational productivity
experienced a greater impact due to the IT usage.
Consequents of productivity dimensions are given below:
 Financial Productivity: Financial system packages help the
organization in reconciliation of accounting transaction, faster
preparation of half yearly and yearly financial statements,
understanding of operational costs, understanding of working account
payable and better management of accounts receivable.
 Strategic Productivity: IT applications increase the value addition for
the organization, organizational capability for process innovation and
increase the organizational flexibility.
 Operational Productivity: IT Systems enable better visibility of
inventory, better management of material procurement, better vendor
 management and vendor performance rating, and reduce marginal cost
of production.
 Operational Quality Productivity: IT applications lead to efficient
human deployment, greater communicative capability and better
training using presentation packages.
 Maintenance Productivity: The use of IT results in preventive
maintenance of plants/machinery, and improves the management of
breakdown of plants, the management of maintenance of inventory,
and the uptime of plants/machinery.

Some researchers have found positive impacts of IT investments on

business performance. Kwon found a direct positive relationship
between IT investment and five firm performance variables (firm
growth, market competiveness, customer relationships, partnerships with
providers, operational efficiency), controlling for the role of the chief
information officer (CIO), mobile tech adoption, IT support and
maintenance, and IT outsourcing. Campbell found that IT investment
has an overall significantly positive impact on firm performance over
and above the effects of firm size, the relative degree of effective IT use,
past performance of firm, and industry performance in terms of both
profit ratios — return on sales (ROS) and operating income to assets
OI/A — and cost ratios — cost of goods sold to sales (COGS/S).

 Investment Decision Making Methodologies

In the age of information technology (IT), with its changing work

environment, the role of IT has become more important in strengthening
a firm’s competitiveness in their industries. Firms are therefore
increasing their IT investments and, due to the continuous economic
downturn, management requires IT not only to save costs but also shape
business outcomes. Given such a pressure, multiple efforts have been
made to measure IT investment from a business perspective.
Studies have used a variety of measures of the input levels of investment
in IT. In their biennial surveys of major corporations over the last ten
years, The Diebold Group consistently uses three measures:
 MIS budget as a percentage of revenues
 MIS staff as a percentage of total staff
 Ratio of hardware expenditures to personnel costs
Datamation regularly conducts a survey of the magazine's circulation
base and the Fortune 1000 and 400 firms to assess centralized MIS input
investment. The measure utilized is MIS budget as a percentage of
revenues. Strassmann attempted to refine the input measure to be the
fraction of management costs devoted to IT. He felt that the base of
management costs was more appropriate than revenues since it was
more directly influenced by management decisions. Cron and Sobol
used three input measures:
 Computer ownership - owned/leased vs. timeshare
 Number of standard applications areas computerized
 Types of application areas computerized - Accounting, Management
Control and Environmental Links
All of these approaches have advantages and disadvantages. It is
doubtful that any of them captures all of the input investment in IT, due
to increasing decentralization of IT investment and increasing
impromptu expenditures on IT (e.g., personal computers) from non-IT
operational budgets.
From 1993 to 2013, enterprises proactively invested in the continuous
deployment of information communication broadcasting, increasing IT
investment by 64%, from $210 billion to $330 billion. Therefore, it is
important to measure the relations between IT investment and payoff to
determine the contribution of IT to business performance.
Comparison of these macro investment levels between companies
(particularly across different industries) is useful only as a rough guide.
The macro investment percentages are taken out of the context of the
strategy of the firm. In addition, the ability of a particular management
team to efficiently convert the investments into useful outputs is not
considered.
The determination of performance is highly problematic in this type of
work. A variety of social and economic measures can be adopted
depending on ease of measurement or the concerns of the researcher.
Many combinations of measures have been used, often with as much
regard to convenience as to construct validity.
One study of the relationship between the process of corporate planning
and financial performance of firms used 16 financial measures which
assessed firm size, profitability, performance and growth. This study
showed statistically that the one measure of return on assets could
substitute for all the others. For each firm this measure was compared to
its competitors to take account of industry differences, and this relative
performance was used as the dependent variable.
Another view is that one measure of performance will not capture all the
factors that contribute to high performance and consequently the use of
any measure is relatively arbitrary. A study of the impact of investment
in computerization on financial performance in a group of wholesalers
used four measures:
 Pretax Profits
 Return on Assets
 Return on Net Worth
 Five Year Growth Rates.
Unfortunately no data on correlations among these measures were
reported.
 Other researchers have used user (or department) satisfaction measures
of performance rather than financial measures in their studies. Lucas
incorporated a series of attitude measures to capture satisfaction.

 Conclusion

Investing in technology can help a business thrive in present time.

Whether a business supports IT or not, they have no other options but to
invest in it as it is the way of the present and the future. With the correct
utilization, employees will spend less time on manual tasks, data in
storage will be safer, internal and external communications will be
improved, and the business will have an advantage over its competitors.
Major gains can be made by a firm in terms of productivity, through the
use of information technology investments. To achieve overall
efficiency in the sector, it is very important that the business also adopts
IT effectively. A business should do its research before it impulsively
invests and should remember to invest in technology based on its unique
operational needs and budget. It shouldn’t invest in a new technology
just because it is new and innovative. If it isn’t suitable for the business,
the firm shouldn’t go through with the investment. The business should
work out what will be best for the company and its customers, and
prepare to succeed.
Considering ongoing increases in IT investment, it is important to know
what makes IT investment pay off. The IT itself does not matter; it is
more about how the IT is utilized to create business outcomes. This
study analyzes the relationship between IT investment and business
growth directly based on real data. The conclusion is that IT paradox and
IT pay-off can exist together. Firms need to set priority considering what
IT investment will bring business outcome when they invest and also
need to find a way how they can drive business outcome faster
overcoming IT paradox.
 References and Citation

Roach, 1987
Cash and Konsynski, 1985
Ives and Learmonth, 1984
Porter and Millar, 1985
Korea Association of Information and Telecommunication, 2014.