Refocusing where and how IT value is realized: An empirical investigation

Abstract

This study examines the direct and interaction effects of IT investments and IS department efficiency on different facets of firm performance. Specifically, measures for financial, sales, and intermediate firm performance are considered. IS budget is used as a measure of IT investment; asset turnover and labor productivity are used as intermediate performance measures; and sales per IS employee and income per IS employee are used as measures of IS department efficiency. Secondary sources were used to construct a database of 210 firms, which was used for statistical analysis. Our results suggest that; (i) IS budget is not related to financial firm performance, but is positively related to sales performance; (ii) The results for intermediate performance were mixed; (iii) IS efficiency had no impact on the relationship between IS budget and firm performance measures, except market share. Analysis of the results suggest that the effect of IT investments should be assessed simultaneously on both aggregate and intermediate performance. Furthermore, IS departments with ‘high’ efficiency may be unable to better leverage each additional dollar spent on IT. This has significant implications for organizations considering radical downsizing and elimination of their IS departments, as in the process they could reduce their conversion effectiveness.