Abstract

Prior research introduces the concept of IT architecture as an important organizational competency that enables IT and business strategy. Two important lingering questions are identifying the drivers of IT architecture maturity and whether IT architecture maturity actually pays off in terms of subsequent firm performance. Drawing from two theoretical views, i.e., the resource-based view of the firm and agency theory, we hypothesize that IT architecture maturity is determined by the firms contextual factors, including IT spending intensity, managerial IT competencies and knowledge, managerial incentives and power. Using a multisource dataset that combines proprietary survey data with publicly available data, we found empirical evidence suggesting these factors explain substantial variance in IT architecture maturity. We also found that IT architecture maturity is positively associated with future operating income, cash flow from operations, and Tobins q, whereas it is negatively associated with future selling and administrative expenses. Overall, the evidence suggests that the IT architecture maturity construct can be useful for future studies to examine the nomological network related to the IT business value proposition.

1. Introduction

Understanding information technology (IT) investments and their impact on firm performance are fundamental issues in the IT business value literature (e.g., Anderson et al. 2006; Brynjolfsson and Hitt 1996; Dehning and Richardson 2002; Melville et al. 2004). Although extant research generally documents a positive impact of IT on business value, there is less consensus on the context and conditions under which IT contributes to firm performance (Kohli and Grover 2008; Sambamurthy et al. 2003). IT architecture the logic for applications, data, and infrastructure technologies intended to enable the firms business strategy (Ross 2003) has been suggested to be an important and useful conceptual framework to examine the business value of IT proposition. Both academics (e.g., Chatterji 2007; Ross 2003; Ross and Beath 2006;Tiwana and Konsynski 2010; Venkatesh et al. 2007) and practitioners (e.g., Brown and Hagel 2003; Daniel 2007) propose that mature IT architectures allow firms to have agile and dynamic associations between IT resources and business strategy, leading to improvements in business processes and overall firm performance.

This study contributes to the extant knowledge about IT architecture by empirically investigating the determinants and performance consequences of IT architecture maturity at the organizational level of analysis.

Melville et al. (2004) note that prior research has mostly considered the direct relationship between IT spending and firm performance metrics. Early work did not find an association between IT spending and performance (e.g., Hitt and Brynjolfsson 1996), but more recent studies have consistently documented a positive association between IT spending levels and firm performance (e.g., Bharadwaj et al. 1999; Devaraj and Kohli 2003; Kobelsky et al. 2008). Despite these encouraging findings, some researchers suggest that it is not a matter of how much companies spend on IT that is important, but rather the capabilities and strategic options IT creates, when coupled with other key firm resources, such as IT managerial knowledge and managerial incentives (e.g., Aral and Weill 2007; Barney 1991; Bharadwaj 2000; Bhatt and Grover 2005; Mata et al. 1995). Devaraj and Kohli (2003) encourage further research on the mechanisms or contexts through which IT investments affect performance. Kohli and Grover (2008) call for an expanded IT value research premise that effective convergence between business capabilities and IT capabilities is a prerequisite to realizing capabilities between organizations, creating information value , and generating business value. More recently, Nevo and Wade (2010) propose that IT enabled resources are capable of sustaining competitive advantages when the relationships between IT assets and organization resources are synergistic, noting that future research can contribute by delving more deeply into the processes through which firms achieve potential synergy. In this spirit, our research proposes IT architecture maturity as a channel through which firms can attain strategic capabilities and performance improvements.Researchers suggest that the strategic impact of IT comes from incremental innovations, the cumulative effect of a sustained IT architecture and the necessary adjustments to business processes (e.g., Brown and Hagel 2003; Daniel 2007). For example, Tiwana and Konsynski (2010) state that sustaining IT and business alignment demands IT architectures that are adaptive and agile because business processes are often intricately enabled or constrained by IT. Such arguments point to the importance of IT architecture maturity as a channel through which firms can sustain competitive advantages.

We adopt Ross (2003) formal definition of IT architecture as the organizing logic for applications, data, and infrastructure technologies, as captured in a set of policies and technical choices, intended to enable the firms business strategy (p. 32). Ross IT architecture framework consists of four hierarchical stages: application silo, standardized technology, rationalized data, and modular architectures. The underlying assumption behind Ross framework suggests that progressing through the IT architecture stages reflects the combination of resources and culmination of sustained efforts that endow firms with value-enhancing strategic IT capabilities. This notion is consistent with the resource-based view (RBV) of the firm (Barney 1991; Mata et al. 1995) suggesting that firms can attain sustained competitive advantages when they possess resources that are valuable, rare, hard to imitate, and non-substitutable. Based on RBV, we contend that the capabilities associated with IT architecture maturity refer to a firms ability to integrate IT resources with other valuable organizational resources to allow the firm to implement value-enhancing strategies that are ultimately reflected in firm profits and value (Amit and Schoemaker 1993; Bharadwaj 2000).

The objective of our work is to understand the determinants and the operating and market performance consequences associated with IT architecture maturity. Our identification of the determinants of IT architecture maturity is initially guided by RBV theoretical predictions in Mata et al. (1995) and Bharadwaj (2000). Collectively, these studies identify three broad categories of potential factors that would allow firms to generate IT capabilities: IT resources, human IT resources and knowledge, and access to capital. IT resources are likely to be commodities (Bharadwaj 2000; Carr 2003; Mata et al. 1995)i.e., although necessary, IT resources are insufficient to achieve IT architecture maturity. However, when coupled with other critical organizational resources, IT resources may generate organizational capabilities. One such resource is human IT resources and knowledge, or the tacit abilities needed to direct investments in IT and to couple the appropriate complementary resources, structures and processes to ensure that IT is deployed for strategic advantage (e.g., Earl and Feeny 1995; Karahanna and Watson 2006; Mata et al. 1995; Sambamurthy et al. 2003). Access to capital is typically associated with firm size (Fama and French, 1993). Large firms enjoy economies of scale (Doyle et al. 2007; Masli et al. 2010) and are better positioned to deal with risk and uncertainty (Fama and French 1993), which allow them to access the necessary capital to develop their IT architecture. Large firms are also older and more diversified. The number of different product-markets in which a firm competes may affect the firms incentives to develop its IT architecture and coordinate across functions.

We expand the initial list of determinants of IT architecture maturity based on agency theory (Jensen and Meckling 1976) that predicts that monetary incentives and ownership in the firm provide manages with an enticement to commit to innovative, albeit potentially risky, investments (e.g., Coles et al. 2006; Core and Guay 1999; Jensen and Meckling 1976). Progressing through the IT architecture stages involves uncertainty and risks (Ross 2003), so absent proper incentives, managers may be deterred from committing the resources and making the organizational and business process changes necessary to advance through the IT architecture maturity stages. Further, as managers commit to enhancing IT architecture maturity in their firms, they may encounter resistance to change. Thus, the vision and influence of top managers becomes critically important (Ross 2003). A nascent branch of agency theory suggests that managers with greater influence and power have greater flexibility in embarking on innovative IT projects (Hirshleifer et al. 2010). Collectively, these theoretical arguments complement the RBV as they point to managerial incentives and ownership as potential factors influencing the generation of IT capabilities through IT architecture maturity.

The second aspect of our work examines the association between IT architecture maturity and firm performance. Specifically, we consider three operational measures of performance, namely operating return on assets, cash flows from operations, sales, general and administrative (SG&A) expenses, and one overall market performance measure, Tobins q. This part of the study seeks to inform the criterion validity of IT architecture maturity as a conceptual framework to examine the business value of IT. In addition, by examining several performance metrics, we hope to present a robust understanding of the business value consequences of IT architecture maturity. Our work is expected to contribute to the business value of IT literature. Using a multisource dataset that combines proprietary survey data with publicly available data, we will gain insights about the business value of IT proposition. Prior empirical archival studies have focused on such IT constructs as IT spending and IT implementation announcements, but have not specifically examined the IT architecture maturity concept as it relates to business value. Other work (e.g., Ross 2003; Sauer and Willcocks 2002, 2003) examining the merits of IT architecture maturity have been theoretical in nature or have focused on case studies (Venkatesh et al. 2007). To our knowledge, our study is the first one to provide quantitative empirical evidence on the determinants and operational and market benefits associated with IT architecture maturity. Further, by drawing and integrating from two theoretical perspectives, i.e., the RBV of the firm (Bharadwaj 2000 and Mata et al. 1995) and agency theory (e.g., Coles et al. 2006; Core and Guay 1999; Jensen and Meckling 1976), our work enriches the understanding of the factors that enhance a firms IT architecture maturity and how IT architecture maturity in turn creates value. Thus, although the IT architecture discourse is more than two decades old, it generally has not been given its due recognition as a tool to bridge business and IT strategies effectively. We provide support for the use of IT architecture maturity as a lens through which future studies can investigate the nomological network related to IT business value, and should serve as a springboard for subsequent research in this important area.

Our work is also expected to make practical contributions. Prahalad and Krishnan (2002) suggest that in order to be thoughtful about IT investments, senior business and IT executives need to consider whether their enterprise IT architecture and underlying infrastructure reflect the companys strategic objectives. In a Forbes list of top 10 strategic issues for 2013, Evans (2012) emphasizes that CIOs need to be continuously augmenting their companys IT architecture (i.e., future-proof the IT architecture) to meet the ever-growing demands and challenges. The results we present on the determinants of IT architecture suggest that the right mixture or complementarity of resources will create value.

2. Business Value of IT, IT Architecture Maturity and Research Expectations

We draw on the research on the business value of IT that aims to explain the impact of IT on firm performance and market value. Agarwal and Lucas (2005) suggest that examining the business value of IT is a fundamental contribution to the IS discipline, noting that this line of research is key to aiding decision makers understand the firm value implications of IT. Despite the plethora of studies on IT value (e.g., Dehning and Richardson 2002; Masli et al. 2010; Melville et al. 2004), Melville et al. (2004) suggest that an expanded conceptualization of what constitutes IT business value is required to continue advancing knowledge. Kohli and Grover (2008) further suggest that there are still opportunities for studies on IT value to expand their scope regarding the how and why IT creates value question. Others have observed that theoretical frameworks have yet to fully explain how IT investments enhance firm performance (Chari et al. 2008; Sambamurthy et al. 2003).

We propose that one path to value is for a firm to invest in its IT architecture. When coupled with other critical resources, such as managerial talent and knowledge and managerial incentives, IT architecture is enhanced and becomes more mature, creating strategic options and arguably, improved profits for the firm. We propose that examining IT architecture maturity as an additional conceptualization of IT may get us closer to understanding how IT contributes to performance.

2.1. IT Architecture Maturity

IT architecture can be conceptualized as the infrastructure for aligning IT and business strategy (e.g., Daniel 2007; Sauer and Willcocks 2002). Well-designed IT architectures are purported to endow firms with capabilities to have agile and dynamic associations between IT resources and business processes, leading to improvements in productivity and firm performance (e.g., Chatterji 2007; Ross 2003; Ross and Beath 2006; Venkatesh et al. 2007). Ross (2003) was the first to articulate the notion of IT architecture, defined, as noted earlier, to be the organizing logic for applications, data, and infrastructure technologies, as captured in a set of policies and technical choices, intended to enable the firms business strategy (p. 32). Ross definition runs counter to the notion that IT architecture follows business strategy. Instead, she contends that IT architecture implies IT capabilities, specifying what the architecture enables the firm to accomplish. Under this view, all else being equal, firms with more mature IT architectures possess IT capabilities that positions them to undertake value-maximizing initiatives.

Achieving mature IT architecture allows firms to seamlessly align IT with business strategy. Ross (2003) proposes a framework that consists of four hierarchical (potentially path-dependent) stages: (i) application silo; (ii) standardized technology; (iii) rationalized data; and (iv) modular architecture. In the application silo stage, firms focus their resources on meeting the IT needs of individual business functions. Although this stage may generate local optimization of IT processes by leveraging a single application, users are unable to gain additional synergies by fusing applications or knowledge bases. The second is the standardized technology architecture stage where firms begin to have shared infrastructure and reduce (not eliminate) the number of disparate individual applications. Next is the rationalization stage where firms centralize data and business processes. Normally, enterprise systems (e.g., enterprise resource planning systems) are introduced to bring improved enterprise-wide process optimization. The final stage of IT architecture is the modular architecture stage that allows customized modules while maintaining centralization of data and processes. The main benefit of the modular stage is strategic agility. Appendix A provides a more complete description of the stages of IT architecture.

The preceding discussion suggests a linear step-wise progression. However, progressing through the IT architecture stages reflects the culmination of continued efforts and the combination of resources that, when assembled together, endow firms with unique IT capabilities that strengthen the firms competitive position (e.g. Bharadwaj 2000; Grant 1991; Ross 2003). These notions are consistent with the resource-based-view (RBV) theory of the firm (Barney 1991; Mata et al. 1995), where firms can attain competitive advantages when they possess resources that are valuable, rare, hard to imitate, and non-substitutable. In the context of IT architecture maturity, resources can include IT physical infrastructure (spending), the technical and managerial IT knowledge, managerial incentives, leadership, vision and power. The mere presence of resources (IT-based or otherwise) does not necessarily translate into a source of competitive advantage (Barney 1991; Mata et al. 1995). For example, extant research documents mixed results with respect to the association between ERP adoption and both market and operating performance (e.g., Nicolaou 2004; Poston and Grabski 2001). These results illustrate that although all firms have the ability to adopt a seemingly ubiquitous technology (e.g., ERP system, SCM system, CRM system), only some of the adopting firms possess additional key ingredients, such as IT and managerial knowledge, incentive systems and culture, that when assembled together, are able to generate unique capabilities. The success or value of an IT resource may thus depend on its embeddedness with other related or complementary resources (Barney 1991; Bharadwaj 2000; Peteraf 1993).

Agency theory (Jensen and Meckling 1976) complements and extends arguments articulated under the RBV and sheds light on factors that may encourage managers to make a commitment to higher IT architecture maturity. In agency relationships, principals (e.g., shareholders) delegate decision making rights and authority to an agent (e.g., manager), who is assumed to be self-interested and relatively more risk-averse than the principal (Jensen and Meckling 1976). The divergence in risk preferences are likely to result in agency costs as reflected in the underinvestment in positive (albeit risky) net present value projects (Jensen and Meckling 1976). Because progressing through the IT architecture stages involves uncertainty and risks (Ross 2003), managers may be deterred from committing the resources and making the business process changes necessary to advance through the IT architecture stages. One way to align incentives and mitigate the risk-preference differences between a manager and shareholders is to implement compensation schemes that tie the managers wealth to firm value (Jensen and Meckling 1976; Core and Guay 1999, 2002).

In sum, the RBV theory of the firm suggests that the capabilities associated with IT architecture maturity refer to the firms ability to integrate IT resources with other valuable organizational resources to allow the firm to implement value enhancing strategies (Amit and Schoemaker 1993; Bharadwaj 2000). Agency theory (Jensen and Meckling 1976) complements this view and predicts that properly incentivized managers are more likely to commit resources and make requisite organizational changes to direct the firm towards higher IT architecture maturity. Based on the preceding theoretical arguments, it follows that firms with more mature IT architectures are better positioned to implement overall business strategies that, in turn, should be associated with higher levels of operational and market performance. Therefore, our main expectation is that IT architecture maturity will be positively associated with future operational and market performance.

Related studies (e.g., Dehning et al. 2007; and Hendricks et al. 2007; Hitt et al. 2002; Hunton et al. 2002; Hunton et al. 2003; Nicoloau 2004) focus on the impact of large enterprise system implementations on operating and firm performance. The results of these studies are mixed.

Examining data from eight hospitals, Devaraj and Kohli (2003) show that the driver of IT business value is not the investment in technology per se, but the actual usage of such technology.

We define each of these stages in greater detail in the background section of the paper.

This line of reasoning is consistent with Bharadwaj (2000), who proposes that while although individual unique resources are the basic units of analysis, firms generate competitive advantages by assembling IT resources that together generate capabilities.

Mata et al. (1995) contend that IT knowledge and skills is the key factor endowing firms with a sustained competitive advantage. Our empirical results are consistent with this theoretical prediction as IT knowledge in the top management team and board of directors explains a substantial amount of the variation in IT architecture maturity.

We focus on the Chief Executive Officer (CEO) because he/she is the executive ultimately responsible for firm strategy and performance. Without the CEOs support, achieving higher levels of IT architecture maturity may be constrained or halted (Ross 2003).

As discussed more fully below, prior research documents that monetary managerial incentives measured though performance-contingent compensation such as stock options - capture a unique resource, i.e., human capital (Hanlon et al. 2003). This finding is consistent with, and complements, the RBV.

This notion rests on the assumptions that firms compete with homogeneous and perfectly replicable resources. These assumptions are unlikely given the observed variability in resources and strategic investments that companies make even within the same industry. Within the context of IT architecture, we contend that some firms may possess relevant physical, human and organizational resources that position them to strategically leverage IT (Barney 1991).

Weill and Vitale (2002) propose a similar definition of IT architecture in the context of Ee-commerce models. They define it as the foundation of budgeted-for IT capabilities shared throughout the firm as reliable services, and centrally located.

Capabilities associated with mature IT architectures include the ability to access data for new applications, the seamless addition of channels to existing processes, the capacity to integrate data from related processes, and the faculties to replicate systems in disperse geographic locations, among others (Ross 2003).

The RBV theory relies on the assumptions that resources are heterogeneously distributed across firms and imperfectly imitable (Barney 1991).

Relative to managers, shareholders can afford to be more risk-seeking because they are able to diversify unsystematic risk by including various securities in their investing portfolio. On the other handIn contrast, managers are risk-averse due to their inability to diversify the unsystematic risk arising to their employment with their current firm (i.e., they cannot diversify their human capital by working in various firms simultaneously).

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