the generic is/it bussiness value category : cases in indonesia

e-Indonesia Initiative 2008 (eII2008)

Konferensi dan Temu Nasional Teknologi Informasi dan Komunikasi untuk Indonesia

21-23 Mei 2008, Jakarta

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The Generic IS/IT Business Value Category: Cases in Indonesia

Ir. Benny Ranti, MSc.

Graduate Program in Information Technology

University of Indonesia

[email protected]

Abstract

For years, many researchers and practitioners have been debating about the worth or business value of IS/IT investment. By

taking into account the positive impact of IS/IT investment, a research has been done to explore the identification of IS/IT

business values resulting from the implementation of various IS/IT projects in various industries in Indonesia by using a

collection of documents as the key data source. Each document contains valuation report of IS/IT project investments in

organizations collected using Information Economics methodology. The focus of this study is in identifying the IS/IT business

values with hermeneutics as the method to interpret the meaning of the document. In the identification process, IS/IT is seen

from the tool and ensemble views, i.e., how people develop and use IS/IT as a tool to generate value to increase organizational

performance. This paper discusses the research result called the Generic IS/IT Business Value Category which consists of 13

categories and 74 sub-categories. They have been compared against 190 sub-categories from the 4 previous studies built

based on the developed countries case to find out values which might be unique to the Indonesian case.

Keywords: IS/IT investment, organizational performance, IS/IT business value, Information Economics, hermeneutics, tool

view, and ensemble view

1. INTRODUCTION

Information systems/information technology (IS/IT)

business value can be commonly defined as the IS/IT

contributions to improve business performance of the

organization. Topics related to IS/IT business value

measurement or IS/IT investment management have been

among the key issues in IT Governance and

Management/CIO Forum discussions in the last decade.

Luftman, based on his research published in MIS Quaterly

Executive 2006 (Luftman 2006), found that “Measuring the

Value of IT Investments” and “True Return on IT

Investments” were in the Top 10 Management Concerns in

2005. The IT Governance Framework produced by MIT

Sloan School of Management’s Center for Information

Systems Research (CISR) put “IT Investment and

Prioritization” as one of the 5 domains or pillars of IT

Governance (Weill 2002). Peterson also put “IT

Propositions and IT Investments” as one of the key

dimensions in his IT Governance Model (Peterson 2004).

According to survey done by IDC, the worldwide IS/IT

spending covering hardware, software, and services, reached

nearly USD 1 trillion in 2004 and is on the way to reach

USD 1.2 trillion by 2008. It is no surprise that an

investment of that magnitude will attract the attention of top

executives everywhere. Without analyzing the IS/IT

business values properly, the CIO in particular not only can

miss the potential values but also misjudge the total

economic value of the IS/IT investment. This less accurate

judgement might lower down the feasibility level of the

IS/IT project or initiative which might cause the initiative to

be turned down or delayed. Consequently, the company

might loss the opportunity to increase business performance

gained through the implementation of the IS/IT initiative.

Thus, identifying IS/IT business values becomes the basic

necessity to increase the success rate of IS/IT

implementation.

2. RESEARCH FOCUS AND SCOPE

The focus of the research is in identifying IS/IT business

values resulting from the implementation of various IS/IT

projects in various organizations in Indonesia with

hermeneutics as the method to interpret the meaning of the

data sources in the form of text/document. In the

identification process, IS/IT is seen from the tool and

ensemble views, i.e., how people develop and use IS/IT as a

tool to generate value to increase organizational

performance.

The research was conducted using data sources (in the form

of research reports using Information Economics method to

measure IS/IT project) from 60 cases of various IS/IT




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project implementations in various organizations in

Indonesia with the following spread of data:

1. The projects or cases vary including Management

Information Systems (20 cases), Enterprise Resource

Planning (10), Banking System (7), Customer

Relationship Management (5), Data Warehouse (3),

Electronic Procurement (3), Intranet (3), Electronic

Learning (3), Billing System (2), Executive Information

Systems (2), and Human Resources Management

System (2).

2. The organizations vary representing Services (12

institutions), Banking (7), Manufacturers (7),

Government (7), Telecommunications (6), Insurance

(5), Distributors (3), Oil and Gas (3), Contractors (2),

Universities (2), and Airlines (2). Each company can be

counted more than one as long as the projects are

distinct.

The choice of the variety of IS/IT projects as well as

organizations where the projects were implemented is by

purpose (purposive sampling). Purposefully picking a wide

range of variation on dimensions of interest or maximum

variation sample to identify important common patterns that

cut across variations was used by the research. The research

follows the understanding that the implementation of IS/IT

brings in values or benefits to any type of organization. The

premise is that any organization or firm has the same

opportunity to use IS/IT optimally in order to get the most

values out of it. It is strengthened by the findings of (Shang

2002) that include there are no apparent differences in types

of benefits across industries and benefits gained by large

and small organizations seemed to be similar.

3. THE GENERIC IS/IT BUSINESS VALUE

CATEGORY

Based on the findings, as a tool (tool view), in general IS/IT

provides 3 functions to generate values, i.e., online or

remote connection, process automation, and process and

data integration. These functions help people (ensemble

view) generate IS/IT business values that can increase

organizational performance. The research result called the

Generic IS/IT Business Value Category consists of 13

categories (and 74 sub-categories) is as follows:

1. Reducing Cost of (travelling cost,

staff/operator/employee cost, meeting cost, service

failure cost, application development cost, delivery

cost, training cost per employee, returning cost for

incorrect delivery, cost of money, office supplies and

printing cost, subscription cost of certain reading

materials or subscription cost per employee, space

rental cost, device rental cost, inventory cost, research

failure cost).

2. Increasing Productivity caused by (restructuring job

function, accelerating mastering product knowledge,

ease of analysis, increasing employee satisfaction).

3. Accelerating Process of (production process, stock

procurement process, report making process, data

preparation process, order checking process, debt

payment process, transaction process, decision making

process).

4. Reducing Risk of (price miscalculation, unrecoverable

claim, inventory lost, rejected goods, data lost, incorrect

data, penalty, losing potential employee, forgery,

administration fraud, incorrect payment, asset

mismanagement).

5. Increasing Revenue caused by (increasing business

capacity, increasing report quality, increasing customer

trust, widening market segment, increasing other

incomes).

6. Increasing Accuracy of (billing, analysis, data,

planning, decision).

7. Accelerating Cash-in caused by (accelerating billing

dispatching).

8. Increasing External Services of (reducing order

cancellation, knowing customer’s problems, adding

point of services, personalized services, customer

satisfaction).

9. Increasing Image caused by (increasing service

quality, offering substantial discounts, complying with

regulations, using branded systems).

10. Increasing Quality of (better supplier/vendor

management, work result, services, products).

11. Increasing Internal Services of (shared services,

matching employee’s right and responsibility, employee

services, proper schedule and training material).

12. Increasing Competitive Advantage caused by

(forming business alliances, accelerating the execution

of new business opportunities, increasing switching

cost).

13. Avoiding Cost (ACO) of (reserved fund, maintenance

cost, lost and delay cost).

The above sub-categories are then compared against 190

sub-categories from the 4 previous studies (Parker 1988,

Remenyi 1995, Tallon 2000, Shang 2002) built based on the

developed countries cases. Based on the comparison, there

are 4 IS/IT business values unique to the Indonesian case,

i.e., “reducing application development cost”, “reducing

subscription cost”, “increasing image caused by complying

with regulations”, and “increasing image caused by using

branded systems”.

4. THE INDONESIAN CASE

4.1. Reducing Application Development Cost

The implementation of medium to large scale or enterprise

wide systems such as Core Banking, Customer Relationship




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Management, Supply Chain Management, and in particular

Enterprise Resource Planning (ERP), has 2 approaches, i.e.,

a “big bang” or all modules and a phased module by module.

Common ERP modules mimic major functional areas of an

organization including production planning, parts and

material purchasing, inventory control, finance, cost

accounting, marketing, sales and distribution, and human

resources. In general, the reasons for choosing a phased

approached are cost, risk, and in particular company’s

unwillingness to adopt the whole best practice business

processes built in the package mostly based on the

American and Western European cases. The latter reason

can be said as unique to Indonesia. It is because most of the

organizations/employees here are reluctant to change their

“working philosophy and procedures” which has gone on

for years.

It is predicted that only around 40-60% of the best practice

business processes will be adopted, the remaining will be

customized to follow the old (existing) business processes of

the company. Customization will take longer time, so it is

unlikely that a company will implement all ERP using a big

bang approach. Knowing this client’s behavior and to lock

in the client, ERP vendors keep selling all ERP modules;

modules which will not be customized and implemented in

the first phase will be put as ready-to-use modules. These

ready-to-use modules are normally inactive or active but

with single license only. Whenever needed, these modules

can be activated, customized, and implemented as usual so

reducing application development cost.

4.2. Reducing Subscription Cost

The availability of online newspaper and business and

technical journals might reduce the paper-based reading

material subscription cost. By using electronic means the

reading materials can also be accessed by more people so

reducing the subscription cost per employee. This sub-

category is not the concern of the previous studies probably

because the subscription cost is affordable by organizations

in the developed countries. In Indonesia, because the

majority of business and technical journals, reports,

magazines, etc., still come from abroad, the cost becomes

substantial especially because of the currency exchange.

For example, IDC charges USD 1,500 (~ Rp. 14,000,000)

for a 38-page report on ASEAN Online Gaming 2006-2010

Forecast and Analysis and charges USD 3,500 (~ Rp.

32,000,000) “just” for a 2-page report on Asia/Pacific

Enterprise Mobility Technology Spending 2006-2010

(http://www.idc.com/). With that scale amount of money, it

is believed that only upper middle and large companies

especially multinational companies in Indonesia which can

afford to pay for it.

4.3. Increasing Image caused by Complying with

Regulations A Core Banking System for example is a system equipped

with facilities to support policies regulated by the Central

Bank including the application of accrual basis, “know your

customer” system, and money laundering protection. By

supporting these Central Bank’s regulations, the system can

increase the company’s compliance level so reducing

unnecessary penalties. Increasing company’s compliance

level will eventually increase company image. In general, at

least there are 4 achievement criteria to measure company’s

performance, i.e., financial, operational, good corporate

governance (GCG), and corporate social responsibility

(CSR). In this research IS/IT is seen from the angle to

support GCG.

IS/IT is part of the initiatives used to enforce company to

comply with certain regulations issued by the regulatory

agency. In our case example, the Core Banking System is

such an enforcement tool that increases company’s

compliance level. Increasing compliance level will increase

GCG and definitely increase company image. This sub-

category is not the concern of the previous studies probably

because it is only relevant for the developing countries like

Indonesia where compliance publicity is still one of the

most effective marketing weapons. In Indonesia, the success

of an organization to get certified by the International

Standards Organization (ISO) is widely publicized for

increasing image in particular. The certification ceremony is

valid and probably a common practice everywhere including

in the developed countries. However, whether or not the

international compliance standards are implemented by the

organization properly is another side of the coin as long as

the certification has already increased the organization

image in the first place.

It is believed that in the developed countries like the USA

compliance is already built in both people and

organization’s way of life. It is mandatory and

disobediences will be punished severely. A well-known

example is the Enron case in 2001 affecting the dismissal of

one of the big international consulting firms. Quickly in

response to the need for stronger compliance regulations for

publicly listed companies, the Sarbanse-Oxley Act was

issued in 2002 which shows how importance this way of life

for the USA.

4.4. Increasing Image caused by Using Branded

Systems

The brand value of already proven system and used by well-

known corporations can be used to increase company image

and it is a common practice everywhere and this is a case

especially happened in immature and inefficient market like

Indonesia where unbranded systems are available in the




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market and a brand is still a strong marketing hype. Branded

system might increase company image although it might not

be the correct solution. The latter case is common in

Indonesia.

It is possible that the costs of failures due to incorrect

solution is offset by the benefits or values gained due to

increased image. So leveraging the brand value of the

system, regardless of whether the system gives correct

solutions or not, is a strategic step to increase company

image which in return might increase revenue. This sub-

category probably is not relevant for mature markets found

in the developed countries.

5. CLOSING REMARKS

The construction of the Generic IS/IT Business Value

Category has shown the role of IS/IT as a tool whose

intended purpose is to generate values especially for the

customers, employees, and organization including

stakeholders. All the identified IS/IT business values from

as simple as reducing meeting cost and increasing

productivity, to more complex ones such as increasing

image and increasing quality of products, have contributed

to the increasing level of organizational performance.

The presence of IS/IT is not meant to substitute the people’s

role in managing and running the organization. In reality,

the fundamental management functions such as planning,

organizing, executing, and controlling, are still under the

people’s command. The role of IS/IT is to help people do

their functions more efficiently and effectively.

The Generic IS/IT Business Value Category has enriched

the classification/categorization of IS/IT business values of

well-known IS/IT valuation methods including Information

Economics, Economic Value Added, and Real Options,

which might be very helpful in the process of measuring

IS/IT business values especially for the Indonesian cases.

6. REFERENCES

[1].Luftman, J., Kempaiah, R., and Nash, E. "Key Issues for

IT Executives 2005," MIS Quarterly Executive (5:2),

June 2006, pp 27-46.

[2].Weill, P., and Woodham, R. "Don't Just Lead, Govern:

Implementing Effective IT Governance," in: Center for

Information Systems Reseach Working Paper No. 326,

MIT Sloan School of Management, 2002.

[3].Peterson, R. "Crafting Information Technology

Governance," Information Systems Management (21:4)

2004, pp 7-22.

[4].Shang, S., and Seddon, P.B. "Assessing and Managing

the Benefits of Enterprise Systems: the Business

Manager's Perspective," Information Systems Journal

(12:4), November 2002, pp 271-299.

[5].Parker, M.M., Benson, R.J., and Trainor, H.E.

Information Economics - Linking Business Performance

to Information Technology Prentice-Hall, 1988.

[6].Remenyi, D. The Effective Measurement and

Management of IT Costs and Benefits Butterworth-

Heinemann, 1995.

[7].Tallon, P.P., Kraemer, K.L., and Gurbaxani, V.

"Executive's Perceptions of the Business Value of

Information Technology: A Process-Oriented

Approach," Journal of Management Information Systems

(16:4) 2000, pp 145-173.

ABOUT THE AUTHOR

Benny holds Bachelor Degree in Electrical Engineering

from the University of Indonesia and Master of Science

Degree in Computer Science from Michigan State

University, USA. He is a doctoral candidate of Faculty of

Computer Science, University of Indonesia, with research

area in IT investment valuation, especially in identifying IT

business values resulting from various IT implementations

in various institutions in Indonesia.

Benny is Vice Chairman of Permanent Committee of IT –

the Indonesian Chamber of Commerce and Industry

(KADIN) Indonesia, Director/Founder of PT. Inforindo

Intersolusi – IS/IT Consulting Firm, President

Director/Founder of PT. Ayola Cybernet – Online Game

Center, and Lecturer/Thesis Advisor at the Graduate

Program in IT, University of Indonesia.




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