A Method for Assessing the Economic Impact of Information Systems Technology on Organizations

TLDR: A methodology for assessing the productivity of expenditures on information systems technology on the economic performance of business units (or profit centers) is presented, and its use for several types of analysis within an organization is demonstrated.

Abstract: Although the relative efficiency of information technology (IT) continues to improve at an exponential rate, the real investment in this technology throughout the economy is also expanding. Despite these two empirical facts, the ability of managements to assess the economic impact of IT on their organization's performance has not progressed very far in the past two decades. This paper presents a methodology for assessing the productivity of expenditures on information systems technology on the economic performance of business units (or profit centers), and demonstrates its use for several types of analysis within an organization. A business unit is modeled as a production process that employs various input resources to produce commodities which yield economic outputs (such as profits, revenues, ROI, market shares, etc.). The approach employs microeconomic production frontiers to compare output performance of organizational units through the method of data envelopment analysis based on mathematical programming. With IT expenditures isolated as separate input factors, methods for analyzing business unit performance based on production efficiency are described. Application of these procedures to cross-sectional and to longitudinal investigations of empirical data are discussed, and numerical examples are included. While the approach is primarily descriptive at this stage, it provides guidance for more indepth normative study to determine preferred management practices.