Evaluating Information Systems Alignment in Small Firms

Paul Cragg Professor Department of Accountancy, Finance & Information Systems University of Canterbury Private Bag 4800 Christchurch, 8020, New Zealand email: [email protected] phone: ++64-3-364-2622 fax: ++64-3-364-2727 Marco Tagliavini Università Carlo Cattaneo – LIUC Castellanza (VA), Italy [email protected]

Evaluating Information Systems Alignment in Small Firms Abstract Many studies of IS alignment have focused on the alignment between business strategy and IS strategy. This study is different to these prior studies as it develops a measure of IS alignment that is focused on business processes rather than business strategy. Therefore, it examines whether IS is aligned with business processes, i.e. the functional sub-component of the Henderson & Venkatraman (1993) model of IS alignment. The framework for this study was the Process Classification Framework (PCF) by the American Productivity & Quality Center (APQC, 2005). The framework identifies twelve first-level business processes and a total of 63 second-level processes. For example, one of the first-level processes is ‘develop vision and strategy’. The PCF suggests this particular process has three second-level processes: “define the business concept and long-term vision”, “develop business strategy”, and “manage strategic initiatives”. Other first-level processes include: “market and sell products and services”, “develop and manage human capital”, and “manage IT”. The goal of this project was to create a measure of alignment between IS and a firm’s business processes. A sample of 37 small manufacturing firms was studied. A questionnaire was created to guide interviewers and asked managers to indicate how important each business process was to their firm. Managers were also asked to indicate how well IS contributes to each business process. The data has been analysed using both matching and moderation techniques (Chan et al, 1997). The results indicate that the business process approach looks promising as the instrument could provide an efficient measure of IS alignment for small firms. The preliminary analysis indicates that both matching and moderation techniques can be useful. Keywords: Information systems, alignment, business processes, small firms.

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Evaluating Information Systems Alignment in Small Firms

1. INTRODUCTION Firms want their information systems (IS) to not just work but to be effective and efficient. Thus firms need to manage their IS. However, unlike large firms, few tools have been developed that are aimed at helping small and medium-sized (SME) firms manage their IS. One of the key aspects for owners to manage is whether a firm’s IS is serving the firm well. In large firms, this problem has been addressed under the topic of “IS alignment”, which refers to how well IS fits the aims and needs of the firm (Henderson & Venkatraman, 1993). To help SMEs manage IS alignment, this paper presents a model that is specifically designed to evaluate an SME’s IS alignment. The model is drawn from the literature and is centered on the process-based view of the firm. The main aim of the model is to evaluate the alignment between IS and the firm’s business processes. This paper presents the model’s theoretical background, as well as some evidence from the model’s use with a sample of Italian SMEs. 2. IS Alignment The model of IS alignment by Henderson & Venkatraman (1993) identifies four domains: business strategy, IS strategy, organizational infrastructure, and IT infrastructure. Their model indicates that organizations have many aspects of alignment to manage. In particular, organizations have to manage the fit between strategy and structure, that is, strategy and structure have to match. Henderson & Venkatraman (1993) argue that the firm is more likely to be successful if there is a good fit between strategy and structure. In addition, firms need to manage the fit between business and IS. If IS fits the needs of the business, then it is likely that IS will be enabling the firm to perform well. The model has been the basis for many studies that have examined how well firms have aligned IS and the business. While some of this research has attempted to consider the whole model (for example, Bergeron et al, 2004) and thus all aspects of fit, most studies focus on part or parts of the Henderson & Venkatraman (1993) model. In particular, there have been a growing number of studies that focus on ‘strategic integration’, that is, the alignment between business strategy and IS strategy. One of the most comprehensive attempts to quantify strategic alignment was by Chan et al (1997). Their study demonstrated a positive relationship between strategic alignment and business performance. Business strategy

↔ Strategic integration

I/T strategy

Organizational infrastructure and processes

↔ Operational integration

I/S infrastructure and processes

Figure 1. The major components of strategic alignment (Henderson & Venkatraman; 1993) Only a few studies (for example Luftman and Brier, 1999) have focused on “operational integration”, that is, the link between organizational infrastructure and IS infrastructure within the Henderson & Venkatraman (1993) model. Aerts et al (2004) show how the business structure, the 3

software applications, and the hardware infrastructure interact and affect each other through parallel development processes. Other researchers (Benjamin et al., 1993; Malhotra, 1993) outline the need of a correct planning and development of organizational requirements in order to get a competitive advantage from the use of IT: “for IT-based change to be effective, technology, business processes, and organization need to be adapted to each other”. The study by Raymond et al (1995) of SMEs found a strong correlation between structural sophistication (as an indicator of organizational infrastructure) and IS sophistication (as an indicator of IS infrastructure). Thus SMEs that were more structurally sophisticated (in terms of being more formal, more administrative and more professional) had more sophisticated IS (in terms of their IS use and IS management). They also found partial support for operational integration being linked to higher firm performance. IS alignment issues have been recognized for many years within the small firm literature. For example, Thompson & Iacovou (1993) examined how well business critical success factors (CSF's) were supported in small firms. Also, Levy et al (1998) provided evidence of IS alignment within some of their different types of small firms. In particular, within their 'innovation' type small firms, they reported that "IS are an integral and tightly woven part of the business strategy" (p. 6). This is in contrast to their ‘efficiency’ type small firms, where Levy et al (1998) recognised a lack of alignment; "there is no recognition of the role of information in supporting the achievement of business strategy" (p. 5). The growing interest in IS alignment within small firms has led to studies that have aimed at examining both the level of alignment as well as factors that influence the level of alignment. For example, Cragg et al (2002) reported that many small firms have achieved high levels of alignment between IS and business strategy, and that firms with high alignment performed better. Hussin et al (2002) found that strategic alignment in small firms was influenced by many factors, but particularly by IS maturity and the CEO’s software knowledge. Scott Morton (1991) reported that successful organizations are characterized by a high level of alignment between five basic elements: strategy, business structure, individual competencies, process management, and IS. According to this study, the ability of business processes to create value depends on the alignment between IS and the business strategy. Tallon and Kraemer (1999) studied the alignment between IS and business strategy through a process-oriented approach: in their work they define the concept of strategic alignment as the extent to which the IS strategy supports and is supported by the business strategy. In conclusion, prior studies have investigated IS alignment, with many studies using the Henderson & Venkatraman (1993) model as a framework. However, the focus of these studies has tended to be on ‘strategic alignment’ rather than ‘operational alignment’. Thus operational alignment is an under-researched topic, particularly in the context of small firms. In some ways this is surprising as there is much evidence to indicate that managers of small firms are more interested in operational issues compared with strategic issues, particularly when it comes to IS (Faverio et al., 2003; Hagmann and McCahon 1993). 2.1 Measuring IS Alignment There has been considerable debate in the literature about how alignment should be measured. The two most popular approaches are referred to as ‘matching’ and ‘moderation’ (Chan et al, 1997). The matching perspective is most commonly based on the difference between the two measures. For example, if a business process gains a strategic importance score of five, and an IS contribution score of three, then the matching approach would calculate the difference of the two scores, that is, (5-3 = 2) to indicate a level of mis-alignment of two. Alignment is thus the level of similarity 4

between the measures. A high correspondence is considered to result in improved firm performance. The moderation perspective assumes that fit reflects a synergy between IS and business, with fit being a primary determinant of performance. Under moderation, alignment is calculated as the interaction between the business score and the IS score. For example, if a business process gains a strategic importance score of five, and an IS contribution score of three, then the matching approach would calculate the product of the two, that is, (5*3 = 15) to indicate a level of alignment of 15. This perspective gives a higher weight to the processes that are seen as most important to the organisation. This is based on the notion that, if a business process is considered to be highly important, then it is most important for IS to support that process if the firm aims to perform well. The matching and moderation perspectives have been used by a number of researchers, and other perspectives are still being explored. Van de Ven & Drazin (1985) concluded: “Studies should be designed to permit comparative evaluation of as many forms of fit as possible” (p. 358). This suggested that more than one approach should be examined. However, studies have tended to indicate that the moderation approach is more consistent than the matching approach. For example, Chan et al (1997) compared results for both approaches and supported the moderation model. Hoffman et al (1992) concluded that the moderation model was the least ambiguous and most widely applicable. In the small firm setting, Cragg et al (2002) reported inconsistent results with the matching approach. As a result, warned researchers to be cautious, particularly with the matching approach, despite the matching approach being simpler to use and easier to explain. 3. Research Design 3.1 Process-based approach Much research claims that a process-based view of firms can be useful when studying a number of common organizational problems, such as fragmentation or the lack of cross-functional integration (Galbraith et al. 1986; Harrington 1991; Garvin 1998), while enabling individual workers to identify and anticipate new business opportunities (Davenport 1993; Brooke 2000). In particular, a process-based approach rather than a functional approach seems appropriate for studying SMEs, as employees carry out inter-functional tasks and do not precisely define their roles (Dutta et al. 1999). The three parts of the Henderson and Venkatraman “organizational infrastructure and processes” are: administrative structure, processes, and skills. Thus, their model recognizes business processes as a significant part of organizational infrastructure. In terms of alignment, Henderson and Venkatraman argue that business processes need to fit the firm’s business strategy. And IS should fit the firm’s business processes. This paper is going to focus on this aspect of alignment, that is, between business processes and IS. 3.2 Process Classification Framework The model used to identify the business processes is the Process Classification Framework (PCF) by the American Productivity & Quality Center’s International Benchmarking Clearinghouse (APQC, 2005), an industry-neutral enterprise model to allow organizations to identify their activities from a horizontal cross-industry process viewpoint. It consists of a taxonomy of business processes organized into four levels of detail: categories, process groups, processes, and activities. The PCF is a very detailed list of more than 700 items classified into 12 first-level categories (table 1). The PCF was developed by Arthur Andersen and the American Productivity and Quality Center starting in 1992: its first version was published in 1996 and was used as the basis to organize the best practices knowledge (O’Leary, 2004). 5

Table 1. The list of first and second-level items of the APQC process classification framework (the six items belonging to category two were originally placed at the third level). Business Activity 1 Develop Vision and Strategy 1.1 Define the business concept and long-term vision 1.2 Develop business strategy 1.3 Manage strategic initiatives 2 Design and Develop Products and Services 2.1 Develop strategy and concepts for new products and services 2.2 Produce new products and services, and evaluate and refine existing products and services 2.3 Design, build, and evaluate products and services 2.4 Test market for new or revised products and services 2.5 Prepare for production and marketplace introduction 2.6 Support and implement changes to product manufacturing and service delivery process 3 Market and Sell Products and Services 3.1 Develop marketing, distribution, and channel strategy 3.2 Develop and manage customer strategy 3.3 Manage advertising, pricing, and promotional activities 3.4 Manage sales partners and alliances 3.5 Manage sales opportunity and sales pipeline 3.6 Sales order management 4 Deliver Products and Services 4.1 Plan for and acquire necessary resources (Supply Chain Planning) 4.2 Procure materials and services 4.3 Produce/manufacture/deliver product 4.4 Deliver product service to customer

Business Activity 7 Manage Information Technology 7.1 Manage the business of information technology (IT) 7.2 Develop and manage IT customer relationships 7.3 Manage business resiliency and risk 7.4 Manage enterprise information 7.5 Develop and maintain information technology solutions 7.6 Deploy information technology solutions 7.7 Deliver and support information technology services 7.8 Manage IT knowledge

8 Manage Financial Resources 8.1 Perform planning and management accounting 8.2 Perform revenue accounting 8.3 Perform general accounting and reporting 8.4 Manage fixed assets 8.5 Process payroll 8.6 Process accounts payable and expense reimbursements 8.7 Manage treasury operations 8.8 Manage internal controls 8.9 Manage taxes 9 Acquire, Construct, and Manage Property 9.1 Property design and construction 9.2 Maintain workplace and assets 9.3 Dispose of workspace and assets 9.4 Manage physical risk

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4.5 Manage logistics and warehousing

9.5 Manage capital asset

5 Manage Customer Service

10 Manage Environmental Health and Safety 10.1 Determine health, safety, and environment impacts 10.2 Develop and execute health, safety, and environmental program 10.3 Train and educate employees

5.1 Develop customer care/customer service strategy 5.2 Manage customer service 5.3 Perform after sales installations and repairs 5.4 Measure and evaluate customer satisfaction 5.5 Manage customer service work force

10.4 Monitor and manage health, safety, and environmental management program 10.5 Ensure compliance with regulations 10.6 Manage remediation efforts

6 Develop and Manage Human Capital 6.1 Create and manage human resources (HR) planning, policies, and strategies 6.2 Recruit, source, and select employees 6.3 Develop and counsel employees 6.4 Reward and retain employees 6.5 Re-deploy and retire employees 6.6 Manage employee information

11 Manage External Relationships 11.1 Build investor relationships 11.2 Manage government and industry relationships 11.3 Manage relations with board of directors 11.4 Manage legal and ethical issues 11.5 Manage public relations program 12 Manage Knowledge, Improvement, and Change 12.1 Create and manage organiz. performance strategy 12.2 Benchmark performance 12.3 Develop enterprise-wide KM capability 12.4 Manage change

The PCF has evolved over time. Firstly, the APQC study structure was based on Porter’s value chain. Then, APQC developed a revised version of the value chain that they used as the basis for development of the PCF. In 1996, there were 13 top-level categories and 71 second level concepts. In 2003, there were 13 top-level categories and 60 second-level subcategories. The current version (June 2005) has 12 top-level categories and 63 second-level subcategories. The most important differences with respect to Porter’s value chain are (O’Leary, 2004): • Porter uses “Inbound Logistics” and “Outbound Logistics”, while APQC uses “Produce and Deliver”. APQC does not treat distribution separately. • Porter uses “Operations”, while APQC uses “Design Products and Services” and “Produce & Deliver”. APQC expands the notion of operations to include design. • APQC includes “Develop Vision and Strategy” as a primary function, but that function is not represented in Porter. • Porter lists “Firm Infrastructure” as a support function. APQC includes a number of such general infrastructure categories, including, “Manage Information”, “Manage Financial and 7

Physical Resources”, “Execute Environmental Management Program”, “Manage External Relationships”, and “Manage Improvement and Change”. A few researchers refer to the PCF as a tool to effectively identify and manage business processes. Davenport (2005) talks about the PCF by highlighting the importance of defining standard processes. Kankanhalli and Tan (2004) report that the PCF can be employed to benchmark and assess the impact on business processes as a result of the introduction of knowledge management initiatives. English and Baker (2006) use the PCF for “reaching out and finding hundreds of best practices in the world’s stockpile of knowledge and importing them for use or reuse to achieve value and profit”. Moreover, the PCF has been used by the partners of the CEBUSNET European Project for the collection and evaluation of business best practices (Seibt et al., 1997). The overall objective of project CEBUSNET is to strengthen the competitiveness of European enterprises by collecting, describing, verifying, consolidating, adjusting, and disseminating business best practices. 4. Methodology This study measured the alignment between IS and a firm’s business processes based on the evaluation of two important indicators: • the strategic importance of each process (firms were asked to quantify the strategic importance of each of the 12 first-level processes) • the level of IS support (firms were asked to quantify, for each of the 12 first-level processes, how well information systems contributed to the process). Both the strategic importance of business processes and the level of IS support were evaluated on a five value Likert scale, from one (low) to five (high). Moreover, in order to validate the PCF within SMEs, the firms were asked which of the second-level processes were carried out by the firm (for every activity of the list below, please specify if it is carried out by your firm). The questionnaire has been used with a sample of 66 small and medium sized firms. According to the current definition provided by the European Community, the sample is composed of 26% of micro companies (from 1 to 10 employees), 56% of small firms (from 11 to 50 employees), and 18% of medium-size companies (from 51 to 250 employees). In this work, the authors decided to focus on the 37 small firms within the sample. As shown in Figure 2, most of the surveyed companies have between 21 and 50 employees (68% of the sample). from 11 to 20 32%

services 19%

metal & mechanical 35%

printingpackaging 5%

electronic 8% chemical 3% from 21 to 50 68%

mechanical 30%

Figure 2. Distribution of the sample by Figure 3. Distribution of the sample by industry size Moreover, the surveyed companies were classified by industry (Figure 3). The sample is mainly composed of manufacturing firms (81%), with a smaller percentage of services firms (19%). From the geographical point of view, the sample is composed of companies placed in the Lombardia Region (northern part of Italy). 8

5. Results This section presents descriptive results for the 37 firms. Tables 2 and 3 report data by process, while Figure 4 reports firm-level data. Table 2 indicates which processes are of most/least strategic importance to small firms, and which processes are best/least supported by IS. Data has been sorted and presented based on ‘strategic importance’. It shows four business processes with scores close to 4. Three of these are considered by the PCF as ‘operating processes’ while managing financial resources is a ‘support service’. The bottom set of three processes in Table 2 shows that three processes had scores of 3 or less. All three were ‘support services’ within the PCF framework. The IS contribution column in Table 2 indicates how well each business process was supported by IS. The data indicates two patterns of importance. Firstly, the IS data shows a reasonable fit to the ‘strategic importance’ data, particularly for the lowest rated processes. For example, IS support tends to be highest for the processes of greatest importance. The second observation is that the scores for IS support tend to be lower than the ‘importance’ scores, with a few exceptions. These differences suggest there is the potential for many firms to improve their IS support for most business processes. Table 2. Level of strategic importance for each business process Strategic Business Process Importance (mean) Deliver Products and Services 4,2 Manage Customer Service 4,2 Manage Financial Resources 3,9 Design and Develop Products and Services 3,9 Develop Vision and Strategy 3,5 Market and Sell Products and Services 3,4 Manage Knowledge, Improvement, and Change 3,3 Manage Information Technology 3,2 Develop and Manage Human Capital 3,1 Manage Environmental Health and Safety 3,0 Acquire, Construct, and Manage Property 2,8 Manage External Relationships 2,5

IS Contribution (mean) 3,6 3,3 3,7 3,7 2,8 3,0 2,8 3,5 2,4 2,4 2,1 2,3

Table 3 indicates which processes are most/least aligned. It shows that some processes are better supported by IS than others. The data has been sorted based on the matching score for alignment and shows that some processes are highly aligned, and others not so well aligned. For matching, a low score means high alignment, while a high score means low alignment. The opposite is true for the moderation approach. For moderation, a low score means low alignment while a high score means high alignment. It is important to note that the matching and moderation scores are not consistent, ie, they do not tell the same picture. For example, ‘manage external relationships’ is highly aligned under matching (ranked 2nd) but poorly aligned under moderation (ranked 11th equal). Such inconsistencies need to be explained through further research.

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Table 3. The most aligned processes (sorted on matching) Business Process Design and Develop Products and Services Manage External Relationships Market and Sell Products and Services Manage Knowledge, Improvement, and Change Manage Financial Resources Manage Information Technology Manage Environmental Health and Safety Develop and Manage Human Capital Deliver Products and Services Acquire, Construct, and Manage Property Manage Customer Service Develop Vision and Strategy

Matching (mean) 0,54 0,81 0,84

Moderation (mean) 15,41 6,16 10,92

0,84 0,89 0,97 1,00 1,03 1,05 1,11 1,14 1,16

10,14 14,81 11,62 7,78 7,49 15,00 6,16 13,84 9,86

Figure 4 presents a scattergraph for alignment scores for each firm using both matching and moderation. The graph does indicate the expected negative correlation for the full set of 37 firms.

Moderation

Scattergram for matching v's moderation by firm 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 0.00

0.50

1.00

1.50

2.00

Matching

Figure 4: Scattergraph for alignment data by individual firm – matching v’s moderation. However, the graph shows that the two scores for alignment are not perfectly correlated. For example, the firm on the far right of the graph is a firm that has a matching score of 1.75 and a moderation score of 10.58. This firm has the worst matching score (rank 37) but many firms on the graph can be seen to have a lower (worse) moderation score, ie, scores of less than 10.58. Although the firm is ranked 37 on matching, it is ranked 21 using moderation. Thus the two approaches are inconsistent. Thus further research is required to explain such inconsistencies. 6. Conclusions and Future Work This paper focused on the alignment of information technology with business processes within SMEs. The paper has proposed a new approach to measure IS alignment, based on a business 10

process framework. The framework was used to measure alignment in a sample of SMEs, based on a questionnaire that was administered to managers during face-to-face interviews. One of the most important contributions of the study is the step towards the development of a practical method to measure IS alignment in small firms. The relative simplicity of the approach shows promise. However, aspects of both validity and reliability require further research. In particular, the inconsistent results for ‘matching’ and ‘moderation’ have to be explained. Further research could indicate that one of the approaches is more valid. For example, Chan et al (1997) concluded that the moderation approach was superior to the matching approach. Also, Cragg et al (2002) concluded that the matching approach could give misleading results. The data for this paper was collected through direct interviews with the CEO. In some firms, the CIO was also interviewed, ie, the person in charge of IS management. Thus, for some firms, we have data from two interviewees. While the CEO would seem to be the most suitable person to assess the strategic importance of each business process, he/she may not be aware of the actual level of IS support within the company. Thus we plan to extend the data analysis to compare the CEO and CIO perceptions, with the aim of making a recommendation about multiple respondents. A fully validated version of the instrument could be valuable to managers of SMEs, as it could provide them with a simple tool that allows them to gain a relatively speedy measure of IS alignment and thus help them identify areas where the business can improve. Future researchers could also use the instrument to examine IS alignment in SMEs. For example, studies could focus on the antecedents to alignment (Hussin et al, 2002), and the link between alignment and firm performance (Chan et al, 1997). However, it should be noted that the instrument has as yet only been partially tested on a small number of SMEs. It requires further validation with other samples. Other researchers could assist in this process and should assess the applicability of the instrument prior to its use. Importantly, all the firms within this study were manufacturers. The business process framework that is at the heart of the instrument may be biased towards manufacturers. Also, the instrument has as yet, only been used with an interviewer rather than as part of a postal or webbased survey. REFERENCES Aerts A.T.M., J.B.M. Goossenaerts, D.K. Hammer, J.C. Wortmann, Architectures in context: on the evolution of business, application software, and ICT platform architectures, Information & Management, June 2004, pp. 781-794. APQC’s International Benchmarking Clearinghouse and Arthur Andersen & Co. SC, 2005. Process Classification Framework (www.apqc.org) Benjamin R., E. Levinson, A Framework for Managing IT-Enabled Change, Sloan Management Review, 1993, pp. 23-33. Bergeron F., L. Raymond, S. Rivard, “Ideal Patterns of Strategic Alignment and Business Performance, Information & Management, November 2004, pp. 1003-1020. Brooke, C. (2000). "A framework for evaluating organizational choice and process redesign issues” Journal of Information Technology 15(1): 17-28. Chan, Y.E., Huff, S.L., Barclay, D.W. & Copeland, D.G. (1997) Business strategic orientation, information systems strategic orientation and strategic alignment. Information Systems Research, 8:2, 125-150. Cragg, P., King, M. & Hussin, H. (2002). IT alignment and firm performance in small manufacturing firms, Journal of Strategic Information Systems, 11, 109-132. Davenport, T. H., Process Innovation: Reengineering Work Through Information Technology. Boston, MA, Harvard Business School Press, 1993. Davenport, T. H., The Coming Commoditization of Processes, Harvard Business Review, June 2005. 11

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