Information technology infrastructure, organizational process redesign, and business value: An...

Decision Support Systems 49 (2010) 417–429

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Decision Support Systems

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Information technology infrastructure, organizational process redesign, and businessvalue: An empirical analysis

Ronald Ramirez a,⁎, Nigel Melville b,1, Edward Lawler c,2

a Business School, University of Colorado Denver, United Statesb Stephen M. Ross School of Business, University of Michigan, Ann Arbor, United Statesc Marshall School of Business, University of Southern California, United States

⁎ Corresponding author. Tel.: +1 303 315 8439.E-mail addresses: [email protected] (R.

(N. Melville), [email protected] (E. Lawler).1 Tel.: +1 734 764 0199.2 Tel.: +1 213 740 9814.

0167-9236/$ – see front matter © 2010 Elsevier B.V. Aldoi:10.1016/j.dss.2010.05.003

a b s t r a c t
a r t i c l e i n f o
Article history:Received 18 December 2008Received in revised form 29 April 2010Accepted 6 May 2010Available online 2 July 2010

Keywords:Business valueInformation technologyOrganizational complementsProcess redesignReengineeringProduction functionMarket value

We extend current research examining synergies between information technology, process redesign, andfirm performance in three ways: analyze a firm's entire IT and BPR portfolio, examine production and marketvalue performance implications, and conduct analysis using a unique dataset of 228 firms between 1996 and1999. We find a contingent association between IT, process redesign, and performance. The interaction of ITand BPR portfolios is positively associated with firm productivity and market value. However, we find mixedevidence of a difference in these impacts across different types of BPR. Insights for business investment in ITand process redesign are discussed.

Ramirez), [email protected]

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© 2010 Elsevier B.V. All rights reserved.

1. Introduction

Business process redesign (BPR) is an approach to improvingorganizational performance that focuses on business processes andtheir efficiency [30,46,47]. The concept has evolved from its reengineer-ing roots into today's process-based approach to organizational change(e.g., qualitymanagement, human resourcemanagement, and customerrelationship management) [3,18,64]. The promise of substantialfinancial gain has motivated numerous firms across a wide range ofindustries to adopt major process change initiatives [20,69,71], withsome achieving significant benefits [7,69]. However, documented ratesof redesign failure are also high, with some estimates as large as 70%[47]. Collectively, the conflicting evidence of both BPR success andfailure has led to a “paradox of BPR outcomes,” warranting furtherinvestigation to assist managers in their evaluation of process changeopportunities [43].

The variability in BPR success is rooted in many factors, includingthe challenge of implementing information technology to supportprocess redesign. Information technology is often a central componentof BPR and at times is promoted as a keymotivator for the change itself

[46,47]. Continued innovation in IT and its capabilities implies that IT'srole in process redesign is not likely to diminish. Case-based researchillustrates specific challenges to successful process change and how toovercome them. However, it remains unclear whether IT-enabledprocess change, examined across large numbers of organizations, is arational investment for firms. In addition, there is a deficiency inknowledge concerning the interplay between business processredesign, information technology, and organizational performance atthe program-level (i.e., across all projects in a firm).

In this paper, we contribute to the literature by analyzing theinterplay between process redesign, information technology, andorganizational performance. At any given time, a single organizationmayhavemanyprocess redesign efforts underway. Cigna, for instance,completed 20 reengineering initiatives over a five-year span [21].While examining the value generated from individual processredesign projects is informative, the single-project approach doesnot indicate whether all BPR projects in a firm, taken together, arepositively associated with firm performance. Moreover, evaluating asingle project in each organization may introduce bias given thelikelihood of within-firm heterogeneity in process redesign success.Our unique data set, collected by the Center for Effective Organizationsat the University of Southern California, contains information about anorganization's entire portfolio of redesign projects. This allows us tocomprehensively evaluate the performance impact of the BPRmethodin firms, contributing to an existing research stream which primarilyexamines BPR across only one or a few individual projects.

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418 R. Ramirez et al. / Decision Support Systems 49 (2010) 417–429

We examine two related research questions. First, do the outcomesof all projects in a firm's process redesign portfolio impact the firm'soverall performance? Second, what is the contribution of informationtechnology to the performance improvement generated by a firm'sprocess redesign portfolio? We analyze these questions in depth byusing a unique dataset of firms spanning multiple years and industries,assessing performance via productivity andmarket value, a performancemeasure not previously examined in BPR literature. We also introducetwoprincipal categories of process redesign– cost rationalization aimed atdoingmorewith less andwork restructuring aimed at implementing newbusiness processes – as part of our analysis. Taken together, our researchcontributes to the literature through its analysis of a firm's entire portfolioof BPR projects, an assessment of their performance impacts includingmarket value, and a detailed examination of twowidely adopted types ofBPR.

Our evaluation of the comprehensive impact from a firm's BPRprogram isboth relevant and timely. Spendingonprocess changeprojectsis expected to reach over $6 billion annually within the next four years.Given the mixed results of previous research, our study provides newinformation thatwill informmanagers in their evaluationofBPRspendingat the program-level. Moreover, information technology has long beenpromotedasacentral tenetofprocess redesign [46,47]withcurrent formsof process change continuing the call for IT investment (e.g., businessprocess management) [22,28]. Our research allows us to examine if IT isindeed essential for effective BPR implementation.

Several principal results emerge from our empirical analysis. First,the combination of information technology and process redesign isfound to be synergistic. Both the value added during production and themarket value of a firm are positively and significantly affected by theinteraction of a firm's information technology and BPR portfolios.Second, when examining the IT-BPR relationship further, we identifyvariations in performance impacts depending upon the focus of processredesign. When independently examining the combination of IT andBPR focusing on work restructure, we find evidence of a positiveperformance association with respect to production andmarket values.On the other hand, when analyzing IT and cost rationalization BPR, wefind evidence of a positive and significant relationship with productionvalue but notmarket value.We also find a difference in the incrementalimpacts of high versus low levels of BPR use. Whether it is high levels ofcost rationalization or work restructure, the IT-BPR combination has anegative incremental impact on firm market value. In contrast, noincremental change in production value is identified for different usagelevels of either type of BPR.

Themixed results are not surprising given thewide range of processredesign initiatives and multiplicity of contexts. Rather than indicatingthat combined investment in information technology and BPR is notfruitful, as a benefit does not occur uniformly, our analysis suggests thatfirms can take advantage of IT by taking into account the requirementsof the BPR selected. In other words, rational managers must select theright type of information technology based upon a firm's processredesign goals, regardless of the type of BPR involved. Taken together,the results support ourbasic proposition thatprocess redesign and ITaresynergistic and provide a rational investment opportunity for enablingstrategic organizational change.

In the next section we describe theoretical foundations and developresearch hypotheses. We then explicate our research methodology,including data sources, theoretical models, and empirical methods. Wethen discuss empirical results, summarize key findings, and discussimplications.

2. Theory and hypotheses

2.1. Process redesign

Business process redesign (BPR) involves the creation of new andinnovative business processes [30,47] and represents one way a firm

can adapt to changes in the competitive environment. It is especiallyrelevant in the current business climate, enabling a firm to createflexible business processes that meet the demands of today'sdynamic, information-intensive, global marketplace [22]. The newprocesses implemented through BPR reflect a philosophy of processefficiency across all business functions involved, a fundamental shiftfrom the focus on functional efficiency in the Industrial era. Toredesign a business process, firms invest in a variety of workpractices to implement a desired set of activities that create a serviceor product output that is valued by a customer, whether internal orexternal. In today's high performing organizations, the types of workpractices that can be implemented as part of a business process caninclude the adoption of self-managed teams, new incentive plans,assignment of decision responsibility, work cells, informationsharing policies, and the like [4]. The types of practices implementedare dependent upon the objective (i.e., the process) of the BPRproject.

Process redesign is one of many programs that can produce positiveorganizational change. Other programs utilized by firms includeemployee involvement, total quality management (TQM), lean manu-facturing, six sigma, and business processmanagement. Managersmustbe cautiouswhen considering BPR and other such programs, as at times,they can be insufficient given the challenges faced by the organization[7]. However, when key processes are redesigned correctly, whetherincrementally or radically, BPR has the potential to improve overall firmperformance [30,46–48,70].

2.2. Process redesign, information technology, and organizationalperformance

Information technology provides organizations with the flexibilityto redesign processes and create a high-performing organizationaldesign [16]. This results, in part, from the information processingcapabilities enabled by modern IT; capabilities that were previouslyunavailable when many existing business processes were originallydesigned [31] but are required by modern work practices [49,63].Enterprise software, for example, offers a common data infrastructureacross an organization, providing work cells with the ability to accessall functional data necessary to complete their assigned tasks.Broadband networks allow for the free flow of information, enablingthe timely sharing of critical data with employee teams regardless oflocation. Business intelligence applications improve corporate deci-sion making through the effective analysis of corporate data. Internet-based networks also create an effective control environment wherecentralized managers can monitor the performance of empoweredemployees, helping to ensure that appropriate decision rules are beingfollowed.

Research demonstrates that information technology plays animportant, complementary role in process redesign. The informationcapabilities enabled by IT make technology investment an importantcomplement to work practices associated with organizationalchange [11,49]. Firms with higher levels of IT investment havebeen found to have a greater application of decentralized decisionauthority, use of self-managed teams, and cross-functional units[49]. These and other such work practices leverage the informingand automating capabilities of technology to enable new forms andtypes of organizational structure, decision authority, human re-source management, and the like [14,16,29]. Teams, for example,may be more effective when integrated with technology as IT'scapabilities help to fulfill the information management andknowledge sharing needs of its members [58]. Other organizationalfactors found to complement IT are employee behavior, workercomposition, size, and culture [17,66].

Complementary investment in information technology and pro-cess redesign shape organizations in two stages [56]. First, IT and BPRassets bring about informational, automational, and transformational

Fig. 1. Process redesign, information technology, and organizational performance framework.

419R. Ramirez et al. / Decision Support Systems 49 (2010) 417–429

organizational change at the process-level.3 Informational effectsresult from the implementation of IT and work practices that affectthe organization's capability to collect store, process and disseminateinformation. In short, this type of intermediate improvement istargeted at the redesign of information processes associated with afirm's value chain activities. Automational effects result from the useof IT and BPR-related work practices to automate business processes,removing the use of labor inputs in firm activities. Transformationaleffects arise from the use of IT and work practices to bring aboutprocess innovation and transformation.

While there is a slight overlap between each of these intermediate-level effects, transformational redesign is closer to the type of radicaldesign called for in BPR literature. In contrast, informational redesignis solely focused on information process change whether the level ofchange is incremental or radical. Similarly, automational change has aprimary focus, that of labor reduction. We summarize these threetypes of IT-enabled BPR change as information processing capability,labor substitution, and process transformation, respectively. Theinclusion of intermediate-level outcomes in a framework modelingthe relationship between firm inputs and outputs has precedence inresearch investigating the impacts of IT investment [8].

Each of these intermediate-level effects ultimately affects specificareas of the organization based upon the goals of the BPR program.

3 This section draws heavily from Kohli and Hoadley [56] R. Kohli, E. Hoadley,Towards Developing a Framework for Measuring Organizational Impact of IT-EnabledBPR: Case Studies of Three Firms, The Data Base for Advances in Information Systems,37(1) (2006). as well as prior research informing the three component, process-leveleffect of IT [62] J. Mooney, V. Gurbaxani, K. Kraemer, A Process Oriented Framework forAssessing the Business Value of Information Technology, The Data Base for Advances inInformation Systems, 27(2) (1986).

Kohli and Hoadley [56] summarize these firm-level effects ascustomer value, efficiency, and profitability. When a firm is interestedin change that impacts its market, the company focuses on processredesign that adds value to its customers. If a company is interested inimproving its costs or productivity, it focuses BPR projects on theimprovement of operational efficiency. Finally, if a company wants toimprove profitability, it adopts BPR projects with a dual focus on bothmarket and productivity improvement. It is the “pairing of benefits”from these efforts that leads to higher profitability [56].

Given its theoretical basis and its demonstrated applicability, weadapt the conceptual model developed by Kohli and Hoadley. Kohli andHoadley [56] test the validity of their model using case studies of threelarge organizations that had orwere currently implementing IT-enabledprocess redesign. The findings of the case studies support the model'slinkages andmultilevel pathways between input-level investments andperformance improvement in firms. The results also support theexamination and measurement of IT-enabled BPR project benefits atthe intermediate and organizational levels. The framework details thelink between IT and BPR investments, the intermediate-level changeoutcomes resulting from these investments, and the connection toorganizational-level performance impacts. We now explicate theframework, which has been adapted for the current context (Fig. 1).

At any given time, a firm may have multiple BPR projects underwaysimultaneously, which is illustrated on the left side of Fig. 1. Each of theseBPR projects may require BPR-specific IT, such as customer relationshipmanagement software used to change a firm's customer acquisitionprocess or an inventory management system used to reduce stockoutsrelated to a firm's order fulfillment process. In addition to specializedinvestments, BPR projects also utilize a firm's IT infrastructure, includingpersonal computers, laptops, email, Internet-based networks and the like.


These technology components are also illustrated on the lower-left side ofFig. 1.

At the intermediate-level (middle), a firm's BPR portfolio representsthe collective outcome of all BPR projects in a firm's BPR program.Similarly, the collection of a firm's BPR-specific IT and its IT infrastructuremake up the firm's information technology portfolio. Together, these IT-enabled BPR portfolios target two intermediate impacts: cost rationali-zation andwork restructure. To detect such impacts at the portfolio-level,amanagermight beasked: “Towhat extenthaveyourBPRefforts resultedin cost reduction.” Consistent with Kohli and Hoadley [56], theintermediate-level impacts collectively affect multiple areas of organiza-tional-level performance based upon the a-priori goals of the firm's BPRprogram. According to our conceptual framework, process improvementpayoffs not only impact production efficiency, but afirm'smarket value aswell (Fig. 1, right side).

The performance implication of IT and organizational investmentslike those associatedwith process redesign has led to numerous studiesconcerning the value implications of these investments [9,19,26,52,68].However, few empirical studies examine the association betweenprocess redesign and firm performance [56]. Prior studies haveexamined a single business sector such as hospitals [34], employedperceptualmeasures to examine relationships between process change,IT, andperceivedproductivity [41], and focused on a project redesigninga single business process [67]. Altinkemer et al. [2] analyzed annualreports of life and health insurance firms using content analysis toexamine the impact of process redesign initiatives on financial variablessuch as sales, sales per employee, return on investment, and return onsales. Results indicate some correlationwith sales per employee in thesetypes of organizations, but mixed results for other variables.

We could not identify a single study that examines the linkbetween IT-enabled BPR and organizational-level performance usinga broad sample of firms across several years and that employsobjective performance measures. Nor could we find a study whichexamines the comprehensive performance impact of a firm's entireset of process redesign projects. There has been limited researchassessing the performance impacts of BPR at the intermediate-level,such as a case study of Japan Airlines (JAL). In that study, researchersfound that redesign-inspired management and technology changeshelped JAL automate seat reservation and tickets sale processing,reducing overall processing times and ultimately reducing airlineoperating costs [23]. There has also been research examining impactsat the organizational-level. For instance, researchers analyzed the linkbetween redesign practices and return on equity, cost, and overallperformance at 50 firms in the Australian finance and insuranceindustry [75]. Though mixed overall, the results did indicate astatistically positive association between the proactive use of processredesign and all three measures of organizational performance.

Taken as a whole, research presents evidence of a link betweenspecific IT-enabled BPR projects and performance primarily measuredat an intermediate-level. However, no evidence exists of a positiveassociation between a firm's total investment in all IT-enabled BPRprojects, their comprehensive impact on intermediate portfolio-leveloutcomes, and their overall effect on organizational-level perfor-mance. In addition, despite the identification of positive intermediate-level impacts, [7,34,65,69], there is also ample evidence that processredesign projects may not impact performance. Martin [59] forinstance, reports that for ERP implementations, a technology at thefoundation of many IT process redesign projects in the 1990 s, nearly98%were late or over budget. Hammer and Champy [47] estimate that70% of process redesign projects fail to achieve their expectedbenefits. In-depth case studies in financial service firms, informationtechnology firms, as well as public sector organizations furtherillustrate such failures [33,57]. Indeed, researchers have identifiedfactors that, if missing, may reduce the likelihood of process redesignsuccess [5,21,31,40,45,54,73]. One such study identifies twenty-twofactors that can contribute to BPR failure [1].

Thus, while there is a sound theoretical link between IT, BPR, andperformance, empirical examination of this link presents conflictingevidence. This may be due in part to focusing on a single BPR effortrather than a firm's full portfolio of BPR projects. However, givencontinued investment in information technology and process rede-sign, we expect a synergistic, positive link to exist between IT, BPR,and organizational performance across a firm's entire processredesign effort. From an economic viewpoint, if this positiveassociation did not hold, rational managers would simply stopinvesting in this type of organizational change and would chooseother alternatives. In sum, we expect:

Hypothesis 1. The interaction between an organization's informationtechnology and process redesign portfolios is positively and signifi-cantly associated with organizational performance.

To test Hypothesis 1, we examine two dimensions of firm per-formance. First, we examine the impact of IT and BPR on firm efficiency(Fig. 1). Existing research has identified IT's positive contribution to thevalue added during the production of goods and services [13]. Orga-nizational complements such as high-performing work practices used toimplement business processes [11,15] have also been identified as criticalco-investments that help maximize IT's contribution to production value.

Case research examining the impact of IT-enabled BPR in firmsidentifies a link between IT-enabled BPR and firm efficiency. In one suchstudy, a firm in the petroleum industry implemented changes in its ITinfrastructure to assist in the redesign of supply chain and procurementprocesses, reducing production defects and improving overall produc-tion efficiency [12]. In a study of eight hospitals, investment in decisionsupport systems enabled the redesign of patient care processes,improving the quality of hospital service delivery as measured bypatient satisfaction [34]. Given evidence of a link between IT, BPR, andproduction efficiency in select firms, we expect the relationship toextend to a broad spectrum of firms. Thus, we expect:

Hypothesis 1a. The interaction between an organization's informa-tion technology and process redesign portfolios is positively andsignificantly associated with an organization's production efficiency.

We extend the framework of Kohli and Hoadley [56] and testHypothesis 1 by broadening the area of organizational-level BPR impactsto include firm market value. To maximize market value, rationalmanagers invest in various capital goods to efficiently produce goodsand services to meet market needs [44]. Tangible assets are one type ofcapital and include ordinary forms like factory equipment, buildings, realestate, and new forms like information technology. Intangible assets donot have aphysical form, yet are avital componentof companyoperationsandoverallfirmvalue [16,44]. These typesof assets include, amongothers,employee skills, organizational structure, culture, and corporate brands.The value of these assets is often captured in Goodwill and is oneexplanation for why the market value of a firm is worth more than thebook value of its assets. Researchhas demonstrated that investors accountfor intangible assets when valuing firms and investment in these types ofassets can lead to incremental gains in market value [16,42,44].

Research and development is an intangible asset that canincrementally affect firmmarket value [38,39,42]. The firm innovationprocess can result in new product and service innovations that areunique in the marketplace, leading to higher levels of customerdemand and sales. Existing products and services can also benefitfrom innovation in new manufacturing and service delivery tools andprocesses. These technology opportunities affect the corporatebottom line as production costs fall, profit margins increase, andquality-related benefits result in higher sales.

Human resourcemanagement is another intangible investment thatcan positively impact a firm's market value [50]. Human resourcepractices, such as employee hiring and selectionmethods, incentive andcompensation systems, the use of cross-functional teams, etc., affect


employee behavior, motivating workers to exert more effort, maintaintheir employment with the firm over longer periods, and work moreproductively. The result is the generation of firm value that is higherthan the replacement cost of the workers themselves [50]. Indeed, in astudy of over 900 firms, Huselid [50] finds that the use of HR practicesrelated to employee skill, organizational structure, and employeemotivation can positively affect both firm profits and market value.

Extending research that examines the link between informationtechnology and market value [10,32,72], Brynjolfsson, Hitt, and Yang[16] find evidence of a complementarity between informationtechnology and the human resource practices used in today's highperforming organizations. Matching firm data from a cross-sectionalsurvey on human resource practice use with annual data on firmcomputer use between 1987 and 1997, the authors find evidence of anincremental market value impact from the interaction of IT and HRpractices. The positive return is over and above the impact of thesefactors individually. This occurs, the authors posit, because informa-tion technology provides the information capabilities required bytoday's high performing organizations. Information networks andprocurement related technologies, for example, enable the adoptionof new programs like lean manufacturing, which help to reduceinventory holding levels through IT-based purchasing and invoicingautomation. In short, the functionality of today's informationtechnology provides the necessary information processing capabilitythat enables a firm to take advantage of new organizationalinnovations and bring about a positive change in market value.

We expect a similar relationship to exist between informationtechnology, business process redesign, and firm market value. BPR isan intangible investment, a concept of organizational change thatpromotes the fundamental redesign of key business processes. BPRalso requires innovation for the creation and design of new businessprocesses that are fundamentally different from existing processes. Inaddition, the implementation of the process change often requires theuse of human resource practices. If a company, for example, adopts anew call center process that empowers workers to make new types ofcredit limit decisions, appropriate incentives, training, and controlpractices must be implemented tomotivate the right type of behavior.Similarly, with this example, information technology can be used toenable the associated HR practices. Software applications could beused to limit the level of credit limit increase that an operator canauthorize before referring the request to a supervisor. Thus, given theassociation between BPR-related innovation and HR practices, andtechnology, we hypothesize that:

Hypothesis 1b. The interaction between an organization's informa-tion technology and process redesign portfolios is positively andsignificantly associated with an organization's market value.

As illustrated in Fig. 1, investments in IT-related process redesigncreate intermediate-level changes which ultimately impact organiza-tional performance. Research provides examples of the types ofintermediate-level automational, informational, and transformationaloutcomes that can result from IT-enabled BPR projects. The type ofoutcome is dependent upon the a priori goals of the BPR project. In thecase of a financial services firm, a manufacturing company, and ahealth care service firm, these outcomes include improvements incustomer satisfaction, turnaround times, coordination levels, andcapacity utilization [56]. Information technology, management (style,systems, measures), people (job, skills, culture), and organizationalstructure (teams, jobs, control) have also been identified as areas of anorganization that can be changed as part of BPR [40].

In a study of BPR efforts in over 250 Fortune 1000 firms, Lawleret al. [58] find that the implementation of process redesign results inprocess simplification, creation of cross functional units, majorinformation systems redesign, enriched multi-skilled jobs, and theuse of multi-skilled teams. BPR implementations also result in doing

the same work with fewer people and less supervision, as well asreducing the overall cost structure of the processes that wereredesigned. A factor-level analysis of these intermediate-levelchanges indicates that these outcomes can be grouped according totwo general process-level goals; the restructure of how process workis completed and the reduction of process cost. The first type of goal orgeneral outcome can be summarized as “Work Restructure” [58] andis comprised of five intermediate-level changes (Table 3). The secondcategory is called “Cost Rationalization” [58] and is the outcome ofimplementing process redesign that results in doing the same workwith fewer people, doing the same work with fewer supervisors, andrestructuring work for a lower overall cost structure.

The two intermediate outcomes identified in earlier research [58]and adopted here are similar in nature to the strategic intent for BPRidentified by Broadbent et al. [12]. In their study of four BPR adoptingfirms in the petroleum and retail industries, one petroleum firmadopted what we label as a “process cost consciousness” strategicintent for its BPR efforts. In this firm, managers turned to processredesign as a means for reducing the overall cost of its refining andbilling processes. In the case of one petroleum and two retail firms,managers turned to BPR to fundamentally restructure how specificbusiness processes were completed (i.e., work restructure) in order tocompete effectively in the marketplace.

Given the evidence of different intermediate-level process rede-sign outcomes, one might posit differences in organizational perfor-mance depending on the specific type of process redesign employed.However, prior empirical research has not employed sufficientlygranular data on process redesign to test this proposition. Our data,which include both cost rationalization and work restructureintermediate-level outcome dimensions of process redesign, enablesuch an examination. Thus, we test the following:

Hypothesis 2. The association between organizational performanceand the interaction of an organization's information technology andprocess redesign portfolios varies by the type of process redesignpursued: cost rationalization or work restructure.

Consistent with Hypothesis 1, we specify Hypothesis 2 accordingto the performance dimension of impact under investigation. In bothcases, we examine the influence of a firm's entire BPR portfolio.

Hypothesis 2a. The association between an organization's produc-tion efficiency and the interaction of an organization's informationtechnology and process redesign portfolios varies by the type ofprocess redesign pursued: cost rationalization or work restructure.

Hypothesis 2b. The association between an organization's marketvalue and the interaction of an organization's information technologyand process redesign portfolios varies by the type of process redesignpursued: cost rationalization or work restructure.

3. Research methods

3.1. Data sources

Our analysis employs a dataset created by matching firm-yearobservations from three secondary datasets. Process redesign data forthe years 1996 and 1999 were derived from surveys administered bythe Center for Effective Organizations at the University of SouthernCalifornia (USC) to senior managers of Fortune 1000 firms who havein-depth and comprehensive knowledge of their respective organiza-tions. The firm is the sampling unit and unit of measure. The processredesign data provide measurement of eight intermediate-leveloutcomes that result from investment in BPR. In 1996 and 1999,212 and 140 firms responded (some in both years), representingresponse rates of 22% and 14%, respectively. While these response

Table 1

Construct Operationalized definition

Input factors1. Information technology Information Technology (IT): Total value of IT capital stock, including mainframe and mini computers, PCs, local area networks,

disk drives, tape drives, dummy terminals, etc.2. Regular capital Ordinary capital (K): total value of capital, net of information technology.

Other capital (KO): total value of receivables, inventory, cash, goodwill, and other capitalPhysical capital (KP): total value of property, plant, and equipment (PP&E)

3. Labor Labor (L): total labor expense.

Process redesign4. Cost rationalization Cost rationalization (CR): key tactical initiative associated with process redesign involving a primary focus on cost reduction

rather than the fundamental alteration of existing processes.5. Work restructure Work restructure (WR): key tactical initiative associated with process redesign involving a primary focus on the creation of new

business processes, fundamentally redesigning the way in which work is accomplished.

Performance6. Production efficiency Value added (VA): value added by a firm when turning inputs into products or services (output) to be sold in the marketplace.

VA is calculated by subtracting materials expense from firm sales.7. Market value Market value (MV): total market value of the firm. MV is calculated by multiplying the number of a firm's outstanding stock

by the average price of that stock.

5 The value of 1996–1999 IT capital stock is determined by applying CI market pricesfrom earlier years (adjusted for price and quality changes over time) to the CI IThardware counts (see [13] E. Brynjolfsson, L. Hitt, Information Technology As a Factorof Production: The Role of Differences Among Firms, Economics of Innovation and NewTechnology, 3(1995) 183–199, [15] E. Brynjolfsson, L. Hitt, Computing Productivity:Firm Level Evidence, Review of Economics & Statistics, 85(4) (2003) 793–808, [16] E.Brynjolfsson, L. Hitt, S. Yang, Intangible Assets: Computers and Organizational Capital,


rates are on par with prior research4, it is important to consider thedegree to which our results are generalizable (external validity),especially as the USC data are unique to our research area and driveswhich firms are included in our analysis. Comparing the USC samplewith the entire Fortune 1000 for each year, responding firms in theUSC sample are larger than the average Fortune 1000 firm, but aresimilar in terms of average labor productivity. Inferences are thusreasonably applicable to large industrial organizations.

While it would be favorable to have more recent data on processredesign, our BPR data provides us with a one-of-a-kind opportunity toexamine the comprehensive impacts generated by the outcomes of allBPRprojects in afirm. This is an incremental addition to existing literaturewhich heretofore has concentrated on the impact of individual BPRprojects. In addition, our data gives us the opportunity to examine theimpact of IT and process redesign during the late 1990s, a period ofunprecedented economic growth in theU.S. [53]. During this time period,BPR-related process change was occurring widely in U.S. firms in anattempt to bring about performance enhancing processes acrossorganizations [6]. Information technologies like network communicationsystems and enterprise resource planning systems were central to thesechanges, facilitating information connectivity throughout the firm andenabling new process capabilities.

Adopting a methodology established in previous research [11,15,16],we extend our BPR measures one contiguous year, for each year of BPRdata; 1996 to1997and1999 to 1998. This serves tofill in the twoyearBPRdata gap in our analysis time frame (1996–1999) and incorporates theorganizational time lag that occurs during the implementation of processchange in large Fortune 1000 organizations [15]. Indeed, researchindicates that IT and complementary organizational change (decentral-ization, self-managed teams, employee empowerment practices, etc.) cantakefive to sevenyears to implement fully and forperformance impacts toreach their maximum potential [11,15,16]. Previous research [11,15,16]extended one year of cross sectional organizational data and merged itwith 10 years of annual IT data for Fortune 1000 firms. While not ideal,thismethoddid provide for a reasonable test and subsequent validation ofthe existence of implementation lags of IT and complementaryorganizational change. Rather than extend our data 10 years, we take a

4 Illustrative response rates for studies in this research stream are 13% for global e-commerce [76] K. Zhu, K. Kraemer, S. Xu, J. Dedrick, Information Technology Payoff inE-Business Environments: An International Perspective on Value Creation of E-Business in the Financial Services Industry, Journal of Management InformationSystems, 21(1) (2004) 17–54. and 26% for interorganizational system adoption [74] H.Teo, K. Wei, I. Benbasat, Predicting Intention to Adopt Interorganizational Linkages: AnInstitutional Perspective, MIS Quarterly, 27(1) (2003) 19–49.

more conservative approach and extend our BPR data 1 contiguous yearforward for 1996 and 1 contiguous year backward for 1999. Althoughmore conservative in nature,we believe themerging of our survey data tothe same firms across a single contiguous year is consistent with earlierresearch [11,15,16].

Firm-level computer and financial data for 1996 through 1999 areobtained from the Computer Intelligence (CI) and Compustat datasets,respectively. The CI database contains data on IT hardware and its value,collected annually from firms using a variety of methods, includingsurveys, site visits, physical audits, and telephone interviews.5 Themeasures represent a firm's total spending on information technologythroughout the year.

Use of the CI database is well established in prior IT Business Valueresearch and is one of the most comprehensive datasets of its kind.While the CI data are informative, they do not include other related ITspending for software, training, etc., nor does it include specificapplication spending information.6 Nonetheless, as demonstrated inearlier published research in IT Business Value literature[11,15,16,25,61], the use of the CI dataset allows for an approximateyet informative point estimate of the impact offirm investment in IT andIT-related organizational change. The measurement level of CI data isalso helpful in our case as BPR redesign can involve the investment inand use of application-specific IT as well as a firm's general ITinfrastructure [12,34]. To the extent that the collection of BPR projectsuses specific IT applications aswell as thefirm's general IT infrastructure(e.g., TCP/IP network), our level of IT measurement enables us tocomprehensive capture these variety of IT investments. In addition, ourmeasure of IT is at the same intermediate portfolio-level as ourmeasures of process redesign (Fig. 1). As such, the interaction of theBPR and IT measures in our analysis allows us to identify the

Brookings Papers on Economic Activity, 1(2002) 137–181, [25] P. Chwelos, R. Ramirez,K. Kraemer, N. Melville, Does Technological Progress Alter the Nature of InformationTechnology as a Production Input? New Evidence and New Results, InformationSystems Research, 21(2) (2010) 392–408, [61] N. Melville, K. Kraemer, V. Gurbaxani,Review: Information Technology and Organizational Performance: An IntegrativeModel of IT Business Value, MIS Quarterly, 28(2) (2004) 283–322).

6 While it would be ideal to have all IT spending elements for the firms in ourdatabase, no such comprehensive IT dataset exists today.

http://isr.journal.informs.org/papbyrecent.dtl

Table 2Principal component analysis with varimax rotation.

Construct Indicator Loading Sum of squared loadings CronbachAlpha

1 2 Total % of Var Cum %

Cost rationalization (CR) FP .882 2.766 34.57 34.57 0.85LS .844LC .793

Work restructure (WR) PS .656 2.449 30.61 65.19 0.80CFU .686ISR .610MSJ .845MST .773

Note: FP — do same work with fewer people, LS — do the same work with less supervision, LC — lower overall cost structure, PS — process simplification, CFU — creation of crossfunctional units, ISR — major information systems redesign, MSJ — enriched multi-skilled individual jobs, MST — multi-skilled teams.


comprehensive incremental value of IT to a firm's BPR change program.Finally, we recognize that our IT return estimates represent the returnsto both BPR-specific IT as well as a firm's IT infrastructure andacknowledge such limitations in the discussion section.

The Compustat database provides firm financial data for total non-IT(ordinary) capital, total labor expense, number of employees, and otherfinancial data necessary for calculating firm market value and valueadded. A definition of these financial data elements and other factorsused in our analysis, including information on their computation, can befound in Table 1. The computation of these variables follows establishedmethods utilized in previous IT Business Value research [13,15,16,25,61].After matching organizational, IT, and financial data, there are 430observations for 228 unique firms from 1996 to 1999.

7 See Table 1 for variable definitions. In all models we use the number of firmemployees and the percentage of employee union membership to control for scaleissues and internal labor forces that can affect the degree and level of adoption ofprocess redesign practices. For performance analyses, we add an additional control forindustry-specific factors. Existing research has established these factors as essentialcontrols for examining the influence of IT and organizational complements on firmperformance [11] T. Bresnahan, E. Brynjolfsson, L. Hitt, Information Technology,Workplace Organization and The Demand for Skilled Labor: Firm Level Evidence,Quarterly Journal of Economics, 117(2002) 339–376, [51] C. Ichniowski, K. Shaw, G.Prennushi, The Effects of Human Resource Management Practices on Productivity: AStudy of Steel Finishing Lines, American Economic Review, 87(3) (1997) 291–313.

3.2. Measurement of constructs

Information technology is operationalized as the total value of ITcapital stock for a firm (Table 1). As identified by Lawler et al. [58],process redesign comprises two dimensions; cost rationalization andwork restructure. These two dimensions represent the targetedoutcomes of a firm's overall process redesign effort and result fromthe process-level organizational changes brought about by redesign-ing a firm's business processes. Cost rationalization indicates processredesign efforts that focus on cost reduction. The work restructuredimension focuses on the fundamental restructuring of how work iscompleted, the central theme of business process redesign touted inseminal process redesign literature [46].

Using principal components analysis, we examine the BPR surveydata to determine if the BPR outcome variables load onto therationalization andwork restructure constructs as identified in Lawleret al. [58]. Consistent with Lawler et al., our analysis results (Table 2)highlight two factors with Eigenvalues greater than 1 (4.1 and 1.2).The first component indicates a strong relationship between five ofthe process redesign measures. These five items (process simplifica-tion, cross functional units, information systems redesign, multi-skilled jobs, and multi-skilled teams) are consistent with the processredesign concept of redesigning the way in which processes arecompleted. The three remaining process redesign measures load ontothe second component. These three items (fewer people, lesssupervision, lower overall cost) relate to reducing cost in the firmand are consistent with the cost rationalization construct. Cronbach'salpha of both factors (αN0.8) indicates that the respective variablesmapped to each factor consistently measure the same latent construct(high indicator reliability).

Following methodology from prior research [11], the processredesign variables are created by summing the z-scores of theappropriate process redesign survey items for the cost rationalizationand work restructuring dimensions. We also create an overall processredesign variable by summing the z-scores of all process redesignsurvey items. In sum, the two process redesign dimensions are firmly

grounded in the conceptual foundations of process redesign anddemonstrate statistical and face validity [30,31].

3.3. Empirical models

We utilize two primary empirical models employed in the extantliterature to test our hypotheses. First, we estimate a Cobb–Douglasproduction function to analyze the production efficiency implications ofcoordinated investments in process redesign and information technol-ogy, both in terms of main and interactive effects. Our basic model,shown in previous research to be appropriate in this context [35], is:

Log VAð Þ = α + β1Log ITð Þ + β2Log Kð Þ + β3Log Lð Þ + β4BPR

+ β5BPR*Log ITð Þ + Controls + ε

ð1Þ

where VA, IT, K, and L denote value added, IT capital, ordinary capital,and labor respectively. BPR represents process redesign. The variable“BPR*Log(IT)” represents the interaction between information tech-nology and process redesign.7

A market value model is used to test the performance impacts of ITand BPR investments, both in terms of main and interactive effects.Estimating the financial market impacts of IT investments has thebenefit of taking the long-run view of technology value, incorporatingthe complementary intangible assets that accompany IT into estimatesof future cash flows. To test Hypotheses 1b and 2b, we estimate:

MV = λ1KP + λ2KO + λ3IT + λ4BPR + λ5BPR*IT + Controls + ε ð2Þ

where KP represents physical capital, KO represents other capital, ITrepresents computer capital, BPR represent process redesign, andBPR*IT represents the interaction between IT and process redesign.Our econometric specification is based upon models from previousresearch investigating the market value impacts of informationtechnology [16] and R&D investment [27,38].

Table 3Descriptive statistics: matched sample.

Pooled High usage Low usage

Unit Mean SD Mean SD Mean SD

Sales $M 10,745 21,529 12,015 22,540 9,797 20,845Value added $M 4343 8567 4754 8283 4059 8975Non-IT capital $M 4666 8807 5672 10,732 3812 6459Labor $M 1929 3575 2080 3727 1828 3484IT capital $M 199 312 232 377 172 236Employees 44,212 78,349 48,236 87,139 41,329 70,114

Cost rationalizationSame work, fewer people 1–5 3.43 1.00 4.01 0.77 2.88 0.90Same work, less supervision 1–5 3.22 1.05 3.82 0.85 2.64 0.89Lower overall cost structure 1–5 3.25 1.04 3.89 0.86 2.62 0.82

Work restructureProcess simplification 1–5 3.21 0.93 3.80 0.68 2.61 0.76Creation of cross functional units 1–5 2.94 1.07 3.63 0.82 2.24 0.80Major IS redesign 1–5 3.26 1.21 3.88 0.91 2.64 1.15Enriched multi-skilled individual jobs 1–5 2.67 0.97 3.31 0.76 2.04 0.73Multi-skilled teams 1–5 2.69 1.07 3.31 0.93 2.08 0.81Observations 430 209 213

10 Input elasticity is defined as the percent change in production output (valueadded) for a given 1 percent change in a production input. An estimated positive


4. Results

4.1. Descriptive statistics

The averagefirm in our sample has nearly $11 billion in sales and over$35 billion inmarket value (Table 3). The number of employees averagesjust over 44,000, ofwhich twenty-fivepercent haveunion representation.The averagefirmhas approximately $200 million in IT capital stock.Giventhe time frame, the size, and thecapital intensity of theaveragefirm inoursample, our data primarily represents conventional, industrial era firms.This mitigates the potential effects of any abnormal gains experiencedduring the dot com boom.8

While firms are usingmore IT over time, the proportion of IT assetsto regular capital remains small. Regarding process redesign, firmsexperience cost rationalization outcomes at a higher level than workrestructure outcomes. This suggests that reducing costs is a major goalof BPR, certainly during the time period under review. Within workrestructure, firms appear to implement process simplification (3.21)through the redesign of major information systems (3.26).9 Together,these types of outcomes are consistent with process redesignphilosophy [30,46,47]. To redesign processes, firms implementcross-functional groups and self-managed teams to execute processesvia linked workers united by a common goal.

For production function and market value regressions, we conductanalysis for the pooled sample as a whole. To enrich understanding ofthe returns to IT and BPR investments, we also conduct regressionanalysis using dummy variables. The variables add a level-of-usedimension to each BPR type (work restructure and cost rationaliza-tion) and provides additional information regarding the impacts of ITand these two types of BPR. The first dummy is defined as a “1”when afirm uses higher than average levels of work restructure BPR (“0”otherwise) and the second dummy is defined as a “1”when a firm useshigher than average levels of cost rationalization BPR (“0” otherwise).Descriptivemeasures indicate that firms that use high levels of BPR arelarger in size (e.g., employees) and revenue than low usage firms,indicating that larger firms aremore likely to utilize high levels of BPR.

8 Analysis of our merged dataset identifies 8 technology firms out of a total 228firms.

9 An analysis across 1996 and 1999 did not find any statistical change in the use ofeach practice by firms, at the pb0.05 level.

4.2. Correlation analysis

We compute partial Pearson correlations of IT and process redesignitems with controls for firm size and level of union membership withinfirms (Table 4). In addition to IT capital stock,we also include the quantityofmainframesandpersonal computers tobetter capture the full rangeof afirm's centralized computing anddecentralized computingutilization.Weobserve no statistically significant relationship between IT and anyprocess redesign item in 1996. In 1999, there are threemain positive andsignificant relationships. The first two encompass using IT to enable costreduction, specifically, using IT to enable the headcount reduction ofsupervisors (pb0.05)andemployees (pb0.05). The third involvesusing ITto enablework restructure viamulti-skilled teams (pb0.05).Moreover, ineach of these three cases, the results indicate firms are turning todecentralized computingplatforms to implement these typesof change asall significant relationships involve personal computing.

4.3. IT, BPR, and performance impact

4.3.1. Production efficiencyThe estimation results for Eq. (1), using the full sample and

ordinary least squares, are presented in Table 5. The baselinespecification (Column1) provides a reference estimate, using ordinarycapital (K), labor (L), and IT inputs, as well as a constant and all controlvariables. We then introduce the comprehensive process redesignvariable and a term representing the interaction of IT and BPR (ouritem of interest). In the next two columns, we introduce the BPRvariables representing work restructure and cost rationalization BPRand their respective interaction terms.We analyze these two separateequations independently and display the results in columns 3 and 4.

Estimates of the baseline equation indicate that IT investments havea positive and significant association with firm output, with IT elasticityestimated to be 0.120 (pb0.01).10,11 While this is slightly higher in

output elasticity (e.g., a positive contribution of inputs like IT and BPR to value added)is an indication that investment in these inputs positively impacts the value of a firm'sproduction activities.11 Production function and market value equations were estimated first using OLS,then using White heteroscedasticity-consistent standard errors and covariance. Also,consistent with prior research, simultaneity was tested using two-stage least squareswith lagged values as instruments. The patterns of results using both types ofspecification checks were highly consistent with OLS so we report OLS results herein.

Table 5Production function estimation.

Base (1) All firm BPR (2) Work restructure BPR (3) Cost rationalization BPR (4)

C 0.939*** (0.155) 0.946*** (0.153) 0.960*** (0.153) 0.920*** (0.154)K 0.296*** (0.021) 0.294*** (0.020) 0.296*** (0.021) 0.291*** (0.021)L 0.603***(0.028) 0.602*** (0.027) 0.601*** (0.027) 0.604*** (0.027)IT 0.120*** (0.023) 0.125*** (0.022) 0.118*** (0.022) 0.131*** (0.023)BPR −0.052*** (0.012)IT* BPR 0.010*** (0.002)WR −0.068*** (0.017)IT* WR 0.014***(0.004)CR −0.104*** (0.027)IT* CR 0.020*** (0.006)N R2 430 0.916 430 0.920 430 0.921 430 0.919

Dependent variable: value Added; ***pb0.01, **pb0.05, *pb0.10. Independent variables: C— constant, K— ordinary capital, L— labor, IT— IT capital. BPR variables: BPR— overall BPRin firm, WR — work restructure BPR, CR — cost rationalization BPR. Controls: single digit SIC sectors 4, 5, 6, 7, 8, 9; percentage of worker union membership; year. z-score BPRmeasures. Constant 1993 dollars.

Table 4Correlation between process redesign and IT.

1996 1999

IT Main PC IT Main PC

Cost rationalization Same work, fewer people −0.0927 −0.1254 −0.0363 0.2542** 0.1337 0.2427**Same work, less supervision −0.0642 0.0296 −0.0367 0.2485** −0.0027 0.2727**Lower overall cost structure −0.0741 −0.0748 −0.0945 0.0477 0.0766 0.0359

Work restructure Process simplification 0.0027 −0.0163 −0.0998 0.0299 0.0969 0.0130Creation of cross functional units 0.0038 −0.0531 −0.0807 0.0600 −0.0268 0.0742Major IS redesign 0.0202 −0.0900 0.0042 0.0554 −0.0513 0.0734Enriched multi-skilled individual jobs 0.0631 −0.0305 −0.0080 0.1811 0.0822 0.1698Multi-skilled teams −0.0072 −0.0347 −0.0080 0.2750** 0.1028 0.2692**

Note: Partial Pearson Correlations with controls for firm size and level of union membership.Significance: ***pb0.01, **pb0.05, *pb0.10.


magnitude than estimates in previous empirical research, the sign,significance, and overall pattern of results is consistent with priorresearch [61].12 The introduction of the comprehensive BPR and IT*BPRvariables does not alter the returns to IT or its significance (Column 2).More importantly, we find evidence that indeed, as hypothesized, theinteraction of IT and BPR is positively and significantly associated withfirm performance at themargin. In this case, it adds approximately a 1%increase in production output.

We create the specifications involving work restructure and costrationalization BPR to further examine if the estimated relationshipsbetween IT, overall BPR, and output extend to specific types of BPR. Theresults of the two independent OLS regressions are displayed in Table 5.In both the cases of work restructure BPR (column 3) and costrationalization BPR (column4),wefind consistent support for a positiverelationship.Whether the focus of BPR is on the restructure of howworkis accomplished or the reduction of cost, the interaction of IT and BPR ispositively and significantly associated with value added at the margin.

The analysis results highlight the importance of IT in achievingspecific BPR outcomes firm-wide. In the case of work restructure(column 3), the estimated coefficient on the WR variable is negativeand significant (0.068, pb0.01). However, the coefficient of the

12 Using a Cobb Douglas production function to analyze firm level data between1987–1994, Bresnahan et al. [11] Bresnahan, Brynjolfsson, Hitt, Information Technol-ogy, Workplace Organization and The Demand for Skilled Labor: Firm Level Evidence.report a base IT elasticity estimate of 0.0347. Gao and Hitt [37] G. Gao, L. Hitt, IT andProduct Variety: Evidence from Panel Data, in: International Conference on Informa-tion Systems (ICIS), (Washington D.C., 2004)., on the other hand, using the same coreIT data but extending the time period three years (1987–1997), report a higher ITelasticity estimate (0.0596). Differences may be attributed to multiple factorsincluding our examination of the late 1990s, a period of rapid economic growth; theuse of updated price indexes for adjusting all monetary variables especially IT stockvalues; the introduction of unique control variables such as union membership; and asmaller data sample of primarily very large Fortune 1000 firms.

interaction term IT*WR is positive and significant (0.014, pb0.01),suggesting that IT is critical for implementing process change thatpositively contributes to a firm's production value. This pattern is alsofoundwith BPR focused on the reduction of employees and overall cost(column 4). The estimated coefficient on the IT and Cost BPRinteraction term is positive and significant at pb0.01. Together, thework restructure and cost rationalization regression results suggestthat firms that adopt the IT centric philosophy of seminal BPRwritings(choosing BPR projects that necessarily incorporate informationtechnology) achieve positive returns. However, BPR programs notassociated with complementary IT do not appear to payoff.

As a whole, we find general support for Hypothesis 1a. Theinteraction between IT and BPR across the entire firm is positively andsignificantly associated with production efficiency. This holds acrossall types of process change goals pursued by firms. Further, our resultshighlight information technology as a critical co-investment in processredesign programs that positively affect production performance.

4.3.2. Market valueMarket value analysis enables an alternative interpretation of

performance impacts: a longer-term view of the implications ofprocess redesign and IT, as against a historical, short-run view.Empirical analysis of the pooled sample reveals a positive andsignificant association between market value and the interaction ofa firm's entire IT and BPR portfolios (Table 6, column 2), in initialsupport of Hypothesis 1b. Further examination of work restructureand cost rationalization BPR reveals that the underlying driver of thisresult appears to be the interaction of IT and BPR projects associatedwith work restructuring (column 3). In contrast, no significantcomplementarities between IT and cost rationalization BPR areobserved (column 4). These results provide support for Hypothesis2b; the association between the interaction of a firm's IT and BPRportfolios and its market value varies by the type of BPR.

Table 6Market value estimation.

Base (1) All firm BPR (2) Work restructure BPR(3) Cost rationalization BPR (4)

C 4960.0**(2947.2) 5582.4**(2937.0) 5735.4**(2896.2) 4842.4* (2966.2)KP 2.604*** (0.202) 2.585*** (0.202) 2.564*** (0.199) 2.600*** (0.203)KO 1.303*** (0.053) 1.333*** (0.054) 1.351*** (0.054) 1.300*** (0.054)IT 37.410*** (6.009) 30.192*** (6.598) 26.069*** (6.545) 38.368*** (6.355)BPR −272.864 (284.772)IT* BPR 2.252*** (0.906)WR −635.866 (418.447)IT* WR 4.918*** (1.272)CR 331.043 (657.517)IT*CR −1.133 (2.318)N R2 352 0.889 352 0.891 352 0.889 352 0.889

Dependent variable: value Added; ***pb0.01, **pb0.05, *pb0.10. Independent variables: C — constant, KP — physical capital, KO — other capital, IT — IT capital. BPR variables: BPR —

overall BPR in firm, WR—work restructure BPR, CR— cost rationalization BPR. controls: single digit SIC sectors 4, 5, 6, 7, 8, 9; percentage of worker union membership; year. z-scoreBPR measures. Constant 1993 dollars.

Table 7Dummy variable estimation for testing differences by type of BPR.

Production function estimation Market value estimation

Dummy–high work restructure (1) Dummy–high cost rationalization (2) Dummy–high work restructure (3) Dummy–high cost rationalization (4)

C 0.952*** (0.158) 0.941*** (0.153) 7738.8** (3665.6) 6212.6** (2936.9)K 0.294*** (0.021) 0.293*** (0.021) 2.564*** (0.196) 2.507*** (0.199)L 0.602*** (0.027) 0.602*** (0.027) 1.334*** (0.053) 1.338*** (0.053)IT 0.127*** (0.022) 0.127*** (0.022) 42.477*** (6.964) 28.309*** (6.516)BPR −0.052*** (0.012) −0.054*** (0.012) −525.039 (383.615) −573.729* (320.729)IT*BPR 0.011*** (0.003) 0.011*** (0.003) 10.895*** (2.097) 5.182*** (1.198)D-HW −0.011 (0.058) −432.901 (4211.5)IT*BPR*D-HW 0.001 (0.002) −11.634*** (2.551)D-HC 0.018 (0.145) 7049.1 (6520.6)IT*BPR*D-HC −0.001 (0.003) −5.465*** (0.003)N R2 430 0.919 430 0.920 352 0.897 352 0.894

Dependent variables: value added, market value; ***pb0.01, **pb0.05, *pb0.10. Independent variables: C — constant, K — ordinary capital, KP — physical capital, KO — other capital,L — labor, IT — IT capital. BPR variables: BPR — overall BPR in firm, WR — work restructure BPR, CR — cost rationalization BPR. Dummies: D-HW=high/low work restructure,D-HC=high/low cost rationalization. Controls: single digit SIC sectors 4, 5, 6, 7, 8, 9; percentage of worker union membership; year. z-score BPR measures. Constant 1993 dollars.


4.4. IT, BPR, and performance relationship variation analysis results

Our second set of hypotheses (Hypotheses 2a and 2b) predicts avariation in the relationship between the interaction of IT and BPR, andfirm performance, based upon two types of BPR. In our analysis ofproduction efficiency impacts (Table 5), we do not observe a difference inproduction impacts across the different types of intermediate BPR goalspursued by a firm. The estimated coefficient on the interaction termsinvolving both types of BPR with IT (columns 3 and 4) are both positiveand significant. Due to the overlap of data samples in these analyses, wearenot able toperformaChowtest to test if thereare statistical differencesin these results. However, we do observe that the estimated coefficientsoverlap by as little as one standard deviation. On the other hand, in ouranalysis ofmarket value impacts,wedoobserve adifference in the returnsto different types of BPR. In firms that focus on work restructure, theinteraction of IT and work restructure BPR positively and significantlyimpactsmarket value.However, in the caseof cost rationalizationBPR, theestimated IT and cost rationalization BPR interaction term is negative andnot significant at the pb0.10 level. Thus, it appears that there is a variationin impact between these types of BPR and long run market impacts.

To examine this issue further, we conduct a dummy analysis13,regressing modified versions of our empirical specifications, eachcontaining dummy variables that reflect different levels of use ofthe type of BPR under review (high versus low).14 The results of the

13 We thank an anonymous reviewer for this valuable suggestion.14 Eqs. (1) and (2) were each augmented with a dummy term (D) and an interactionterm which involved the IT, BPR, and dummy variables (IT*BPR*D). Augmentedequations were created for each type of BPR under review. The BPR term representedall BPR projects in a firm regardless of type. D was defined as a “1” when firms used ahigh level of the particular type of BPR under examination (work restructure, costrationalization ) and a “0” when a low level was used.

dummy analysis, displayed in Table 7, help elucidate the informationtechnology, process redesign, and firm performance relationship andprovides for an additional test of Hypotheses 2a and 2b.

The estimated returns for the IT*BPR term, in all regressions(Table 7: columns 1–4), are positive and significant. Again, theseresults confirmour earlierfinding that the combination of IT and BPR ispositively and significantly associated with firm performance, both inthe short term (value added) and the long term (market value). Theestimated IT*BPR*dummy coefficients for the production value addedspecifications, in both the case of high/low levels of work restructure(column 1) and high/low levels of cost rationalization (column 2), arenot significant at pb0.10. This indicates that the association betweenproduction output and the interaction of IT and BPR does not varywhen a firm employs a high versus low level of any particular type ofBPR program.

In the case of market value regressions, unlike the value addedanalysis, results yield a significant coefficient on the IT, BPR, anddummy interactive terms. In both specifications involving the workrestructure (Table 7, column 3) and cost rationalization (Table 7,column 4) dummies, the estimated IT*BPR*dummy terms are negativeand significant. In the case of high/low usage of work restructure, theestimated impact is−11.634 (2.551 standard error, pb0.01) whereasin the case of high/low usage of cost rationalization, the estimatedimpact is −5.465 (0.003 standard error, pb0.01). Again, consistentwith earlier analysis (Table 6), we observe a variation in theassociation between a firm's market value and the interaction of ITand different types of BPR. In this case, our analysis indicates avariation by the type and level of BPR adopted. However, due toconcurrent adoption of both types of BPR, we cannot directly test if theestimated impacts involving work restructure and cost rationalizationBPR differ significantly from each other. On the other hand, we do

Table 8Summary of findings.

Hypothesis Result

Hypothesis 1a The interaction between an organization's information technology and process redesign portfolios is positively and significantlyassociated with an organization's production efficiency.

Supported

Hypothesis 1b The interaction between an organization's information technology and process redesign portfolios is positively and significantlyassociated with an organization's market value.

Supported

Hypothesis 2a The association between an organization's production efficiency and the interaction of an organization's information technologyand process redesign portfolios varies by the type of process redesign pursued: cost rationalization or work restructure.

Mixed

Hypothesis 2b The association between an organization's market value and the interaction of an organization's information technology andprocess redesign portfolios varies by the type of process redesign pursued: cost rationalization or work restructure.

Mixed

15 We thank an anonymous reviewer for this suggestion.


observe that these two estimates do not overlap for well over twostandard deviations. As such, it is reasonable to argue that we haveanother indication that the market value impacts from the interactionof IT and BPR varies by the type of BPR involved.

4.5. Summary

Together, the value added and market value regression analysisoffers insight into the test of our hypotheses. First, as expected,results are consistent with the assertion that the combination of ITand BPR provides a positive return to investing firms, both in terms ofvalue added and firm market value. This provides continued supportfor Hypothesis 1. Second, in relation to value added in production,there is no evidence that the IT*BPR impact varies by the type or levelof BPR adopted by a firm. Rather, the results suggest that regardless ofthe type and level of BPR selected by a firm, company managers mustinvest in the information technology appropriate for the BPRadopted. Given the assumption that managers are rational andskilled in their ability to select the right IT, the returns to thecombination of IT and BPR for different types and levels of BPR arestatistically equivalent at the margin. In the firms in our database, itappears that managers have been rational in matching the right ITappropriate for the chosen BPR.

Finally, while the production value added dummy analysis doesnot support Hypothesis 2 (Hypothesis 2a), the market value dummyanalysis does (Hypothesis 2b). These results suggest that the marketplaces a slightly lower value on a high level implementation of BPR,for both types of BPR. In both cases, a less aggressive (i.e., lower level)adoption of a BPR program appears to be more beneficial. This holdswhether we examine work restructure or cost rationalization. Giventhe challenge of process redesign and high rate of BPR failures notedin research [5,21,31,40,45,54,73], it seems logical that the marketwould expect the impact of more complex and extensive BPR pro-grams to be lower. The market may simply be erring on the side ofcaution and taking a wait and see attitude in relation to suchadoptions. Looked at another way, the market appears to be signalingthat firms are better off selecting BPR programs that are moretargeted in nature and less firm-wide. Indeed, research highlightsthe risk of failure stemming from complex change projects that ofteninvolve multiple functional and geographic boundaries, cultures,technologies, and people [36], and that can outlive their originalenvironmental context [24].

Given the above evidence, we conclude we have mixed evidencesupporting Hypothesis 2. Long run market value appears to be an areaof significant impact that varies across different types of BPR.However, in both types of BPR, this incremental impact is negative.It appears that excessive BPR adoption could be viewed as toocomplex and challenging, with the market predicting an adverseperformance impact. This is certainly possible given the evidence ofprevious BPR failures in research and in practice. The results alsosuggest that it is not a selection or focus on any one particular type ofBPR program that is important for firms. Rather, it is a selection of theright type of BPR given a firm's needs, implemented using the rightinformation technology called for by the BPR selected.

5. Discussion and conclusion

In this study, we conduct a unique examination of the impacts of theinteraction of IT and process redesign. First, we examine the impacts of afirm's entire BPR portfolio – accounting for every BPR project in a firmversus themore limited scope of early firm-level studies – by adapting aframework of BPR from prior research [56]. Second, we examine theimpact of the IT-BPR interaction to a firm's production efficiency aswellas its market value. The latter is an outcome measure new to the BPRliterature. Third, based upon a previous theoretical model, we examinethe performance impacts of different intermediate-level BPR outcomes;work restructure and cost rationalization. Overall, the empirical resultsare consistent with the basic proposition of synergies between processredesign and information technology (Table 8). Analysis concerningsplits by degree of use, type of performance impact, and type of redesignprovides mixed support.

The research results suggest several implications for practice. First,managers should consider investment in IT and process redesign as ameans for improving firm performance. In the short term, managerscan improve performance, especially production efficiency, byfocusing on how work is structured in the firm. Second, for longerterm market impacts, our results suggest that managers should bemore conservative with their change efforts. Rather than attemptingto implement a large amount of change across the firm concurrently,process redesign can be more effective if an organization implementschange (cost or work focus) that is more manageable in scope. Forexample, a firm is better off using IT to help automate new processdesigns in a more targeted, focused manner rather than through amore shotgun, broad level approach.

Our results also suggest that IT is a necessary complement to processredesign efforts. Positive and significant payoffs from BPR only appear insituations where IT is implemented jointly with process redesign (i.e.,the interaction of IT and BPR). For managers, this does not mean thatprocess change cannot be accomplished without information technol-ogy. Rather, it identifies the combination of IT and process redesign as apotential recipe for bringing about positive corporate change. It ispossible that managers have been guided by BPR evangelists and havecreated the necessity of IT through the types of BPR projects selected.However, it is important to acknowledge that process change can comeabout without information technology and managers should broadentheir considerationof howprocess change is accomplished even if it doesnot involve information technology. For example, communication flowsare critical for successful BPR [55] and must be designed appropriatelywhether or not IT is a component of theBPRproject. Finally, our researchbolsters recent managerial focus on process-oriented programs as ameans for organizational success. Managers should recognize that suchefforts (e.g., business process management) should focus on howprocesses are structured as the primary means for change.

Finally, our analysis suggests several implications for research.First, the use of additional BPR measures would refine and extend ourresults, for example, metrics focused on quality or environmentalsustainability.15 Second, using more recent datasets is important to


confirm results found herein. Third, using more granular metrics forinformation technology, such as e-commerce or Web 2.0 would refineour results. Fourth, research identifying the complements to processredesign and potential influential factors, like a firm's competitiveenvironment [60], is especially critical. Finally, future research mightalso examine process change spanning multiple national economies,especially those that are home to offshoring services that support U.S.corporations.

Appendix A. Survey instrument

Section D: work process redesign

This section asks about your process redesign activities.Question 1. About what percent of employees in your corporation

work in units that have had process redesign efforts: ___________%Question 2. To what extent have your process redesign efforts

resulted in the following?1. Process simplification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 4 52. Creation of cross-functional units (e.g., departments, customer or

product focusedunits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 4 53.Major information systemredesign . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 23454. Enrichedmulti-skilled individual jobs . . . . . . . . . . . . . . . . . . . . . . . . . 1 23455.Multi-skilled teams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3456.Doing the sameworkwith fewerpeople . . . . . . . . . . . . . . . . . . . . . 1 2 3457.Doing the sameworkwith less supervision . . . . . . . . . . . . . . . . . . . 1 23458.A lower overall cost structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 45Key for question 2: 1=Little or no extent; 2=Some extent;

3=Moderate extent; 4=Great extent; 5=Very great extent

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Ronald Ramirez is an Assistant Professor of Management Information Systems at theBusiness School, University of Colorado Denver. He conducts research on informationtechnology, innovation, and organizational performance. His research has beenpublished or is forthcoming in Information Systems Research, the Information SystemsJournal, and Decision Support Systems. Professor Ramirez holds a BS in electricalengineering from California State University Fresno, an MBA in finance from theUniversity of Southern California, and a Ph.D. in management from UC Irvine.

Nigel Melville is an Assistant Professor of Business Information Technology at theStephen M. Ross School of Business, University of Michigan. He is the author ofnumerous research articles appearing in leading academic and professional journalssuch as Information Systems Research, MIS Quarterly, Decision Support Systems, andCommunications of the ACM. He is an editor of the book Global E-Commerce: Impactsof National Environment and Policy (Cambridge University Press, 2006). ProfessorMelville earned a BS in electrical engineering from UCLA, an MS in electrical andcomputer engineering from UC Santa Barbara, and a PhD in management from UCIrvine.Edward E. Lawler III is Distinguished Professor of Business and Director of the Centerfor Effective Organizations in the Marshall School of Business at the University ofSouthern California. He has been honored as a top contributor to the fields oforganizational development, human resources management, organizational behaviorand compensation. He is the author of over 350 articles and 38 books. His most recentbooks include Achieving Strategic Excellence: An Assessment of Human ResourceOrganizations (2006), Built to Change (2006), The New American Workplace (2006),and America at Work (2006).

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