A framework for measuring the benefits that information technology brings to construction

A FRAMEWORK FOR MEASURING THE BENEFITS THAT INFORMATION TECHNOLOGY BRINGS TO CONSTRUCTION LI YAN (B. Eng., Tianjin University) A THESIS SUBMITTED FOR THE DEGREE OF MASTER OF SCIENCE (BUILDING) DEPARTMENT OF BUILDING SCHOOL OF DESIGN AND ENVIRONMENT NATIONAL UNIVERSITY OF SINGAPORE 2003 Acknowledgements First I would like to express my largest gratitude to my supervisor, Dr Wang Shouqing, for his extraordinary guidance and enthusiastic inspiration throughout my research, for his continuous encouragement and untiring support, and for his patient with me through all the times I have been frustrated. I have learned many valuable things from him, such as proper research methodology, reasoning process and communication with people. I am indebted always to him for his efforts in shaping both my work and my personality. There are other special mentors that I must acknowledge due to their timely support in my work, such as Prof. Goh Bee Hua, Prof. Gan Cheong Eng, Prof. Willie Tan and Prof. Fu Yuming. I wish to sincerely thank them for giving me enthusiastic suggestions on my research whenever I needed. Also I owe a debt of gratitude to all my friends who have encouraged and supported my work, such as Yu Tao, Kang Jian, Zhang Meiyue, Teng Nee Peng, Alex Chong, Jiang Hongbin, Sui Yong, Sze Hui, Yang Yiqing, Mao Zhi, Lin Chao and Nga Na Leung. I wish to acknowledge all for their roles in my life. Finally, I am forever indebted to my dear family for their understanding, endless support and encouragement. i Table of Contents ACKNOWLEDGEMENTS I TABLE OF CONTENTS II SUMMARY .IV LIST OF TABLES VI LIST OF FIGURES VII LIST OF APPENDICES .VIII CHAPTER ONE: INTRODUCTION . 1.1 BACKGROUND . 1.2 RESEARCH PROBLEM . 1.3 RESEARCH SCOPE . 1.4 RESEARCH OBJECTIVES . 1.5 SIGNIFICANCE OF RESEARCH . 1.6 RESEARCH METHODOLOGY . 1.7 ORGANIZATION OF THESIS . 10 CHAPTER TWO: LITERATURE REVIEW 12 2.1 DEFINITIONS . 12 2.2 PAST RESEARCH . 14 2.2.1 IT and company performance 14 2.2.2 Classification of IT benefits . 17 2.2.3 Justification of techniques for IT benefits evaluation 23 2.2.3.1 Traditional evaluation techniques 24 2.2.3.2 Innovative techniques developed for IT benefits evaluation . 30 2.2.4 Other issues in IT benefits evaluation 35 2.2.5 Conclusion . 38 CHAPTER THREE: PROPOSED IT BENEFITS EVALUATION FRAMEWORK . 41 3.1 ORIGINS OF THE BASIC CONCEPT . 41 3.2 PROPOSED FRAMEWORK 42 3.3 CONTEXT 45 3.3.1 Business strategy 45 3.3.2 The alignment of IT with business strategy . 46 3.3.3 Purpose of IT benefits evaluation 48 3.3.4 Evaluation involvement . 48 3.4 CHARACTERISTIC . 49 3.4.1 Function of IT 49 3.4.2 IT Goal (Purpose) 50 3.5 CONTENT 51 3.5.1 Benefits identification and categorization . 52 3.5.2 Measures selection . 52 3.5.2.1 Financial measures . 54 3.5.2.2 Internal efficiency and effectiveness measures . 55 3.5.2.3 Customer measures . 58 3.5.2.4 Innovative culture measures . 59 ii 3.6 CONDUCT 60 3.7 CONCLUSION . 66 CHAPTER FOUR: VALIDATION OF THE FRAMEWORK STRUCTURE AND COMPONENTS 71 4.1 DATA COLLECTION . 71 4.1.1 Method for data collection . 71 4.1.2 Questionnaire design 74 4.1.3 Sample 75 4.2 RESULTS AND ANALYSIS . 76 4.2.1 Current practice for IT benefits evaluation 76 4.2.2 Relationship between IT goals and business strategies . 81 4.2.3 Consolidate IT benefits evaluation measures 86 4.3 CONCLUSIONS DRAWN FROM SURVEY RESULTS 88 4.4 ANALYSIS OF THE CONSOLIDATED AND REFINED FRAMEWORK 90 CHAPTER FIVE: COMPUTERIZED IMPLEMENTATION OF THE PROPOSED FRAMEWORK 96 5.1 IT BENEFITS EVALUATION SYSTEM 96 5.1.1 Background 96 5.1.2 Development Environment 97 5.1.3 Structure of the IT Benefits Evaluation System 97 5.2 CASE STUDY 99 5.2.1 Background Information 99 5.2.2 Data Input . 100 5.2.3 User Assessment 109 5.2.4 Conclusion . 112 CHAPTER SIX: CONCLUSIONS 117 6.1 A REVIEW OF RESEARCH AIM AND OBJECTIVES . 117 6.2 A SUMMARY OF FINDINGS . 117 6.3 CONCLUSIONS AND IMPLICATIONS . 118 6.4 LIMITATIONS AND RECOMMENDATIONS FOR FUTURE RESEARCH 120 BIBLIOGRAPHY . 122 APPENDIX A TRADITIONAL EVALUATION TECHNIQUES . 132 APPENDIX B INNOVATIVE TECHNIQUES DEVELOPED FOR IT BENEFITS EVALUATION . 133 APPENDIX C THE CONTEXT 134 APPENDIX D THE CHARACTERISTIC . 135 APPENDIX E THE CONTENT 136 APPENDIX F QUESTIONNAIRE ON FRAMEWORK FOR MEASURING IT BENEFITS IN CONSTRUCTION COMPANIES 137 iii SUMMARY Information Technology (IT) is seen as an enabling mechanism that enables radical change to be effected in the construction industry. However, firms in the construction industry are slowly responding and adapting to developments in information and communication technologies (Love, et al., 2000). A key barrier to the more effective exploitation and application of IT in the construction sector has been the lack of investment on a scale comparable with other sectors. A primary reason cited for the low level of investment is the low level of perceived benefits from IT investments amongst construction business managers (Andresen, et al., 2000). Construction is a traditional industry. On one hand it is conservative in adopting new technology and, on the other hand, for competitive reasons, many construction companies cannot afford not to make investments in IT. Measuring IT benefits is in its infancy in construction literature. This research was therefore undertaken to explore effective ways that help managers to identify, capture and evaluate IT benefits for construction companies at the company level. Based on literature review and a survey in the local construction companies in Singapore, this dissertation presents a “5Cs” evaluation framework to assist construction companies to predict, measure and evaluate the potential benefits that can or should be achieved by the introduction of IT. The five components of the framework are the Context, Characteristic, Content, Conduct and Conclusion, which together help evaluators answer all questions that are involved in the evaluation, such as why there is a need to an evaluation, what needs to be measured, from which iv aspects the evaluation is done, when to conduct, who should participate and how to perform. This framework can be used as a guideline in practice. This research stressed the alignment of IT with business strategy (Context and Characteristic) since it is the starting point in understanding what is the right thing to be measured. The survey in local construction companies explored the correlation between IT goals and business strategies. Also, 20 evaluation measures (Content) derived from literature review were validated by the survey. Six steps have been proposed to perform the evaluation by the proposed framework (Conduct). Finally suggestions on how to interpret the evaluation results and derive the conclusions (Conclusion) are presented. An IT benefits evaluation system was developed as the computer implementation of the framework and a case study was conducted by asking three experts from a local construction company to use and assess the system. The evaluation system is validated for its operability by the case study. v LIST OF TABLES Table 1: Three stages of IT evolution . 22 Table 2: Overall business benefits of IT (Andresen’s framework) . 34 Table Indicators of quality . 56 Table 4: IT function ranked by mean importance ratings . 79 Table 5: Factors that affect IT benefits derivation 81 Table 6: Business strategy ranked by mean importance ratings . 82 Table 7: IT goal ranked by mean importance ratings . 83 Table 8: Correlations matrix of business strategies and IT goals . 84 Table 9: Business strategies and correlated IT goals 86 Table 10: t-test for the means of evaluation measures . 88 Table 11: Dynamic nature of IT benefits evaluation in the lifecycle of IT 94 vi LIST OF FIGURES Figure Flowchart of the research strategy Figure IT evaluation framework (three rings of the evaluation “onion”) 41 Figure The “Five Cs” IT benefits evaluation framework 42 Figure Increasing sophistication with respect to IT . 48 Figure Detailed structure of the proposed “Five Cs” framework 70 Figure Structure of questionnaire . 75 Figure IT benefits evaluation involvement (those involved in conducting evaluation) . 77 Figure IT benefits evaluation involvement (those responsible for the evaluation) . 78 Figure Structure of the IT benefits evaluation system . 98 vii LIST OF APPENDICES APPENDIX A TRADITIONAL EVALUATION TECHNIQUES 132 APPENDIX B INNOVATIVE TECHNIQUES DEVELOPED FOR IT BENEFITS EVALUATION . 133 APPENDIX C THE CONTEXT . 134 APPENDIX D THE CHARACTERISTIC . 135 APPENDIX E THE CONTENT . 136 APPENDIX F QUESTIONNAIRE ON FRAMEWORK FOR MEASURING IT BENEFITS IN CONSTRUCTION COMPANIES . 137 viii Chapter One: Introduction 1.1 Background Information Technology (IT) now represents substantial financial investment for many organizations (Lin and Pervan, 2001). Organizations are continuing to invest sums of money in IT in anticipation of a material return on investment (Willcocks and Lester, 1996). With vigorous growth of expenditure on IT, managers are often under immense pressure to find a way to measure the contribution of their organization’s IT investments to business performance (Lin and Pervan, 2001). The integration of construction processes using IT offers considerable potential for construction firms (Griffiths, 2000). Construction industry is a traditional industry with highly fragmented nature and geographical dispersal. Lack of integration of information flows has led to low productivity and competitiveness in the industry (Aw, 2000). Technological developments such as the Internet and Intranet are re-defining the way construction firms carry out many of their strategic, tactical and operational business processes (Betts and Shafagi, 1997; Betts, 1999). Singapore is an island nation with limited resources. 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Building and Environment, 32(2). 131 Appendix A Traditional evaluation techniques Categories Financial techniques The ratio approach Typical methods Cost-Benefit Analysis, Payback Period, Return On Investment (ROI), Internal Rate of Return (IRR), Net Present Value (NPV), Productivity Index Return On Management and Boundary Values or Spending Ratios The portfolio approach Investment portfolio and investment mapping are popular portfolio approaches The multicriteria approach Multi-Objective-MultiCriteria (MOMC) and Critical Success Factors (CSFs). Advantage • Present numerical result (in most cases in terms of monetary value) • Provide direct information • Easy to understand Disadvantage • Inaccurate, cannot cover intangible benefits • Clearly show an organization’s current position compared with its previous position or current peers • Take into account of the opinions from various parties • Consider the alignment of the IT investment strategy with the business strategy • Easy to use because of their visual representation • Help to achieve consensus on the attributes and objectives of IT • Cover wide spectrum of benefits from different viewpoints • Difficult to make estimation of figures needed • Causal rational will affect the inaccuracy of the evaluation results • Only provided very general information • No general criteria for a certain area. Companies have to generate their own criteria for each case. • Involve a great deal of discussion and can be very costly and time consuming Application areas • Widely used in accounting and finance literature • Appropriate for those welldefined projects in which investment contains little innovations and little unknown • Best suited to the evaluation of existing systems and is better suited to ex-post evaluation of IT project. • A well-known decisionmaking tool in the management literature • Used in many decisionmaking problems and is well known in the capital budgeting literature 132 Appendix B Innovative techniques developed for IT benefits evaluation Categorize Bedell’s approach Value Analysis Advantage • Easy to understand and time saving to implement. • Results are specific and direct • Reduces uncertainty on benefits identification by means of prototype demonstrations and Delphi approach Information Economics • Impact of the IT is assessed for risks and benefits • First attempts to explore the wide-ranging impact of IT on organizations by covering financial, business and technological criteria Balanced Scorecard • Accounts for a wider range of IT effects • Provides measures that can be usefully tracked beyond the investment appraisal stage and into the system’s life cycle Andresen’s framework for measuring IT benefits in construction • Contains a clear statement of the means by which benefits are measured, clear accountability for actions, a focus on strategic thinking, identification of benefits that were previously unquantified and unidentified, the creation of a learning culture, and a means for comparing alternative proposals and solutions Disadvantage • Depends totally on subjective attitudes of evaluators • Establishing values through Delphi approach is a lengthy and costly exercise. Application areas • Measuring IS/IT Effectiveness • A robust procedure for establishing agreed numeric scores for intangible benefits for further analysis • Requires considerable expertise to • It is the best known IT investment justification implement in-depth analysis of technique that attempts to various possibilities take into accounts the risks and benefits of a proposed investment in IT • Performance management • No general criteria for a certain system area. Companies have to generate their own criteria for each case. • Involves a great deal of discussion and can be very costly and time consuming • Categorization method of benefits • Measuring IT benefits in construction is difficult to understand and use. • The outputs were judged as less suitable for decision-making for the lack of an overview of the multi-dimensional outputs. 133 Appendix C the Context Table C-1: Business Strategy Strategy One Gain low cost leadership Strategy Two Product differentiation Strategy Three Human resource differentiation Strategy Four Technology leadership Strategy Five Segmentation and product breadth Strategy Six Market share orientation Strategy Seven Improve strategy links with customers to gain customer satisfaction Table C-2: Evaluation Involvement Parties IT manager Internal audit User department Financial officers Board/executive/business manager External partners Table C-3: Evaluation Purpose Choose between alternative proposals/systems; Making a “Go” or “no Go” decision Correct IT system design and performance Regular reviews to monitor the progress of a system Get a conclusion of whether the original goals has been achieved and whether the investment is worthwhile 134 Appendix D the Characteristic Table D-1: Function of IT Function categorization Function areas Specific function Administration Expert system, decision support system Data base system Electronic documentation submission Electronic data management Electronic data interchange Automation of building regulation and code of practice Automation plan checking Internet & intranet E-commerce Costing system Financing system Demand forecast Greater distribution channels Strong links to customers Bar-coding Estimating, scheduling and planning system Electronic procurement system CAD, 3D, 2D VR Site project management system (project monitoring and control of the project quality, cost and progress) Facilities management, as built survey Inventory control Increase flexibility in operations Distribution, supply and transport of building products Supporting the management of organizational production processes Accounting programs Sales and marketing Supporting the production process of an organization’s products or services Project management Production function Table D-2: IT goal IT Goal One IT Goal Two IT Goal Three IT Goal Four Enable new ways of management and improve productivity and quality Improve company’s economic performance (financial perspective) Improve company’s market performance (customer perspective) Improve the innovative culture in the company 135 Appendix E the Content Table E-1: IT Benefits Categorization (at company level) Category One Category Two Category Three Category Four Improvement in company’s internal process performance Improvement in company’s economic performance Improvement in company’s market performance Improvement in company’s innovative culture Table E-2: Measures for IT Benefits Evaluation Categories Internal efficiency and effectiveness measures Financial measures Customer measures Innovative culture measures Measures Cost reduction Productivity improvement Product quality improvement Service quality improvement Value added Gross profit Net profit Construction turnover Growth in revenue Return on assets Return on investment Market share Customer retention Customer acquisition Customer satisfaction Customer profitability Employee capabilities Information systems capabilities Employee motivation Employee empower Employee alignment 136 Appendix F Questionnaire on framework for measuring IT benefits in construction companies Part one: General Information Name (optional) Designation Company (optional) Contact address Tel: Fax: Please indicate whether you would like to receive a softcopy of the survey report: □ Yes □ No If you tick “Yes”, please write down your e-mail: _________________________________ What is the employment size of your company? (Please tick applicable) Less than 5-9 10-49 50-99 100149 150199 200299 300399 400499 500 & over Part Two: About the IT Benefits Evaluation Framework Q 2-1 What is the importance of the following business strategy for your company? (Please use scale: - not important at all; - not important; - neutral; important; - very important) Business strategy Gain low cost leadership Product differentiation Human resource differentiation Technology leadership Segmentation and product breadth Market share orientation Improve strategy links with customers to gain customer satisfaction Others (please specify): _______________________ Please tick appropriate weight 5 5 5 137 Q 2-2 Who are involved in the evaluation process? (Please tick applicable) Parties IT manager Internal audit User department Financial officers Board/executive/business manager External partners Others (please specify): Conduct the evaluation Responsible for the evaluation Q 2-3 For the following IT function, what is the importance of their application to your company? (Please use scale: - not important at all; - not important; - neutral; - important; - very important) Function areas Please tick appropriate weight Administration (Expert system, Decision support system, Electronic documentation submission, Electronic data management, Automation plan checking, Internet & intranet, E-commerce) Accounting programs (Costing system, Financing system) Project management (Bar-coding, Estimating, scheduling and planning system, Site project control, Facilities management) Production function (Inventory control, Increase flexibility in operations, Distribution, supply and transport of building products) Sales, marketing and customer support (Strong links to customers) Others (please specify): _______________________ Q 2-4 What is the importance of IT goals in your company? (Please use scale: not important at all; - not important; - neutral; - important; - very important IT goals Enable new ways of management and improve productivity and quality Improve company’s economic performance (financial perspective) Improve company’s market performance (customer perspective) Please tick appropriate weight 138 Improve the innovative culture in the company Others (please specify):__________________ 1 2 3 4 5 Q 2-5 what is the importance of the following contingencies in IT benefits derivation? (Please use scale: - not important at all; - not important; neutral; - important; - very important) Contingency Regulation change Competitor’s adoption of a similar technological innovation Pricing of IT-based services change Emergence of a new technology Technology standards change Others (please specify):__________________ Please tick appropriate weight 5 1 1 2 2 3 3 4 4 5 5 For Q 2-6 to Q 2-9, please refer to the following scale: - no impact at all; unperceivable impact; - some impact; - high impact; - significant impact Q 2-6 How does IT impact the following internal efficiency and effectiveness measures? Internal efficiency and effectiveness measures Cost Productivity Product quality and service quality Others (please specify): ___________________ Please tick appropriate weight 5 5 Q 2-7 How does IT impact the following economic performance measures? Economic Performance measures Value added Gross profit Net profit Construction turnover Growth in revenue Return on assets Return on investment Others (please specify) _________________ Please tick appropriate weight 5 5 5 5 Q 2-8 How does IT impact the following market performance measures? 139 Customer measures Market share Customer retention Customer acquisition Customer satisfaction Customer profitability Others (please specify):___________________ 1 1 1 Please tick appropriate weight 5 5 5 Q 2-9 How does IT impact the following future oriented innovation measures? Future oriented innovation measures Employee capabilities Information systems capabilities Employee motivation Employee empower Employee alignment (personal goals align with organizational goals) Others (please specify):___________________ Please tick appropriate weight 5 5 End of survey Thank you for your participation 140 [...]... (Ballantine and Stray, 1998) The wide adoption of financial techniques in IT evaluation may stem from the fundamental assumption that an organization’s primary objective is to maximize the shareholder’s wealth Financial appraisal techniques are consistent with the theory of shareholder maximization and, therefore, are adopted more willingly However, the general weakness of financial approach is that. .. companies The main objectives are: • to develop an effective IT benefits evaluation framework that help evaluators find out what exact benefits IT can bring to a certain construction company and how to identify, measure and control them effectively; and 6 • to develop a computerized implementation system for IT benefits evaluation based on the proposed framework, which helps to make the evaluation easy to. .. field adopt financial measures as company performance indicators Bharadwaj (2000) empirically examined the association between IT capability and firm performance Results indicate that firms with higher IT capability tend to have a higher performance than those with lower IT capability on a variety of profit and costbased performance measures In Floyd and Wooldridge’s (1990) study, path analysis was used... benefits are those that do not readily translate into monetary values but nonetheless have significant value to the firm There is not much meaning to further divide tangible benefits, since they have in common the nature to translate into monetary values The main arguments are concerned with the further classification of intangible benefits for their wider concept Hares and Royle (1994) indicated there... develop an evaluation framework for a certain IT project does not have much meaning and, on the other hand, it is very hard or even impossible to build a framework suitable for all The impact of IT on a company’s performance will be identified and evaluated 1.4 Research Objectives This research aims to explore the impacts of IT on company’s performance, or the benefits that IT brings to construction companies... designing an evaluation framework Based on those gathered information, a conceptual framework is proposed 9 In the second stage a questionnaire is formulated A mail survey is conducted by distributing the questionnaire in local construction companies The sample is randomly selected from the registered categories of A1 , A2 and B1 contractors, the top three categories at the BCA (Building and Construction Authorities)... This research is conducted at the company level and focuses on the impact of IT on a company’s performance Therefore, the “IT benefits in this thesis refers to the lagged positive effects of the implementation of IT on changing a company’s performance Measuring IT benefits and IT benefits evaluation The word “measure” when used as a verb means to estimate by evaluation or comparison to ascertain the dimensions,... likely that managers hesitate to conduct IT benefits evaluation at regular intervals for the time and cost reasons Besides, the lack or absence of the records for regular evaluations makes it difficult to track the performance of the evaluated IT project To address those issues, the main research problem in this work is on how to measure the right IT benefits in the right way for construction companies... Mann’s (1993) exploratory research related comprehensive sets of IT investment measures to organizational strategic and economic performance measures In that study organizational performance is measured using the key internal and external factors upon which the organization depends on for survival In addition to profitability measures, the framework includes market measures such as market to book value... national competitive advantage To promote the integrated approach to construction, a few national IT initiatives have been set up to allow seamless communication and exchange of information The CORENET project is a major IT initiative undertaken by the Building and Construction Authority (BCA) with IT leadership from the National Computer Board, in collaboration with other public and private organizations . on company’s performance, or the benefits that IT brings to construction companies. The main objectives are: • to develop an effective IT benefits evaluation framework that help evaluators find. help evaluators answer all questions that are involved in the evaluation, such as why there is a need to do an evaluation, what needs to be measured, from which iv aspects the evaluation is. likely that managers hesitate to conduct IT benefits evaluation at regular intervals for the time and cost reasons. Besides, the lack or absence of the records for regular evaluations makes it