Impact of Information Technology on Organizational Performance A Comparative Quantitative Analysis of Pakistan’s Banking and Manufacturing Sectors.

2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 Impact of Infor m ation Technology on Org anizational Perfor m ance: A Comparative Quantitative Analysis of Pakistan’s Banking and Manufacturing Sectors Muhammad Shaukat, Assistant Professor, Institute Of Management Sciences, Bahauddin Zakariya University Multan (Pakistan) Email: shoukatmalik@bzu.edu.pk Prof Dr Muhammad Zafarullah, Vice-Chancellor, Bahauddin Zakariya University Multan(Pakistan) Email: vc@bzu.edu.pk Prof Dr Rana Abdul Wajid, Director, Centre for Mathematical and Statistical Sciences, Lahore School of Economics, Lahore(Pakistan) Email: drrana@lahoreschool.edu.pk Key Words: Information Technology, Organizational Performance, IT in Banking and Manufacturing sectors Abstract One of the major developments which had profound impact on the economic growth pattern in the world in the new millennium has been the strides in the domain of Information Technology sector The world has observed significant growth of applications in diverting areas of Information Technology Information Technology has permeated nearly every aspect of modern business operations and communications This technology really has drastically changed the working of today’s organizations and is being used both by developed and developing countries for performance improvements Similar to other developing countries, this technology is also being applied in all the organizations of Pakistan Information Technology is also one of the most exciting areas of research that has been the focus of intense interest throughout the globe over the decades but little has been devoted to examining the impact of Information Technology on Pakistani organizations This study examines the impact of IT on organizational performance in quantitative terms of Pakistan’s manufacturing and banking sectors over period of 1994-2005 The primary data was collected through in-depth interviews, official documents and field surveys of 48 companies, 24 in manufacturing sector(12 local and 12 foreign) and 24 in banking June 22-24, 2008 Oxford, UK 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 sector(12 local and 12 foreign) The data was tested by applying different statistical and financial techniques The results of the research have led to the conclusion that Information Technology has positive impact on the organizational performance of all the organizations but the banking sector performance outstrips the performance of manufacturing sector and local banking sector of Pakistan dominate the scene by implementing world class IT systems INTRODUCTION Information Technology is a powerful force in today’s global society The advent of computers and Information Technology (IT) has been perhaps the single massive drive impacting organizations during past few decades Information Technology or IT is revolutionizing all the living ways No doubt, it has given a new meaning to the word “Convenience” Information Technology has drastically changed the business landscapes and word “IT” has become the “Catchword” of the modern life today Information Technology has become, within a very short time, one of the basic building blocks of modern industrial society The effective use of IT is an essential element of competing in a fast-paced, knowledge based economy Information Technology is the major contributor to the progress of the developed countries(Drucker, 1992; Lang,2002; Vasudevan,2003) The developing countries are increasingly deploying IT to solve their developmental problems by investing in it from their own sources as well as by borrowing from different institutions(Odedra & Kluzer, 1998) Lending for IT by the World Bank has also been quite pervasive and growing at six times growth rate of total banks’ lending A study has shown that the significant IT components were present in over 90% of all world bank’s lending in developing countries(Harris & Davision, 1999) It is also estimated that total annual worldwide expenditure on Information Technology (IT) probably exceeds 1.5 trillion US June 22-24, 2008 Oxford, UK 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 dollars per year and is growing at about 10% compounded annually (Anandarjan et al., 2002) Information Technology also creates a serious dilemma for management today IT innovations have the potential for changing the competitive game for any organization On the other hand, the size of IT investments put increasing pressure on managers to asses its business value One key to this dilemma is to improve the ability to measure and track the impact of IT on productivity Alongside, the seemingly inexorable rise in IT investment during the last 20 years, there have been considerable uncertainty and concern about the productivity and efficiency impact of IT being experienced in work organization However, in quest of improving efficiency and effectiveness the companies are making heavy investments in Information Technology These enduring magnitudes of investment in Information Technology so has drawn attention of many researchers, managers and policy makers to the impacts of IT on growth and productivity The expectation was that increased investment in IT would naturally lead to increase performance of organization But despite the massive investments in IT both in the developed and developing economies, the impact of IT on productivity and business performance continued to be questioned (Wilcock, et al, 1998) Despite hundreds of studies carried out, scholars remained deeply divided into two groups which can be identified as “Productivity Paradox-IT has no impacts on productivity”(Turner, 1985, Loveman, 1988,1994; Roach, 1988; Mitra & Cyaya, 1996; Strassman(1997); Dasgupta & Sarkis(1999) etc.), and “Productivity Payoff-IT does improve productivity” (Bender, 1986, Mody & Dahlman, 1992); Raheim & Pennings, 1987; Harris & Katz, 1991, Brynjolfsson, 1993, 1996, Brynjolfsson, & Hitt, 1994, 1997, 1998; Attewel, 1991; Karemer, et al, 1994; Dewan & Kraemer, 1998, Quinn, et al, 1994 ; Ng, 1996, Weill, 1992, Mehmood & Mann, 1993) The goal of every information systems, based in any organization is to improve performance on the job and this performance efficiency is only achieved when IT is accepted and used warmly by the concern employees in organizations (Venkatesh et al., 2003) In their quest for development, many developing countries put great hope in use of IT Yet, the challenges of IT diffusion in these countries are by no means identical to the June 22-24, 2008 Oxford, UK 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 ones in the developed countries The challenges faced by developing countries in harnessing the full potential of IT are not really very different from those of that confronted by the developed countries(Khan, 2003) Information Technology now is the most preferred choice of all developing and developed countries to upgrade their economies and become competitive in the global market place The IT based economies have streamlined the most complex economies of the world and enhanced the productivity to the level where an economy such as US has wriggled out of the entire trillion plus dollars national deficit and turned into a surplus in recent years The world economy now has moved from lowvalue basic industries to a fast paced high-value information based economy Motivation for this Study The impetus for this research came from the main reason that in modern organizations Information Technology is a key to competitiveness and economic growth It has no doubt the greatest influence on the global economy Like other countries Pakistan has also accepted this challenge of 21st century by making efforts in the development of Information Technology A decade ago IT had very little introduction in the country, but very soon with the efforts both on private and government fronts the concept of IT has become very popular with all Pakistani organizations Pakistani manufacturing and banking industries are the major users of IT products The central thesis of the present study is to seek the impact, which Information Technology has on organizational performance of Pakistani companies working in above mentioned sectors Literature Review Definition of the concept of Information Technology Information Technology has been defined in various ways by different authors Over the years, IT has been conceptualized and measured differently by different researchers The majority of the authors, however, parallel Information Technology with computer systems June 22-24, 2008 Oxford, UK 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 Frenzel(1999) for example defines IT as “Information Technology is the term that describes the organization’s computing and communications, infrastructure, including computer systems, telecommunication networks, and multimedia (combined audio, text, and video) hardware and software” Shelly et al(2005) narrate that “IT includes hardware, software, databases, networks, and other related components which are used to build information systems” Many other researchers also have come up with the same idea and say that “IT is the technology that supports activities involving the creations, storage, manipulation and communication of information together with their related methods and management applications” (Martin et al., 1999; Gupta,2000; Kendall & Kendall ,2000; Chan, 2000; Poku & Vlosky, 2002) However, William & Sawyar, 2005 define Information Technology as a general term that describes any technology that help to produce, manipulate, process, store, communicate, and/or disseminate information This definition may be regarded as the comprehensive one, as it covers all aspects discussed by different researchers and includes all the components and processes needed to carry out information processing work in the organization So it can be said that that IT concept came from a merging of computer with telecommunications technologies, when computer and communications technologies are combined, the result is Information Technology or ‘infotech’ Information Technology Developments In Pakistan The process of computerization in Pakistan started since 1957 when a company named ‘Packages Ltd.” started using computer for its work Since then IT usage is increasing gradually Though in the beginning Pakistani government was slow in adoption and diffusion of IT but now it is at forefront of all government priorities In Pakistan, realizing the global revolution in Information Technology, the government has liberalized its policies with regards to hardware & software imports since 1985 The custom duties on electronic goods were also reduced drastically, but the real quantum jump was experienced in early 90s, which can be termed as IT revolution in Pakistan and satellite communication technology was introduced In 1991, 90% telephone lines were converted to digital In 1995, Internet Service Providers (ISPs) started providing Internet facility to Internet users June 22-24, 2008 Oxford, UK 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 and now there are more than 132 ISPs in operation all over the country providing internet facility to more than 3,000,000 users1 It is all in 2000s, that the government started giving a lot of emphasis to IT sector New IT educational institutes are opened & IT professionals are hired to impart IT training in universities Nationwide IT seminars, forums, exhibitions and competitions are being arranged to create IT awareness among the people Computer as a subject have been introduced in schools & colleges Cyber Cafes are being opened to create awareness for Internet use Telephone network has been enhanced and in rural areas, telecommunication facilities are provided through small exchanges and PCOs By doing so links between Pakistan & other countries have been improved significantly (Imam 2002) Information Technology is now also being used in all government organizations Now the Government of Pakistan is taking all steps to make Pakistan an IT super power by adopting IT as a national program so as to enable personal and national growth The country’s current ‘IT Policy and Action Plan’ intends to involve all walks of life, e.g., industry and commerce, banking and insurance, finance, revenue, communication, media, human resource development, defense etc.(Rehman, 2005) The computerization in the country which was initially monitored by the Ministry of Science & Technology(MOST), now is being managed by a separate ministry of Information Technology since November 2002 This ministry is maintaining firmness and viscosity with the policy and achievements made in the IT & Telecommunications sectors since its inceptions and to cope with modern challenges and meeting requirements of the IT and Tele-communications, the policy is regularly updated Many other departments/ institutions like Electronic Government Directorate, Pakistan Computer Bureau, Pakistan Software Export Board, Pakistan Telecommunication Authority, Computer Society of Pakistan, Pakistan Software Houses Association (PASHA) etc are working side by side the Ministry of Information Technology to help forward IT in the country To provide www.moitt.gov.pk PASHA is a representative body of software developer of Pakistan It was found in late 1992 by software hoses and now have about 350 members national wide: www.moitt.gov.pk June 22-24, 2008 Oxford, UK 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 protection and enhance the confidence of users, providers and facilitators of information services, legislation based on the recommendation of the working group comprising IT and legal experts have been framed Action in the area of digital signature act intellectual property and copy right act and the consumer protection act has been started.(Kazmi, 2005) According to some estimates, in Pakistan presently there are around 2,100 mainframe and minicomputers in the country with nearly half of them being in the government sector Liberal import policy and reduction/removal of duties has led to a burgeoning usage of PCs and servers (Osama, 2005) It is estimated that nearly half a million PCs are added each year, representing a three fold increase in annual volume over the decade straddling the 21 st Century Analysts estimate that this rate of growth could very well quadruple by 2010 The Federal Government of Pakistan has laid great emphasis on expedition towards the intensity of Information Technology in a variety of fields (Ghauri, 2003; Pasha, 2005) To conclude all efforts of the government it can be said that the Government of Pakistan now is giving all-out support and push to IT sector Millions of dollars are being invested by the government in IT, and majority being spent on human resource development and enabling infrastructure provision The Government of Pakistan is leading the technology revolution in the country in various projects aimed at improving infrastructure, human resource development and integrating IT in the public and private sector (Kazmi, 2000) Information Technology And Pakistan’s Banking Industry Financial sector appears to be a clear leader in the growth of IT It was among the first to incorporate electronic data processing in its operations, through check handling, bookkeeping, credit analysis and ATMs Mayer(1987) while narrating the history of computer usage in banking demonstrates that the use of computers in banking first began in the early 1950s, when the first large commercial computer was built for Bank of America Initially, computers were used to process check transactions through magnetic ink character recognition With the introduction of first automated clearing house in the early 1970’s electronic funds transfer (EFT) was made possible, and then ATM was introduced June 22-24, 2008 Oxford, UK 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 Automated Teller Machine (ATM)3 is one of the most significant technological investments made by the commercial banks ATM’s introduced the power of computer technology to the general public and made banking convenient for consumers Today, ATM’s deliver banking service 24 hours a day, days a week to more than 22 millions peoples only in USA The banks increasingly have turned toward ATM and other computer technology like prepaid cards, loyalty cards, debit cards and even chip cards, to reduce the high costs associated with maintaining traditional “brick and mortar” branches staffed by tellers Koepp(2000) Franke(1987); Martini(1999) Now the banks are using Information Technology in back-office (check and accounts) processing, mortgage and loan application processing, and the electronic funds transfer to more strategic innovations such as automated teller machines and new kinds of securities (Nsouli,2002) The financial sector in Pakistan can be grouped into banking and non-banking financial institutions (NBFIs) Banking institutions include large public sector scheduled banks, private sector banks and foreign banks, while NBFIs include development finance Institutions (DFIs), private sector investment banks, leasing companies and modarbas The banking industry in Pakistan has seen great transition during fifty-nine years of his history, especially since early 1970s The banking nationalization in 1974 and then privatization and liberalization in early 1990, are termed as major restructuring years of the entire banking industry of Pakistan At the time of inception of Pakistan in 1947, only few bank branches existed in the country, which were concentrated mainly in the urban areas Moreover, Pakistan was without a central bank of its own till June 30, 1948 However, by early 1990s the banking sector had spread to every nick and corner of the country The market for banks is diverse in Pakistan comprising Nationalized Banks, Private Banks and Foreign Banks In 1993 there were 33 commercial banks in Pakistan 14 being local & 19 foreign By the end of 2001 due to government liberalization policy to setup a private bank, the number has increased to 43, 24 being local & 19 as foreign But by the end of 2005, with some mergers there were 38 commercial banks 14 being foreign and 24 being local Total number of scheduled banks branches stood at 7,075 as on 30 th September, Don Wetzel developed ATM in 1973 and it was first installed at Chemical Bank in New York (Shelly et al(2004) pp5.39 June 22-24, 2008 Oxford, UK 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 2005 There is a phenomenal progress in banking sector of Pakistan It recorded an increase of 99% growth in profit in only one year i.e 2005 NBP, HBL, MCB, ABL,UBL are considered five large banks and are very dominant in the banking industry , in term of total number of branches, deposits and advances, collectively accounting for 78% and 77% of total deposit and advances respectively Most of the local banks are in private sector now, and many of them have started business since 1992 The introduction of computer in banks in Pakistan started in 1965 when the main commercial banks in private sector i.e Habib Bank, United Bank and Muslim Commercial Bank started acquiring computers to regulate their banking work Since that time there is a massive investment in IT in banking sector (Akhtar, 2006) This is bore out by the fact that during fiscal year 2003-2004, over US$ 200 millions was invested by the financial services sector into Information Technology products and services6 Shafiq(2002) says that not only this but also the banking sector has dramatically increased its dependence on use of IT, and it is evident by the growth in the number of branches that are connected online In Pakistan almost all national and multinational banks are using Information Technology to increase their performance Most of the Pakistani banks (local and foreign), have launched their web sites and have uploaded many things on web including accounts opening forms and loan applications Likewise, the number of Automated Teller Machines(ATMs) and the use of automated cheque clearing and other back end systems within the banking community have increased7 There have been great advances in Pakistan banking technology in the past several years The most recent automated banking systems like Misys, Sibel, and Fidility etc are being installed in many of the Pakistani banks Kazmi(2004) points out that most of the banks operating in Pakistan however, have been making huge investments in three key areas namely 1) expansion of the branch network 2) up gradation of the existing infrastructure 3) adaptation of the new technologies with their ultimate objective is to offer a complete The daily Dawn: “Banks profit grew 99pc in 2005”, Tuesday March 21, 2006 pp9 Mahmood Javed (2006) “Another productive year for Banks” Money Plus July 17,2006 Pakistan banking infrastructure statistic: State Bank of Pakistan’s report 30-09-2005 “Status Of IT Industry Of Pakistan, The Dawn, 28th February, 2005 Approximately 2174 ATMs have been installed by different banks till May 2007 in different cities of Pakistan (The Dawn, June 22, 2007) Out of Total 7674 Branches, 4091 (53%) are Online Jang 31-5-2007 June 22-24, 2008 Oxford, UK 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 electronic banking facility Table presents a real picture of E-Banking infrastructure statistic of Pakistan till September 2005 Ahmed(2003) posits that the huge investments by the commercial banks in technology has ushered a new era of convenience and improved quality of services in Pakistan The banks are offering Internet and mobile banking but it has not made major impacts yet In the end to mention another big achievement in payment area is RTGS setup by State Banks of Pakistan for interbank settlement June 22-24, 2008 Oxford, UK 10 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 iii All Companies In Both The Sectors: After analyzing the performance of individual sector, the analysis is made to know about performance of all the companies in banking and manufacturing sectors for group and As discerned, IT has positive impacts on income of all the companies (p-valueD Edward/Oracle 1998 43 2000 1999 2001 2000 2005 2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3 Pakistani Top Banks & Manufacturing Companies IT Usages Summary/Statistics Local Manufacturing Companies Sr No Company Year of starting Busines in Pak Year of starti ng IT Name of Standard application 1984 1990 No standard application 1964 1984 N.A 1970 1982 No standard application S.A.P 1965 1966 S.A.P 2000 1970 1980 No standard application N.A 1990 1990 S.A.P 2000 1994 1994 N.A 1985 1992 No standard application No standard application D.G.Khan Cement Ltd General Tyres Ltd Lakson Tobaco Ltd Packages Ltd Service Industries Ltd Indus Motors Ltd Honda Cars Ltd Pakistan Electric Company Dawlence 1985 1991 N.A 10 PECO 1976 1990 11 Atlas Honda LTd Pakistan Steel 1992 1992 No standard application No standard application S.A.P 1974 1985 No standard application N.A 12 June 22-24, 2008 Oxford, UK 44 Year of Installing standard Applicati on N.A 2005 N.A N.A 2003