Information systems are vital to the operation and management of every organization. Managers investing in IS are interested in the benefit their organizations gain from this investment. However, neither managers nor researchers have found a way to justify investment in IS based on its contribution to an organization’s performance. Most studies examining the relationship between IS and performance level have found no positive relationship between the two variables . But these studies have been holistic, relating the total IS investment—software, hardware, personnel—to the total profit of the organization. Our study now suggests that the analysis should be particulate, not holistic. An organization should not look for benefits by viewing the IS applications portfolio as one entity. Benefits should be found for each individual area of activity/IS application (such as suppliers and purchase orders, customers, and sales) as a function of the organization’s characteristics. Hence, IS managers should justify the investment in each IS application, not in the entire IS application portfolio. A 1985 study that examined service sector firms found no significant relationship between investment in IS and high performing firms . A 1992 study found a “statistically significant negative relationship between productivity growth and the hightech intensity of the capital” . However, it also pointed out that the negative results may have been due to measurement problems. In 1993, Brynjolfsson summarized this issue: “It is possible that the benefits of IT investment are quite large, but that a proper index of its true impact has yet to be analyzed,” adding that “The lack of good quantitative measures for the output and value created by IT has made the MIS manager’s job of justifying investments particularly difficult” . We offer other measurements and a different approach to identifying and evaluating the benefits derived from IS investment. Since business performance is measured by profit, managers need to assess the benefit of IS investment by answering two questions: Arik Ragowsky (ARagowsky@aol.com) is an associate professor of Management Information Systems, and the Director of the Manufacturing Information Systems Center at the Department of Information Systems and Manufacturing, School of Business Administration, Wayne State University in Detroit, Michigan. Seev Neumann is the Mexico professor of information systems, Faculty of Management, Tel-Aviv University. Niv Ahituv is the Marko and Lucie Chaoul Chair for Research in Information Evaluation at Tel Aviv University in Israel.
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• What benefits should organizations expect from IS? • What variables predict or explain these benefits? One resolution to these difficulties is to use a large sample with firm-level data, where evidence of productivity is based on the assessment of someone in the firm. Such an approach must take organizational characteristics like lead time, throughput time, and lot size into account, since these characteristics determine the benefits to be gained from IS . In 1985, Porter argued that “competitive advantage cannot be understood by looking at a firm as a whole. It stems from many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its products. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation” . Following Porter’s...