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|Title: ||Which Came First, IT or Productivity? The Virtuous Cycle of Investment and Use in Enterprise Systems|
|Authors: ||Aral, Sinan|
|Keywords: ||Business Value of Information Technology|
Customer Relationship Management
Supply Chain Management
Enterprise Resource Planning
|Issue Date: ||10-Nov-2008|
|Series/Report no.: ||CeDER-PP-2006-11|
|Abstract: ||While it is now well established that IT intensive firms are more productive, a critical question
remains: Does IT cause productivity or are productive firms simply willing to spend more on IT?
We address this question by examining the productivity and performance effects of enterprise
systems investments in a uniquely detailed and comprehensive data set of 623 large, public U.S.
firms. The data represent all U.S. customers of a large vendor during 1998–2005 and include the
vendor’s three main enterprise system suites: Enterprise Resource Planning (ERP), Supply Chain
Management (SCM), and Customer Relationship Management (CRM). A particular benefit of our
data is that they distinguish the purchase of enterprise systems from their installation and use.
Since enterprise systems often take years to implement, firm performance at the time of purchase
often differs markedly from performance after the systems “go live.” Specifically, in our ERP
data, we find that purchase events are uncorrelated with performance while go-live events are
positively correlated. This indicates that the use of ERP systems actually causes performance
gains rather than strong performance driving the purchase of ERP.
In contrast, for SCM and CRM, we find that performance is correlated with both purchase and golive
events. Because SCM and CRM are installed after ERP, these results imply that firms that
experience performance gains from ERP go on to purchase SCM and CRM. Our results are robust
against several alternative explanations and specifications and suggest that a causal relationship
between ERP and performance triggers additional IT adoption in firms that derive value from
their initial investment. These results provide an explanation of simultaneity in IT value research
that fits with rational economic decision-making: Firms that successfully implement IT, react by
investing in more IT. Our work suggests replacing “either-or” views of causality with a positive
feedback loop conceptualization in which successful IT investments initiate a “virtuous cycle” of
investment and gain. Our work also reveals other important estimation issues that can help
researchers identify relationships between IT and business value.|
|Appears in Collections:||CeDER Published Papers|
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