Linking the Impact of IT Investments to Productivity and Profitability

Abstract

Implementing IT (information technology) systems such as ERP (enterprise resource planning) requires huge investments. Measuring the impact of these investments on productivity and profitability is extremely important for business managers. Many studies have failed to show the direct relationship between IT investments, organizational productivity and profitability, a phenomenon known as productivity paradox. The failure might relate to problems with the measurement techniques. This paper describes a measurement model, known as the PPP model (“Profitability = Productivity + Price Recovery”), that can fill the gap and show a link between IT investments, productivity, and profitability. The spreadsheet-based implementation of the PPP model, using multi-period data, generates performance trend charts of productivity, price recovery, and profitability. These performance charts provide a multi-period perspective to managers in identifying and understanding the impact of IT investments. This model is useful to managers considering heavy investments in IT as well as for managers interested in assessing their organizational performance and taking corrective actions in a timely manner.