This article is the fourth in a series reviewing research relevant to practicing accountants. Previous articles covered auditing, management accounting and tax. Recent, top-ranked journals that cover accounting and information technology systems were examined to determine results containing practical implications.
HOW IT OUTSOURCING IMPACTS STOCK PRICES
When a firm publicly announces the use of outsourcing in the area of information technology (IT), the firm’s short-term stock price is affected. Investors respond depending upon the transactional risk of the outsourcing and the vendor chosen to perform the work. Transactional risk in IT relates to the risk associated with the loss of control over the vendor performing the outsourcing, the specific software being outsourced and the outsourcing agency itself.
Authors Wonseok Oh, Michael Gallivan and Joung Kim examined changes in the stock market price that occurred five days before and five days after a firm announced a new outsourcing of its IT. The research was designed to determine how investors react to a variety of IT outsourcing scenarios. Their work studied investor behavior under several categories: the extent of outsourcing, challenges with outsourcing in monitoring performance, use of customized or vendor software, vendor competence, and the cultural differences between the firm and vendor.
Their study determined that investors associate greater risk with large outsourcing contracts as well as with small vendors receiving large contracts. Likewise, if customized software is outsourced, investors are more skeptical. Their findings also suggest that cultural differences between the company and the outsourcing agency negatively affect the investor’s decision. The reverse in each scenario also holds true, with investors reacting positively to the perception of low transaction risk.
Generally, the findings conclude that stock investors recognize the overall risk of specific types of IT outsourcing. The article, “The Market’s Perception of the Transactional Risks of Information Technology Outsourcing Announcements,” was published in the Spring 2006 issue of the Journal of Management Information Systems.
ALIGNING STRATEGY WITH IT
In a survey of 274 chief information officers (CIOs), researchers Grover Kearns and Rajiv Sabherwal examined the importance of coordinating business strategy with investments in IT to avoid costly mistakes. Their results showed the importance of centralized decision making and an organizational focus on knowledge management. The study reveals the value of top management’s coordination with IT in both planning and implementation of projects.
The authors’ research, appearing in an article in the Journal of Management Information Systems titled “Strategic Alignment Between Business and Information Technology: A Knowledge-Based View of Behaviors, Outcome, and Consequences” (Winter 2006/2007) suggests several implications for practice. Their work stresses the importance of top management’s knowledge of current and potential IT projects. This includes frequent meetings with the CIO, IT management, and non- IT management to ensure an information exchange between all parties involved relevant to technological advances, competition and business operations. Additionally, the study shows that collaboration between these groups during implementation addresses potential problems more efficiently.
USING ERP TO ADD VALUE
IT investments continue to consume a large part of an organization’s capital budget, and therefore call for a closer look at the best way to successfully implement and enhance their value to the organization. The research studies discussed below examine these important questions.
One major IT investment is the implementation of an enterprise resource planning system (ERP) that has the potential to deliver major benefits to the firm. The goal of these enterprisewide systems is to eliminate the operational silos that exist when systems of various functional areas are not well-integrated. Systems that are not integrated fail to provide centralized data sharing and real-time information for decision makers. A successful ERP system, therefore, can prepare the way for future IT-dependent initiatives such as tighter supply chain integration, improved e-commerce capabilities and enhanced organizational learning.
Given the potential positive benefits of an ERP implementation, it is expected that investors will react to a firm’s announcement and signal their approval or disapproval. Researchers C. Ranganathan and Carol Brown examined how investors react in their study “ERP Investments and the Market Value of Firms: Toward an Understanding of Influential ERP Project Variables” (Information Systems Research, June 2006).
After reviewing the market impact of ERP announcements by 116 firms in diverse industries, they found that an announcement of an ERP project implementing two or more software modules that affect the value-chain (material management, operations, sales, etc.) got a bump in market value of 2.86%. In addition, announcements for projects with larger physical scope, covering multiple sites and divisions, had a market value increase of 2.34%. Conversely, the ERP announcements of projects with limited functional and physical scope resulted in slight negative returns, signaling limited expectations that the firm’s benefits would offset the ERP investment costs. It is interesting to note that the ERP vendor’s reputation and status did not significantly affect investor reactions.
CULTURAL IMPLICATIONS OF ERP
Organizations that manage or interact with systems outside of the United States, particularly in Asian countries, should be aware of the impact of culture on the success of an ERP implementation. Researchers Eric Wang, Gary Klein and James Jiang found that the ERP vendor’s country of origin is significant to the project’s success because a large part of an ERP system’s value lies in its ability to standardize business processes based on a belief in how things “ought to be done” that differs between Western and Eastern cultures (“ERP Misfit: Country of Origin and Organizational Factors,” Journal of Management Information Systems, Summer 2006).
Such “belief-based” formalized procedures are an integral part of ERP packages from major global vendors in Europe and the United States, and do not support the more flexible operational practices and unique decision styles of Asian firms. To make a Western system useful for an Asian business, modification is required. This is best accomplished through the use of the local business knowledge that must be considered along with the technical knowledge of the consultants.
ENSURING PRIVACY WHILE DATA MINING
One business asset that continues to provide value to an organization is the data it has collected. Data mining tools have been effectively used in fraud detection, risk assessment of loan applicants, medical diagnostics and other decision processes. Data mining seeks to discover hidden relationships between factors (attributes) associated with records in the database. With technology supporting faster collection and cheaper data storage, the next concern is the privacy of confidential information.
Organizations often think that if they remove unique information such as Social Security number, name or address, they will keep the data confidential even if it is analyzed by data mining tools. However, once the data are grouped into categories, such as age, gender, location, occupation, marital status or medical treatment, it is possible that a record will be unique and thus recognizable even without a unique identifier. The larger the number of categories, the greater the likelihood of a recognizable record.
To combat this problem, “data perturbation” is commonly used to add random “noise” to identifiers before analysis so that the original information cannot be uniquely identified. Xiao-Bai Li and Sumit Sarkar (“Privacy Protection in Data Mining: A Perturbation Approach for Categorical Data,” Information Systems Research, September 2006) have created a data perturbation method that will provide privacy even when working with data grouped into multiple categories. Businesses and medical institutions often collect data from customers and patients in prespecified categories such as age, gender, income brackets and ZIP code. The authors recommend that an organization’s IT department use this method to ensure confidentiality of information before data analysis.
Cynthia Bolt-Lee , CPA, M. Taxation, is an associate professor at The Citadel School of Business Administration in Charleston, S.C., and Janette Moody, CPA, Ph.D., is a professor at The Citadel School of Business Administration. Their e-mail addresses, respectively, are firstname.lastname@example.org and email@example.com.
Previous articles in series
- “A Showcase of Tax Research,” Oct. 08, page 48
- “Management Accounting Research for the C-Suite,” Nov. 07, page 50
- “Mining Audit Research,” April 07, page 68
Other related articles
- “Managing Multiple Identities,” Sept. 08, page 38
- “Join the Hunt: Customize Join Properties for Better Data Analysis,” Sept. 08, page 46
- “Test Your Information Security IQ,” July 08, page 50
Management Accounting Guidelines
- Evaluating Performance in Information Technology
- Evaluating the Effectiveness of Internet Marketing Initiatives
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