IT Business Alignment and IT Usage in Operational Processes: A ...

Proceedings of the 39th Hawaii International Conference on System Sciences - 2006

IT Business Alignment and IT Usage in Operational Processes: A Retail Banking Case Heinz-Theo Wagner E-Finance Lab J. W. Goethe-University, Frankfurt, Germany [email protected]

Daniel Beimborn E-Finance Lab J. W. Goethe University, Frankfurt, Germany [email protected]

Jochen Franke E-Finance Lab J. W. Goethe-University, Frankfurt, Germany [email protected]

Tim Weitzel E-Finance Lab J. W. Goethe University, Frankfurt, Germany [email protected]

Abstract What is the impact of operational (i.e. nonstrategic) IT business alignment on IT usage? Using case studies in three branches of a retail bank employing identical information systems, many findings of the alignment literature can be supported. The cases also add new insights by showing that alignment is important in operations as well, and that alignment positively impacts IT usage. Especially mutual understanding between the business units and the IT unit turned out to be the single most important factor of IT usage that resulted from frequent interaction and, as far as the IT unit is concerned, from the business orientation of the IT personnel.

1. Introduction From the rich literature on the resource based view (RBV) of IT we know that it is not IT systems as such yielding utility but rather the way they are used and deployed within a business context. Thus, the usage of IT in business processes seems to be an important factor in achieving business value from IT. Still, investigations of concrete usage situations in daily business are rare. From the IT Business Alignment literature it is known that alignment processes are necessary to strategically exploit IT [10]. Empirical studies confirm a positive impact of these processes on performance [2, 12, 13, 24]. But research into the operational level of alignment and into the linkage between alignment and

usage is scarce. Our research question in this paper thus is: How does operational (i.e. non-strategic) IT business alignment impact IT usage? To address this question, we use an embedded case study in three different branches of a retail bank exploring how operational IT business alignment impacts IT usage in the financial services industry. To address this question a process oriented view is chosen [15]. Using the case study with three branches employing the same IT systems, it is shown how indeed alignment at an operational level positively impacts IT usage. The managerial implications are to select managers with work biographies across different organizational units or to foster cross departmental work experience. The theoretical implications are that alignment is important in operations as well and that it positively impacts IT usage. The remainder of the paper is structured as follows: section 2 gives the theoretical foundation. In section 3 the research model and the methodology are explained. Chapter 4 presents the results from the case study, while section 5 discusses its limitations. Chapter 6 outlines the conclusion and the following steps of our research.

2. Theoretical foundation: IT usage and alignment Alignment of business and IT is believed to improve organizational performance by mechanisms including governance processes, human resources and technological capabilities [10], whereas capabilities

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Proceedings of the 39th Hawaii International Conference on System Sciences - 2006

can be interpreted as the capacity to deploy resources [1]. The concept of alignment was originally introduced by Henderson and Venkatraman who proposed the strategic alignment model (SAM). They argue that the creation of value from IT investments needs an alignment between business and IT strategy in both strategy formulation (product-market choices) and implementation (choice of firm structure). The SAM distinguishes between an external and an internal domain where the first deals with strategy formulation reflecting the competitive environment. The latter is engaged in firm-internal choices like an IT infrastructure and operational processes. The alignment model emphasizes the strategic fit between strategy formulation and implementation for both the business and the IT domain, and also the functional integration between business and IT on both the strategic level and the operational level. An important point is that the entire model calls for crossdomain relationships between business and IT and between the strategic and operational level [10]. This is also consistent with Keen [13] who states that “the key to alignment is relationships, not ‘strategy’”. According to Reich and Benbasat [19, 21] alignment can be defined “as the degree to which the information technology mission, objectives, and plans support and are supported by the business mission, objectives and plans”. This definition focuses on alignment as a state or an outcome. Another research perspective focuses on the process of alignment and views alignment as a process “in which managers participate in the ex-change of knowledge” [12] (see also [21]). Correspondingly, Sambamurthy and Zmud [22] see alignment as a dynamic capability evolving as specific management processes engaged in adapting IT to business et vice versa, for example. This is also supported by a study of Reich and Benbasat [21]. In this paper we follow the process perspective of alignment. Shared domain knowledge was proven to be an important factor to the success of both long-term and short-term alignment [20] which, among others, involves improved relationships between functional areas and communication in a manner that is understandable to all [16]. Many contributions support the importance of aligning IT and business strategies [4, 9, 11]. The focus lies on strategy, on the role of senior management like a CIO or CEO, and so on. The implications for the day-to-day business and the relationship between IT and business units are far less clear [9]. Thus, little attention has been given to the relationships between IT and business units who use information systems.

The use of IT has to be investigated in detail to explain how IT affects the organization [15]. For benefits to be realized applications must certainly be developed but they must also be used to leverage the potential of the system. Applications usage must successfully be transformed into a change in business activities. Impacts from IT require “appropriate” use [23]. Thus, expecting higher benefits from more usage neglects the nature of this usage. This nature can be addressed by determining whether the full functionality of a system is being used for the intended purposes [6]. Inappropriate use may prevent or undo potentially positive impacts. Before an application can successfully be used, the users have to learn how to interpret its output and how to apply it when performing their business activities [17]. While usage of a system may be mandatory at one level, the continued adoption and use of the system itself may be voluntary, based upon management judgment at a higher level [6]. Voluntariness of use was also proven to be positively related to the impact on productivity because of the willingness of users (as opposed to some mandatory settings) [7]. In the context of IT usage the nature of the interactions between business and IT units seems to be an important element of a firm’s success which is not only restricted to the strategic level but also covers the operational level. Lower level functioning groups have to interact to transform strategy into daily business [9]. To address the operational level this paper is engaged in the influence of functional integration between IT and business at an operational level on the usage of an information system provided by a central IT unit.

3. Modeling 3.1. Research model As discussed in the previous section the use of an information system may explain benefits arising from the employment of an application in a business process. Usage in turn seems to be affected by the interaction of IT and business units along all levels from strategy, via development to day-to-day operations. Additionally, appropriate usage may be influenced by skills and experiences of the users affecting the ability and willingness to use a system. Therefore, the goal of this paper is to explore the relationships between usage and alignment as well as skills and experiences of users on an operational level.

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3.2. Methodology For this paper we used an embedded single case study approach [25]. To achieve the necessary rigor of a study, case studies have to be prepared and carried out thoroughly. Especially, the research question, the propositions and the unit of analysis have to be made explicit during design and preparation [25]. The research question employed for the single case study presented in this paper is: how does operational (i.e. non-strategic) IT business alignment impact IT usage? ‘How’ and ‘why’ questions are appropriate for case studies [25]. The proposition to be explored in our case study is that IT business alignment in the operational phase is an antecedent of IT usage. The unit of analysis is chosen in concordance with literature as (part of) a specific business process (here: the sales part of the retail process carried out in a bank branch; see below and section 4.2 for the reasons of this choice). After the definition phase the case was selected according to Eisenhardt [8] in that it was selected out of banks serving the retail market for private customers. By choosing the case it was important to control for extraneous variation. We chose to conduct an embedded single case study by selecting multiple branches of a single retail bank. Advantage of this approach is an identical environment of all sub-cases (see section 4.1) in terms of: 1. 2. 3. 4. 5.

firm strategy IT strategy hiring policy training concept for new employees formal organizational processes (e.g. interaction between business and IT department) 6. Information Systems deployed Differences among the branches relate to the competitive environment and the individual biographies and experiences of the employees. While focusing on alignment and usage as opposed to impacts on performance in the following we especially control for the biographies and the experiences of the employees. For carrying out the case study, case and interview patterns were developed, discussed within the research community, and then tested with four bank managers. After testing, the adapted documents were used for the actual case study interviews [8, 25]. Interviews were conducted in two parts. The first part was carried out with a semi-structured questionnaire to cover a variety of contextual variables while the second part consisted of a structured questionnaire. The interviews lasted between four and five hours and were taken in two steps. The interviews of the first step were carried out at the headquarters of the bank

and involved the heads of the IT organization, the back office department, and two managers of the sales department (see section 4.2 for further details). The latter managers are head of sales for specific sales regions. The second step involved interviews with the directors of three branches. During these interviews which were carried out in the branches additional branch personnel was involved for answering specific questions. The respective director was participating during the whole interview, while the staff was only consulted for particular questions. Data was complemented by reports, process documentation, and academic literature. The interviewees reviewed and validated the collected data as well as the results. This procedure is concordant with the literature in case study methodology [8, 14, 25]. The following section describes the German banking landscape which is the industry environment for the case study, followed by a description of the concrete case.

4. Case Study 4.1. Case study environment The German banking landscape consists of three groups of banks covering credit banks (also called private or commercial banks), publicly owned savings banks and credit cooperatives. The savings banks are owned by municipalities, county governments or even federal states. Savings banks and credit cooperatives typically have a strict local focus, serving only clients within a defined region. Therefore, there is nearly no competition among credit cooperatives or among savings banks. Regarding credit cooperatives there is an exemption which will be elaborated when discussing the concrete case. Only in the border area of a given region competition among a specific group of banks can occur. The regional segmentation among savings banks is not congruent with the regional segmentation of credit cooperatives. Therefore, a credit cooperative can have more than one savings bank as competitor in its region and vice versa. In terms of regional segmentation, commercial banks are different from savings banks and credit cooperatives as they serve any region and often operate Germany-wide (or even worldwide). Drawing on Beck et al. [3] most German banks are universal banks, offering the full range of financial products and services. Most banks follow multichannel distribution strategies in a more or less consistent way. The small savings banks do not consistently encourage customers to use the Internet thus branches remain exceptionally important.

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The case study presented in this paper is engaged in a bank within the credit cooperatives group. As mentioned, there is an exception regarding competition within this banking group. Within the group of credit cooperatives two forms have evolved historically which compete (at least moderately) within their particular geographical area. The first sub-group roots in banking services for farmers while the second one roots in banking services for railroad employees. In the following the first type is called credit cooperatives type I and the latter type credit cooperatives type II. The focus of type I on a specific customer segment has still an effect today, although nowadays all private customers within a defined region are served. But, there are still some differences. Three of these differences are explicated in the following to allow for a more complete picture of the case. The first difference affects the sales channels. While both forms of cooperatives provide similar online and telephone banking services, the coverage with branches differs heavily. Credit cooperatives of type I have far more branches than type II because they are typically serving the rural area. Type II cooperatives have branches in cities with 30,000 inhabitants or more, according to the sites of larger railroad stations. The effect is that there are branches of both types in these cities while there are only branches of the cooperatives type I in rural areas. Although online access is provided, the market penetration of type II banks depends on the site of the branch. Most customers are centered around the branch. Market penetration decreases with increasing geographic distance to the branch. The second difference refers to the customer segment served. In contrast to type I cooperatives only private customers are served, but no firms. Therefore, the offered products comprise transfer and savings accounts, credit cards, insurances, credits for private homes, credits for other acquisitions like cars, various savings products, funds, and equities. Shares can also be bought and sold but without advisory. The third difference refers to the IT environment. There are twelve credit cooperatives of type II in Germany with clearly defined regions as opposed to about 400 credit cooperatives of type I. All type II cooperatives use the same self-developed information systems. The information systems are provided by a service provider which is a separate company owned by these cooperatives. The information systems are run in one data center serving all type II cooperatives. Credit cooperatives type I use other information systems and also other providers. Credit cooperatives type II are quite successful in comparison to the other regionally oriented banks

(type I cooperatives and savings banks). The last annual statistics showed an average increase of total assets of 2.75% compared to 1.19% (cooperatives type I) and -0.83% (savings banks). Similarly, the increase of granted credits was 8.94% compared to 0.38% (cooperatives type I), and 1.76% (savings banks). Also, deposits increased by 1.94% compared to 1.26% (cooperatives type I), and 0.25% (savings banks) [5].

4.2. Case study description In the case study, we focus on a credit cooperative type II which will be called C-Bank in the following. As type II bank, C-Bank focuses on retail customers and offers only services for these clients, specifically. It has total assets of 2.5-5 billion EUR, 300-700 employees, and serves 150,000-450,000 customers (due to anonymity reasons the parameters are specified as ranges). In 2004 the number of customers increased by more than 10% and the profit by 7%. In contrast to many other banks in Germany the number of branches have not been reduced but increased. During the last five years it increased from eight to 25 which also reflects the strong commitment of the bank’s strategy to retail banking. The bank continuously carries out surveys regarding customer satisfaction which show very high and increasing customer satisfaction values. Basis of the customer relationship and also a core service is the free transfer account which is the anchor for the relationship. Other services are centered on this account. A further core service is granting credits for building private homes. C-Bank consists of branches and a headquarter with administration, controlling, call center, back office activities like rating and contracting, IT support department, etc. The data center is run by a service provider owned by all type II credit cooperatives. This service provider also develops and enhances the information systems or realizes requested changes. The communication between the service provider regarding operational tasks and also development tasks is realized via the IT support department of C-Bank. In our case study we focus on the retail sales process in branches of C-Bank. The reason for the process level is that there is evidence in the literature that the business value of IT should be measured on this level rather than on firm level, industry level, or even national level [18]. The rationale is that a firm comprising several business processes may excel in some and is average or below average in other processes which leads in total to some net effect at firm level. A business process is defined as “actions that firms engage in to accomplish some business purpose or

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Proceedings of the 39th Hawaii International Conference on System Sciences - 2006

objective” [18]. More specifically, a bank’s business process of retail sales (“retail process”) is chosen for the following reasons: first, the retail process is the primary process of this bank with a direct value contribution, second, there is a significant amount of nonautomated activities in this process (e.g. compared to highly automated payment processes) requiring human business competencies and a need for alignment between IT and business unit in different phases (e.g. development phase for automated activities to improve the existing process, operation phase for nonautomated activities). In the following, branch activities are briefly described. A branch has typically three spaces. 1. The very first, just behind the front door contains ATMs, printers for banking accounts and self-service equipment (e.g. for initiating a money transfer from one account to another). 2. The second is an open room with service points consisting of desks with a desktop computer each served by a bank employee. 3. The third space consists of offices used for customer contact, back office activities, and the cashier area. The employees are so-called bank advisors who are allowed to consult a customer, bank clerks responsible for standard business, and specialized advisors for insurances and building savings agreements. The latter group serves several branches and is present only one or two days in a particular branch. Clients who are already customers and are in need for standard services like a savings account, cash, or help with a remittance are served by the clerks. If a credit or a more sophisticated savings service is requested, a bank advisor will serve the customer. A bank advisor also serves (potential) new customers. In most cases, a new customer enters the branch and asks for concrete products like an account or a credit. Such customer will be looked after by a bank advisor which is instructed to carry out a holistic finance analysis. This analysis can be conducted immediately at the service point or in an office depending on the actual customer frequency. Sometimes a separate meeting for this analysis is appointed. For the bank the analysis is a means for cross-selling. If an account has to be opened, this is done immediately at the service point by a bank advisor or a bank clerk using an information system which is called PAS because it supports the so-called passive business. Passive business involves all finance products of the bank except of credits, e.g. savings accounts, overnight money etc. PAS was introduced in 1998. It is mask-oriented and is seen as a mature and easy to use system. After data input in the branch the processing of data is fully automatic.

Credits, especially those for buildings, are supported by another system called ACT. ACT was introduced in 2001 and is mask-oriented, too. Because ACT is only used for credits which are a task for bank advisors, this system is only used by advisors. The process of granting credits cannot be accomplished in the branch, exclusively. There are tasks like finishing a contract or rating of securities which have to be carried out in the headquarters of the bank. Therefore, the back office of the headquarters uses the same application. Table 1 shows an overview of the branches taking part in the case. Table 1. Branches in the case study Branch A

Branch B

Branch C

Employees

4 (2 advisors, 2 clerks)

7 (4 advisors, 3 clerks)

4 (3 advisors, 1 clerk)

Number of customers

3,500

14,000

2,600

Savings bank, credit cooperative type I

Savings bank

Strong

Moderate

Main competitors

Degree of competition

Savings bank, credit cooperative type I, credit banks Very strong, employees of the savings bank have order to beat every offer of CBank

4.3. Results Our case focuses on the use of ACT which is used for the core product “building credit”. ACT covers building loans as well as so-called private credits, e.g. for purchasing a car. ACT is based on the same core banking application as PAS and is run by a service provider in a central data center. Access to the system is granted via Windows desktop PCs with a GUI for the system and a wide area network provided by a telecommunications services provider. The masks of ACT cannot be customized and contain mandatory and optional fields. To switch to another mask or getting help, a three-letter code must be entered via the keyboard. It takes up to 90 minutes to finish a “standard” request for a building credit. In the branch the whole task regularly consists of three subtasks which are consulting, sales, and processing. Consulting and sales are intertwined and can be done using the finance analysis instrument. These sub-tasks are not supported by information systems. The processing of sub-tasks can be done using ACT. The use of ACT at the service point in front of the customer is

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voluntary, but it must be used sometimes for getting the data processed. When hired, all employees of the branches get an introductory training in the headquarters, also including the introduction to ACT. Furthermore, a specific training crew visits each branch for three days per year to train and to refresh the use of all information systems. All branch employees have a banking education, no advanced IT training, and no professional IT work experience. Beside the trainings provided to the branch employees, three further sources supporting the use of ACT exist. These are a manual, experience of other branch employees, and – in most cases – phone contact to the IT support department located at C-Bank’s headquarters. The manual covers all business processes of the branch including the use of all information systems in

a high level of detail and is updated once a week. Even though this manual is available online and also searchable, it is only marginally used. Main sources of support are personal contacts between the employees of the same branch and phone or mail contacts to the IT support department. A direct contact to the service provider, which runs the data center and develops the information systems, does not exist. Although the available systems the education background of the employees, the formal processes, and the trainings are identical in all branches, we disclosed huge difference in the usage of ACT. A summary of the case study results is shown in table 2. Indicators with ratings like “average” are employed using a 5-point-Likert scale.

Table 2. Summary of the case study results Construct

Indicator

Usage

Content with system

Usage of system

Administrative activities which should be shifted to the back office

Branch A

Branch B

Branch C

complicated, slow, not comfortable Recording of data and presentation of credit conditions via Excel sheet; subsequent data entry in ACT

not comfortable but appropriate All data is recorded in ACT in presence of the customer; specific object data are entered subsequently

Data entry into ACT

Expert’s report of object value

not comfortable but appropriate All data is recorded in ACT in presence of the customer; specific object data are entered subsequently Expert’s report of object value; application for public funded credits (e.g. for heat insulation)

Stability of system

Experience

Alignment

Perceived competence of IT support department

Very stable Mixed: two groups are identified, one with low IT competence, and the other with high IT competence

Perceived cooperativeness of IT support department

Competence is very heterogeneous, but overall the competence is average

Competence is rated as high

Cooperativeness is rated as high

Does IT understand business needs?

Mixed: Corresponding to the aforementioned question, the rating is split. Over all understanding of business needs was rated low.

Interaction between advisors and IT support department

Interaction almost always takes place if a problem occurs

Interaction almost always takes place if a problem occurs

Average 2.25 years

Average 5 years

Average 4 years

None

Branch director worked two years in the back office where ACT is used as core system, exclusively.

None

Skill level of employees Employees’ working experience in general banking Employees’ working experience in current position Working experience outside current position (= sales)

Understanding of business needs is average

Understanding of business needs is high

Interaction occurs in cases of problems, but mostly in cases of handling questions All have banking education which is rated as sufficient for the actual tasks Average 11 years in Average 16 years Average 8 years different positions within sales

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Branch A does nearly never use ACT in presence of a customer. Instead, the customer data is collected in a self-developed Excel sheet which is also used to make a rudimentary rating of the customer to tell him if a credit can probably be granted and at which conditions. If the customer wants a credit, the whole data will have to be transferred manually to ACT, subsequently. This is done by a bank advisor in times when there are only few customers. Before the data has been entered into ACT, the back office in the bank’s headquarters cannot start its activities of finishing the rating and contracting. Thus, a bank advisor spends considerably more time for fulfilling the task (up to two times longer) and prevents the back office from starting work, therefore, slowing down the completion of the whole process of granting a credit. Branch B and C use ACT while the customer is present and just register some data regarding the object to be financed, subsequently. When asking for the reason of these different usage patterns we found corresponding assessments of the system. In branch A ACT was said to be complicated, slow and not comfortable. In branches B and C ACT was rated as not comfortable but appropriate. Table 2 summarizes the results. When exploring the relationships between the constructs experience, usage, and alignment, it seems that higher usage is dependent on the interaction between advisors and the IT support staff and that a more frequent interaction causes a better understanding and a higher usage. Experience of the team leader as another factor may also influence the usage because the team leader of branch B worked in the back office for two years, while his branch uses ACT efficiently, compared to the other branches. The back office team, located right beside the IT support department, works exclusively with ACT and has frequent contacts to the IT support department. Following, the team leader’s average perception of the IT staff’s competence and cooperativeness (compared to the other branches) might also be influenced by former times, when he was closer to the IT support department. The single most important aspect turned out to be mutual understanding between the business units and the IT unit which is concordant with literature [20]. Mutual understanding was reported to arise from frequent interaction and, as far as the IT unit is concerned, from the business orientation and basic business knowledge of the IT personnel. In the case of CBank the contacts to the IT support department are reduced to phone and mail contact, although sometimes of informal nature. The main reason for this

evaluation is the geographic distance as opposed to the contacts between back office and IT department, and a lack of business understanding.

5. Limitations Limitations of this case study mainly refer to the following items. Explicit research into the relationships between business departments of the headquarters and the IT support department which seem to influence the construct of experience is not yet completed. Furthermore, performance parameters of the business process were not considered. Although Branch A needs more time to fulfill the process, it is quite difficult to determine if the lower customer facing time (due to the use of the convenient Excel sheet) leads to higher customer satisfaction and therefore to relatively higher sales success. This is in part due to the different competitive environments. Also, research on “past alignment patterns” is still needed as these might have an effect on current alignment and usage patterns as it seems to be the case with the experiences of the team leader of branch B. Additionally, it should be taken into account that the case study was employed in the specific setting of the German banking landscape, and even more in one particular segment of the banking industry (i.e. cooperatives type II) which allows for repetition in other segments, industries, and countries but might also influence the results.

6. Conclusion and further research Methodologically, we used an embedded single case study of a retail process in branches of a retail bank with focus on alignment and usage. This case study setting allowed us to do research in a homogeneous environment regarding firm and IT strategy, hiring policy, training concepts, formal processes, and information systems employed. Strategic alignment is known from literature as having a positive impact on performance. Furthermore, several studies showed the impact of actual usage of an information system on performance. In contrast, this paper focuses on two perspectives which are rarely explored in literature, and, to our knowledge, are not investigated in combination: 1. Alignment at an operational level as opposed to a strategic level and 2. The impact of operational alignment on the continuous use of an already developed information system.

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Furthermore, this case provides insights into a concrete usage situation at the operational level of a business process which is also very rare in literature. This paper contributes to literature in suggesting a connection between the usage of a particular information system and alignment between business and IT at an operational level (functional integration). Alignment at an operational level fosters the usage of the information system ACT as reported in the case. Furthermore, experience of the team leader was found to be another factor influencing the usage of the information system. In our case, the experience is based on working in another business department in the past. This business department works with ACT and has frequent contacts to the nearby IT support department. Thus, not only current alignment at an operational level influences usage but also experience, in this case of the team leader. The most important aspect regarding operational alignment was the understanding of business needs by the IT staff which is also in line with literature dealing with the strategic aspects of alignment. Our findings, therefore, can support the importance of a mutual understanding between business and IT as known from literature and additionally provide a concrete business context. Thus, understanding of business needs seems to be an important factor at both the strategic and the operational level of alignment. This understanding corresponds with the frequency of interaction between business and IT. The managerial implications are to foster interrelationships between IT and business departments and also to encourage the working of employees in different departments. Both may provide for a smoother process of alignment and an appropriate usage of IT. Using a case study we are not able to statistically generalize our findings but at least indicate that there is a connection in our case which should be subject to replication in further studies for closer investigation. The case study data will serve as a basis for further research. Currently, we are conducting further case studies at banks from other segments, especially analyzing the role of alignment and mutual understanding not only between the sales department and the IT unit, but also between the sales department and the backoffice (which used the same application in the case of C-Bank) as well as between the back-office and the IT unit. First results indicate that IT usage as described in this case has an effect on reported performance parameters of the retail process. These parameters are the cross-selling rate and a score regarding “building credits”. Extending the case study to include performance of the business process will allow us to research

alignment, usage, and performance at a business process level of analysis.

Acknowledgements This work was developed as part of a research project of the E-Finance Lab. We are indebted to the participating universities and industry partners.

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