The impact of information systems on the efficiency of banks: an empirical investigation

Uma G. Gupta Assistant Professor, Department of Decision Sciences, East Carolina University, Greenville, North Carolina, USA William Collins Professor, Department of Decision Sciences, East Carolina University, Greenville, North Carolina, USA
Financial institutions, and banks, in particular, are one of the largest investors in information systems (IS) and information technologies (IT) and there are indications that this trend is likely to continue. However, there is growing concern that IS investments are not yielding the anticipated results, an issue that is of grave concern to many CEOs and top managers. One way to address this concern is to analyse the relationship, if any, between investments in IS and an organizations efficiency measures. Reports the results of an empirical study that assesses the role and contribution of IS to a banks efficiency, based on a study of nationalized banks in the state of Florida. More specically, reports on the role of IS in achieving business goals, improving productivity, and enhancing customer service in banks.

Introduction
Financial institutions are one of the largest investors in information systems (IS), and according to a survey by Ernst and Young and the American Banker, the industrys information technology (IT) spending is expected to reach unprecedented heights in the late 1990s. It is estimated that in 1994 alone, banks invested close to $20 billion in information systems and technologies in an effort to improve efficiency and enhance customer service. Many successful nancial institutions have clearly demonstrated that information systems and technologies can be a powerful competitive weapon that can be used to capture market share, improve customer service, reduce operating costs, and create new products and services (Lederer and Mendelow, 1988). Chief executive officers (CEO) and top managers often have an intuitive understanding of the power and potential of IS, thus propelling many companies and institutions to invest large sums of money in IS and IT. However, decision makers often struggle with how to assess the returns from these investments because of the many intangible benets associated with IS and IT. The primary question of What is the relationship between investments in information systems and the bottom line? is a difficult one to address since traditional ROI measures for IT investments are often inappropriate and misleading (Bender, 1988). As the IS community tries to develop innovative and meaningful cost-benet methodologies for IS and IT and as the pressure on CEOs and chief information officers (CIOs) to be more accountable increases, more and more companies are taking a hard look at the gains derived from IS (Benjamin, 1982). In spite of the large investments in IS and IT by the banking industry and the pressing concern to assess the returns from these investments, little has been done to assess the contribution of IS to the growth, protability, and efficiency of banks. A literature search yielded almost no theoretical frameworks or nancial models for conducting such a study . Most references in the literature to banking IS appear in trade journals and are often

news releases of investments in specic technologies. There are a number of how to articles in the popular literature, such as how to design and develop client-server systems for banks, but little has been written on how to assess the contribution of such systems to the broader goals and objectives of the bank. With the new debate on the information productivity paradox raging in the IS community, the issue of measuring the impact of IS on a banks efficiency is both appropriate and timely . This paper reports the results of an empirical study that evaluates the contribution of IS to various productivity and efficiency measures in a bank. This paper is laid out as follows. In the following section we describe the research methodology and the results of the survey . We then analyse the implications of the results, followed by recommendations and conclusions.

Methodology and results

The survey was mailed to the CIOs of all member banks of the Florida Bankers Association (FBA), which enthusiastically supported the study . The survey was initially tested on six bank CIOs who reviewed the survey and made several recommendations. The input of this test group was incorporated into the survey and the revised surveys were mailed to member banks of FBA. Multi-part questions were broadly divided into the following categories: 1 prole and characteristics of the bank; 2 technologies used by the bank; 3 investments in technology; 4 alignment between IS and business goals; 5 top managements commitment to technology; 6 role of IS in supporting organizational tasks; 7 efficiency measures used to identify the contribution of IS; 8 critical success factors. We received 123 usable responses to our survey, giving us a response rate of 57 per cent.

Industrial Management & Data Systems 97/1 [1997] 1016 MCB University Press [ISSN 0263-5577]

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Uma G. Gupta and William Collins The impact of information systems on the efficiency of banks: an empirical investigation Industrial Management & Data Systems 97/1 [1997] 1016

Results
The technology prole of our respondents is shown in Figure 1. As can be seen, banks rely heavily on mainframes, minicomputers, microcomputers, and workstations. Local area networks (LAN) are more popular than WANs and the use of client server systems appears to be on the rise. In terms of other computer technologies used by banks, electronic fund transfers (EFT) are the most widely used, followed by ATMs (see Figure 2). This comes as no surprise. Note, however, the increasing use of executive information systems (EIS) (more than one in three banks), decision support systems (DSS) and electronic data interchange (EDI). Geographical information systems (GIS) are also increasing in popularity . In order better to assess the relationship between investments in IS and organizational productivity and efficiency, as measured by banks, our next question asked the respondents to identify the average amount invested over the last five years in the following areas: hardware; software; system development; system maintenance; training.

We felt that a broader time horizon, such as ve years, was necessary to answer this question in order to avoid skewing the results based on one-time peak investments. Almost 80 per cent of the banks surveyed invested around $50,000 over the last ve years in system development. Not surprisingly, more dollars are invested in system maintenance than in system development. For example, 23 per cent of the banks invested between $50,000 and $100,000 in system maintenance compared with under 10 per cent who invested the same amount in system development. The number of banks that invested more than $250,000 was, on average, under 1 per cent. Somewhere between 4 per cent to 7 per cent of the banks invested more than one million dollars in the above areas. An interesting nding that emerged from this study is that in spite of the repeated pleas by professionals and experts in the eld, banks, like many other institutions, are reluctant to invest in training. Almost 82 per cent of the banks surveyed indicated that they invested under $50,000 in employee training over the last ve years (see Figure 3). The most innovative users of information systems and technologies are often those organizations that succeed in aligning corporate goals with technological investments. In other words, companies that ensure that investments in technology are purposefully

Figure 1 Usage rate of different types of computer technologies

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Uma G. Gupta and William Collins The impact of information systems on the efficiency of banks: an empirical investigation Industrial Management & Data Systems 97/1 [1997] 1016

Figure 2 Usage of different types of computer technologies

and meaningfully aligned with achieving the strategic, tactical, and operational goals of the rm are likely to see a closer link between IS investments and enhancements in organizational productivity . With reference to Table I and Figure 4, an overwhelming percentage of the banks strongly agreed that IS plays an important and valuable role in helping them achieve

overall organizational goals, increase productivity, enhance customer service, and fully utilize existing systems. There was a slight drop in these percentages on the issue of instituting cross-functional systems and in building integrated systems. In other words, the contribution of IS towards building integrated, cross-functional systems was slightly lower than the percentages cited

Figure 3 Percentage of companies investing in software, hardware, system development, system maintenance, and training

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Uma G. Gupta and William Collins The impact of information systems on the efficiency of banks: an empirical investigation Industrial Management & Data Systems 97/1 [1997] 1016

earlier. Clearly, developing cross-functional, integrated systems are highly challenging issues confronting businesses in all sectors of the economy . The above results come as a surprise since there are many references in the literature to the growing dissatisfaction of CEOs with the returns from IS investments. On the other hand, the above results may have an element of bias in them since the respondents were bank CIOs, not CEOs. The next question addressed a wide range of issues that are designed to assess how IS is perceived in the organization and the kind

Table I Success in aligning IS with different organizational goals Success in aligning IS with: Organizational goals Increasing productivity Enhancing customer service Utilization of existing system Instituting cross-functional systems Building integrated information systems Agree (%) 94.13 96.66 96.64 96.64 81.74 81.89 Disagree (%) 5.9 3.33 3.36 3.36 18.26 18.10

of support that it receives from top management. Please refer to Table II. An overwhelming 93 per cent of our respondents indicated that top management is committed to technology. These results contradict some of the findings in the literature which indicate that one of the primary problems that IS professionals face is lack of top management support and commitment to technology. It would be interesting to explore whether management support of technology varies across industries. In other words, top managers in banking institutions may be more supportive and aware of the importance of technology compared with other industries or institutions. A large percentage of the respondents also indicated that there were ongoing efforts to develop strategic systems and align IS with bottom-line profits. The CIOs, however, agreed that there was a lack of rigorous cost-benefit methodologies and that existing systems were not being fully utilized. Finally, given that the study focused on identifying the relationship between investments in IS and a banks efficiency, we

Figure 4 Signicance of the contribution of IS to different organizational goals

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Uma G. Gupta and William Collins The impact of information systems on the efficiency of banks: an empirical investigation Industrial Management & Data Systems 97/1 [1997] 1016

identified a set of efficiency measures commonly used by banks and asked our respondents to specify if these measures were used to assess the return on IS investments. This question was designed primarily to determine if there are formal measures to assess the returns on investments in IS or if it is simply left to the perception of top managers. Refer to Table III which shows the efficiency measures that are commonly used in banks to assess IS returns. Reduced operating expenses, increased protability, increased fee income as percentage of total revenues, increased net-interest margin to average earning assets, and increased non-interest income to average earning assets are the ve most popular measures used to measure IS returns.

Analysis of results
In this section, we analyse the implications of the results presented above and identify some issues that may be of concern both to practitioners and researchers in information systems. Our survey conrms the technology predictions of many practitioners and experts in the IS community, namely, the increasing growth of client server systems and local area networks. Although understandably mainframes are still in extensive use in many banks, client server systems are fast catching up. This is to be expected, given the continuing decline in hardware prices, increasingly powerful machines, and ready availability of user-friendly software. Further, the pendulum appears to be swinging back to decentralization, which is another signicant factor spurring the client server movement. Our survey also indicates a growing use of several intelligent support systems (ISS), such as decision support systems (DSS), executive information systems (EIS), and geographical information systems (GIS). There are several reasons why these technologies are becoming popular across industries. First, organizations are placing increasing emphasis on using data, not just collecting data. There is a growing awareness among organizations that it is highly unproductive for managers to be spending time collecting, processing, or even locating data and information necessary for decision making. Instead, managers should be spending their time applying information and bringing to bear their knowledge and experience in solving problems. This is possible only if information is readily accessible as and when necessary and in a format that is readily applicable to the problem at hand so that managers can use the information to enhance the quality of decisions that they make (Gurbaxani and Whang, 1991). This awareness has, in turn, increased the need for user-friendly tools, such as DSS, EIS, and GIS, that locate, process, and format the data so that they are readily usable in decision making. With regard to investments in system development and maintenance, our survey shows that investments in system maintenance far exceeds investments in system development. This comes as no surprise, given the growing debate and discussion in the IS community about the returns on investments in IS and the effect of IS on organizational productivity . Although there is no empirical evidence to support the idea that this appears to be the norm across industries, recent IS literature

Table II Perceptions regarding different IS-related issues In my bank Top management is committed to technology Investments in IS are aligned with bottom-line results The banks focus is on the customer, not the technology There are ongoing efforts to develop strategic systems Existing systems are under-utilized We lack rigorous cost-benet methodologies for information systems Willingness to form technology partnerships with other banks The impact of information technology on overhead is often overlooked Information technologys relationship to customer service is undened Burdened with complex, monolithic, non-integrated systems Use technology to cover up poorly designed operations Investments in IS are viewed as technical, rather than business decisions Agree (%) 92.97 86.72 85.16 78.13 62.20 61.91 56.80 44.10 22.84 22.22 21.71 18.11 Disagree (%) 7.03 13.28 14.84 21.87 37.79 38.10 43.20 55.90 77.16 77.78 78.29 81.89

Table III Different measures used to assess returns on IS investment Measures used to evaluate returns on IS Reduce operating expenses Increase protability Increase fee income as percentage of total revenues Increase net-interest margin to average earning assets Increase non-interest income to average earning assets Customer retention Create new services Increase new customers Increase shareholder value Improve credit quality Value of relationship per customer Increase fee income generated through processing Increase employee retention Fee income through software sales [ 14 ] Percentage 83.85 78.46 73.08 70.00 70.00 68.46 65.38 63.85 60.00 58.46 55.38 43.85 34.62 10.77

Uma G. Gupta and William Collins The impact of information systems on the efficiency of banks: an empirical investigation Industrial Management & Data Systems 97/1 [1997] 1016

points to a growing concern among CEOs that existing information systems in the organization may not be utilized to their fullest potential. In other words, more and more top managers are asking for proof that existing systems are being used to their full capacity before investing in new systems (Lederer and Mendelow, 1988). The survey also shows that banks, like many other organizations, are often reluctant to invest in employee training. For most banks, the amount invested in training over a ve-year period appears to be rather insignicant, especially if the rate of technological change is taken into account. Unfortunately, poor training often has serious repercussions and is sometimes the underlying cause why new technologies fail or never reach their full potential in the organization. Many top managers treat training as a luxury and are often of the mistaken opinion that employees will eventually learn new technologies on their own. Quite to the contrary, training directly impacts the productivity of IS employees, especially in organizations where technology change is rapid and intense. The CIOs that we surveyed had a strong sense of the role and contribution of IS to the growth, stability, and efficiency of their banks. They felt that investments in IS were closely and intricately integrated with the goals and mission of the bank and therefore, helped to increase employee productivity and customer service. However, like many other organizations across industries, banks are struggling with developed integrated, crossfunctional systems, partly because the technology and the expertise required to achieve cross-functional, integrated systems is both rare and expensive (Carl and Judd, 1994). Financial institutions are one of the largest investors in information systems and technologies and therefore, banks clearly understand the importance and signicance of IS to their growth and survival. Banks have often utilized information systems and technologies to create innovative products and services, capture market niches, and better serve the customer. This is probably why nine out of ten CIOs surveyed for this study indicated that top management in their banks were very supportive and committed to technology . The CIOs surveyed also strongly felt that IS in their banks were being successfully employed to better serve the customer, although many of them felt that existing systems were not being utilized to their fullest potential. The above results come as a surprise and contradict several studies and expert opinion indicating that CIOs and CEOs are often at loggerheads, thereby seriously hampering the ability of the organization to deploy IS

successfully to meet the overall goals and objectives of the organization (Bender, 1988). Although investments in IS continue, CEOs, in different industries, such as manufacturing, are somewhat sceptical about the role and contribution of IS to organizational productivity . Managers of mid-sized companies, in particular, believe strongly that the returns from IS are often disproportional to investments (Carl and Judd, 1994). They argue that while IS personnel continue to demand newer and more advanced technologies as being essential for the smooth operations of the business, the returns from existing systems are frequently undocumented and questionable (Gurbaxani and Whang, 1991). Some managers are even convinced that real returns can be gained more from total quality management, continuous improvement, business process re-engineering, cycle-time reduction and improved customer service, than from IS. In recent years, the issue of measuring the return on investments in IS is being hotly debated in the IS literature. Clearly, assessing the true value of IS is one of the most challenging tasks that IS managers face, regardless of the industry in which they operate. At a very minimum, it entails determining the following (Davenport, et al., 1989): 1 What is the dollar payoff of this system? 2 What is the time period over which the benets will be derived? 3 What is the probability and conditional probability of different events that may affect these benets? Further, given that some of the most signicant benets of IS are intangible and long term, many managers simply avoid engaging in any worthwhile assessment of IS returns. We asked our respondents to identify some of the popular measures used in their banks to measure return on investments in IS. Our study found that the two most popular measures used to assess the return on investments in IS were reduction in operating expenses and increase in protability . This is quite unfortunate, since several studies indicate that both the above measures are poor and inadequate to measure the true value and contribution of IS. There are several reasons why traditional measures of ROI fail when it comes to IS. First, some of the signicant benets derived from IS, such as added competitive edge in the marketplace and increased customer satisfaction are difficult to measure. Second, the true impact of some systems can be assessed only over the long term. Lee Gunderson, managing director of Secura Group, the consultants, summarizes the risk involved with traditional efficiency

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Uma G. Gupta and William Collins The impact of information systems on the efficiency of banks: an empirical investigation Industrial Management & Data Systems 97/1 [1997] 1016

measures, which can sometimes paralyse the organization:

The efficiency ratio is not the Holy Grail. You could produce signicant impacts short term by getting out the meat axe and start swinging to cut costs. But there is a potential for long-range problems. There should be a balance between improving efficiency and meeting the banks strategic objectives.

The tendency to use measures that are convenient, rather than appropriate, places the organization at the risk of poor investments or no investments in IS.

strongly feel the need for developing more rigorous cost-benet methodologies that will help them sell the technology to top management. Third, traditional measures of productivity, such as decrease in operating costs and increase in prots, continue to be the most popular measures of efficiency and return on investments, although these measures may not be suitable for information systems and technologies.

References
Bender, D.H. (1988), Financial impact of information processing, Journal of Management Information Systems, Vol. 4, Spring, pp. 22-32. Benjamin, R.I. (1982), Information technology in the 1990s: a long range planning scenario, MIS Quarterly, Vol. 6, June, pp. 11-31 Carl, E.J. and Judd, J.L. (1994), Bridging product data management systems for effective enterprise integration, Industrial Engineering, December, pp. 18-21. Davenport, T.H., Hammer, M. and Metsisto, T.J. (1989), How executives can shape their companys information system, Harvard Business Review, March-April, pp. 130-4. Gurbaxani, V . and Whang, S. (1991), The impact of information systems on organizations and markets, Communications of the ACM, January, Vol. 34 No. 1, pp. 59-68. Lederer, A.L. and Mendelow, A.L. (1988), Convincing top management of the strategic potential of information systems, MIS Quarterly, December, pp. 525-34.

Conclusion
There is a growing debate in the business community about the importance of measuring the return on investments in IS. This is a difficult and challenging task, given that many of the benets derived from IS are both intangible and long term. In spite of the limitations of existing productivity measures, it is important to monitor and assess the contribution of IS investments to organizational productivity and efficiency . This paper reported the results of an empirical study which investigated the contribution of IS to banks in Florida. There are several interesting ndings that emerged from this study . First, there is a lack of rigorous analysis and theoretical frameworks that explore the link between IS investments and a banks efficiency . Second, top IS professionals

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