Lee 39-3

Modeling the business value of information technology
C. Sophie Lee
*
Department of Information Systems, College of Business Administration, California State University, Long Beach, CA 90840, USA
Received 11 September 2000; accepted 8 February 2001
Abstract
Modeling and measurement issues have been considered the heart of information technology (IT) productivity paradox
problem. By collecting data from seven mortgage rms, this research attempts to shed light on the causal relationships and
complementarity properties among IT and performance variables. The result is a multi-level business value model that
connects the use of IT to a rm's prot. It is concluded that although there exists a causal relationship between IT and prot,
this relationship is indirect and complex. Due to the complementary nature of the relationships, such a complexity is not
reducible. All complementary factors must be in favorable conditions for a positive return of IT investments. #2001 Elsevier
Science B.V. All rights reserved.
Keywords: IT productivity; Complementarity; Modeling and measurement; Business value of IT
1. Introduction
The question of the ``productivity paradox'', why
information technologies (IT) have not provided a
measurable value to the business world, has puzzled
researchers and practitioners. Although the power of
computing to achieve higher quality with less time and
effort is unquestionable, its benets do not seem to be
reected in bottom line business performance at
least not according to a number of studies. While some
studies have found positive associations between IT
spending and workers' productivity or rm perfor-
mance, most nd weak or even negative associations
[3,6,16,41,42].
Measurement and modeling issues are most likely
at the heart of the problem and may lead to the current
inconclusive results in this line of research [4,24]. The
many unique characteristics of IT make it particularly
difcult to measure or model their value. For instance,
capital spending of IT may not be an adequate pre-
dictor of rm performance because converting spend-
ing into effective ITutilization is still an open problem
for management [25,37,39,45]. In addition, IT's
effects can vary dramatically according to how and
where they are used; measuring IT's contributions in
isolation without controlling contextual variables can-
not produce a meaningful indication of IT's business
value. Furthermore, some studies have used a single
production function to try to nd a direct correlation
between IT spending and performance. However, the
impacts of IT on performance variables may be indir-
ect, and would not be discovered through this kind of
modeling. The adequacy of methodology used to
tackle this complex problem has often been a subject
of debate [3,16].
Understanding IT's business value is a vitally
important issue in today's technology-intensive world,
and there is a need to establish a method that appro-
priately represents IT's value in a business context.
Information & Management 39 (2001) 191210
*
Tel.: 1-562-985-1940; fax: 1-562-985-5543.
E-mail address: clee10@csulb.edu (C.S. Lee).
0378-7206/01/$ see front matter # 2001 Elsevier Science B.V. All rights reserved.
PII: S0 3 7 8 - 7 2 0 6 ( 0 1 ) 0 0 0 9 0 - 8
Such a method should capture the interactions
between ITand the business environment, and provide
a basis from which to evaluate IT's value. By adopting
the grounded theory approach and studying seven
mortgage rms, this study builds an IT business value
model of the mortgage origination process from
empirical data. The model of this process identies
what and how IT are used, variables complementary
with IT and the directions of such complementarity,
and multi-layered causal relationships between ITand
performance. The data suggest that there exist recog-
nizable gaps between technology's availability and its
use. It is also found that in the mortgage origination
process alone, IT directly or indirectly interact with
many other variables, going through layers of inter-
actions before nally making an impact on perfor-
mance. The complex nature of the business world
sheds light on prior modeling and measurement
problems.
This paper makes a number of contributions to our
understanding of IT's business value. First, this model
attempts to uncover ``What'' is going on in the black
box, and ``How'' these variables interact from empiri-
cal data. By discovering the variables and relation-
ships from the viewpoint of real users, this research
presents a closer picture of how IT work in reality.
Since modeling IT presents many unique challenges to
conventional methods of modeling, this paper draws
new theoretical conclusions from the practices of the
business world. As a result, it not only demonstrates
the complexity of the environment, it also shows that
such a complexity is not reducible.
Second, it emphasizes the discovery and modeling
of the complementary nature of IT from empirical
data. Although it is generally agreed that IT do not
exist in a vacuum, this study specically tries to
discover and model such a relationship. As will be
seen later in this paper, data from this study suggest
that such complementarity is likely to exist, and IT's
value can be undermined if IT's complementary fac-
tors have unfavorable conditions. The study shows
that for IT investments to pay off, one needs to closely
monitor these complementary factors, not merely IT
alone.
Third, this study combines research methods from
both the qualitative and quantitative schools, It uses
the grounded theory approach to identify variables and
their relationships, and formalize such relationships
into an economic model. This research strategy com-
bines the strengths of both approaches and produces
conclusions that are both relevant and rigorous.
2. Background
Modeling and measurement problems can be fun-
damental to our understanding of the productivity
paradox, and numerous papers have been published
to examine the methodologies, modeling, and mea-
surement issues [16,19,20,24]. Among many, several
topics are considered critical to the current study and
are reviewed in the following sections.
2.1. IT spending versus utilization
One of the measurement problems involves using IT
capital spending as an independent variable to predict
performance. Many studies measure IT capital spend-
ing, but do not study whether such spending is trans-
formed into actual hardware and software functions or
whether such functions are actually used. A unique
characteristic of information systems is the likely gaps
between spending, functions, and use. Many compa-
nies spend millions of dollars on information technol-
ogies and systems but are unable to develop adequate
or usable functions. The infamous IRS Tax Systems
Modernization information systems project has spent
over 9 billion dollars for over 10 years with practically
no usable functions to show for it [2]. Furthermore, it
is often reported that despite the availability of hard-
ware and software, many users decline to use them, for
usability reasons as well as for political and other
reasons (for a complete review of IS use, please refer
to [10]). Information technologies that are not used do
not generate any value for the company. The ``con-
version effectiveness'' problem has been recognized
by many [25,27,45].
Although the difference between IT spending and
IT utilization has been noted by many, data collection
can be a painstaking process. Most IT utilization and
management data are not collected as public data. In
addition, researchers further face the problem of ade-
quately measuring `ùtilization'' of IT. This study
reports the actual IT functions, uses, gaps between
functions and uses, and any policy established to
shorten such gaps in seven mortgage rms.
192 C.S. Lee / Information & Management 39 (2001) 191210
2.2. The complementary nature of IT
It is widely recognized that IT do not exist in
vacuum, and their effects or uses are often accompa-
nied by other factors, the status of which may deter-
mine how much value IT generate. For example, it is
clear that IT used in an efcient process brings more
value to performance than the same IT used in an
inefcient process. Measuring IT's contribution with-
out controlling these other factors is a possible cause
for the mixed results of this line of research [16,22].
The notion that ``x (e.g. IT) works better (e.g.
generates more value) with a certain condition of y
(e.g. an efcient process)'' has been referred to as
``t'', ``synergy'', or ``complementarity''. It is a
powerful concept because it shows that the effect of
x should not be considered alone; it is always affected
by another variable y. To make a wise investment in x,
we should ensure that y is in a favorable condition;
otherwise, the investment in x will generate a less
favorable return. Modeling in complementarity pro-
vides a precise language to describe the usually com-
plex interactions, and enables more inferences to be
drawn from the formulation (such as optimization
behavior), on account of an accumulation of theories
and mathematical tools of complementarity
[11,38,43]. Especially, Topkis' work on discrete pro-
blem domain and optimization has been referenced as
foundation for a number of recent works [5,29].
Recently, there have been a growing number of
studies in the literature that use complementarity to
explain phenomena in organizations. Since organiza-
tional factors are often tightly connected, using com-
plementarity as an analytical framework presents a
natural t between theory and practice. Milgrom and
Robert [29] showed that due to the complementary
nature of new technological advancements such as
shorter cycle time, smaller batch size, and more
product improvements, it is optimal for manufactur-
ing rms to adopt an entire series of new changes
instead of isolated ones. In another study, the ef-
ciency of process, the extent of IT used, and users'
incentive systems are identied as major comple-
mentary factors in a reengineering project [5]. The
model shows that in order to achieve the highest
possible return, the reengineering initiatives should
simultaneously implement all of the changes in
complementary directions. It also suggests that
companies with xed, unfavorable conditions would
not prot from drastic reengineering.
In modeling IT's business value, it is important not
only to realize that IT is complementary with many
other variables and that such complementarity is
critical, but we also need to know what variables
are complementary with IT and in what directions
such complementarity exists. To that end, this study
intends to identify IT's complementary factors and the
direction of such complementarity from empirical
data. Such a nding can help identify possible control
variables and study the best IT strategy for a given
organizational context.
2.3. Modeling IT's business value
Modeling problems have been at the center of the
difculty in measuring IT's business value. First,
`ìnformation technologies'' as a general term includes
so many different functions and features, some of them
may have been designed for purposes other than
increas-ing short-term protability. For instance, in a
study by [45,46], it is suggested that IT can be categor-
ized as transactional, strategic, and informational. The
purpose of strategic IT is to sustain long-term strategic
advantage, or growth; therefore, a measure between
strategic IT and performance should not show positive
association. Inaddition, ``performance'' is oftendened
differently in different studies. Some dene it more as
anendvariable, such as protability, while others dene
it moreas anintermediaryvariable, suchas productivity.
Secondly, some studies model IT's value by examin-
ing the direct associations between IT spending and a
rm's performance, leaving the important interim pro-
cess of transformation unexamined. Findings from this
type of modeling are often puzzling, which shows that
IT's impact on performance in a more complex process.
More recently, it is recognized that there may exist
layers of interactions between IT and a rm's perfor-
mance [19,31], and studies have been conducted to
examine the intermediary variables in the ``black
box'' [4,32,33]. An extensive business value model of
a customer service process in a reengineered context
was established to describe the web of causal relation-
ships between the drivers (various IT functions, incen-
tives, characteristics of processes), intermediate
variables (lead time, quality, and cost), and an end
variable (prot) [5].
C.S. Lee / Information & Management 39 (2001) 191210 193
This studyuses data fromempirical ndings tomodel
specic intermediate-level variables and relationships
in the mortgage origination process, and builds multi-
layered business value functions that link IT usage,
intermediate variables, and performance. Many inter-
mediate variables that are not covered in traditional
literature but play crucial roles in reality are included
through empirical ndings. Such a model helps us to
understand what goes on in the black box between IT
input and rm output and identify what variables are
more likely to be directly or indirectly impacted by IT.
2.4. Research method
Over the years, the methodology deployed to study
the business value of IT has received almost as much
attention as the subject of the research. Each method
has its strengths to solve different facets of this com-
plex problem. The case study approach is outstanding
in its ability to detect causal relationships and gain
insights into the question, but its generalizability or
scientic basis (replicability) is questioned by many
[40]. Economic modeling provides explicit assump-
tions and models, but the practicality of such assump-
tions are often in question. Researchers have called for
an integration of different methods, or utilization of a
portfolio of methods [21,22].
This study deploys combination of quantitative and
qualitative methods. It uses the grounded theory
approach [7,1215,26,28,36,44] to discover possible
variables and causal relationships empirically from the
eld, and formalizes the variables and relationships
into hypotheses and a multi-layered economic model.
It intends to integrate the strengths of both ``schools''
of the MIS discipline to generate ndings that are not
only theoretically rigorous but also practically relevant.
In particular, the complementarity between variables
and the properties between the dependent and inde-
pendent variables are captured. By linking all variables
and relationships through one formal mathematical
formula, this research presents a more complete picture
of IT's effect on prot and on other variables.
3. Research design
The residential mortgage origination process is
chosen as the substantive area of study. The mortgage
origination process involves approving new loans for
customers. Despite the advance of computer automa-
tion in other nancial sectors, the origination process
is still characterized by unnecessary handoffs and
inefciencies [9]. In recent years, mortgage rms have
become aware of the many inefciencies and non-
value-added activities in the origination process and
sought ways such as automation and new process
design to improve it.
3.1. Site selection
The selection of research sites in this study follows
the theoretical sampling approach (or purposive sam-
pling) in grounded theory; the purpose of sampling is
to replicate or contrast cases in order to build a rich
theory. I started the study with an indenite number of
sites in mind. After interviewing mortgage ofcers
from four mortgage companies two are larger,
national lenders and two are smaller, local lenders,
I developed a knowledge of what constitutes ``high-
tech'' and ``low-tech'' for mortgage rms. I found that
large lenders are usually more ``high-tech'' and can
provide much richer, more contrasting perspectives
into technologies and process redesign. ``Low-tech''
rms tend to provide a base-line description. There-
fore, I deliberately looked for national, larger mort-
gage companies for later cases. These companies were
identied both through my own research (reading
local trade journals), and through the recommenda-
tions of my prior cases.
After interviewing three more companies, I stopped
collecting data. In the later cases, no more new
technological categories, process items, values of
IT, insights, or ideas were introduced. At this point,
I did not feel that more cases would add more richness
into the theory; the study had reached theory satura-
tion. Moreover, at each interview, I would ask the
interviewee to recommend companies in the Boston
area that do things differently or from whom I may
learn something new. Most of the them pointed to
three rms; all three have been included in my study.
3.2. Data collection
The research was conducted between the end of
1996 and the beginning of 1997. Data were collected
by personal interviews, review of company documents,
and direct observation of the computer systems. In
each company, one branch manager or mortgage
ofcer was interviewed. I personally interviewed,
observed, and coded all seven cases. Every interview
followed the same open-ended questionnaire and was
audiotaped. Each interview lasted between 1 and 4 h.
In addition to providing background information, each
interviewee was asked to describe in detail and in
sequence each step in the mortgage origination pro-
cess, from receiving a mortgage application to the
sending of a commitment letters (a letter that indicates
the formal, legal decisions on the loan case). For each
step, the interviewee described the nature of the task,
the participants in the task, any type of technologies
and their use in the task, the amount of time required to
accomplish the task, and any prerequisite tasks. I was
able to grasp and relate to their comments rapidly
because I myself had been a customer of the mortgage
process a number of times.
I also asked the interviewees to describe their
perceptions of the benets and the values of informa-
tion technologies. This question often opened up our
conversation and caused the interviewee to become
very active and vivid in describing what computers
can and cannot do, and what unanticipated effects the
introduction of computer systems had on their com-
pany. The interviewees were asked to be as specic as
possible. For example, if the answer was `èfciency'',
I would ask them to describe specic ``things'' of
efciency. They were also asked to reason or elaborate
on variables or causal relationships once mentioned.
In addition to interviews, I also reviewed and
collected many documents. These documents include
government-standard and company-specic forms,
such as mortgage application forms, rate locking
forms, current rate forms, credit report forms, and
company White Paper reports. By reviewing the forms
and documents, I could further verify their degree of
computerization and how much they still rely on non-
computer means, or how much they have actually
changed their process. Company annual reports were
collected whenever available. I have also reviewed
literature relating to the mortgage industry to further
conrm the nding of the study [1,8,17,23,34,35].
Another extremely important data source was the
direct observation of each company's computer sys-
tem. In all but one company, the interviewees showed
me detailed demonstrations of their computer systems.
Although no company was willing to release their
system or users manual, I did sketch and record the
interface and functions of each system in my memo.
Some systems appeared to be old mainframe based
systems that only recorded basic information such as
housing price and down payment. Other systems
appeared to be more sophisticated with Windows
interface and more functions. As each interviewee
demonstrated their system, I took note of the specic
functions and what they did.
The demonstrations proved to be an extremely
useful data source for this study. Computer functions
are difcult to describe verbally without a demonstra-
tion. While every company has a ``computer system'',
their levels of sophistication vary widely. The demon-
strations also enabled me to further conrm the
content of the interview. For instance, although having
used a particular function many times, one interviewee
did not know it was called a ``decision support sys-
tem'' when it indeed was.
As the research progressed, follow-up phone calls
were placed to prior interviewees to conrm new
variables or relationships suggested by other intervie-
wees.
3.3. Data analysis
After each interview, I transcribed audiotapes of the
interview, organized sketches and functions of com-
puter demonstration, and recorded any other observa-
tions, impressions, and my own memos immediately. I
started open coding after each case. Open coding is the
identication of concepts from the data, combining
and integrating concepts into categories, and nding
dimensions and properties of categories. Axial coding
was also done to relate categories through relation-
ships. Since the goal of this study is to discover a
causal map linking the use of IT to performance
variables, causal relationships are of particular interest
in this study. Individual causal instances are identied
through the interviewee's description (such as ``by
using IT, we reduce the operation time . . .'') and my
observation (using computer system indeed shortens
the time to look up a customer's information). Causal
relationships are hypothesized when there are either
recurring causal instances across cases, or when a
causal relationship offers a plausible explanation to
phenomenon across cases.
Each new case triggers the re-examination of all
prior cases, including all categories and relationships.
Categories and relationships were revised each time to
ensure that the latest version of the model can t all
data. Categories were given new labels or denitions;
some were replaced by more immediate variables.
New insights, contrasts, and comparisons to earlier
cases also helped me to rene categories and relation-
ships. Special attention was paid to instances when
there are conicting facts or unexplainable phenom-
ena. I would call interviewees from previous cases and
seek their suggestions. This often resulted in modify-
ing or adding categories into the model.
Here is an example of how such a process took
place. Each mortgage company has a ``decentralized''
or ``centralized'' underwriting style. While processing
of paperwork is always done locally at each branch,
underwriting is done either at the same local branch (a
decentralized style), or at a centralized location (a
centralized style). For companies of the centralized
style, transporting of paperwork could take days since
the centralized location could be in another state.
``Centralized versus decentralized underwriting style''
or ``physical distance'' was at rst a category that may
affect ``processing time''. However, with a closer look
at the data and ``cross examination'' of cases, I found
that the document transporting time is actually longer
for certain decentralized companies than centralized
companies. Why? Several centralized rms installed
telecommunication systems between local branch and
central underwriting centers, and loan documents
were posted to the network for both sites to view
simultaneously. The transport of document literally
takes no time. For many decentralized companies,
however, moving a package from the third oor to
the fourth oor takes one business day. Therefore,
``physical distance'' is immaterial to ``processing
time''. ``Telecommunication systems'' becomes the
key category that causes a decrease in processing time.
Note that such a causality is not obtained from any
individual interviewee's direct testimony. Each com-
pany has only one underwriting style, and none would
have had a comparative perspective. Such a relation-
ship was obtained through the iterative, overlapping
data collection and analysis technique in grounded
theory.
Toward the later part of the study, selective coding
was in place. This is an iterative process to direct the
study to a focused central theme, choose core cate-
gories, and basically move the research from ``data
and relationships'' to `à model''. Many categories are
combined into abstract core categories, and appropri-
ate labels and denitions are added. For instance,
``telecommunication systems'' and many other IT
items are combined into the `ÌT'' core category; more
specically, it is dened as the `ùse of IT'' with two
dimensions: the possession of it, and the use of it.
Another example is the initial category ``number of
steps'' with dimensions such as participants, time, and
tasks. In order to relate this category to other cate-
gories in the model such as time and cost, the ``lean-
ness of process'' core category is abstracted. Instead of
counting steps in the process, I abstracted the notion to
reect how ``lean'' the process is. The properties and
dimensions to quantify ``leanness'' are also abstracted
by comparative examining of data. Finally, internal
consistency and logic is developed and checked to
ensure a complete model.
4. Research ndings
The model emerged from the study data describes a
causal map from the use of IT to higher level perfor-
mance variables. The IT usage gap, complementarity
of ITand other variables, technical and human aspects
of IT use, and the multi-layered interactions between
ITand performance are all captured in this model. This
model helps to explain many of the productivity
paradox problems, and offers opportunities for more
insights on IT management to be drawn. This section
presents the core categories, hypotheses, and the
complete model of this study.
4.1. Categories
4.1.1. Leanness of internal process (P)
A traditional mortgage origination process involves
much paper shufing, handoffs, and inefciency. The
process starts when a potential mortgage applicant,
with the help of the loan ofcer, lls out a lengthy loan
application, and submits many supporting documents.
The package is organized by the loan ofcer and
passed down to a ``loan opener'', whose job is to
verify the data again and enter data into the computer.
Between the loan ofcer, opener, and ``processor'' a
person whose job is just to process paperwork, another
dozen forms need to be sent out to different places,
including employment verication, asset verication,
credit history request, and property appraisals. In the
meantime, the applicant must be reminded to mail in
any documents that he did not submit during the
application. Each document needs to be received,
veried, and led. To make things worse, there are
usually many people involved in the process and they
operate in complex ways: the person who sends out the
request form is not the person who receives it; several
people call the applicant to ask for the same docu-
ment; the same document is copied many times and
kept in different locations in the company. Finally,
after all the documents are in place, the package is
turned over to the underwriting department. The nal
decision and terms are then written on the commit-
ment letter and passed to the customer.
The concept is named as ``the leanness of the
process''. It is dened as the ability to complete
required tasks with a minimum amount of waste. A
high P value indicates a lean process where as a low P
value indicates a wasteful process.
By comparing the detailed processes of the seven
companies, synthesizing their similarities and differ-
ences, and understanding howone company's problem
is solved in another company, I summarized several
characteristics to represent the leanness of a com-
pany's process.
4.1.1.1. Degree of duplicate work. This refers to the
degree to which the same work is repeated by multiple
people. For instance, in many companies, it is a
common practice that both the loan officer and the
processor are involved in collecting documents for an
applicant. A lack of clear job assignments and
accountability often result in duplication of work.
The interviewee from Company 6 described his
personal experience:
. . . you would have two or three people calling
the customer on different days and essentially
request the same information. I remember as a
loan ofcer, having the customer calling me and
yelling at me and saying, `Why are you asking
for this again? I gave it to Susan and now Bob
wants it again!' Since it (the process of applying
for a mortgage) is so emotionally charged, the
customer would feel that the bank is not on their
side; they are just asking for so much informa-
tion.
Company 1 still uses this as common practice:
If there is any additional information needed on
the case, both the loan ofcer and the mortgage
processor would call the borrowers and request it.
. . .. Borrowers can send additional documents to
either the loan ofcer or the mortgage processor.
The packages are compiled by both the loan
ofcer and the processor.
The degree of duplicate work can be reduced
through clear job distinctions and accountability.
For instance, instead of having both loan ofcer and
processor working on all the paperwork, some com-
panies assign each person to handle a specic set of
documents.
4.1.1.2. Degree of handoffs. This refers to the situat-
ion wherework is passed fromone person to the next. In
addition to the time needed for the document to travel
from one person to the next, it also involves learning
time for the new person to familiarize herself with the
material. While handoffs are inevitable, some handoffs
are unnecessary and should be minimized through
process redesign. One possibility of unnecessary
handoffs is where the activity is divided too finely,
so there are many handoffs fromA B C. Another
situation is when two people are assigned tasks that are
too closely related, thus there are constant handoffs
between them, or A B A B.
The following quotes reect the handoffs situation
in companies.
Most loan ofcers take applications on their
portable computers. They also collect documents
during application. They use the computer and
the hard copy to verify data on the application.
Then the package is sent to a loan opener, who is
a different person from a loan processor. The
opener veries the data again, then she prints the
verication forms and mails them. Then the
package is sent to the mortgage processor, who
assembles the paperwork, opens the mail, and
collects the verication. In the meantime the loan
ofcer orders appraisal and credit reports, but the
loan processor is responsible for collecting them.
This is how another company does it:
The loan ofcers take the application. The loan
opener takes the hard-copy application and inputs
data into the computer system. She also generates
verication forms and sends them out. She orders
credit reports and appraisals. Then the le is
turned to the processor who would collect
returned documents. The processor does the
initial review, sends a follow-up letter to the
borrowers, telling them what things are needed
and introducing himself to the borrower.
Handoffs can be drastically reduced by work inte-
gration and redesign. Work can be horizontally inte-
grated so that one's job responsibility is enlarged to
include similar tasks. For instance, instead of having
one person order the credit report, and the other order
the appraisal, and yet a third person receive the return
documents, all tasks are performed by one person. In a
vertical integration scenario, many sequential phases
performed by different parties are combined into
fewer parallel phases, performed by the same person.
For instance, instead of having the application phase
followed by the credit verication phase, at Company
2, the two are done at the same time. Company 6
started the document collection phase even before the
applicant's rst meeting with the loan ofcer (the
application phase).
4.1.1.3. Degree of duplicate les. This refers to the
practice of keeping duplicates of the same paper file at
multiple locations. Driven by the overwhelming
amount of paperwork and the fear of misplacing
documents, everyone who ever touched a case is in
the habit of keeping a paper copy of it. This is not only
a waste of resources and time (to make copies), it also
creates a great deal of work to keep all the files
consistent.
The Vice President at Company 7 indicated that:
``Both loan ofcer and processor can do processing.
. . .. All documents are copied and sent back and forth
between ofcer and processor since each of them
keeps a copy''.
By having a centralized ling system (either com-
puterized or on paper), everyone could access the most
current version of the le. All the updates would be
made to the le, and data inconsistency problems
would disappear.
Many companies nd reducing the number of
people involved in a case to be an effective way to
improve the leanness of the process: it reduces the
possibility of duplicate work, unnecessary handoffs,
and duplicate le problems all at once. The most
extreme examples are in Company 2 and 6, where
only one person is involved in processing all paper-
work of a mortgage.
Table 1 summarizes the process characteristics by
company. The ``Degree of Duplicate Work'' is rated
``High'' when there appears to be totally duplicate
work by two or more people during processing, and
there is no indication of any separate job assignments.
It is rated ``Medium'' where there is some separation
between job assignments but some jobs are still dupli-
cated. It is rated ``Low'' where the degree of duplicate
work is reduced to the minimum, either by reducing
the number of people processing paperwork, or by
clear job assignments. The ``Degree of Unnecessary
Handoffs'' and ``Degree of Duplicate Files'' are rated
similarly.
4.1.2. Use of information technologies (T)
Avariety of IT software and hardware are used in a
mortgage origination process. The variable, `ùse of
information technologies``, is dened as the use of
information technologies in the mortgage origination
process. First, companies that have these IT features
have a higher T value than companies that do not.
Second, having these features, companies that exer-
cise mandatory use have higher T value than compa-
nies that do not practice mandatory use. The software
and hardware features are summarized as follows.
4.1.2.1. Ratio calculation program. A software
program that calculates the mortgage payment, debt
ratios, and various other ratios after the housing and
borrower data are input. This feature is the most
popular IT function; it has been adopted and is used
by all firms.
4.1.2.2. Decision support systems for mortgage
products. This software program recommends
feasible loan products instantly after the housing
and borrower data are input. Traditionally,
recommendations of products are made based on
the loan officer's knowledge, experience, and
printed guidelines, which might be subjective,
incomplete, and time consuming. Only two out of
seven firms have this feature and its use is mandatory.
It is connected to the Ratio Calculation Program and
considered a very handy and helpful program.
Table 1
Leanness of internal process by company
a
Company 1 2 3 4 5 6 7
Degree of duplicate work High: highly duplicated
work assignment between
LO and PR
Low: no duplicate work Medium: clear job
assignments in some areas
Medium: clear job
Medium: clear job
Low: no duplicate work Medium: clear job
Degree of unnecessary
handoffs
Medium: handoffs between
PR and LO
Low: virtually no handoffs Medium: handoffs between
PR and LO
High: handoffs between
PR, LO, and OP
High: handoffs between
PR, LO, OP, and accounting
Low: virtually no handoffs High: handoffs between
PR, LO, and OP
Degree of duplicate files High: duplicate paper files Low: centralized computer
filing
High: duplicate paper files High: duplicate paper files High: duplicate paper files Low: centralized
computer filing
High: duplicate paper files
Number of persons
processing paperwork
2 1 2 3 3 1 2
Number of persons
involved in case
4 2 3 4 5 2 3
Overall leaness of process Low High Low Low Low High Low
a
LO: loan ofcer, PR: processor, OP: loan opener.
4.1.2.3. Application record keeping program. An
electronic database system that captures the
borrower's application data, such as income, work
history, and credit history. Traditionally, the
borrower's application data were written on paper
forms, and keyed into computer systems later. This
feature is found in all seven companies and its use is all
mandatory.
4.1.2.4. Laptop computer. Laptop computers give
loan officers the flexibility to input application data
at places convenient to the clients, such as their homes.
Six out of the seven firms provide loan officers with
laptop computers. The usage rate, however, is well
understood to be low. Since traditionally the key-in of
data was not performed by loan officers, many loan
officers view learning and using this software as
additional work. Only one company developed
policies to make laptop computer usage mandatory.
4.1.2.5. Portable printers. Portable printers enable
mortgage application forms to be printed anywhere,
especially places convenient to customers. Printing
forms can be a critical element in processing time
because many forms require the borrower's signatures.
If printed on site, the forms can be verified, signed, and
filed right away; otherwise, the forms will be printed
later and be mailed back and forth for verification and
signature. Companies that provide loan officers laptop
computers also give them portable printers; however,
it is understood that the usage is not mandatory.
Portable printers are very slow, and it was
embarrassing for the loan officers to wait during
printing.
4.1.2.6. Modem on laptop computers. This feature
enables the officer to transmit mortgage application
data and lock an interest rate from a laptop computer
instantly. Four out of seven companies have this
feature, and two make it mandatory to use (i.e. the
loan must be registered through modem).
4.1.2.7. Status tracking program. This software
program keeps track of the status of a loan file, prima-
rily of the completeness of required documents. This
feature is particularly useful, since chasing required
documents is considered a very lengthy and labor-
intensive part of the process. With this program, it
is very clear to the borrowers and the process-
ing center which documents are completed or still
needed. Without it, processing personnel must manua-
lly search through mountains of paper files. As a result,
mistakesanddelaysareverycommon, suchthat aneeded
document mayneverberequested, orthesamedocument
is requested several times. In this study, only two out of
seven companies have this feature; the other five
companies still take manual notes.
4.1.2.8. EDI to credit bureau. Electronic data
interchange (EDI) with credit bureaus enables the
borrower's credit report to be composed and viewed
in a matter of minutes. Without EDI, a paper request
for a credit report can take 3 days to 1 week. This
feature is becoming the norm of the industry, and six
out of seven firms have this feature. Its use is
mandatory.
4.1.2.9. Decision support system for underwriting.
Artificial intelligence and credit scoring are used to
generate an index for the quality of the loan profile.
The system also includes a knowledge base of
underwriting guidelines for the underwriters'
reference. Without this system, loans are approved
upon the underwriter's own knowledge and
experience, sometimes subjectively. Only one
company has this feature. After being scored, loans
that have very good or poor ratings are approved or
rejected right away; only borderline loans will need a
human underwriter's approval.
4.1.2.10. Telecommunications between processing
and underwriting. This feature enables the loan
officer to transmit a complete loan file to under-
writers for underwriting and to have immediate access
when a loan decision is made. This feature eliminates
the back and forth of mailing and the possible confu-
sion and delay caused by phone tag, which has been
the traditional way of doing business. Three out of
seven companies have this feature, and its use is
mandatory.
4.1.2.11. Automatic printing of commitment letters.
This feature involves mail merge and links to the
borrower's computer file, which enables the decision
and conditions of a loan to be printed directly on a
form letter. Traditionally, a loan processor would use a
typewriter to fill in a form letter from the underwriter's
hand-written notes. Any typo or mis-interpretation
could cause the borrowers to fix the wrong conditi-
ons and delay the processing of the loan. Three out of
seven firms have this feature, and its use is mandatory.
Table 2 summarizes the actual functions and usage
found in the seven companies.
4.1.3. Origination cost (C)
The category `òrigination cost'' represents the
average unit cost of originating a mortgage. According
to the Mortgage Bankers Association of America
(MBAA) 1995 survey of 200 mortgage companies
[30], on average, each mortgage production incurs
US$ 2324 cost. The biggest cost item is ``loan proces-
sing expenses'', US$ 690, followed by `ìn-house
origination employees'', US$ 623, and ``loan origina-
tion ofcer'' (commissions), US$ 452. Notice that the
processing employee salary and expenses represent
well over 50% of the total origination cost.
It is well known within the mortgage industry but
not widely publicized that origination actually gen-
erates negative income ow to the company. Accord-
ing to the same survey by MBAA, on average each
mortgage production generates US$ 952 income while
incurring US$ 2324 cost, which leaves a net loss of
US$ 1372 per mortgage generated in house. An inter-
viewee states that `` . . . on origination, you lose one
half percent of the loan, counting commissions, rent,
administration cost, and so forth''.
4.1.4. Cycle time (t)
The cycle time category represents the elapsed time
from the point where the borrower applies for the
mortgage, to the point when the commitment letter is
issued. The current industry standard is about 4 weeks,
while more ambitious companies have expressed the
hope of reducing it to 1 week. The importance of cycle
time as a variable is stressed by many.
The mortgage business is emotional, just like real
estate. You would think that it is a rational
business, but it's not. Customers sometimes apply
for mortgages at two places and go with the one
who approves them rst, even if their rates are
higher.
That is becoming the trend of the industry, where
people want to be pre-approved before they even
go to look for a house.
Beginning to end, on average, the process takes
45 days. That has been the norm of the industry.
Our goal is to shorten it, because we felt that we
can do more business if we can close up the
pipeline more quickly and get more loans in the
system.
4.1.5. Mortgage ofcer retention (I)
Mortgage ofcer retention is dened as the rate at
which a company retains mortgage ofcers. Although
to the naive eye mortgage products appear to be
identical and differentiated only by interest rates, a
rm's existing loan ofcers and their sales skills are
Table 2
Use of IT by company
a
Company 1 2 3 4 5 6 7
Ratio calculations
DSS for mortgage products
Application record keeping
Laptop computer and usage
Portable printers and usage
Modem on laptop computers
Status tracking
EDI with credit bureaus
DSS for underwriting
Telecommunication between processing and underwriting
Automatic printing of commitment letters
Overall IT and use Low High Low High Low High High
a
(): Indicates that companies do not have this feature; (): indicates that companies have this feature but the use is not mandatory; ():
indicates that companies that have this feature and the use is mandatory.
critical to the company's protability. Top producers
can consistently bring in millions of sales every
month, due to years of experience in the industry,
the wide customer net they generate over the years,
their ties with the high-priced housing industry, and
personal characteristics (some people are just better at
sales than others). The strategic importance of mort-
gage ofcers to a mortgage company is similar to that
of realtors to a real estate company or faculty to a
university. Since mortgage ofcers are the primary
source the mortgage companies rely on to generate
income, retaining mortgage ofcers, especially
experienced ones, is a critical task.
4.1.6. Control over external process partners (B)
This category is dened as the extent to which the
company exercises control over external business
partners, such as realtors, customers, and appraisers,
in order to better manage the mortgage process. Many
companies mentioned that despite managing in-house
processes, the most time-consuming activities
which determine the total cycle time are often in
the hands of other business partners. One such partner
is the appraiser, who needs to physically enter and
inspect the property. Often times, this is not controlled
for and may delay the whole process.
The processor would order appraisals. The
appraiser would call the realtor and set up a time
to look at the property. If the broker says, Ì do not
have time until next week', it is going to slow
down the process.
To order the appraisal, I would call and fax the
appraisal form to the appraiser. Time wise, it
depends on the availability of the appraiser, real
estate agent, and the property. It can take any-
where from1 to 2 days to, well, um. . . usually not
more than 2 weeks.
One company exercises moderate control over the
appraiser:
As a lender, we can dictate some of the terms . . .
with the appraisers. If the appraiser is going to
take 2 weeks to get the appraisal back, we are not
going to use them that often. So, we say we want
to have it back in 2 days.
Another company exercises strict control over the
appraiser:
We generally want to have the appraisal back
within 72 h. If you cannot do that, we will send it
to somebody else. That's on a written agreement
system. Again, that's our goal to press the process
into 7 days, versus the industry average, which is
about 34 weeks.
Another source of delay is caused by customers
themselves failing to provide complete documents.
What we are trying to do as a company is to issue
a commitment letter within a couple of days, but
that's assuming that it is a good, complete pack-
age there. If it is going to take longer than that,
that is because not all the information is there that
we need. The borrower may not be providing it in
a timely fashion.
The majority of the companies I interviewed are
aware of this problem but do not have a systematic
method to speed up the document collection process,
other than constantly calling the customers to remind
them. Only one company has wisely enlisted the
realtors to help them. Since most customers use
realtors to locate a property, this company gives
realtors their company's envelope with a checklist
of needed documents. Customers are given the envel-
ope during house hunting, and start to collect docu-
ments well before they actually apply for a mortgage.
By the time the loan ofcer meets with the customers,
they are more likely to provide complete documents.
Since 50% of this company's customers are referred
by realtors, this is a very effective way to attract
customers and reduce document collection time.
4.1.7. Price (p)
Price is dened as the average unit price the mort-
gage company charges the customers. Price items
include origination fee, and various other fees charged
to the customers. According to the Mortgage Bankers
Association of America's 1995 survey of 200 mort-
gage companies, the total loan production income is
US$ 952, which includes loan origination fee of US$
737, document preparation fee and attorney fees of
US$ 210, and other operating income of US$ 4.
4.1.8. Customer base (V)
The category ``customer base'' is dened as the
total number of customers who have mortgages origi-
nated by the mortgage company. Customer base is
probably one of the most important variables in this
business value model. It has direct association with
sales, and it has an intangible effect on the rm's
image, which contributes to possible increase in mar-
ket share. The importance of this variable in the model
was conrmed by the numerous times the words `òur
customers'', ``clients'', ``borrowers'' are mentioned in
the interviews.
4.1.9. Marketing (M)
The ``marketing'' category is dened as the market-
ing effort of the mortgage company to attract more
business. It includes providing more innovative loan
products, advertising, exploring new geographic ter-
ritory, building reputation, exploring niche markets,
and many other factors.
We intend to open production ofces in specic
areas where we are not presently well repre-
sented. . . .. We also plan to add smaller satellite
ofces, which are relatively inexpensive to open
and operate.
It is important . . . to offer our customers as many
nancial products as possible in order to increase
our earnings. These new products include adjus-
table rate mortgage products, a pre-approval
program which approves a loan application
before the customer selects a home, another
program which enables the home owner to tem-
porarily buy down his mortgage rate, resulting in
a reduced monthly payment, and a home equity
line of credit which allows a home owner to
borrow against the equity in his home.
(The company)'s radio, television and print
advertisements include a toll-free telephone
number that potential borrowers can call to obtain
information about home loan products.
Looking ahead, management sees an increased
emphasis on conducting business electronically.
For example, borrowers will utilize the Internet
with increased frequency to apply for a mortgage.
4.1.10. Prot (p)
Prot is dened as V(p c), or the customer base
multiplied by average unit price minus average unit
cost. This denition is consistent with that used in
most economic literature.
4.2. Hypotheses
Hypothesis 1. C (origination cost) is a function of T
(information technologies) and P (leanness of internal
process). (T, P) are increasing
1
and complementary
in C.
2
Hypothesis 1 states that information technologies
and leanness of process are both factors of origination
cost. (T, P) increasing in C means that as informa-
tion technologies increases, origination cost decreases
(C), and that as the leanness of process increases,
origination cost decreases. In addition, the hypothesis
further states that the two are complementary in C,
which means that the same technologies have more
power to reduce origination cost when the process is
leaner, and the process has more power to reduce
origination cost when there is more technology usage.
IT reduces origination costs in a number of ways.
By using an application record keeping program, a
status tracking program, and telecommunications
between processing and underwriting, the progress
of a current le is under better control, the coordina-
tion among workers is better, work is performed with
higher efciency and less waste in terms of ofce
supplies and labor. There is less need for personnel
whose job is simply to collect and distribute paper-
work.
The leanness of the process also has a signicant
impact on reducing origination cost. A lean process
reduces the amount of duplicate work, handoffs, and
duplicate les. As a result, the company needs less
non-value-added activities and fewer employees. For
instance, by reducing the number of people working
on the same le, the company eliminates the need to
make multiple copies of the same les as well as the
labor involved in keeping them updated and consis-
tent.
The study data suggests the possibility that the
use of IT and the leanness of process has a comple-
mentary effect in reducing costs. That is, while using
IT and improving the leanness of the process each
reduces costs independently, doing both will have
a more dramatic effect than the additive effects of
each. One company was able to totally eliminate the
position of ``mortgage processor'', because all the
1
For f(x), x is increasing in f means that if x
//
_ x
/
, then
f (x
//
) _ f (x
/
); x is decreasing in f means that if x
//
_ x
/
, then
f (x
//
) _ f (x
/
).
2
``(T, P) are increasing in C'' means that as T increases, C
decreases (or C increases) and that as P increases, C decreases.
``(T, P) are complementary in C'' means that T and P has
complementary effect in reducing origination cost.
processing tasks were automated and could be handled
by loan ofcers. Without IT, such an elimination is
impossible, or at best causes chaos in the organization.
Similarly, if a company uses IT but still maintains the
traditional process, the surplus generated by ITwill be
absorbed by the inefciencies. The real savings are
achieved by using IT to create a new and more
efcient process, rather than simply to automate parts
of the old process. According to one manager
(Table 2):
In the traditional model, you have the processor,
the opener, the closer, the underwriter, and the
loan ofcer, at least ve people that have to
interface with the customer. Now generally
speaking, we have loan ofcers mortgage
specialists who combine the duties of the opener,
processor, and closer into one job . . .. They can
do that because they do not have to physically
type in data. Because we reduce the documents,
we can combine the four jobs into one.
One company has achieved a positive income on
mortgage origination in year 1995, which is highly
unusual in this business:
We were able to bring down the origination cost
from 17001800 to 1200 per loan, including
commissions. It was done by both technology
and process, well managed process, so we can
control cost much better.
Hypothesis 2. Cycle time (t) is a function of T
(information technologies), P (leanness of internal
process), and B (external process). (T, P, B) are
increasing and complementary in t.
This hypothesis states that information technolo-
gies, leanness of process, and control over external
process are all factors in cycle time. More information
technology usage, leaner process, and more external
process control contribute to the decrease of cycle
time (t). In addition, the hypothesis further states
that the three are complementary in t. It means (1)
keeping external process control (B) constant, Tand P
are complementary in reducing t (or, the same tech-
nology usage reduce cycle time more when the process
is at a ``leaner'' status and the same lean process can
reduce cycle time more when the usage of IT is at
higher status), and (2) keeping P constant, Tand B are
complementary in t, and (3) keeping T constant, P
and B are complementary in t.
IT has a signicant impact on reducing cycle time,
according to the interviewees' experience. By using
laptop computers, portable printers, DSS to nd the
right loan products, and telecommunication between
different parties, a loan ofcer can complete tasks that
used to take days or weeks in a matter of hours. By
tracking the loan le electronically, the time needed to
coordinate multiple paper les and search through
mountains of paper is reduced. With EDI, the time
required to obtain a credit report was reduced from 3
5 days to 35 min.
IT has a great effect on reducing time. From
application to commitment letter, it now takes 5
7 days, versus the 46 weeks, which was the
industry norm. If the package is complete, we can
do it in 2.5 days.
A lean process also reduces cycle time. A lean
process has fewer handoffs and fewer duplicate les.
People no longer spend time on non-value-added
activities such as duplicating les or passing the same
paperwork back and forth; rather, the time is spent on
getting things done. The more integrated work design
eliminates articial ``phases'' of the process, and jobs
are completed in a parallel fashion. In addition, the
control of external partners such as customers and
appraisers also contribute to cycle time reduction. By
formalizing the expected turnaround time on the
appraisal, a company was able to restrict its turn-
around time to 3 days, instead of aimlessly waiting
for 2 weeks.
The most substantial cycle time reduction comes
from using IT to implement a more efcient process
instead of using IT or process alone, which demon-
strates the complementarity of IT and process in
reducing cycle time. Adopting IT without process
redesign, a company may save hours of time from
data entry and input, but more time is wasted in non-
value-added and repetitive activities. Similarly,
improving the leanness of a process is often impos-
sible without the help of technologies. By adopting IT
and improving process simultaneously, all paperwork
is veried, signed, entered, and credit issues are
resolved in a one-stop process; the time savings can
be dramatic. The entire cycle time also depends on the
turnaround time of external processes, such as the
customer's data collection and the appraisal. Even if
both internal process and ITare well-designed, a slow
customer or appraiser would still delay the process.
From the above analysis, it is reasonable to
hypothesize that IT, process, and other business part-
ners are all important factors in determining cycle
time; in addition, they are likely to have complemen-
tary effects on reducing cycle time since a low score in
any of the three would signicantly increase the total
cycle time.
Hypothesis 3. I (loan officer retention) is a function
of T (information technologies) and P (leanness of
internal process). (T, P) are increasing and comple-
mentary in I.
This hypothesis states that information technolo-
gies and leanness of process are both factors in
retaining loan ofcers. Somewhat surprisingly, a
higher level of information technology adoption and
a tightening of the process may have a negative impact
on retaining loan ofcers, and such negative impacts
are complementary. This hypothesis seems counter
intuitive at rst, but an understanding of the organiza-
tion culture and an analysis of the interview data
suggest otherwise. In the past, loan ofcers were
responsible for attracting customers and retaining
them. Once an application was hand-lled, the loan
package was passed on to the ``processing'' division.
Chasing documents, making copies, and ling paper-
work were processors' duties. The loan ofcer was
involved in processing just enough to keep in touch
with the customer. In many companies, the loan
ofcers and the processors are on different oors in
the same building, and their skills, responsibil-
ities, and status are distinctively different. Since
they were trained this way and expectations were
set this way, it is not surprising that many loan
ofcers view learning about and using computers
as additional work. Loan ofcers are used to the
people-oriented, sales-type tasks. Using computers
to enter data or generating reports is considered
``processors' work'', not ``loan ofcers' work''. Also,
using computers do not directly increase their custo-
mer base; they only create more work for the loan
ofcers.
In addition, the lean process usually coming with
tighter cost and efciency monitoring may also
have a negative impact on mortgage ofcer retention.
As a result of the new process, loan ofcers are often
asked to do things that were done by processors, which
means more work for the same pay.
One company took the drastic measure of forcing
everyone to use ITand a new process. This resulted in
losing many highly-successful and experienced loan
ofcers, who simply felt that it was a degradation of
their job (`Ì have to type my own report now!''). As a
result, the company did save much on the expenses,
but their sales were also badly hurt. The people who
are willing to learn tend to be younger mortgage
ofcers who have less experience and fewer connec-
tions than the more experienced ones. The following
quotation reects the situation:
Use of a laptop computer is now a condition of
employment. It is unusual. In some aspects it
gave us problems. Because loan ofcers come in
and say, `Now I have to learn all these new
technologies. . . .. I have talked to some of the
loan ofcers and they have said, `Well, I have to
do all this work'. In some cases we have lost the
top producers of the sales reps (representatives).
They would say, Ì write 1520 million dollars of
business every year, I can go anywhere, any one
would hire me, and I am not going to do all this
work'. They would go and work for our compe-
titors. Sometimes they come back because they
feel, Òk, now it takes 6 weeks to get a loan';
sometimes they just move on. So, the type of reps
we tend to attract is the 68 million dollar
producers, who had to learn how to use compu-
ters . . .. We tend to get representatives who were
not necessarily the top of the market sales reps,
but we get middle type of reps who are good at
technology, at computers.
It is a tough process (to make the changes). The
loan ofcer would tell you that processing papers
is not their job.
Similar experience was also noted in other compa-
nies. Although these companies knew their mortgage
ofcers were not really using the new technologies,
they did not pursue it further. One reason may have
been to retain mortgage ofcers. As a regional man-
ager put it: `Ìt was our intention to give them (the loan
ofcers) laptop computers, and everybody would use
them, but that is not happening. They do not like to use
computers''. But when asked: ``What will you do
about it?'' He just shrugged his shoulders.
This hypothesis offers a very plausible explanation
for the IT productivity paradox problem. Even though
the companies are fully aware of the ``complementary''
changes in technology and people, it is easy to change
technology but difcult to change people. Under the
pressure of pre-existing interests and conditions, their
IT investments are not likely to be as effective. It
is also noted that human reactions to work environ-
ment are very subtle, and there may be ranges of T
and P value for this hypothesis to hold. That is, the
ofcer retention rate is signicantly and negativ-
ely affected only when T and P reach a very high
level.
Hypothesis 4. V (customer base) is a function of p
(price), M (marketing), I (officer retention), and t
(cycle time). (p, M, I, t) are increasing and com-
plementary in V.
First, this hypothesis assumes that price is a factor in
customer base, and a lower price (p) will increase
customer base (increasing in V). This is consistent
with most economic literature. Next, Marketing plays
a signicant role in customer base. Heavy advertising
increases name recognition, which helps to attract
customers. Home owners with high interest rate mort-
gages are identied as target customers for renancing
by direct marketing efforts. Companies also seek to
propose new and more exible mortgage plans to lure
customers with different backgrounds and needs.
Other marketing efforts include providing convenient
access to mortgage information and services. The
effect of mortgage ofcer retention on customer base
is also very strong. Mortgage ofcers are the com-
pany's most important sales force to solicit products,
as well as to attract and retain customers. A top
producer may bring in double or even triple the
amount of an inexperienced loan ofcer.
The study data also suggest that time is a factor in
customer base; a shorter turn around time (t) may
increase customer base. `Èveryone wants the process
to be faster. We typically get approval, instead of 23
weeks, in 23 days. It increases our credibility and the
customers' happiness with the transaction''.
It used to be 510 years ago, a 90-day contract.
When I started, it was a 60-day contract. Nowit is
more like 45 days . . .. But to make the process,
you have to set expectations for the industry. We
envision ourselves to be the leader in the industry.
A customer approved after 60 days is NEVER
happy. Our feeling is that if we can get the
customer satisfaction, we have good word of
mouth. The word of mouth is very favorable if
we close the loan quickly.
Does IT play a role in increasing customer base?
``Not directly'', according to many interviewees.
Customers will not come because you have tech-
nologies; they come because you have better
rates, faster turnaround time, and better services,
which can be done through technologies.
The complementarity of the four factors can also be
justied. For instance, marketing will not be as effec-
tive if the company offers expensive products, lengthy
turn-around time, and inexperienced ofcers; market-
ing will be more effective if all the conditions are
favorable. Similarly, a fast turn-around time would
generate a larger customer base if all the other con-
ditions are favorable.
Hypothesis 5. Price (p) is a function of C (origination
cost). Price (p) is increasing in C.
This hypothesis suggests that price is a function of
the origination cost. Companies view a reduced ori-
gination cost as an opportunity to lower price, which
makes them more competitive in the market.
Our goal is to lower cost, which can be achieved
by technologies, by streamlining. After we lower
the cost, we can lower the price and attract more
customers, become more competitive.
Similar observations were made in other studies
[16]. According to the theory of competitive strategy,
if any rm is able to obtain supernormal prots by
adopting technologies, other rms will join in and
drive down the price. This may also help to explain the
productivity paradox. Even though IT can help reduce
cost, companies reduce price as a result. Therefore,
their prot margin remains the same and does not
correlate with IT spending.
4.3. Final model
Finally, according to most economic literature, we
assume that prot, p, is equal to V(p C), where V
is customer base, p the price, and C the origination
cost.
Combining Hypotheses 15, we have p =
V(p C), or
f
p
(M; B; T; P) = f
V
(ft(T; P; B); f
p
(C); fI(T; P); M)
(f
p
(C) f
C
(T; P)) (1)
where p is the prot, p = f
p
(M; B; T; P); V the cus-
tomer base, V = f
V
(t; p; I; M); p the price, p = f
p
(C);
C the origination cost, C = f
C
(T; P); M the marketing
efforts; I the mortgage ofcer retention, I = f
I
(T; P); t
the cycle time, t = f
t
(T; P; B); T the use of information
technologies; P the leanness of internal process and B
the control of external process partners.
The following is a graphical representation of the
business value model (Fig. 1), where the arrows
indicate causal relationships.
According to this model, an organization can
choose to set the value of the following variables:
the leanness of internal process (P), the amount of
information technologies usage (T), the control over
external process partners (B), and the amount of
marketing effort (M). As a result, P and T have a
positive and complementary effect on reducing origi-
nation cost (C); P, T, and B have a positive and
complementary effect on reducing cycle time (t);
and P and T have a complementary and negative effect
on the loan ofcers' retention rate (I). In addition,
origination cost (C) has a positive effect on price (p)
that is, if the origination cost is lower, the price would
be lower. Customer base (V) is impacted by four
factors: price, cycle time, ofcers' retention rate,
and marketing effort. Among the four, low price
(p), short cycle time (t), high ofcer retention
(I), and high marketing (M) have a positive and
complementary effect on increasing customer base.
And nally, prot (p) is customer base (V) multiplied
by unit prot, or price (p) minus unit cost (c). This
model reects the variables, causal, and complemen-
tary relationships found in the grounded theory
research in one formula.
According to this model, information technologies
(T) and prot (p) do have a causal relationship, but this
relationship is rather indirect. Using information tech-
nologies may very well improve cycle time or reduce
origination cost, for instance, but the positive impact
on the nal prot is only realized when other com-
plementary factors are also in favorable conditions,
such as a superior marketing plan and high loan ofcer
retention.
Empirical data of this study show that not every
company is able to take advantage of the complemen-
tary moves. For instance, take the T (information
technologies) and P (leanness of internal process)
values for an example. Company 2 and 6 have both
high T and P values. These companies adopted
advanced information technologies and in the mean-
time, revamped their processes to take advantage of
the investments. Company 4, on the other hand, had
high T value but a low P value. This means that the
company does use sophisticated information technol-
ogies but their process remains traditional and rather
wasteful. That is, although they automate some of
their operations, the entire management structure and
reporting hierarchy is the same. However, Company 2
Fig. 1. The model.
and 6 do have a high revenue as payoff? Not necessa-
rily. Company 6 admits that their revenue was badly
hurt because, under the enforcement of new technol-
ogy and process policies (high T and P values), many
loan ofcers left the company (a low I value.) As a
result, for the most recent quarter, their revenue was
worse than before they adopted the technologies and
internal processes.
5. Conclusions and limitations
This study intends to model business value of
information technologies by developing an economic
model using the grounded theory approach. Choosing
the residential mortgage origination process as the
substantive area of study, this research identies the
types of IT and their usage behavior in the eld. The
business value model includes other variables such as
origination cost, cycle time, loan ofcer retention,
control over external partners of the mortgage com-
pany, and marketing effort. Behavior and properties of
these variables are also described. Data from this
research suggest possible causal relationships between
the use of IT and variables such as cost and time. By
examining recurring cases, hypotheses were devel-
oped to suggest the complementarity properties
between ITand other variables. In summary, this study
supports the notion that there is an indirect and com-
plex causal relationship between IT and prot.
This research helps to shed light on the productivity
paradox problem, or the inconclusive association
between IT spending and rm performance. By study-
ing actual interactions inside the real world ``black
box'' where IT generate value, this study nds that the
``black box'' is actually very vibrant and complex. In
the mortgage origination process alone, IT are shown
to interact with many other variables, going through
layers of interactions to nally make an impact on
prot. Since what goes on in the black box actually
determines the level of value IT can deliver, previous
models analyzing associations between IT and prots
in isolation of other controlled variables or intermedi-
ate variables may be inadequate to represent such
interactions and the value of IT.
In addition, the model also offers explanations as to
why ITimpacts lower- or intermediate-level variables,
but not high-level variables such as prot. As the
model shows, the impact of IT on intermediate-level
variables such as cycle time or origination cost is
simple and direct. Toward the top level of the model,
more variables and interactions come into play. Due to
the complementary nature of ITand these variables, IT
will not make a positive impact to prot if any of the
complementary variables has an unfavorable condi-
tion. Therefore, more management efforts are needed
to ensure a favorable overall results. It is perceivable
that not every company is able to deliver this kind of
careful planning and management.
Many insights of IT management can be drawn
fromthis study. The study shows that well-managed IT
can generate tremendous value. IT can reduce cycle
time and cost, and virtually change the way business is
run. What used to take days or weeks can now be
completed in hours with lower cost and higher quality.
Companies with innovative ideas and visionary fore-
sight can explore the unlimited potential IT bring.
Also, IT's effects are best materialized when they are
used to implement efcient processes. Judging from
the complementarity of IT and process, adopting both
strategies can provide much greater benets than
adopting IT alone. On the other hand, this research
also shows that managing IT is a tricky and costly
business. Due to the complementary nature of ITwith
many other variables, one has to know what variables
to manage and how to manage them in order to make
IT investments protable. One has to identify all other
variables affected by technologies and align them to
explore the full potential of IT. As witnessed by one
company, top of the line ITand efcient processes may
not produce prots if the employees' incentives are not
well managed; yet such incentive problems are actu-
ally caused by the new IT and processes. Since such
impacts are usually not foreseeable or documented,
companies have to experiment and learn from their
experiences.
Many key limitations facing this study call for more
research efforts. One limitation is the potential of
subjectivity. The identied variables and causality
are limited to the interviewees' personal perception
and the author's interpretation. Moreover, the question
of ``the value of information technologies'' may be
beyond anyone's comprehension when discussed at a
macro level.
Another limitation is related to the difculty of
modeling human behavior. Economic researches are
often criticized for making unrealistic assumptions;
however, without those, the model will become too
complex and untraceable. We have seen economic
literature that starts to model human feelings, such as
peer pressure [18]. There is a need to model human
behavior given its importance in understanding IT in
organizations. This paper has incorporated human
behavior as an important part of an otherwise prot
and cost model: loan ofcer retention rate is modeled
as a subtle reaction to changes of technological and
process policy. However, whether organizational
memory and culture also play a role in this interaction
and how these behaviors can be modeled needs further
work.
Lastly, the increasing and complementarity assump-
tions in the current hypotheses are insufcient for an
optimal solution to be derived. More properties such
as higher orders of complementarity as well as ranges
of complementarity are needed before more mathe-
matical conclusions can be derived. This will rely on
future work of data collection and testing.
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C. Sophie Lee is an Associate Professor of Information Systems in
the Department of Information Systems, College of Business
Administration, California State University at Long Beach. She
received her PhD in Information Systems in 1995 and MBA in
1991 from the University of Texas at Austin. Her research interests
include utilizing complementarity framework on information
technology productivity, mass customization, electronic commerce,
and customer relationship management. Her papers have appeared
in journals such as Organization Science and Information Systems
Research.

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Modeling the business value of information technology

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