ASSESSING THE EFFECT OF EXTERNAL ...

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ASSESSING THE EFFECT OF EXTERNAL PRESSURE IN INTERORGANIZATIONAL IS ADOPTION – CASE ELECTRONIC INVOICING Esko Penttinen, Virpi Kristiina Tuunainen Helsinki School of Economics [email protected], [email protected]

Abstract In this paper, our aim is to assess the effect of external pressure in IS adoption in the interorganizational settings of electronic invoicing. Electronic invoicing has been hailed as one of the biggest savings generators for businesses in recent years. However, the adoption in different countries has been much slower than anticipated. Based on earlier literature on diffusion of innovations, adoption of inter-organizational information systems, and institutional theory, we build a research model to empirically estimate the relative importance of external pressure in the context of an IOS implementation. We test the research model empirically using a survey data of companies that have received a letter enforcing them to move to electronic invoicing. We find that organizational readiness, external pressure, and perceived benefits are the most important factors affecting the adoption of electronic invoicing systems in small and medium sized companies (SMEs). We also find evidence for the “bandwagon effect” as well as for the supplier pressure. Keywords: Adoption of IS, external pressure, electronic invoicing, survey

1. Introduction In this study, our focus is on inter-organizational information systems, more precisely on electronic invoicing. Electronic invoicing is defined as the electronic transmission of invoice data in a structured and standardized format, allowing the automated processing of the invoice at the buyer site (Penttinen 2008). Its importance is highlighted by the attention it has received from the European Commission, naming it as one of most important sources of productivity growth in Europe (EEI 2007). In Europe, the two most commonly used forms of electronic invoicing are PDFs and EDI messaging. PDFs, however, do not allow for the invoice data to be automatically processed in the receivers’ information systems as the data transmitted is not in structured format. EDI messaging, on the other hand, is mainly used in point-to-point systems, requiring usually somewhat heavy investments in information systems. In the Nordic countries, there are standards for exchanging invoice data electronically, in a structured format, through many-to-many networks. In Finland, these standards are TEAPPSXML and Finvoice standards, with which the invoice data is electronically transmitted in structured format between two trading partners. Compared to paper-based invoicing or e-mail based PDF-invoicing, true electronic invoicing in structured format presents numerous benefits for both trading partners, including processing cost savings, time and material savings, and decreased number of errors in the invoicing process (Lempinen and Penttinen 2009). Despite the benefits, the transition to electronic invoicing has been slow (Penttinen and Hyytiäinen 2008). As a result, some companies and government units have begun enforcing their suppliers to send their invoices in electronic format (see e.g. Brun 2007). The objective in this study is to evaluate the effect of these enforcement initiatives in the adoption process of electronic invoicing. In other words, our main focus is on assessing the effect of external pressure in an IS diffusion. To do this, we build a research model based earlier research on diffusion of innovations and adoption of inter-organizational information systems, to empirically estimate the relative importance of external pressure in the context of electronic invoicing. Our objective is to enhance the current understanding of the external pressure component in IOS diffusion.

8th Workshop on eBusiness, Phoenix 2009

The extant literature offers many avenues for examining the factors affecting the rate of adoption of information systems (Iacovou et al. 1995; Mehrtens et al. 2001; Saunders and Hart 1993; Teo et al. 2003). We took the existing studies on IS adoption as a starting point and gathered a set of factors that had been identified as important in IS adoption. Using principal component analysis to reduce the number of constructs, we found eight easily identifiable constructs: (1) perceived benefits, (2) complexity, (3) perceived competitor benefits, (4) supplier pressure, (5) bandwagon effect, (6) organizational readiness, and (7)-(8) two constructs measuring the external pressure from customers. The results of the regression analysis suggest that perceived benefits, supplier pressure, bandwagon effect, external pressure from customers, and organizational readiness can be used to explain the adoption of electronic invoicing in small companies. Concerning the items related to the focus of our study, external pressure from customers, these items loaded on two separate constructs in the principal component analysis. The component which included the reception of the enforcement letters and the attitude towards these letters (positive vs. negative) was statistically significant in explaining the adoption of electronic invoicing. The paper is organized as follows. We will next review the relevant literature on IS diffusion and adoption of inter-organizational IS. Then, we will present our research model and its operationalization to the context of electronic invoicing. Finally, we provide the results using the 96 responses we have gathered so far. 2. Literature Review For the purposes of our study, we collected a set of factors from earlier research on IS adoption. We were especially interested in exploring the research addressing the external pressure component in IS adoption. 2.1 IS adoption The extant literature provides a plethora of factors affecting the rate of diffusion of technological innovations. The diffusion of innovations (DoI) theory (Rogers 1995) addresses how, why, and at what rate new ideas and technology spread through organizations. The theory suggests a number of variables that determine the rate of adoption of an innovation. First, it identifies five factors or innovation characteristics impacting the adoption rate of innovations: relative advantage, compatibility, complexity, trialability, and observability. Second, it distinguishes between optional, collective, and authority innovation decision types.It also distinguishes between different channels through which the innovation is communicated,and presents the nature of the social system as a factor affecting the rate of adoption. Finally, it acknowledges the extent of change agents’ promotion efforts. (Rogers 1995) The diffusion of innovations theory has been used in numerous studies in the field of information systems. Most importantly, Moore and Benbasat (1991) expanded the five factors impacting the adoption of innovations, generating eight factors (voluntariness, relative advantage, compatibility, image, ease of use, result demonstrability, visibility, and trialability) that impact the adoption of IT. Furthermore, they presented scales to operationalize these factors and validated them in their empirical study. Since the early applications of DoI to IS research the theory has been applied and adapted in numerous ways. Research has, however, consistently found that technical compatibility, technical complexity, and relative advantage (perceived need) are important antecedents to the adoption of innovations (see e.g. Bradford and Florin 2003; Crum et. al. 1996). 2.2 Institutional factors Utilizing the institutional theory, DiMaggio & Powell (1983) discuss the three mechanisms of institutional isomorphic change - coercive, mimetic, and normative - as sources of organizational change.. Coercive pressures result from both formal and informal pressures exerted on organizations by other organizations upon which they are dependent and by cultural expectations in the society within which organizations function. Such pressures may be felt as use of force, as persuasion, or as invitations to join

8th Workshop on eBusiness, Phoenix 2009

Penttinen & Tuunainen / Effect of External Pressure in IS Adoption

in collusion. Mimetic pressure stems from uncertainty. When organizational technologies are poorly understood, or when the goals of the organization are ambiguous, or when the environment creates symbolic uncertainty, organizations may model themselves on other organizations, in other words, imitate existing organizational models. Therefore, the process of imitation can be seen as a response to uncertainty. When an organization faces a problem with ambiguous causes or unclear solutions, it is tempted to imitate similar organizations in their field that it perceives to be more legitimate or successful. Normative pressures stem primarily from professionalization. According to DiMaggio and Powell (1983), there are two main aspects of professionalization that act as the sources of normative isomorphism. First, universities and professional training institutions are important centers for the development of organizational norms among managers and staff. Second, professional and trade associations are another vehicle for the definition and promulgation of normative rules about organizational and professional behavior. (DiMaggio and Powell 1983) Teo et al. (2003) used the institutional isomorphism framework to empirically test the contribution of these three factors to the adoption of inter-organizational linkages (IOL). Consistent with the institutionalbased theories, they found that all three institutional influences – mimetic pressures, coercive pressures, and normative pressures – can be dearly distinguished conceptually and empirically in terms of their influence on organizational predisposition toward an IT-based IOL (Teo et al. 2003). Furthermore, when institutional forces are examined as a whole, and their influence is evaluated within a larger set of factors that include organizational readiness to adopt financial EDI (FEDI) and attitudes toward adopting FEDI, institutional factors still exhibit a significant and high influence on intentions to adopt. Overall, there is strong empirical support for institutional-based variables as predictors of adoption intentions for interorganizational linkages. 2.3 External pressure in IOS adoption Earlier research has identified two main sources of external pressure to adopt information systems: competitive pressure, and even more importantly, imposition by trading partners. The impacts of these factors have been exemplified, for instance, in automotive industry, where car manufacturers have required their suppliers and subcontractors to use EDI in their transactions with them (Iacovou et al. 1995; Tuunainen 1998). Imposition from trading partners is expected to be one of the most critical factors for EDI adoption by small firms; as the typically weaker partners in inter-organizational relationships, small businesses are extremely susceptible to coercion by their larger partners (Saunders and Hart 1993). Such impositions are especially prevalent in the case of EDI because of its network nature (Iacovou et al. 1995). The pressure exercised by trading partners is a function of two factors: the potential power of the imposing partner and its chosen influence strategy (Provan 1980; Iacovou et al. 1995). Provan (1980) discusses potential and enacted power in organizational relationships. A powerful partner may pursue three different strategies to induce a small partner to adopt EDI: (1) recommendations, (2) promises, and (3) threats (Iacovou et al. 1995). Threats have been invoked, for instance, by large automobile manufacturers and department store chains (Brent 1994). Mehrtens et al. (2001) developed a model of Internet adoption by SMEs. Their model included perceived benefits, organizational readiness (technical and financial), and external pressures by trading partners. The findings of their multiple case study indicate that all three factors had an impact on the decision making process to adopt Internet in small and medium sized enterprises (Mehrtens et al. 2001). 2.4 Research Model and Operationalization of Constructs Based on the above discussion, our model for assessing the importance of external pressure in the diffusion of electronic invoicing includes four sets of factors: institutional factors (coercive, mimetic and normative), perceived benefits, complexity, and organizational readiness (financial and technical).

8th Workshop on eBusiness, Phoenix 2009

Institutional factors Perceived benefits Organizational readiness

Adoption of electronic invoicing

Complexity

Figure 1. Research Model

In operationalizing the research model, we measured the dependent variable, the intention to adopt electronic invoicing by asking the respondent to evaluate the following statement on a LIKERT scale from 1 to 7: “During the next six months, we plan to regularly use electronic invoicing in our organization”. For our independent variables, we utilized the constructs from earlier studies (mainly from Mehrtens et al. 2001; Teo et al. 2003). To study the effect of external pressure, in addition to the constructs provided by Teo et al. (2003), we included questions about the enforcement letter sent to the suppliers indicating that they should send their invoices in electronic format in order to continue the business relationship. The question “My organization has received requests to adopt e-invoicing” was a 0/1 variable, whereas the questions “We perceived the requests positively”, “We perceived the requests as a means to deepen the relationship with the customer”, and “We perceived the requests as a burden that increases our costs of invoicing” were measured on a LIKERT scale 1-7. 3. Empirical Study 3.1 Key Variables and Sample Following our research model depicted in the section above, we created a questionnaire to be used in the survey. The questionnaire included background questions (industry, size of the organization, country, etc.) and questions related to the penetration of electronic invoicing and the intention to adopt electronic invoicing in the near future. In addition, we asked 33 questions related to the independent constructs in our research model. These items can be found in Appendix 1. The questionnaire was tested by piloting it with a group of academics and practitioners. Our empirical study consisted of four groups of survey data collection. First, invitation to participate in the electronic survey was sent to companies that had received a letter by a large Finnish company, sent to their suppliers requesting them to supply the invoices in electronic format. Second, the invitation was sent to organizations that had received a similar letter sent by a government unit to their suppliers. Third, the invitation was sent to a list of respondents provided by an electronic invoice operator to study the effect of third-party persuasion. Fourth, the survey questionnaire was sent to a group of organizations that had not received, to our knowledge, a letter enforcing them to move to the use of electronic invoicing. The questionnaire used in these surveys was not changed between the rounds of data gathering. The data collection for each of these rounds was conducted in August – September 2009. We received 105 responses to the survey, of which 96 had all questions answered.

8th Workshop on eBusiness, Phoenix 2009

Penttinen & Tuunainen / Effect of External Pressure in IS Adoption

3.2 Principal Component Analysis First, we conducted a principal component analysis (varimax rotation) to the set of 33 independent variables to reduce the number of variables to be used in the regression analysis. We decided to use eight variables using the threshold of Eigenvalues above 1. The rotated factor pattern can be found in Appendix 1 and the Eigenvalues of the correlation matrix in the following table (Table 1). All of the eight components can be clearly distinguished. We named the constructs as (PC1) perceived benefits, (PC2) complexity, (PC3) perceived competitor benefits, (PC4) supplier pressure, (PC6) bandwagon effect, (PC8) organizational readiness, and two constructs measuring the external pressure from customers (PC5 and PC7).

Table 1. Principal Component Analysis Eigenvalues Component

Eigenvalue

Difference

Proportion

Cumulative

PC1 (perceived benefits)

8.69205080

3.85517836

0.2634

0.2634

PC2 (complexity)

4.83687244

1.45476555

0.1466

0.4100

PC3 (perceived competitor benefits)

3.38210689

1.30537037

0.1025

0.5125

PC4 (supplier pressure)

2.07673652

0.20504346

0.0629

0.5754

PC5 (ext. pressure from customers 1)

1.87169305

0.39212708

0.0567

0.6321

PC6 (bandwagon effect)

1.47956597

0.20143047

0.0448

0.6769

PC7 (ext. pressure from customers 2)

1.27813550

0.15094716

0.0387

0.7157

PC8(organizational readiness)

1.12718834

0.11481809

0.0342

0.7498

Next, we used these eight principal components to explain the dependent variable in the model. We will next proceed to discussing the results of the regression analysis. 3.3 Regression Analysis We used linear regression to analyze the data. By examining the residuals of the regression analysis, we decided to test the model separately for large and small companies. We used the turnover of the company as an indicator of size; large companies in our sample had turnovers of more than 50 million Euros. There were 72 responses in the data set from small companies with less than 50 million Euros turnover. By using the eight constructs to explain the intention to regularly use electronic invoicing, we were able to explain more than 50% of the variance in the dependent variable (R2 = 0.5628, adjusted R2 = 0.5072).

Table 2. Results of the Linear Regression (small, n=72) Variable

DF

Estimate

Error

t value

Pr

Intercept

1

4.95748

0.17859

27.76