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Information Technology Value Model using Constant

Partial Adjustment Value Method


Case Study PT. Kereta Api Indonesia (Persero)

Hilman Ramadhan

Suhardi

School of Electrical Engineering and Informatics


Institut Teknologi Bandung
Bandung, Indonesia
hilmanrmdhn@gmail.com

School of Electrical Engineering and Informatics


Institut Teknologi Bandung
Bandung, Indonesia
suhardi@stei.itb.ac.id

AbstractInformation Technology (IT) is an enabler in today


organization or firm. IT enable the firm to execute their process
more efficient and effective. That can be done by investing in IT
resources that will deliver the IT capability. However, IT
investment doesnt always give the promised capability. Some
researcher said that IT resources doesnt affect the firm
performance. But some others say in contrary that IT resources
does affect the firm performance. This lead to the IT Productivity
Paradox. Latter research propose the resource based view which
define certain resource characteristics that will increase the firm
performance. This theory is further modelled by using the
constant partial adjustment theory to validate the correlation
between the IT investment and the firm performance. PT. Kereta
Api Indonesia (Persero) one example of the company utilizing the
IT resources. The companys data is retrieved from its annual
report to be used to build the model. The resulting model will show
the IT investment significance on the companys performance.
Keywordsfirm performance, IT investment, performance ratio,
partial adjustment value, IT resources

I. INTRODUCTION
Information Technology (IT) has become one significant
driving force of business. Information technology provide
business with capability to increase their effectiveness and
efficiency. Those capability can be obtained by utilizing
sufficient information technology with respect to the firms
condition. Information technology resources that deliver the
capabilities require certain amount of effort to be deployed.
Also the realization of the capability needs proper synergy of
people and process. The capability hopefully will increase the
firm performance.
In order to realize the IT capability, enterprise must first invest
the resources. However investment in IT resources doesnt go
linearly with the firms performance. Higher IT investment
doesnt guarantee the increase in firms performance. There
conditions called IT Productivity Paradox proposed by past
researchers. Earlier studies examining the correlations between
IT investment and firms performance resulted in zero or
slightly negative correlation [1]. However, the latter empirical
studies show positive correlation [1]. [2] proposes five possible
reasons for this phenomenon, including mismeasurement of

inputs and outputs, time lags due to learning and adjustment,


redistribution of profits, mismanagement of IT, and
inappropriateness of traditional productivity measures.
Researchers propose a theory called Resource Based View. The
theory view the resource as something that are valuable, rare,
inimitable, and non-substitutable [3]. The theory tells us that
resources which is valuable, rare, inimitable, and nonsubstitutable will provide the competitive advantage to the firm.
IT resources itself can be classified in tangible resources
comprising the IT infrastructure, human IT resources
comprising the IT skills, and intangible IT-enabled resources
such as knowledge assets, customer orientation, and synergy [1]
[3].
IT investment and firms performance can be modelled to
determine the IT contributions in increasing the firms
performance. The model use the partial adjustment value to
measure the firms performance. The partial adjustment value
assumes that the change in the actual output (measured in
physical units) of a product in the current period (t) is adjusted
to the difference of the output desired in present period to the
output of the previous period at constant speed of adjustment
[4]. This theory is used in modeling the firms performance to
the IT investment.
PT. Kereta Api Indonesia (Persero) is Indonesia state owned
railway transport provider. The company provide railways
transport services including passenger transport, logistic
transport, and asset undertaking [5]. The companys vision is
provide railway transport service which focus on customer
service and fulfill the customer expectation. IT resources is one
important resources used by the company. It makes the
company suitable to use as the model. The companys IT
investment and the companys performance will be used to
build a model of IT value using constant partial adjustment
value method. The following section will describe the method
and materials used to build the model, the result of the model,
and conclusions of the model. [3] [2] [4] [5] [6] [1]

II. METHOD AND MATERIALS


A. The Partial Adjustment Value
The method used to model the IT value is constant partial
adjustment value. The method assume that the output of the
current product is adjusted based on the expected value and the
previous value [6]. Below is the formula representation of the
method.
1

= ( )

( = 1,2, , )

B. The performance measure


From eq.(2) a logical measure of performance is provided by
= ( ; ) [6]. The performance value is written
by [6].
= ( ; )
=
The average performance value is denoted by [6].

(1)
=

Where is the current actual output, 1 is the previous actual


output, is the expected value of the current output, and is
the adjustment value. The value of range is 0 1.
is quantified using production function ( ; ).
1 = (( ; ) )

(2)

= ( ; ) + (1 )1

(3)

Production function ( ; ) is consisted of two parameters


and . is the production factor consist of (the
traditional capital) and (the traditional labor) in two factors
model, and add (the IT-capital) in three factors model. ITcapital comprise IT infrastructure and the IT human resources.
The form of the production function can be specified in several
way such as Cobb-Douglas (CD) function, Box-Cox (BC) and
Box-Tidwell (BT) [6]. The production function used in this
paper is Cobb Douglas Function.
Two factors function.
( ; ) = 0 1 2

(4)

Three factors function.


( ; ) = 0 1 2 3

(5)

The constant 0 , 1 , 2 , 3 , and is unknown and will be


estimated to determine the model. Substituting Eq. (4) and (5)
to Eq. (3) give the following equation.
Two Factors Model.
(6)

Three Factors Model.


2

= 0

(9)

The variable is the amount of output sample. The


performance ratio is formulated by [6].

The average performance ratio is written by [6].


=

+ (1 )1

(7)

Eq. (6) and (7) will be used to determine the unknown constant
, 0 , 1 , 2 , and 3 .

(10)

(11)

The performance ratio represent the level of performance of


the current output with respect to the production function.
C. Non-linear Regression
The Eq. (6) and (7) contain the unknown constant which is
needed to determine the production function. Those equation
forms non-linear equation. In order to get the value of unknown
constant value, the non-linear regression is used. The regression
used in this paper is non-linear regression provided by the
Microsoft Excel Solver Add-Ins. The tool uses GRG non-linear.
The constant is initialized by using seemingly proper value. The
initialized constant will let us to create the model to be
compared with the actual value. The error is calculated also the
sum of squared error of all sample. The Solver Add-Ins is used
to determine the appropriate unknown constant value by
minimizing the sum of squared error.
The unknown constant initialized using the most proper value.
The is initialized by 0,5 as it is the average of the value range.
The 0 , 1 , 2 , 3 is initialized by 1 as it seems to provide
neutral degree on the production function factors (K t , Lt , It ).
Table 1 Initialization

= 0 1 2 + (1 )1

(8)

Constant

Initial Value
0,5

D. Data samples
Based on the partial adjustment method described before, there
are three factors involved in the modeling. Those are (the
traditional capital) and (the traditional labor) in two factors
model, and add (the IT-capital) in three factors model. Those
factors are determined by extracting the companys annual
report.
The K t factor, traditional capital, is retrieved by comparing with
the IT infrastructure spending. Based on Association of
American Railroads Total Annual Spending 2013 Data, the IT
spending of the company is assumed at 6.8%. This value is
obtained by summing the percentage of the computer
equipment spending and other track and property spending
which include communication system. The actual amount of K t
is the percentage of non-IT spending to the total company
equity.
The companys labor is classified in non-IT labor and IT labor.
The proportion of the non-IT labor to total labor is used to
determine the Lt factors. The Lt uses the non-IT labor to total
labor proportion of the total labor cost.
The It factors is the total IT spending which include the IT
infrastructure and IT labor. The amount of It is obtained by
summing the amount of IT infrastructure spending based on the
percentage on IT spending assumption, and the IT labor cost
based on the proportion of IT labor with total labor to the total
labor cost.
All units in trillion rupiah.

Table 4 Three Factors Regression Result

5,16
5,20
5,65
8,35
13,62
15,74

0,97
1,71
0,75
0,64
0,75
0,97

0,39
0,39
0,42
0,61
1,00
1,16

0,273727105

Value

0,54745421

0,453122474

1,981723317

1,72985897

SSE

0,111895657

Based on the regression result, the following is the performance


ratio of two factors model and three factors model.

Table 5 Performance Ratio

Table 2 Production Factors Value

Year
2009
2010
2011
2012
2013
2014

Variable

Year

2009
2010
2011
2012
2013
2014

0,377961
0,816608
0,207055
0,16391
0,74781
0,676419

0,624537
0,443921
0,548852
0,464785
1,087783
0,531079

The following is the graphical result of the performance ratio.


1,2
1
0,8

III. RESULT
Non-linear regression is done to the Eq. (6) and (7) to determine
the constant value. The initial value of the constant is using the
value of Table 1 Initialization. Following is the result of the
regression.
Table 3 Two Factors Regression Result

Value

0,6
0,4
0,2
0
2008

2009

2010

2011

2012

2013

2014

2015

Variable

0,342604162

0,024892316

1,476619006

Figure 1 Performance Ratio Comparation

0,006894137

SSE

0,158992824

Based on the figure, the performance ratio of two factors model


shows fluctuations with maximum value at 2013. On the other
hand the performance ratio of three factors model shows
maximum value at 2010. From six sample gathered, the three

Three Factors
Two Factors

factors model mostly has lower performance ratio than the two
factors model. However, on the last data at 2014, the three
factors model shows higher performance ratio than the two
factors model.
The graphics shows that the performance ratio of the firm by
using IT resources are lower than using traditional resources.
However, this conditions may happen due to the companys
strategy. In 2010 until 2013, the company may focus on
increasing the operational capability which mostly concerned
about the railway transport infrastructure. On those years the
company seems not concerning the IT resources too much. This
can be seen as the railway service of the company is improved
based on the annual report. The company is focusing on
improving the railway transport infrastructure to increase the
firm performance. In 2014, the company is assumed to already
have good railway transport infrastructure, so it change its focus
on IT resources to maintain the railway transport infrastructure.
The companys performance ratio in 2014 using three factors
model is higher than the two factors model. The company IT
resources is improving the companys performance in 2014.
IV. CONCLUSIONS
The performance ratio of the IT resources involvement in firms
performance doesnt have significant change in 2009-2014.
This may be happened as the company is focusing on improving
their traditional capital such as railway transport infrastructure.
However, the impact of IT resources can be seen as the
company is focusing on maximizing their IT usage. IT
resources does affect the firm performance. The company can
be said as using the IT resources in their business and affected
by it.
The data used in this paper is data at 2009-2014. The regression
result may not sufficient to best fit the function. In order to

increase the accuracy, it is encouraged that more data is used to


model the IT value.
REFERENCES
[1] L. Yongmei, L. Hongjian and H. Junhua, "IT Capability as
Moderator Between IT Investtment and Firm
Performance," Tsinghua Science and Technology, pp. 329336, 2008.
[2] E. Brynjolfsson and H. L, "Beyond the productivity
paradox," Communications of the ACM, vol. 41, no. 8, pp.
49-55, 1998.
[3] A. S. Bharadwaj, "A resource-based perspective on
information technology capability and firm performance:
An empirical investigation," MIS Quarterly, vol. 24, no. 1,
pp. 169-196, 2000.
[4] M. Nerlove, Distributed Lags and Demand Analysis for
Agricultural and Other Comodities, vol. 141, Washington,
DC: US Department of Agriculture, 1958.
[5] PT Kereta Api Indonesia (Persero), "Annual Report," PT
Kereta Api Indonesia (Persero), Bandung, Indonesia,
2014.
[6] W. T.Lin, C.-H. Chuang and J. H. Choi, "A partial
adjustment approach to evaluating and measuring the
business value of information technology," International
Journal of Production Economics, vol. 127, pp. 158-172,
2010.