Week 7

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Business Process, Financial Performance and Data Management

Kayla Summerville, Alfred University Zong Dai, Alfred University

EXECUTIVE SUMMARY Business process and financial performance enabled by strategic data management has not been well documented in the literature. This paper examines how a business firm develops their strategic data management system to create new business processes and to enhance financial performance. Keywords: Strategic data management, Competitive advantage, Business process, Financial performance

INTRODUCTION Data is a corporate resource (e.g. Levitin & Redman, 1998) and effective strategic data management yields competitive advantage (e.g. Vesely, 1990). However, the relationship between strategic data management and business process and financial performance has not been well documented in the literature. This paper is intended to examine how business firms develops their strategic data management system to create competitive advantage and to financial performance. The research methodology employs a fact-based principle that combines quantitative and qualitative methods. Company access includes information retrieval from the company’s website and interviews conducted with Kathryn Beaton, a Systems Development Manager at Paychex, Inc. Mrs. Beaton is in charge of the Enterprise Data Warehouse and is responsible for updating and maintaining the tools that allow it to function properly. Data was collected and analyzed at the corporate level of the subject organization. The paper begins with an introduction, followed by a literature review, then a case study, and concludes with a section of findings.

LITERATURE REVIEW

In quest of competitive advantage, the resource-based view of firm (RBV) has suggested that competitive advantage is derived from a bundle of strategic resources and focuses on individual resources while under-exploring multiple resources interactions (e.g., Barney, 1986, 1991; Dierickx & Cool, 1989; Peteraf, 1993; Rumelt, 1984, 1987; Smith, Vasudevan, & Tanniru, 1996). According to Barney, a resource must possess four attributes of value, rareness, inimitability, and non- substitutability, in order for it to provide a firm with the source of sustained competitive advantage (Barney 1991). In recent years, many studies in information technology have adopted the RBV as a theoretical framework (e.g. Mata et al., 1995; Duncan, 1995; Ross et al., 1996; Sambamurthy & Zmud, 1997; Feeny & Willcocks, 1998; Bharadwaj, 2000). Vesely (1990) suggests that strategic data management is the key to corporate competitiveness. A recent global survey by Investment Weekly News supports this statement. The importance of the relationship between strategic data management and corporate performance warrants more empirical research (Investment Weekly News, 2011). Yin (1994) suggests that the case study method is deemed proper for a research project that is exploratory in nature. The purpose of this paper is to substantiate that a strategy-driven data management can be a possible source of competitive advantage.

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PAYCHEX, INC.

Company Background Paychex, Inc. offers payroll, human resource, and benefits services to small and medium sized business. The company was founded in 1971 by B. Thomas Golisano, who was the only employee at the time. Paychex now employs more than 12,000 people and serves more than half a million businesses in the United States. With more than 100 office locations in the US, the company has gone international and has 4 offices in Germany. Paychex went public in 1983 and is currently traded on the NASDAQ Stock Market and is a member of the S&P 500. Paychex implemented an Enterprise Data Warehouse in 2005. Figure 1 Paychex Data Management System shows the flow of data through the data warehouse. Each “Source System” brings together different aspects of all of the products and services offered by the company. For example, “Source System 1” is client payroll data and “Source System 2” is client Human Resource Services data. Data from each source system is collected, but all of it is in different codes, therefore the data is run through an “Extract, Transform, and Load” (ETL) tool. This tool translates everything into one common data dictionary and then loads the data into the data warehouse. The data warehouse contains two targets, one of which is loaded weekly and the other is loaded monthly. The data is then retrieved by analysts within the company to perform an examination using a business intelligence tool. This tool offers a user friendly interface for non-IT users. The analysts then transform the data into information.

FIGURE 1 Paychex Data Management System

Organizational Development

Business Intelligence Tool

ETL Tool

Enterprise Data Warehouse

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Strategic Data Management

The analysts’ extraction of data from the data warehouse allows them to gain valuable knowledge and create competitive advantages. The four major ways in which this information is used is in identifying revenue producing clients, new product packages, key performance indicators, and key risk indicators. Each process is discussed as follows. Identifying revenue producing clients allows the company to focus on the customer service of specific clients. Customer service is, of course, supplied to all clients, but once major revenue producing clients are identified, it becomes the company’s business to keep that client with Paychex. Losing these clients would have a devastating impact on the company’s overall financial performance, especially on revenue. Identifying new product packages is done in order to appeal to more potential clients as well as the company’s current clients. Since 2005, Paychex has added several new products and services, such as Paychex Premier Human Resources, Health Savings Accounts, Tax Credit Services, and Time and Labor Online. These products and services were found to be sought after by clients through the use of the data warehouse. Because the data is all translated into one format, it isn’t hard to put the data together into a useful piece of information. Identifying key performance indicators (KPI) is helpful in assessing the health of the company. The analysts have an existing method to identify KPIs. The important part is that by having all data readily available, it becomes quite easy to identify new KPIs in an ever changing environment. Identifying key risk indicators is important in Enterprise Risk Management. Due to the ease of which data is extracted from the data warehouse, this division of the company can compile data on a monthly basis and see where security should be increased or where fraud must be decreased. By identifying these risk indicators, the company can watch particular areas and react efficiently and effectively. Each of these identifications can create a competitive advantage if used properly.

Financial Performance Figure 2 shows some of the financial aspects of Paychex, Inc. The company’s revenue has been stable since 2008, while their equity and total assets dropped around 2008 when the stock market crashed and the economy entered this recession. It is presumed that this is because of the Enterprise Data Warehouse and the significant advantages discussed previously. This company has managed to keep its annual revenue on a relatively steady incline and is rebounding in most other financial areas without a bailout.

FIGURE 2 Paychex Financial Performance (In Thousands)

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Revenue Total Assets

Stockholders' Equity Cash&Cash Equivalents

Source: Paychex (2011), based on the financial data retrieved from the Paychex. Inc website at http://www.paychex.com/, accessed in December 2011.

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FINDINGS AND IMPLICATIONS

As described above, it is clear that the data management system provides a fundamental platform on which Paychex has sustained competitive financial performance as evidenced for the past ten years by both quantitative and qualitative financial measurements. If such a system has made Paychex so successful, what is really the relationship between and interactions of data management and the performance? What are most important factors that make the company so successful? Can any other company build a similar system? What are the most important experiences or lessons (successes or failures) in building a similar strategic data management system? First, at Paychex, IT initiative is driven and guided by business requirements and strategies, i.e. business processes created by data management, instead of just looking for sheer technology fashion. Second, Paychex management is acutely sensitive to challenges and opportunities brought by newer technology and continue sto upgrade and advance its IT capabilities to catch business opportunities by technology drivers. Third, Paychex’s data management system is fully integrated with its key business processes. This integration creates a unique and valuable corporate resource. Because the integration process of IT and business is usually implemented under the contexts of the very unique historical, business, and technological situations, with the intrinsic and contextual complexities and causal ambiguity, this would make the capacity of managing the integration very difficult and even impossible to be imitated by competitors. Thus the capacity of managing the strategic integration of IT and business would be a possible source of competitive advantage for the organization which implements an enterprise system. This issue has not been well addressed in the literature.

RECOMMENDATIONS FOR FUTURE RESEARCH

A growing trend is that firms in all sizes, large or small, will implement an enterprise system such as the ERP, which typically contains the attributes of integration, modularity, and IT personnel skills. Thus, an existing competitive enterprise system will eventually become either a strategic necessity (Clemons & Kimbrogh, 1986; Clemons & Row, 1991; Powell & Dent-Micallef, 1997), or a prerequisite for staying in IT-enabled business (Porter, 1985; Hamel & Heens, 1994), but not the potential for competitive advantage. It is the uses of IT that ultimately create competitive advantage. It is the business-driven integration of business processes and IT, which is illogical or difficult for rivals to imitate. Thus, what is essential is the ability to manage, to apply IT for a well-defined specific business strategy under a unique context, and to implement a cross-functional and/or cross-activity integration, which is much beyond the technical system integration. It is this type of ability to manage IT that may be one sustainable source of competitive advantage. Thus, this type of managerial IT capability needs to be considered as the core of the firm’s IT capacity and warrants further empirical studies.

REFERENCES

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1241. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120.

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