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Computerizing small business.

Many Montana small businesses have taken the plunge into computers. Others are poised on the brink, contemplating their first, perhaps second, or even third "generation" information processing system. By now the technology is pervasive, and for the most part, it has proven a useful adjunct to business operations. However, computer systems are still highly complex and represent a substantial investment for most small businesses.

What little is written on systems development and success in small business uses the Small Business Administration's (SBA) definition of a small business: Fewer than 250 employees and less than $5 million in gross annual sales. Firms at the high end of that group, however, are very large relative to most start-up or entrepreneurial endeavors. Relative to Montana, firms that size qualify as "big business."

Small business in Montana means very small: Retail specialty stores; legal, medical and dental offices; insurance agencies; personal care salons; and a plethora of private contractors and specialty manufacturers. Typically, such firms employ fewer than fifty people and take in less than $1 million in gross annual sales - a fifth of the SBA's upper limit. In firms this small, profit margins tend to be small also, and the risk associated with investment in technology tends to be high.

How can Montana small businesses make sure their technology investment is wise and workable? What are the pitfalls and the costs, both explicit and hidden, of computerizing a small business? What are typical system development patterns and how successful are they?

Study Sample

To get at these and related issues, the authors selected a sample of sixty-eight very small (fewer than fifty employees and less than $1 million in gross annual sales) businesses from Montana, Idaho, and Wyoming. Criteria for inclusion in the study included the size restriction noted above, implementation of a new computer information system within the past year, and willingness to participate in the study.

Although this sample does not correspond to Standard Industry Classification (SIC) codes and is not the usual simple random sample, the results are nevertheless important for Montana small businesses. Our survey of sixty-eight small businesses had an average of 8.3 employees per firm. In Montana the average employees per firm are as follows: for all manufacturing firms, 16.1; for all transportation firms, 11.2; for all retail sales firms, 8.4; for all service firms, 8.0; for all financial, insurance, and real estate firms, 6.8; and for all contract construction firms, 4.2. Our judgement sample targeted very small business and Montana is dominated by very small businesses. Consequently, the results of this study can be very meaningful for Montana businesses. A personal interview was conducted with the owner or manager of each firm. During the interview, answers to 100 open-ended questions were obtained. The survey elicited information about hardware, software, costs, uses, and purpose of the computer system. It also posed and attempted to correlate the answers for three basic research questions:

1. Who is involved in the needs assessment, design, implementation, training, and evaluation of the system?

2. How successful is the information system relative to goals and expectations laid out prior to its development?

3. How is the system's success - or lack of it determined?

Results of the study are summarized below. System Configuration, Purpose, and Costs

As figure 1 shows, microcomputers are the most popular hardware choice in the sample group. Almost 87 percent of all computers installed were micros. In addition to its lower cost, the micro more nearly matched small business computing needs. Larger machines were simply overkill.

As with many small businesses reported elsewhere in the literature, our sample firms purchased accounting, word processing, and spreadsheet software significantly more often than any other type. Database programs were a distant fourth (see figure 2). Figure 3 summarizes the purpose of the computer installation, with accounting problems and data processing time as major concerns.

Not surprisingly, small business firms sought to contain overall operating costs via the technology, and to recover costs associated with manual processing of payables and receivables (figure 4). Finally, figure 5 reflects the most common uses of data generated by the computer.

Over half the sample firms were implementing their first computer system. Another third were upgrading (expanding or replacing) a single micro computer. Most of these very small businesses then, are at the stage larger firms were twenty years ago: automating transactions and data to achieve faster, more efficient operations.

A word of caution: Small businesses don't often purchase more advanced computer applications such as decision support or expert systems, or statistical modeling tools - and there's a good reason why not. Even for large firms with enviable profit margins, the payoff from such expensive, managerial-oriented information systems is not well-established. So small businesses should stick with transaction-oriented systems which are less expensive, generally bug-free, and have a good track record. Resist a vendor's or consultant's hard sell. And if you want technology support for managerial decision-making, explore the data analysis and modeling available in a spreadsheet program.

Figure 6 illustrates direct costs for the system and includes only the hardware, software, and installation fees. Direct costs amounted to less than $10,000 for over half the firms. And nearly all of these lower-cost systems represented the firms' initial stab at computerizing. Interestingly, almost 25 percent of the firms spent over $20,000; for the most part, this group was installing a second or third "generation" system.

Obviously, a small business should examine estimated costs carefully. But direct costs, as cited above, don't necessarily cover everything. You may find yourself saddled with fees for consultants, maintenance contracts, user training, and special environments to control dust and extremes of temperature.

Develops the System?

Table 1 shows the key players in a typical small business computer installation: management, users, vendors, and consultants. Management and vendors were the two largest contributors to system development in the sample; users and consultants played a secondary role. Table 2 presents the relative involvement of each group in installing and implementing the system. Implementation, again, is primarily a partnership of management and vendors. Users have a relatively larger role than consultants in the implementation phase, but it is still secondary.

The high degree of input from vendors raises an important question: Does dependence on vendors produce an overselling of computer products? To test this idea, we ran correlations on three key sets of variables. Not surprisingly, more vendor involvement was associated with more expensive systems. Yet there was no relationship between vendor involvement and system success. High vendor involvement was not associated with more successful systems and low vendor involvement was not associated with less successful systems. Similarly, more expensive systems were not necessarily more successful systems, and less expensive systems were not necessarily less successful.

The obvious conclusion here is that small businesses considering computerization should not rely too heavily on vendors for system development and implementation. The end result of such reliance could be merely more expensive - rather than more successful - systems.

How Successful Was the System?

Table 3 summarizes respondents' expectations for their new computer system. Most expected efficiency. The largest response category was an explicit desire for improved efficiency, and the second largest category - "time savings" - is also directly related to the idea. So too is "faster reports." Together, these eighty efficiency responses are almost double the forty-two responses in other categories (which might be grouped as an expectation for increased effectiveness).

Tables 4 and 5 describe the degree of satisfaction and success respondents felt. For table 4 data, respondents focused on how smoothly the system conversion went, how well employees took to the system, and whether or not the process included unexpected problems; overall, respondents felt their expectations for a smooth efficient implementation were well satisfied. Respondents also felt the system was highly successful in terms of its stated purpose (table 5).

What Does Success Mean, Exactly, and for Whom?

This substantial feeling of success and satisfaction seemed to have no basis in objective fact. Few firms undertook any formal measure of their system's performance. One owner/manager in our survey, however, knew exactly what his new computerized point-of-sale system bought. By checking invoices for several months before and after installation, he discovered that the system was recovering several hundred dollars a day in pricing errors. Additionally, the interval from a billing cycle's end to mailed statements dropped from six days to one.

Evaluation like that described above takes a little time and effort but is a good investment. If you purchase one computer, chances are you'll eventually go after another one. Yet it is very difficult to estimate how effective a new technology will be if you inadequately understand the old one's effect. Small business managers today must be scientists, and understand what is happening in their firms, and why.

Once you understand the "what" and "why, you can intelligently develop solutions and spot opportunities. A system evaluation will help you understand the "what" and "why" of computerized operations.

Owner/managers aren't the only ones who determine the success (subjective or objective) of a new computer system. End users also have to live with the new machine, and make it work.

Our survey attempted to measure only the satisfaction of owner/managers. But smart management can heighten user satisfaction and consequently make computerization more effective. Three specific management practices can enhance user satisfaction.

1. Involve end users in the process. They're knowledgeable about your business and can make valuable suggestions. Seek their advice and input about what areas of the business should be automated, and about hardware and software capabilities. When individuals are involved in a decision-making process, they tend to "own" the decision more, and be invested in its success.

2. Provide adequate end user training. Nothing is more discouraging than feeling pressure to make something work and not having a clue how to proceed. At one business in our survey, several end users were questioned periodically for several months after implementation. They did not like the system because they did not clearly understand how to use it. Their poor attitude was reflected in customer service. Computerizing your business takes more than just placing a new machine on an employee's desk.

3. Offer to retrain displaced employees. Technology does eliminate jobs; in fact, reduction of labor costs is exactly the goal of automation. But since employees tend to sympathize with each other, one worker replaced by machine can bring down everyone's morale. One company in the survey retrained an employee to help run the computer system, thus bypassing the need for a layoff. Employee morale was much better in that company than in firms using layoffs.

General Warnings and Guidelines

In addition to the suggestions noted above, our survey yielded a number of general guidelines.

1. Don't spend thousands of dollars on a solution for a nickel problem. One respondent in the survey wanted some assistance with a software acquisition decision. He owned a small personal care salon and was concerned with inventory control. He'd located a consultant to develop an inventory control system for about 3,000. Yet the respondent carried only about a dozen categories, or 150 total items of inventory. Instead of $3,000 in custom software, we suggested a simple "two-box" inventory system: When the box on the shelf sells out, open the second box and reorder.

2. Spread development costs around. One small business in the survey contracted with a programmer on an hourly basis. The programmer gave a good faith estimate of the number of hours it would take him to deliver a finished database management system. He was several months late and three times over estimate. The moral here is never pay for the cost of development by yourself. Spread it around among many users by buying software that is already developed and successfully operating in a number of locations.

3. A corollary is: Go with the proven system for the proven cost. For most types of small business (medical, legal, retail, etc.) off-the-shelf software is available from a reliable vendor. At first, the cost may seem higher than the estimate from your sister-in-law's brother's friend. But such estimates, as noted above, are often low.

4. A word about mail order computers and software. A number of our respondents purchased their hardware and software at very competitive prices through advertisements in BYTE Magazine, PC World, and PC Magazine. None reported bad experiences with mail order. However, it's wise to check back issues of the magazine and make sure the company you want to purchase from has been around for a few years - one indication of reliability. Also check the company's return policy and guarantees; most good firms will warranty their products for a year or longer and will pay return postage within a certain time limit. Some also provide on-site service as part of the purchase price. Don't be afraid to ask for references in your local area; if the mail order firm is reluctant to give you customer names, go to another firm! And finally, mail order is not for the novice. Buying a system with no assistance in setup or training means you're on your own.

5. Computerization will not solve poor management practices such as poor marketing or poor capital management. Nor do computers necessarily streamline cumbersome work-flow patterns or correct incomplete records. It might be worthwhile to call in a business consultant before you call in a computer consultant or vendor, just to make sure your manual business systems are ready for the run through silicon.


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Gerald Evans is an associate professor and chair in The University of Montana's Department of Management. Before taking over editorial duties at the Quarterly, Marlene Nesary was an associate news editor at BYTE Magazine.
 Table 1
 Who Does System Development?
 Major Minor No
Group involvement involvement involvement
Management 58 5 4
Users 24 12 24
Vendors 36 16 10
Consultants 18 14 28

Note: Rows may not add to 68 due to lack of responses on some data.
 Table 2
 Who Implements the System?
 Major Minor No
Group involvement involvement involvement
Management 47 8 8
Users 28 5 28
Vendors 35 9 20
Consultants 15 8 39

Note: Rows may not add to 68 due to lack of responses on some data.
 Table 3
 Expectations for the New System
Expectation Respondents
Improvements in efficiency 44 firms
Time savings 31 firms
More usable information 25 firms
Better management of the firm 17 firms
Faster reports 5 firms

Note: The total number of respondents is greater than 68 since some had more than one response.
 Table 4
 The Degree to Which Expectations Were Met
Reponse Category Responses
Very well met expectations 3
Well met expectations 55
Poorly met expectations 9
Very poorly met expectations 0
 Table 5
 System Success Relative to System Purpose
Reponse Category Respondents
Extremely successful 7
Very successful 46
Moderately successful 10
Unsuccessful 4
Extremely unsuccessful 0

Figuration Omitted
COPYRIGHT 1991 University of Montana
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Evans, Gerald; Nesary, Marlene
Publication:Montana Business Quarterly
Date:Sep 22, 1991
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