Information systems (IS) are critical for Performance Management (PM). Information systems greatly aid in defining, measuring and monitoring performance metrics and comparing them against targets and benchmarks. It is a topic you need to be ready for in all sections of your exam. The examiner reports state that students regularly overlook this area of the syllabus, so make sure you cover it during your studies.
Role of IS
Information systems are the backbone of a modern company. IS enables communication, sales and marketing, supply chain management, decision-making, employee management, process improvement and much more. Once considered a tool to improve efficiency, IS is now considered an important source of competitive advantage.
Think of a successful company you’ve recently read about or interacted with, and chances are you can also think of an example of how that company uses IS to distinguish itself from the competition. You can probably think of ways IS has changed the way you prepare for your ACCA exams - you might watch videos, take online courses, and participate in online forums. Moreover, you might have learned of these solutions through targeted advertising in your social media.
First, make sure you are familiar with some of the basic terminology in this area for your PM exam:
Internet vs Intranet
The term ‘internet’ describes the global network of computers and devices that are all connected with an Internet Protocol (‘IP’) address. I’m sure you are familiar with this and use it regularly to browse content on the web, for example, reading this article, accessing social media, and using many of the apps on your smartphone.
‘Intranet’ refers to a subset of the internet that is blocked off from the public and only available to a certain organisation. For example, a university might have a ‘private’ web portal where students can log in with a username and password and then see their schedules, access student message boards, or upload their assignments.
A ‘network’ is a group of computer systems that communicate by physical and/or wireless connections. The wifi router you might have in your home is connected to the internet with a physical cable, and it then allows computers in your home to connect through the wireless network that it broadcasts.
Wireless technology is a fast-growing area of technology. As its name implies, it refers to communication without cables. Moreover, you are probably interacting with wireless technology regularly. You might connect headphones, fitness trackers or other devices to your smartphone with Bluetooth, the car you drive might use Radio Frequency ID (RFID) tags embedded on individual components to monitor maintenance and repair history, and the shipping company that delivers parcels to your home is probably using a variety of these technologies to track packages and monitor performance.
Categories of IS
Ensure that you understand and can distinguish between different types of information systems. While the latest developments in cloud computing, performance dashboards, and big data bring in new terminology and concepts, the following classic IS ideas form a starting place and are required knowledge for your PM exam.
Transaction Processing Systems (TPS)
These are systems used by operational staff to capture data and make processes more efficient, improving the accuracy and timeliness of information. Data will primarily be high frequency and short term.
At your local supermarket you end your shopping trips at the cashier, when your groceries are probably scanned, and your total bill is then automatically calculated. This is a classic example of a TPS. The data collected helps the supermarket produce an accurate sales receipt and is also used to track inventory and understand customer shopping patterns.
Large retailers are now using ‘geo-analytic’ software which tracks your movements through a large store by monitoring your smartphone’s wifi signal from various routers. This is another example of a TPS.
Starbucks is beginning to use high-tech coffee machines in their stores that communicate information via the cloud on the machine usage, maintenance, and even customer preferences – these are examples of the use of transaction processing, big data, and wireless technology.
Management Information Systems (MIS)
These are systems used for structured decision-making that help managers analyse performance and control the business. They draw mainly on summarised, internal information from a company’s existing operations. This summarised information may have been transferred from the organisation’s TPS. An MIS might help the manager of a supermarket to monitor inventory levels and determine reordering requirements; understand product profitability to determine how to allocate floor space and what products to stock and to set staffing schedules based on busy periods.
A modern MIS can access a variety of data types including using big data and presenting this information in real-time, with visualisations. An e-commerce company might build an MIS for a sales manager that monitors key performance indicators (KPIs) such as, ‘site visit to purchase ratio,’ ‘regional sales status,’ or ‘sales by channel.’
Executive Information System (EIS)
These are systems that help senior managers analyse organisational performance, see trends, and make decisions with a highly summarised picture of the business. An EIS not only uses internal information but also brings in external information, like information related to the markets in which the company operates. A modern EIS is sometimes referred to as a ‘dashboard,’ where critical KPIs are presented with charts, tables, and other graphical tools, helping the manager to visualise performance.
Continuing with our supermarket example, a senior manager might use a performance management dashboard that compares the sales or profitability of different regions using a chart showing performance over time. This information, for example, may support strategic expansion plans which the company may be considering. The EIS might also show news headlines about the company from external sources, the company share price, and a real-time summary of customer feedback.
Enterprise Resource Planning Systems (ERPS)
This term describes a system where many diverse business functions of an enterprise, such as human resources (HR), sales, production and supply chain, are integrated under one database system. SAP is an example of such software.
Consider an airline: 20 years ago, the airline might have had separate IT systems for passenger bookings, accounting, and HR. Now, SAP offers a specific ERPS product for the airline industry that integrates business processes such as fuel management, route performance management, catering, airplane maintenance, real-time customer feedback, and direct flight booking all under one unified system. It allows information to flow between all business functions and facilitates connections with external stakeholders, such as suppliers and customers. Such a tool greatly enhances control, data analytics and performance management, as KPIs from many business functions can be monitored on one dashboard.
An ERPS will also enable modern accounting practices, such as activity-based costing, as it will be easier to identify cost pools and cost drivers.
Customer Relationship Management Software (CRMS)
CRM software (which can also be contained as a module in an ERPS) is software that helps companies by centralising customer communications, purchasing history, sales leads and more into one database. This helps a company’s sales team become more productive, improve communication, automation of processes, and measure sales performance.
A retail company might use a CRMS and customer loyalty card information to automatically email customers about specific offers that they may be interested in, or drive a targeted social media advertising campaign.
If you’ve ever purchased anything using Amazon or other modern e-commerce companies, you have probably seen sections on the website, which say ‘recommended for you,’ or ‘other people have also purchased…’ The content in these sections stem from your purchasing history and these features are driven by CRM functionality.
The output of a MIS that can be viewed on a computer, tablet, or smartphone is often referred to as a ‘dashboard.’ This idea is similar to the purpose of dashboard in an airplane or a car which answers questions such as, ‘How fast are we going?’, ‘How much fuel do we have?’, ‘Is the engine running at the right temperature?’ An effective performance management dashboard answers critical questions like that for a business manager.
New tools are readily available, such as Microsoft Business Intelligence, that allows for the creation of highly customised dashboards for decision-makers at all levels of a company, drawing on many types of data (internal, external, financial, non-financial), to create customised performance metrics for any organisation.
Sources of information
A company has many sources of information to draw upon, which can be traditionally be categorised as internal vs. external. Internal information is easier to source, while external information can be more challenging to acquire. External information is particularly useful for strategic planning, when a company needs to consider market share, industry trends, and customer behaviours.
Internal sources can include, for example, the company’s accounting and production records, HR records, website traffic, and call centre data. Information gained from these sources can enable a company to understand product profitability, production efficiency, and employee utilisation. A retailer analysing customer shopping behaviour with information from their CRMS would be using internal information.
External sources of information come from the environment in which a company operates and can include competitor’s websites, social media, credit rating agencies, and internet news, for example. A company that analyses feedback from social media sites and uses internet research to identify new customer segments would be using external information.
Cost vs benefit
Companies should ensure that the benefit received from management information exceeds the costs of gaining that information. For example, the implementation of an ERPS can bring many benefits, such as improved business intelligence, streamlined procedures, improved productivity, and lower cost per accounting transaction.
However, such a system also comes with costs. New software, hardware, testing, and other implementation costs will be incurred by the company, as well as potential disruption to people’s work routines, and the need to overcome resistance to change.
Controls over IS
You should ensure that you have a working knowledge of the following controls over information systems for your Performance Management exam:
These are controls that prevent unauthorised people from gaining physical access to computer systems. Locked doors, picture IDs, and security cameras are examples of physical controls.
Once someone has gained physical access to a computer system, the next level of security would be logical controls. Passwords and access rights are examples of logical controls.
Administrative controls are those that are designed to influence peoples’ behaviour toward IS systems and practices. IT training and certifications, implementation of new procedures and discipline policies are examples of administrative controls.
Most computer users will be familiar with viruses: software intentionally created to harm your computer or data. Malware (malicious software) is considered to be master group heading for viruses, trojans and worms etc. While this is a complex topic which evolves quickly, the idea of anti-virus software is straight-forward: it is software designed to prevent, detect, and remove viruses. You will most likely run both anti-virus and firewall (see below) software on your personal computer.
This term was first used to describe a physical wall in a building that keeps a fire contained. In IS, it describes a type of control that prevents access to a computer or computer network. A firewall is used to control the flow of data between an external source, such as the internet, and an internal network in order to protect it from malicious threats. It achieves this by use of access control rules which define the source and destination IP addresses and the ports being used for the connection. Your company probably uses a firewall to keep hackers out of their computer networks, and if you are using a Windows operating system there is firewall functional included.
Additional protection can be achieved by use of Intrusion Detection System (IDS) and Intrusion Prevention System (IPS) which inspects the data packet coming into the network and compares it to a list of approved and known data signatures in order to ascertain if the data contained within the packet is known to be dangerous or malicious.
Validation is a broad type of control used to ensure the accuracy, rather than security, of data. When you enter your birthday on a web form, you are usually asked to pick the date, month and year from pulldown menus or by clicking on a calendar tool. Moreover, you are probably not allowed to proceed to the next step of what you are doing if you left the birthday field blank. These are two examples of validation—the first control forces you to enter a valid date, and the second ensures you don’t leave the field blank.
This is a control whereby your data is encoded in a way that makes it extremely difficult for people to decode and then use your data if they were to gain access to it. Flash drives often come with encryption software included; this doesn’t prevent loss of the flash drive but, if it falls into the wrong hands, it prevents unauthorised access.
This is an older type of control that comes from the era of dial-up networking when computer users often used a physical phone line to dial-in access the internet. This system works by calling the user back on a pre-determined phone line to ensure that access is being granted from an authorised location.
This is an example of an administrative control that spells out the responsibilities, duties, and potential penalties of employees in terms of ensuring that they keep data private, secure and safely stored away. Confidentiality agreements are commonly used in many larger companies.
Information systems are becoming an ever-increasingly important aspect of performance management. Gaining knowledge in this area will add to your employability if you are not yet working, and help you advance faster in your career if you already are. ACCA recognises this importance which is why it’s an important part of your PM syllabus – make sure you study this often overlooked area and be ready for it in your upcoming PM exam.
Written by Steve Willis, finance and accountancy trainer