Configuring the Enterprise Systems Portfolio: The Role of Information Risk

We investigate how public firms configure their enterprise systems (ES) portfolio when faced with information risk, which refers to the likelihood that corporate financial information is of poor quality. We focus on firms’ configuration of their ES portfolio by introducing a novel construct: ES portfolio balance, or the relative proportion of two categories of ES modules, operational and functional. We draw on the theory of information processing to hypothesize the impact of information risk on ES portfolio balance and how this impact is affected by internal controls. We construct a multisource panel data set of 697 firms and 1,993 firm-year observations from 2005 to 2008 and use econometric and multivariate procedures to test our hypotheses. We find that when faced with an increase in information risk, firms change their ES portfolio balance more toward operational modules. However, when such firms are also faced with materially weak internal controls, they change their ES portfolio balance more toward functional modules instead. These findings expand our understanding of how firms’ information processing needs drive the configuration of their ES portfolio and, more broadly, IT resources portfolio.