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The Make or Break Issues in IT Management
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The Make or Break Issues in IT Management:
A Guide to 21st Century Effectiveness
Edited by
Dan Remenyi and Ann Brown
OXFORD AUCKLAND BOSTON JOHANNESBURG MELBOURNE NEW DELHI
Butterworth-HeinemannLinacre House, Jordan Hill, Oxford OX2 8DP225 Wildwood Avenue, Woburn, MA 01801-2041
A division of Reed Educational and Professional Publishing Ltd
First edition 2002
© Reed Educational and Professional Publishing Ltd 2002
All rights reserved. No part of this publication may be reproduced in any material form (includingphotocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1P 0LP. Applications for the copyright holder’s written permission to reproduce any part of this publication should be addressed to the publishers
British Library Cataloguing in Publication DataA catalogue record for this book is available from the British Library
ISBN 0 7506 50346
Typeset by Avocet Typeset, Brill, Aylesbury, BucksPrinted and bound in Great Britain
Contents
Computer Weekly Professional Series xiAbout the Authors xiiiPreface xxi
1 A word of cautionExploring fashions in IS/IT management 1David Avison ESSEC Business School, Paris, France1.1 Introduction 11.2 Strategic information systems 21.3 Business process re-engineering 51.4 Outsourcing 61.5 Enterprise resource planning systems 71.6 Knowledge management 81.7 A strategy to develop IT applications 91.8 Success and failure 111.9 The role of the consultant 121.10 Conclusions 13References 14
2 Outsourcing IT and e-business 17Leslie Willcocks Warwick Business School, University of Warwick, United Kingdom2.1 Introduction 172.2 Overview of developments 182.3 Using external IT/e-business services: a complex track record 202.4 Sourcing e-business: new rules? 242.5 Sourcing internet implementation capability 242.6 E-sourcing: from projects and technology to strategic partnering 292.7 External sourcing around the customer resource life cycle 292.8 The virtual organization – effective management approaches 322.9 Towards effective IT and e-sourcing decisions 342.10 Conclusions 37Notes 39
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3 Learning to realize the benefits of IT 41Brent WorkUniversity of Cardiff, United Kingdom3.1 Some evidence of the missing benefits 413.2 IT investment as a religious salvation 433.3 IT investment as exploration 463.4 Benefits realization as organizational learning 473.5 What is a benefits map? 483.6 An example of a benefits map 503.7 A case study in benefits realization 533.8 Learning to learn how to realize IT benefits 54
4 Purchasing and information technologyBuying IT and using IT to buy 56Frank Bannister Trinity College, Dublin, Ireland4.1 Introduction 564.2 Purchasing IT 574.3 Using IT to purchase: e-procurement 694.4 EDI 704.5 Conclusion 75Reference 76Bibliography 76
5 Full life cycle management and the IT management paradox 77Egon BerghoutUniversity of Groningen, The NetherlandsandMenno NijlandLondon School of Economics, United Kingdom5.1 Introduction 775.2 Full life-cycle management 795.3 Planning stage 805.4 Development stage 815.5 Exploitation stage 845.6 Full life-cycle management revisited 865.7 Full life-cycle management in practice 87Appendix: Quick scan elements in detail 97References 105
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6 A framework for evaluating legacy systems 108Carole BrookeFaculty of Business and Management,University of Lincoln, United Kingdom6.1 Introduction 1086.2 Getting started 1096.3 Second iteration of the scenarios 1206.4 Conclusions 122Acknowledgements 123Refererences 124
7 IT on board or under the thumb? 125Robina Chatham and Keith Patching Cranfield School of Management, United Kingdom7.1 Introduction 1257.2 The IT revolution – like, when? 1267.3 Reforming the tribes – back to virtual nature 1277.4 Anthropology and society 1287.5 IT people, the shamans of the twenty-first century? 1297.6 IT people – a different kind of tribe? 1307.7 The IT stereotype 1317.8 Organizational politics 1337.9 Task, process and people 1357.10 Conclusions 137References 138
8 Why business models matter(and how they can make adifference in internet commerce) 139Stephen DrewHenley Management College, United Kingdom8.1 Introduction 1398.2 Insights from e-retailing 1408.3 Business models versus value chain 1428.4 Business model analysis 1458.5 A business model framework 1478.6 Value proposition 1488.7 Revenue generation system 1498.8 Delivery system 1518.9 Profit and growth engine 1528.10 The business model framework in practice 153
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8.11 An example in on-line financial services: Nordea 1548.12 Summary and conclusions 154References 156
9 Whither IT?A look at IT in 2005 157James McKeen and Heather SmithSchool of Business, Queen’s University, Kingston, Ontario, Canada9.1 Introduction 1579.2 The changing IT function 1599.3 The IT organization in 2005 1619.4 Conclusion 173References 174
10 Strategic decisions in the information ageTransforming technology promises into business benefits 175Theo RenkemaEindhoven University and Rabobank Group, The Netherlands10.1 Introduction 17510.2 Investment issues and management challenges 17610.3 Foundations for organizational decision making 17810.4 The product and process dimension of investment decisions 18410.5 The ‘P4’ decision-making model 18710.6 Conclusions 197Notes 198References 199
11 E-business model options 203The first challenge is how to sustain the businessDan RemenyiTrinity College Dublin, Ireland11.1 Introduction 20411.2 Defining the business model 20411.3 Components of a business model 20611.4 The term of the business model 21011.5 High-level and detailed business models 21011.6 Generic business models 21011.7 The sustainability issue 22511.8 Risk and the choice of business model 22611.9 The next generation of business model 22811.10 Discussion 22911.11 Summary and conclusion 230
References 232Notes 233
12 The CIO’s career is over … long live the CIO!! 237Han van der ZeeNolan Norton Institute, De Meern, The Netherlands12.1 How ICT changes the economy and industries 23812.2 How ICT changes organizations 23912.3 Why integrate ICT in corporate strategy and management? 24012.4 How to integrate ICT in corporate strategy and management 24112.5 Implications for traditional ICT strategy and the role of the
chief information officer 24612.6 Conclusion 248References 249
13 Herding cats: Managing IT in the twenty-first century 250Terry WhiteBentley West Consultants, Johannesburg, South Africa13.1 Introduction 25013.2 The times they are a-changin’. But is IT management? 25213.3 Sailing the IT ship in the twenty-first century 25413.4 Dealing with complexity 25513.5 Managing complex adaptive systems 25813.6 Complex adaptive systems in the real IT world 26013.7 Managing in the complex environment 26313.8 The long and winding road 264References 265
14 Back to the futureA look at information deliveries 267René PellissierGraduate School of Business Leadership, Pretoria,University of South Africa14.1 Introduction 26714.2 The I in IT 26814.3 Proposed classification of information technologies 27014.4 Vendors and product applications in the extended matrix 28114.5 General trends in information delivery 28814.6 Conclusion 296References 297
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15 Manipulating realityDeception on the Web 300William HutchinsonEdith Cowan University, Perth, Western AustraliaandMatthew WarrenDeakin University, Victoria, Australia15.1 Introduction 30015.2 Principles of deception 30115.3 Deception on the Web 30315.4 Beyond the present 30615.5 How do you identify a lie? 30815.6 Conclusion 310References 311
Index 313
Contents
Computer Weekly Professional Series
There are few professions which require as much continuous updating as thatof the IS executive. Not only does the hardware and software scene changerelentlessly, but also ideas about the actual management of the IS function arebeing continuously modified, updated and changed. Thus keeping abreast ofwhat is going on is really a major task.
The Butterworth-Heinemann–Computer Weekly Professional Series has beencreated to assist IS executives to keep up to date with the management ideasand issues of which they need to be aware.
One of the key objectives of the series is to reduce the time it takes for leadingedge management ideas to move from the academic and consulting environ-ments into the hands of the IT practitioner. Thus this series employs appropri-ate technology to speed up the publishing process. Where appropriate somebooks are supported by CD-ROM or by additional information or templateslocated on the Web.
This series provides IT professionals with an opportunity to build up a book-case of easily accessible, but detailed information on the important issues thatthey need to be aware of to successfully perform their jobs as they move intothe new millennium.
Aspiring or already established authors are invited to get in touch with medirectly if they would like to be published in this series.
Series [email protected]
Series EditorDan Remenyi, Visiting Professor, Trinity College Dublin
Advisory BoardFrank Bannister, Trinity College, DublinRoss Bentley, Management Editor, Computer WeeklyEgon Berghout, Technical University of Delft, The NetherlandsAnn Brown, City University Business School, London
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Roger Clark, The Australian National UniversityReet Cronk, Harding University, Arkansas, USAArthur Money, Henley Management College, UKSue Nugus, MCIL, UKRené Pellissier, School of Business Leadership, South AfricaDavid Taylor, CERTUS, UKTerry White, BentleyWest, Johannesburg
Other titles in the SeriesIT investment – making a business caseThe effective measurement and management of IT costs and benefitsStop IT project failures through risk managementUnderstanding the InternetPrince 2: a practical handbookConsidering computer contracting?David Taylor’s Inside TrackA hacker’s guide to project managementCorporate politics for IT managers: how to get streetwiseSubnet design for efficient networksInformation warfare: corporate attack and defence in a digital worldDelivering IT and e-business valueReinventing the IT departmentThe project manager’s toolkit
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Computer Weekly Professional Series
About the Authors
David Avison
David Avison is Professor of Information Systems at ESSECBusiness School, near Paris, France, following nine years asProfessor of Information Systems at Southampton University.He is also Visiting Professor at Brunel University, UK, andUniversity Technology, Sydney, Australia. He is joint founderand editor with Guy Fitzgerald of the Information Systems Journaland also joint editor with Guy of the McGraw-Hillseries of textson information systems. So far, 17 books are to his credit (plusone translation from French) as well as a large number of papersin learned journals, edited texts and conference papers. He isChair of the International Federation of Information Processing(IFIP) 8.2 group on the impact of IS/IT on organizations andwas past President of the UK Academy for Information Systems.He has chaired a number of international conferences. He is anactive consultant as well as researcher in information systems.He has most recently been involved in IS/IT strategy formula-tion at a major intra-European manufacturing company.
Frank Bannister
Frank Bannister PhD is a Senior Lecturer in Information Systemsin Trinity College, Dublin, where he is also Director of Studies ofthe Management Science and Information Systems programme.Prior to joining Trinity in 1995, he worked in Operations Researchin the Irish Civil Service and for 16 years with Price Waterhouse,Management Consultants. He is a Consulting Associate withPriceWaterhouseCoopers. He has written numerous articles andpapers on Information Systems and Technology in ITPurchasing and Finance published by GEE. He is the ExecutiveEditor of IT Policies and Procedures in Ireland.
Egon Berghout
Egon Berghout is Professor of Information Management at the
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University of Groningen, The Netherlands, and Principal Assoc-iate at M&I/Partners. He is specialized in improving the effi-ciency and effectiveness of the information function (valuation).He has published over 40 articles and is a frequently invited con-ference speaker. He is a member of the executive committee ofthe European Conference on the Evaluation of InformationTechnology. He holds a PhD in Informatics (Delft University ofTechnology), and MSc in Information Management (TilburgUniversity).
Carole Brooke
Carole Brooke is currently Reader in the Faculty of Business andManagement at the University of Lincoln, UK. She was previ-ously Lecturer in Information Technology at Durham UniversityBusiness School for five years. Her background is interdiscipli-nary including a PhD in Information Technology and BusinessAdministration from City University Business School and an MAin Archaeology and Anthropology from the University ofCambridge. She has ten years’ commercial experience spanninginsurance, research and development, and recruitment consul-tancy. Work to date has focused on the human issues of organi-zational change, especially relating to information technology.Amongst Dr Brooke’s current research projects are research intothe experiences of call centre employees (using critical manage-ment theories) and an exploration of community project method-ologies as a way of improving stakeholder involvement inorganizational change.
Robina Chatham
Robina Chatham has 14 years’ experience in IT management,culminating in the position of European IT Director for a leadingmerchant bank. She started her career as a mechanical engineerwithin the ship building industry, where she pioneered theintroduction of computing onto the shop floor. This sparked offan early interest in the people issues associated with IT. Nowturned an academic and psychologist, she uses her real worldexperience to help senior IT managers improve their personalimpact and influence within a business context.
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About the authors
Stephen Drew
Stephen A. W. Drew is Professor and Deputy Dean at the Schoolof Management, University of East Anglia, UK. He is also LeadTutor of e-Business at Henley Management College, Oxfordshire,UK, where he launched one of the first successful internationalon-line MBA courses in e-business. He is responsible for design-ing and teaching MBA and corporate courses in e-business andstrategy for clients, including IBM and American Express. He hastaught on international executive and MBA programmes inEurope, North America, the Middle East and Africa. He has alsotaught business policy at McMaster University in Canada, andglobal strategy at Northeastern University in the United States.Previous to his academic career, Dr Drew held senior roles withthe Bank of Montreal, Ernst and Young, Royal Dutch/Shell, andIBM. He has advised many major international high technology,telecommunications, financial services and government organi-zations. His consulting and research expertise is in e-business,knowledge management, strategic management and scenarioplanning for fast-paced markets.
Bill Hutchinson
Associate Professor Bill Hutchinson is the Associate Head ofSchool of Management Information Systems at Edith CowanUniversity, Perth, Western Australia. He has 20 years’ experi-ence in information systems in government, the oil and financeindustries, and academia. He is a member of the AustralianComputer Society and the Australian Institute for ProfessionalIntelligence Officers. He has recently co-authored with MatthewWarren Information Warfare, published in the Computer Weekly ITProfessional Series by Butterworth-Heinemann. E-mail:[email protected]
James McKeen
James McKeen is the Founding Director of the Queen’s Centre forKnowledge-Based Enterprises, a research think-tank for theknowledge economy, and a Professor of Management Inform-ation Systems at Queen’s School of Business. He is a recognizedauthority on IT strategy, and is among the premier researchersand educators in the field. Along with Heather Smith, Dr McKeen
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About the authors
facilitates the networking of senior executives through three well-known industry conferences, the Queen’s IT ManagementForum, the Queen’s CIO Brief and the Queen’s KM Forum. Healso has extensive international experience, having taught atuniversities in the UK, France and the USA Dr McKeen’s book(co-authored with Heather Smith) titled Management Challengesin IS: Successful Strategies and Appropriate Action was awarded theBook of the Month five-star rating by the Computer Bulletin(October 1997). His research has been published in a variety ofjournals, including MIS Quarterly, Journal of ManagementInformation Systems, Journal of Information Technology Management,Canadian Journal of Administrative Sciences, Data Base, InternationalJournal of Management Reviews, Information and Management, andJournal of Systems and Software. He received his PhD in BusinessAdministration from the University of Minnesota.
Menno Nijland
Menno Nijland is a doctoral candidate at the London School ofEconomics, UK currently researching the adoption of IS evalua-tion practices into organizations. Previous research has focusedon life-cycle evaluation of IT investments at Delft University ofTechnology, The Netherlands, where he was awarded best grad-uate student Informatics in 2000. Apart from his research he isconsultant at the Dutch company M&I/Partners and advisesorganizations on IT evaluation and related issues.
Keith Patching
Keith Patching uses his background in psychology and socialanthropology to understand how people learn and what makesone manager different from another. He specializes in manage-ment development through writing, teaching and one-to-onecoaching and counselling, developing strategies that are gearedto the psyche and style of each individual. Having been themanager of ICL’s management centre, he has significant experi-ence of the particular problems and issues facing IT people.
René Pellissier
René Pellissier holds a Masters Degree in MathematicalStatistics, and an MBA and a PhD in Industrial Systems. She is
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About the authors
Professor in Information Technology at the Graduate School ofBusiness Leadership of the University of South Africa, afterhaving taught Mathematical Statistics and Re-engineering.Following on her strong views on the redesign of Statistics, sheauthored The Little Book of Statistics for Busy Business People andrecently finished In Search of the Quantum Organization: The ITCircle of Excellence, based on her research of IT related issues. Shehas published numerous articles on the subject and is currentlyeditor of the Southern African Business Review.
René enjoys playing classical piano, reading, all things relatingto new technologies and everything involving her great passion,seashores of Africa. E-mail: [email protected]
Dan Remenyi
Dan Remenyi is a Visiting Professor in Information SystemsManagement at Trinity College Dublin, and an associatedmember of faculty at Henley Management College in the UK.He is also a management consultant working worldwide. Hehas spent more than 25 years working in the field of corporatecomputers and information systems. He has worked with com-puters as an IS professional, business consultant and as a user.In all these capacities he has been primarily concerned withbenefit realization and obtaining the maximum value for moneyfrom the organization’s information systems investment andeffort. In recent years he has specialized in the area of the for-mulation and the implementation of strategic informationsystems and how to evaluate the performance of these and othersystems. He has also worked extensively in the field of informa-tion systems project management specializing in the area ofproject risk identification and management. He has written anumber of books and papers on a variety of aspects of the fieldof IT management and regularly conducts courses and seminarsas well as working as a consultant in this area.
Dan Remenyi holds a BSocSc, an MBA and a PhD.
Theo J.W. Renkema
Theo J.W. Renkema works for the Rabobank Group in theNetherlands, as a manager and senior advisor to the board for IT
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About the authors
governance and business performance. Also, he is an affiliatedresearch fellow in the Department of Technology Management ofEindhoven University of Technology (NL). After positions as amanagement researcher, he previously worked for Aegon insur-ance to improve management control of IT investments and wasa management consultant for business management IT support inthe corporate centre of Philips Electronics. As well as gaining a‘cum laude’ masters degree in Business Economics, TheoRenkema has a PhD in Industrial Engineering and ManagementScience. Dr Renkema is an established authority in IT economicsand control and has ample experience in IT governance and valuemangement. He has written several books, numerous articles andregularly runs executive courses in IT economics and control. Hislatest book is The IT Value Quest published by John Wiley & Sons.E-mail: [email protected].
Heather Smith
Heather Smith is a specialist in the field of IT management issuesand holds a Masters Degree in the impact of IT on organizations.A former senior IT manager, for the past 15 years she has workedwith organizations across North America to identify and docu-ment leading-edge practices and to bring the best of academicresearch to practising IT managers. Heather is a founder and co-facilitator (with Dr J. McKeen) of the Queen’s IT ManagementForum, the CIO Brief, and the Knowledge Management Forum,which facilitate interorganizational learning among senior execu-tives, and co-author of the highly acclaimed ManagementChallenges in IS: Successful Strategies and Appropriate Action. Inaddition, she is a Research Associate of the American Society forInformation Management’s Advanced Practices Council andChair of the IT Excellence Awards University Advisory Council.Her research has been published in a variety of journals includ-ing Journal of Information Technology Management, Database, CIOCanada, and Lac Carling Governments Review.
Heather collaborates extensively on research projects with anumber of top international researchers in IT managementissues. At present, she is writing a book on virtual organizingwith the Ecole des Hautes Etudes Commerçiales, completingresearch on transformational IT projects in the Ontario PublicService and collaborating on an international research project onnew organizational models with Boston University.
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About the authors
Han van der Zee
Professor dr. ing. Han T. M. van der Zee is director of the NolanNorton Institute, an international research arm of KPMG/Nolan, Norton & Co. Management Consultants in De Meern,The Netherlands. He is in charge of thought leadership andinnovation of consulting approaches for business strategy, orga-nizational development, and IT strategy and management. He isalso a professor at the Dutch Tilburg University, where heteaches and researches on the impact of information technologyon businesses and business transformation. Prior to rejoiningKPMG/Nolan, Norton & Co. in November 1996, he has beenmanaging consultant for Nolan, Norton & Co. from 1986 to1991. He also worked for Arthur D. Little and the Index Groupin senior consulting positions. Prior to that he worked in mana-gerial IT positions for multinational companies.
He is the author of several articles and books, and speaks regu-larly at public conferences on this subject. He has universitydegrees in Computer Science and Business Administration, andobtained a doctor’s degree on ‘Measuring the value of IT’ fromthe economic faculty of the Tilburg University.
Matthew Warren
Dr Matthew Warren is a Senior Information Systems Lecturer inthe Department of Computing and Mathematics, DeakinUniversity, Victoria, Australia. He specializes in computer secu-rity and information warfare. He is a member of the AustralianStandards Committee IT/12/4 Security Techniques and is theAustralian Representative on IFIP 11 WG 11 – SecurityManagement. E-mail: [email protected]
Terry White
Terry White is a business consultant specializing in businessstrategy, IT management, knowledge management and changemanagement in large corporate organizations. He has writtenextensively for numerous newspapers and magazines. He hasrecently completed his new book entitled Reinventing the ITDepartment in which he proposes that management methods inIT have been left behind by advances in both businessand tech-
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About the authors
nology, and offers radical new ways of viewing the managementof IT. The book has been published by Butterworth-Heinneman.
Leslie Willcocks
Leslie Willcocks PhD has an international reputation for his workon e-business, information management, IT evaluation and infor-mation systems outsourcing. He is Andersen Professor ofInformation Management and E-business at Warwick BusinessSchool, UK. He is also Associate Fellow at Templeton College,Oxford, Visiting Professor in Information Systems at ErasmusUniversity, Rotterdam, Professorial Associate at the University ofMelbourne, and Distinguished Visitor at the Australian GraduateSchool of Management. He holds a doctorate in informationsystems from the University of Cambridge, and has been for thelast 12 years Editor-in-Chief of the Journal of InformationTechnology.
He worked for 12 years in accounting and management consul-tancy, for Touche Ross and several smaller firms, before headinga Research Centre at City University Business School, London.He moved to Oxford University in 1992 where he was for 9 yearsFellow and University Reader at Templeton College. He is co-author of 19 books, including Global IT Outsourcing: In Search ofBusiness Advantage (Wiley, 1998), Moving to E-Business (RandomHouse, 2001), Building the E-Business Infrastructure (BusinessIntelligence, 2001), Managing IT as a Strategic Resource (McGrawHill, 1997), Beyond The IT Productivity Paradox (Wiley, 1999) andInvesting in Information Systems (Chapman and Hall, 1996). Hehas published over 130 papers in journals such as HarvardBusiness Review, Sloan Management Review, MIS Quarterly, Journalof Management Studies, Communications of The ACM and Journal ofStrategic Information Systems.
Brent Work
Brent Work is a consultant, educator, and writer. His major inter-est is in improving information systems practice. He has con-ducted research, developed educational programmes, andmanaged major projects in this area for a number of internationalcorporations and national governments.
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About the authors
Preface
The Make or Break Issues in IT Management is a collection of papers which focuson a number of really important issues of which IT professionals need to beaware.
The issues are wide ranging and include subjects such as the career of the CIOas well as strategic IT decision making and IT evaluation to name only a fewtopics. Furthermore the book also covers a number of e-business topics as wellas addressing the subject of information warfare and security. In all, 15 dis-tinctly different subjects are addressed.
In choosing these subjects we have sought to include not only currentlypopuilar topics, but also important longer term challenges which every IT pro-fessional will face at some stage during his or her career. This is a referencebook for IT professionals that we hope will be of use for some time in thefuture.
The Make or Break Issues in IT Management draws on research conducted atleading universities and business schools in the United Kingdom, France, TheNetherlands, Ireland, Canada, Australia and South Africa.
We hope that you will find this book both interesting and useful.
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1.1 Introduction
IS/IT management theory and practice has been dominated by‘fashion’ for more than 20 years. In this chapter we explore boththe myth and the reality behind some of these fads and fashions.The more recent fashions of electronic commerce, enterpriseresource planning systems, business process re-engineering andoutsourcing follow those of strategic IS and expert systems of adecade or two before.
The purpose of this chapter is not to suggest that such con-tributions are worthless. On the contrary, in almost all casesthey have often made many a positive impact on organiza-tions. However, perhaps more frequently, they have been seento be largely a failure. It is little consolation for those peoplemade redundant or suffering severe stress following the imple-mentation of business process re-engineering, to quote oneexample, to hear its protagonists admit failure in over 80 percent of cases and suggest it was a mistake that ‘we forgot thepeople’.
The purpose of this chapter is to show that such one-dimensional views of IS and IT can never be ‘the’ answer.Readers may comment that such an observation is obvious,which it is indeed to the author, and has been said before, whichit has many times. Yet so often consultants offer such ‘solutions
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1 A word of cautionExploring fashions in IS/IT management
David Avison
ESSEC Business School, Paris, France
to all your problems’ and will continue to do so because, worsestill, decision makers buy into them wholly and absolutely.
Equally damaging are the one-dimensional case studies used inteaching some IS management programmes. To refer to oneexample, having a ‘champion’ from management lead technicalchange is indeed an advantage, but it cannot be the sole criterionon which IS success or failure hinges. In this chapter, the exem-plars of successful IT and good practice, as well as the one-dimensional ‘solutions’, are questioned.
Here, a more balanced view is offered, one that suggests thatthese movements can be a positive influence. But IS manage-ment practice will only be improved if these theories are fol-lowed appropriately, that is, contingent on the particular peopleand culture of the organization, amongst many other factors. Weneed to learn lessons from previous experience and incorporatenew ideas appropriately.
Suggestions are made in the chapter relating to a more balancedview of IS/IT ‘progress’. In particular, we look at organizationallearning, incremental change and contingency. We also suggesttaking up fashions after they have become fashionable, whenthey have been fully tested elsewhere and their appropriatenessfor your organization assessed fully. Whilst less spectacular thanthe ‘hype’ associated with ‘this year’s answer to all IT problems’,it is this author’s view that a more cautious approach is likely tolead to more successful use of IT in organizations in the long run.
1.2 Strategic information systems
We will first explore strategic information systems. These arepotentially vital to top managers because they support theirmain task, that is, strategic decision making. Informationsystems people have long suggested that they can be valuable toorganizations. They are different from the traditional data pro-cessing systems such as sales orders processing, payroll and thelike (now called transaction processing systems). But over theyears systems ‘providing support for management decisionmaking’ have been referred to as management informationsystems, decision support systems, executive informationsystems and strategic information systems, amongst others.Although each term may differ in subtleties, for example in theclaims made as regards ‘automating the decision-making
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The Make or Break Issues in IT Management
process’, ‘appropriateness for direct use by managers’ or‘mining external and internal databases’, and in their sophisti-cation, for example use of graphics, they are very similar in theirgoals and largely in their practice. They all aim to provide infor-mation understandable and relevant to their users, in appropri-ate levels of detail and accuracy, and in a timely manner. Whatwill be the next term for very similar systems? Managers shouldbeware, therefore, that ‘new’ ideas are not very similar to old ideas withnew names.
There is a widespread belief about the success of strategic infor-mation systems. The often-quoted strategic information systemsare given in Figure 1.1. These are described in detail in Avison etal. (1996). This research suggests that the conventional exemplarsof IT success may not be entirely valid.
Figure 1.1 Cases cited as strategic information systems exemplars (Avison et al., 1996)
Let us consider these exemplars. They are all US cases, mostanalysed in the first few months following implementation,much to do with one-off circumstances that are difficult to gen-eralize and based on anecdotal evidence. This ‘cynical’ view issupported by Senn (1992) in his aptly-named paper ‘The Mythsof Strategic Systems’. Thus, in the case of the Federal Expresssystem, which enables customers to track their parcel, the first-mover lead gave only short-term competitive advantage.
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A word of caution: Exploring fashions in IS/IT management
Sector/Company System Type
AirlinesAmerican Airlines SABRE Reservation/bookingUnited Airlines Apollo Reservation/booking
DistributionBaxters (AHS) ASAP Order/stock controlFederal Express COSMOS Consignment/routingMcKesson Economost Order/stock control
Financial ServicesCiticorp GTN Global tradingMerril Lynch CMA Integrated cash
accountingPhiladelphia National Bank MAC ATM network
Another interesting observation about these cases is that mostwere not set up as strategic information systems but are referredto as strategic information systems because their implementa-tion led to unexpected strategic benefits. SABRE, the airlineticket reservation system, was conceived as an internal data pro-cessing system, but turned out to be ‘strategic’ with the benefitof hindsight. Citicorp was the first to implement automatictelling machines, yet they were originally installed to automatesmall and low-turnover branches, so as to make them profitable.They were not originally installed to gain competitive advan-tage. They proved to give Citicorp competitive advantage, butthis was an unexpected benefit. These classic cases proved‘strategic’ in that they might have been successful, important orpervasive, not that they necessarily provided direct help tostrategic management.
In the literature and on courses, these classic cases are used todraw lessons about strategic information systems, for example:
Be the first mover to gain competitive advantageCreate new entry barriers.
Further studies, for example the Harvard cases, such as OtisLifts, draw other lessons, such as the importance of identifying a‘champion’ to see the project through or identifying the ‘criticalsuccess factors’ when putting a project proposal together. Suchone-dimensional cases suggest that computer applications canbe a guaranteed success simply by following a simple edict.Such a view is simplistic and a myth: a one-dimensional view ofsuccess or failure can never be wholly truthful and following them willnot necessarily lead to success. Of course cases can help bring apractical and tangible element to discussions, but they can onlybe part of the truth and are often overstressed in both the litera-ture and in courses.
Further, it does not take much analysis to see that there are con-tradictions, for example one case’s lesson that ‘you must be atthe leading edge’ contradicts another one that argues that ‘youmust sit back, observe and learn from your competitor at thebleeding edge’! Indeed, Ciborra (1994) argues that success ismore to do with ‘chance’ and ‘serendipity’ than any of these‘essentials’ discussed in case studies. The advice must be to takein all these lessons and then see what is most appropriate foryour organization.
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The Make or Break Issues in IT Management
1.3 Business process re-engineering
The more recent ‘hype’ surrounding business process re-engi-neering has been even more pronounced than that for strategicinformation systems. Claims have been made that businessprocess re-engineering provides the ‘silver bullet’ to IT. Havingsaid this, as we shall see, BPR is one of only several such ‘cure-alls’ that have been suggested. In the case of BPR, advocateshave argued that organizations have been sleepy, do not react toa changing environment, and are too concerned to ensurechange is gradual. It represents:
dramatic improvements in critical, contemporary measuresof performance, such as cost, quality, service, and speed.
(Hammer and Champy, 1993)
Re-engineering determines what an organization should do,how it should do it, and what its concerns should be, as opposedto what they currently are. Emphasis is placed on the businessprocesses (and therefore information systems that reflect themand enable the change), but it also encompasses managerialbehaviour, work patterns, values, beliefs, measurement systemsand organizational structure. The role of information systemsand information technology is particularly interesting in thecase of BPR. It is seen as an enabler of change, supporting therunning of the new processes that replace the old ones.
As Jones (1994) points out, Hammer and Champy use rhetoricto ‘sell’ business process re-engineering. Thus they say ‘don’tautomate, obliterate’, ‘sweep away job definitions’, ‘break awayfrom outmoded thinking’, ‘conventional change is as effective asre-arranging the deck chairs on the Titanic’, ‘it is not aboutfixing things but starting again’ and business process re-engi-neering is the solution to the ‘bloated, clumsy, rigid, sluggish,non-competitive and uncreative organization’. Even if the hard-ened professionals do not mind the violent, masculine anduncaring imagery, it is surprising that organizations went alongwith this wholeheartedly and ‘threw away the baby with thebathwater’.
Interestingly, the 1990s movement in BPR is neither totally new(BBC, 2000 showed cases at British Petroleum, Shell, Unilever,Cadbury, ITT and the BBC itself, which could be described asBPR in the 1970s and 1980s) and Grint et al. (1996) further
5
A word of caution: Exploring fashions in IS/IT management
suggest that claims of radicalism and novelty have been exag-gerated in 1990s BPR.
Now this ‘cure for all known organizational diseases’ becomes ‘adisastrous policy’ and even the original advocates are apologiz-ing. This total change is almost equally inappropriate. It isindeed useful and important to take a fundamental look at theway organizations work and adapt to the changing environ-ment. However, organizations are for people. A lack of consider-ation for people factors, be it employees, customers or the publicat large, cannot be for the long-term benefit of organizations. Thestress suffered by those employed undertaking BPR, to take oneexample, can be enormous. Ethical values should not be ignoredin any change. Taking only a selfish view, it is often the mostimportant employees (the ones that can get jobs elsewhere) thatleave in such circumstances. Of course, consideration of businessprocesses is vital, but any one solution cannot be ‘the answer’:there is never one IT strategy that should be followed totally andabsolutely. It is vital for managers not to take a one-dimensionalview of decision making.
1.4 Outsourcing
The outsourcing of IT activities and services is increasinglybeing considered as a legitimate option in managing and organ-izing IT in many organizations. The motivation is, in the main,efficiency gains, and it is often associated with two other‘mantras’ – downsizing and sticking to core competences. Inother words, it is argued that IT will be cheaper if carried out atan external commercial company than in house.
Some organizations simply require any new work to be givenout to tender (including an in-house quotation that, it is hoped,might lead to in-house ‘commercial realism’); others havemoved all their IT activities to an external company (and thereare many solutions within these extremes). Willcocks et al. (1996)suggest that 7 per cent of UK organizations outsource more than80 per cent of IT and this figure is growing. Another ‘silverbullet’ is taken up as organizations see only the short-term costimplications.
What, then, are the downsides? Ignoring the unusual cases, suchas American Airlines, where the information system (in this caseSABRE) became a core competence, first and foremost, the
6
The Make or Break Issues in IT Management
organization is in danger of losing control of their information,a major organizational resource. It is surely essential that organi-zations retain ownership and exercise control of their key information.Further, keeping critical tasks internal is at least ‘desirable’. Inany case, Willcocks et al. (1996) found that organizations in theirstudy failed to keep track of benefits – 33 per cent of organiza-tions did not know if any cost savings were being accruedthrough outsourcing. This indicates a loss of control.
But there are other, long-term effects for the organization. Theexperience of developing and running systems is being lost forthe future. The outsourcing supplier’s expertise and learningare increasing, not yours, with the result that the organization isincreasingly dependent on the supplier. There is a danger thatthe organization fails to manage the supplier sufficiently well(the residual IT group might reduce further, as their moraleworsens) with the potential result that service levels decrease.Further, the supplier will be less concerned about your issues,such as strategic alignment of your IS/IT with the organiza-tion’s overall strategy.
Of course, there may well be financial and other advantages inoutsourcing some activities. An obvious example is companiesoutsourcing the development of their websites. In this case, themotivation is often gaining outside expertise and speed ofimplementing sites (see Plant and Willcocks, 2000). But, as withbusiness process re-engineering, emphasis on critical successfactors, the role of a champion in successful information systemsdevelopment and so on, we should not get carried away withthe euphoria and each should be only a contributor in a holisticview of IT strategy (or anything else). This reinforces our viewthat success or failure is a complex issue and following a sim-plistic, one-dimensional, approach is doomed to failure.
1.5 Enterprise resource planning systems
Enterprise resource planning systems, including SAP, Oracle, JDEdwards, Baan and PeopleSoft, support the integration of ITsystems within organizations. In the extreme, they includestrategic planning, sales and distribution, marketing, financialcontrols, supply management, materials management, work-flow and human resource management; indeed, all the businessprocesses and functions of the organization. The ‘sales pitch’ isobvious – there is support for every aspect of the business, each
7
A word of caution: Exploring fashions in IS/IT management
system is seen as the ‘best of breed’, top management can see theimplications of one part of the business on others, ‘discipline’can be imposed on the workforce as all activities can be costedand controlled. The market leader SAP has around 40 per cent ofthe overall market, over 15 000 installed sites worldwide andover US$6 billion in development. The temptation to join thisbandwagon has been difficult to resist. It is even possible to havesuch software configured for certain sectors, including universi-ties, banks, airlines and retail. Along with the software itself,there is a huge business in training and consulting. Even so,Caldwell (1998) suggests that not using an expert in ERP is onekey to a successful project!
However, many organizations have found that it is not thatsimple. The long implementation time span, the huge invest-ment, the impact of everything changing at the same time, thehuge software burden that requires processes to change to fit thesoftware (that is, minimal customization or ‘vanilla ERP’) andthe sheer direct and indirect costs are just some of the complaintsoffsetting some of the claims. Implementation of ERP systemshave often coincided with downsizing (in all but ERP expertise)as companies try to alleviate costs, and middle management inparticular suffers. As Truex (2001) has shown in his case studiesof ERP failure, the ensuing low morale does not help and, worse,there is often an absence of a retreat strategy.
Of course, we have painted a very negative picture here, but onewhich only counter-balances the claims made earlier. ERP is nodifferent: it can make a useful contribution to organizations butit should be adopted appropriately and with care.
1.6 Knowledge management
As information is increasingly being seen as a common resource,more easily obtainable from databases, data warehouses and thelike, much interest has turned to knowledge management.Knowledge is difficult to define, but it can be seen as informationplus intelligence, leading to new capabilities and providingextra value to information. It is often associated with organiza-tional learning, as the core capabilities, work practices and expe-riences are shared. From an organizational point of view, makingcapabilities rare, valuable and difficult to imitate potentiallygains sustainable competitive advantage. Knowledge manage-ment systems aim to help achieve this so that best practice is
8
The Make or Break Issues in IT Management
shared (even tacit knowledge, which is difficult to describe)amongst different applications and various types of users.
However, again claims are made that are difficult to substanti-ate. People see the value of ‘their’ knowledge as their intellec-tual capital and resist sharing it. It is difficult to create acollaborative culture if, for example, the organization is bureau-cratic. After all, to change a proverb, knowledge is power andsharing dilutes power. It is therefore important that rewardsresult from such sharing so that organizations can fully leveragetheir intellectual assets.
1.7 A strategy to develop IT applications
We now turn to information systems development methodolo-gies, that is, a strategy to develop IT applications. As Avison andFitzgerald (1995) point out, there are a wide range ofapproaches:
Systems approaches, such as soft systems methodology(Checkland and Scholes, 1990)Planning approaches, such as business systems planning(IBM, 1975)Object-oriented approaches, such as object-oriented analysis(Coad and Yourdon, 1991)Participative approaches, such as ETHICS (Mumford, 1995)Prototyping approaches, such as rapid application develop-ment (Martin, 1991)Process approaches, such as structured systems analysis anddesign (Yourdon, 1993)Data approaches, such as Information Engineering (Martin,1989).
Criticisms can be made of all of these approaches. For example,data analysis may merely model existing problems, processapproaches are reductionist and simplistic in the way they struc-ture problems, participation can be inefficient, soft systemsapproaches slow down the development process, proto-typing limits user choice and object-orientation is yet another‘panacea’ that does not add to data modelling in any fundamen-tal way and so on. We may agree with these criticisms or not or,more likely, see them as partly justified. But one thing is clear,one approach will not be appropriate for all situations. Again, we
9
A word of caution: Exploring fashions in IS/IT management
are sold ‘the answer’, and this give rise to another myth, but thereis never one clear strategy for developing information systems.
One observation about these approaches is that they are notslight variations of a theme. They are indeed fundamentally dif-ferent in philosophy, models, scope, techniques and tools used,user base and so on. In offering their Multiview approach,Avison and Wood-Harper (1990) argue that there is much tocommend a blended approach where tools and techniques areused (or not) contingent on the particular application situation.One expression of the approach is seen in Figure 1.2, and eachgeneral stage addresses the fundamental questions that theyargue should be addressed in any information systems develop-ment approach. However, one criticism of the approach is that itsuggests that information systems development continues in aseries of stages with steps within these, but this is not based onmost people’s experience. This gives rise to another myth: infor-mation systems development does not proceed in a stepwise fashion.
Figure 1.2 Multiview: a contingency view of information systems development
A more recent view expressed by the authors (Avison et al.,1998), where the aspects of information systems developmentare emphasized and de-emphasized and re-emphasized later asthe information systems project develops, is expressed in Figure1.3. Here, information systems development is seen as beingsocially constructed and that it is more an ‘exploration’ in infor-mation systems development for a particular organization thanthe application of a methodology as such.
10
The Make or Break Issues in IT Management
5Technical
3 Socio-technical
4Human computerinterface
2 Information1 Human-activity
Q1 – How is the information systemsupposed to further the aims of theorganization using it?
Q2 – How can it be fitted into theworking lives of the people in theorganization using it?
Q3 – How can the individualsconcerned best relate to the computerin terms of operating it and using theoutput from it?
Q4 – What information processingfunction is the system to perform?
Q5 – What is the technical specificationof a system that will come close enoughto meeting the identified requirements
–
Figure 1.3 The Multiview2 framework
1.8 Success and failure
Over-reliance on any information systems developmentmethodology adhered to rigidly may be one reason forinformation systems failure, and well-known IT failures,such as London Ambulance, the Taurus system for the LondonStock Exchange, the RISP system for Wessex Health Authorityand the New Zealand Teachers Payroll system (Myers, 1994)suggest that failure may be due to a number of reasons, such asan overemphasis on keeping costs to a minimum, poor planningand control, not taking account of the views of the stakeholdersor the ‘politics’ of the situation. The New Zealand study is par-ticularly interesting because all the quoted reasons for failureseem to have been taken into account. The main reason forfailure seems to have been a protest by the teachers aboutgeneral government policies. In none of the more recent caseswas failure associated with the technology. Although failure isoften ‘thought’ to be caused by technological failure of somesort, IT failure is usually due to organizational and peoplefactors, not the technology.
Indeed, a study by Parr et al. (1999) suggested that IT failure canbe due to numerous factors and is normally due to a combina-tion of factors. They list the following as important critical
11
A word of caution: Exploring fashions in IS/IT management
Organizationalanalysis
Informationmodelling
Socio-technicalanalysis and design
Technical designand construction
Informationsystems
development
success factors for IT projects:
Availability of skilled staffChampion supporting the systemManagement supportUser satisfactionUser participationProject managementUnderstanding of corporate cultureProcess change completion firstCommunicationMulti-skilled project managerBalanced teamMethodologyAppropriate trainingCommitment to changeMinimal customizationProject team empowermentUse of modelling tools.
It is noticeable that technology is rarely a major factor. Bicknell(1996) suggested that 250 000 development projects in large UScompanies were cancelled outright in 1995. ‘Bad management,carelessness and office politics’ get much of the blame. In otherwords, contingency factors related to the cultural, organizational andpeople aspects of information systems are much more important andfundamental than technological ones. Successful IT does not need tobe at the leading edge nor necessarily related to any IT/ISfashion.
1.9 The role of the consultant
Dangerous Company is the title of a series of books (O’Shea andMadigan, 1998, 1999) and a series of three BBC films (2000),which explore the potential impacts of consultants. There are anumber of companies examined over the last 20 or so years. Asthese companies bureaucratized, upsized, re-engineered, diver-sified, returned to core business, downsized, deskilled, empow-ered, and the rest, it is the thesis of these authors that theconsultant was not far away, and their effects on the companieswere rarely very positive.
The change brought about through the influence of consultants‘to remain competitive’ can have major repercussions to the
12
The Make or Break Issues in IT Management
culture of the organization. This may well lead to unexpectedconsequences, not least human resistance, which can result inultimate failure. It is no coincidence that one mantra often leadsto another, which is exactly the opposite, as there is an attemptto counteract failure of the first. Thus the move to bureaucraciesled to the opposite move to flattened management; upsizingwas followed by downsizing; the move to diversification wasreplaced by one to ‘stick to your core business’; the lack of con-sideration for employees is replaced by a charm offensive andthe mantra of empowerment (if only the words were reflected indeeds!). Management theories have been taken to extremes andimplemented without due care or consideration for people whoare literally and metaphorically the lifeblood of the organiza-tion.
However, consultants can support an organization, indeed helpto turn it round. The key is to use consultants (and their latestmantras) with care. O’Shea and Madigan suggest that success-ful use of consultants is helped by well-defined goals, demand-specific rather than open-ended contracts, and retention ofcontrol and monitoring. Further, good change management prac-tices are essential for change to be successful.
1.10 Conclusions
In this chapter, it is suggested that there are a number of mythsassociated with IT. It is widely believed or assumed from man-agement actions that:
The conventional exemplars of IT success are validA one-dimensional view of success or failure is truthful There is one IT strategy to go forThere is one clear strategy for developing informationsystemsInformation systems failure is due to technology.
It has been argued that these are fallacious and in general there areno ‘quick fixes’, and there has been far too much overselling. Onthe contrary, IT success is much more likely from a balanced viewand a holistic approach taking in many aspects. We picked outstrategic information systems, business process re-engineering,enterprise resource planning systems, outsourcing, knowledgemanagement and information systems development, but we
13
A word of caution: Exploring fashions in IS/IT management
could have equally chosen many other fashions and, especially,electronic commerce. We have avoided the latter because at thetime of writing there is so much evidence to support the thesisof this chapter that it is hardly necessary to refer to this topic.Further, we do not need to ‘obliterate’ when we effect change, asincremental change can also lead to radical improvements.Situations differ, and following a contingent view, that is, oneinterpreted and honed especially for a particular organization’sculture, can be more fruitful than following a prescriptiveapproach.
We should learn from our experiences and mistakes and developa tradition for the learning culture in organizations.Outsourcing, ERP and downsizing each tend to reduce organi-zational memory. Knowledge management aims to increase it.One of the above fashions, business process re-engineering, isdesigned to obliterate organizational memory, and might there-fore be seen as potentially the most damaging of all fashions.
Managers may think about the ‘fashion cycle’ in IT:
1. Each fashion is taken up enthusiastically2. Many are disappointed, and enthusiasm turns to cynicism3. Some long-term successes are reported and others take up the
mantle cautiously and appropriately for their organization.
It may well be appropriate to wait and decide whether to take upthe challenge in the third period of this cycle. Yet how manyorganizations will take up the next fad enthusiastically andforget about the lessons from the past?
References
Avison, D. E. and Fitzgerald, G. (1995) Information SystemsDevelopment: Methodologies, Techniques and Tools. 2nd edn,McGraw-Hill, Maidenhead.
Avison, D. E. and Wood-Harper, A. T. (1990) Multiview: AnExploration in Information Systems Development. McGraw-Hill,Maidenhead.
Avison, D. E., Eardley, A. and Powell, P. (1996) How Strategic areStrategic Information Systems? Australian Journal ofInformation Systems, 4, 1.
Avison, D. E., Wood-Harper, A. T., Vidgen, R. T. and Wood, J. R. G.(1988) A Further Exploration into Information Systems
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The Make or Break Issues in IT Management
Development: the Evolution of Multiview2. IT and People, 11,2, pp. 124–139.
BBC (2000) Dangerous Company, Horizon, Broadcast 22/3/00,29/3/00 and 5/4/00.
Bicknell, D. (1996) Managers Blamed for Record Project Failures.Computer Weekly, 18 January 1996.
Caldwell, B. (1998) GTE Goes Solo on SAP R/3. InformationWeek, 8 June.
Checkland, P. and Scholes J. (1990) Soft Systems Methodology inAction. Wiley, Chichester.
Ciborra, C. (1994) The Grass Roots of IT and Strategy. In:Ciborra, C. and Jelassi, T. Strategic Information Systems: AEuropean Perspective. Wiley, Chichester.
Coad, P. and Yourdon, E. (1991) Object Oriented Analysis. 2ndedn, Prentice Hall, Englewood Cliffs, New Jersey.
Grint, K., Case, P. and Willcocks, L. (1996) Business ProcessEngineering Reappraised. In: Orlikowski, W., Walsham, G.,Jones, M. and DeGross, J. J. Information Technology and Changesin Organizational Work. Chapman and Hall, London.
Hammer, M. and Champy, J. (1993) Reengineering the Corporation:A Manifesto for Business Revolution. Harper Business, NewYork.
IBM (1975) Business Systems Planning. In: Cougar, J. D., Colter,M. A. and Knapp, R. W. (1982) Advanced Systems Development/Feasibility Techniques. Wiley, New York.
Jones, M. (1994) Don’t Emancipate, Exaggerate: Rhetoric,Reality and Reengineering. In: Baskerville, R., Smithson, S.,Ngwenyama, O. and DeGross, J. I. Transforming Organisationswith Information Technology. North-Holland, Amsterdam.
Martin, J. (1989) Information Engineering. Prentice-Hall,Englewood Cliffs, New Jersey.
Martin, J. (1991) Rapid Application Development. Prentice-Hall,Englewood Cliffs, New Jersey.
Mumford, E. (1995) Effective Requirements Analysis and SystemsDesign: The ETHICS Method. Macmillan, Basingstoke.
Myers, M. D. (1994) A Disaster for Everyone to See: AnInterpretive Analysis of a Failed IS Project. Accounting,Management and Information Technology, 4, 4.
O’Shea, J. and Madigan, C. (1998) Dangerous Company: Manage-ment Consultants and the Businesses they Save and Ruin. Penguin.
O’Shea, J. and Madigan, C. (1999) Dangerous Company: theConsulting Powerhouses and the Businesses they Save and Ruin.Penguin.
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A word of caution: Exploring fashions in IS/IT management
Parr, A. N., Shanks, G. and Darke, P. (1999) Identification of Necessary Factors for Successful Implementation of ERPSystems. In: Ngwenyama, O., Introna, L. D., Myers, M. D. andDegross, J. I. New Information Technologies in OrganizationalProcesses. Kluwer, Boston.
Plant, R. and Willcocks, L. P (2000) Sourcing InternetDevelopment. In: Willcocks, L. and Sauer, C. Moving to EBusiness. Random House, London.
Senn, J. A. (1992) The Myths of Strategic Information Systems:What Defines Competitive Advantage? Information SystemsManagement, 9, 3.
Truex, D. (2001) ERP Systems as Facilitating and ConfoundingFactors in Corporate Mergers: the Case of Two CanadianTelecommunications Companies. Systemes d’Information etManagement, 2, 5.
Willcocks, L., Fitzgerald, G. and Lacity, M. (1996) To OutsourceIT or Not?: Recent Research on Economics and EvaluationPractice. European Journal of Information Systems, 5, 3.
Yourdon Inc. (1993) Yourdon Systems Method: Model-DrivenSystems Development. Yourdon Press, Englewood Cliffs, NewJersey.
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The Make or Break Issues in IT Management
2.1 Introduction
In the early 1990s, many company boards and governmentdepartments worldwide increasingly asked: ‘Why not out-source IT?’ Much of this was a questioning of escalating IT costsand a reaction to increased competitive and recessionary pres-sures. Vendors were seen as being able to provide the same orsuperior service cheaper, offer access to technical expertise inshort supply, change fixed to variable costs, and/or throughheadcount reduction and purchase of IT assets, improve thefinancial position of a client organization. IT outsourcing hasalso been portrayed as an opportunity to apply a core–periperymodel to managing and organizing. On this argument, anorganization should focus on its key tasks and capabilities, andoutsource the rest to world class providers. On this analysis, allIT is sometimes mistakenly characterized as an undifferentiated,albeit occasionally ‘strategic’, commodity that can largely beoutsourced. This can be a particularly damaging assumption aswe move into outsourcing e-business components and infra-structure, which by definition should be closely connected to thebusiness.
A further reason for outsourcing IT is all too familiar. Faced withrising IT costs and little demonstrable business value, seniormanagers have often given up on the internal IT function, andcontracted out to third party management some or most IT
17
2 Outsourcing IT and e-business
Leslie Willcocks
Warwick Business School, University of Warwick, United Kingdom
assets and activities. Finally, we are finding in most recent workinto the IT needs for e-business that speed and access to scarceIT skills are becoming much more important influences on ITsourcing decisions generally, and not just for e-business activi-ties. This chapter draws upon leading research into outsourcingto answer key questions.1 How has all this turned out? Whatpractices have actually been adopted, and with what results?Are there proven, sound practices in IT outsourcing, and whatare the prospects and principles for outsourcing in the e-world?
2.2 Overview of developments
IT outsourcing has outlived the 5-year period typical of a man-agement fad. Global market revenues have grown from US$9billion in 1990 to a projected US$150 billion by 2004. The under-lying compound annual growth rate has been 15–20 per cent inthe 1992–2001 period. Despite dips in demand during2000–2001, this buoyancy is likely to be maintained by furtherdevelopments in areas such as e-commerce, applications serviceprovision, business process outsourcing, managed networkservices, and supply chain management.
From an initial main focus on cost reduction, IT outsourcing isfast moving to becoming a complementary or alternative,routine mode of managing IT. On average 30–35 per cent of mostlarge organizations’ IT/e-business budgets will be managed byoutsourcing arrangements by 2003. The question ‘why not out-source IT?’ is no longer, if it ever was, an adequate base fromwhich to make and manage outsourcing decisions. The realquestion now has to be: ‘How do we exploit the ever maturingexternal IT/e-business services market to achieve significantbusiness leverage?’
The high profile mega-deals are often referred to as ‘strategicalliances’ or ‘strategic partnerships’. One could be forgiven forbelieving this type of total outsourcing to be the dominant trend,but globally, this is the reverse of the case. In fact a rich pictureemerges of organizations taking one of three main paths to ITsourcing (see Figure 2.1).
Our recent US and European survey covered IT and e-businesssourcing.2 It found that by far the dominant mode is selectivesourcing, especially in the USA (82 per cent of organizations)and UK (75 per cent). A mixed portfolio, ‘best-source’ approach
18
The Make or Break Issues in IT Management
typically sees 15–25 per cent of the IT budget under third partymanagement, with other IT needs met through buying inresources under in-house management (insourcing), andthrough internal IT staffing. Many organizations (USA 10 percent, UK 23 per cent) have no significant IT outsourcing con-tracts. Here IT is perceived as a core strategic asset; with ITemployees loyal to the business and striving to achieve businessvalue in a way in which external providers are deemed not to beable to do, total outsourcing (80 per cent or more of the ITbudget under third party management of a single or multiplesupplier(s)) is a distinctly minority pursuit. In the USA some 8per cent of organizations take this route, in the UK about 2 percent; worldwide we found there were just over 140 such deals.
Figure 2.1 shows that all arrangements have inherent risks. Amainly in-house function needs to be continually assessedagainst the market if it is not to grow unresponsive and costinefficient. One common underestimated factor is the manage-ment overhead cost of outsourcing IT and e-business. Fromreviewing over 300 case histories we estimate that this is fallingtypically between 4 and 8 per cent of total outsourcing costs,even before the effectiveness of the consequent managementarrangements is assessed.
Total outsourcing deals focusing primarily on cost reduction canachieve these, but often at the expense of IT operational service,
19
Outsourcing IT and e-business
In-housecommitment
Corestrategic asset
IT employeesloyal to the
business
'Value focus'
High costInsular
Unresponsive
Selectivesourcing
Mixedportfolio
Horses forcourses
'Value formoney'
Managementoverhead
Totaloutsourcing
Non-corenecessary cost
Vendor
'Money'
Exploitation bysuppliers
Totaloutsourcing
World classprovision
'Strategicpartner'
'Added value?'
Unbalancedrisk/reward/
innovation
ATTITUDE
PROVIDERS
EMPHASIS
DANGERS
Figure 2.1 IT/e-Business Sourcing: Main Approaches (Source: Feeny, Willcocks, Lacity)
and business strategic inflexibilities – pretty big deficiencieswhere e-technologies are tightly coupled and critical to businesssuccess. Alternatively, incomplete contracts, or negligible profitmargins through overtight contracts can, and have, promotedhidden costs or opportunistic vendor behaviour. Finally, in the1990s ‘strategic partnerships’ were often high risk. Many experi-enced significant restructuring of the deal 18 months to 24months in. Contracts were often found to need more detail, andmore service performance measures. Sometimes the innovationexpected from the vendor is not forthcoming. In others, the risk–reward element is too marginal to the overall deal to affectbehaviours, and a more traditional fee-for-service arrangementbecomes the basis of practice on the ground.
2.3 Using external IT/e-business services: a complextrack record
Too much of the discussion of the IT outsourcing track record isbased on the opinions of interested parties, often arrived atbefore the ink on contracts is dry. Here we present two sourcesof evidence that consider actual practices adopted against out-comes.
Firstly, our 2000 survey found 56 per cent of organizations ratingsupplier performance as ‘good’ or better. Many respondentswere realizing benefits, primarily some mix of cost reduction (52per cent), refocusing of in-house IT staff (45 per cent), improvedIT flexibility (42 per cent), access to scarce IT resources (42 percent), better quality service (41 per cent) and improved use of ITresources (39 per cent). The majority of respondents character-ized problems/issues as ‘minor’, but some customers werehaving severe/difficult problems in some areas. Some qualifica-tions are necessary, however. It is important to recognize thatthese results are positively conditioned by three characteristicsof respondent practice: the vast majority pursue the selective IToutsourcing option; most use multiple suppliers, most have short-term contracts (four years or less in length) and respondents gen-erally targeted infrastructure activities, mainly mainframeoperations, PC support, helpdesk, network management, mid-range operations, disaster recovery. The least commonly out-sourced IT activities involved IT management and applications– in particular IT strategy, procurement, systems architecture,project management.
20
The Make or Break Issues in IT Management
The 79 per cent of organizations using multiple supplierspointed to several main advantages – the use of ‘best of breed’providers, risk mediation, and vendor motivation through com-petition. They also pointed to higher transaction costs, andhidden post-contract management overhead in terms of time,effort and expense. In parallel research we have found much‘disguised’ multi-supplier outsourcing in the form of subcon-tracting. In some large-scale contracts we have found up to30–35 per cent of the work actually subcontracted to other sup-pliers, especially in the areas of technical consulting, desktophardware and installation, e-business development, networkspecialists and software specialists.
There was evidence of lack of contract completeness, with only30 per cent of respondents including all ten major clauses citedby us as vital to any outsourcing contract. There was a notice-able negative gap between anticipated and actual benefits. Inmost cases organizations were getting benefits but invariablyless than they had expected. Only 16 per cent reported signifi-cant cost reduction, while another 37 per cent reported ‘some’cost reduction. Other main benefits, each reported by between33 and 44 per cent of respondents, included: refocus in-houseIT staff, improved IT flexibility, better quality service,improved use of IT resource and access to scarce IT/e-businessskills.
More worryingly, a number of organizations encountered‘severe/difficult’ problems in six areas as a consequence of out-sourcing. These were:
Strategic – supplier does not understand our business (37 percent); corporate strategy and IT no longer aligned (35 percent); poor strategic IT planning (24 per cent)Cost – costs for additional services (38 per cent); cost escala-tion due to loopholes (31 per cent); cost monitoring/control(27 per cent)Managerial – poor supplier staffing (43 per cent); managerialskills shortage (28 per cent); in-house staff resistance (26 percent)Operational – defining service levels (41 per cent); lack of sup-plier responsivenesss (38 per cent); getting suppliers to worktogether (35 per cent)Contractual/Legal – too loose (41 per cent); contract monitoring(41 per cent); inadequate SLAs (35 per cent)
21
Outsourcing IT and e-business
Technical – suppliers’ IT skills shortage (33 per cent); outsourc-ing led to systems duplication (20 per cent); failure to upgradeIT (17 per cent).
These outcomes provide a fairly detailed ‘worry list’ and pre-emptive agenda for action for any senior managers contemplat-ing IT outsourcing.
The second source of evidence is provided by a Lacity andWillcocks study.3 Selective IT outsourcing emerges as the mosteffective practice, closely followed by the in-house route (seeFigure 2.2). Underlining the survey results above, we found suc-cessful selective outsourcers embracing several distinctive prac-tices. They had more limited and realistic expectations, signedshort (2–4 year) contracts for which the business and technicalrequirements remained relatively stable, kept in-house resourceand knowledge to fall back on resulting in less power asymme-try developing in favour of the vendor and lower potentialswitching costs, often leveraged competition through using mul-tiple suppliers, and found ways in the contract to give the sup-plier an incentive and to build in flexibility.
The track record of total in-house IT sourcing has improved fromthat before 1996. At that time, one-third were found to be unsuc-cessful due to an amalgam of in-house complacency, little senseof crisis, lack of external benchmarking and lack of threat froman external vendor outsourcing bid. The evidence suggests thatin-house functions have been actively responding to market-
22
The Make or Break Issues in IT Management
Figure 2.2 IT sourcing decisions and outcomes – 1991-2000 (Lacity and Willcocks, 2001)
DECISION Success Failure Mixed Unable to TOTALdetermine/tooearly to tell
Total 11 10 8 4 33outsourcing (38%) (35%) (27%)
Total in-house 13 4 0 2 9sourcing (76%) (24%) (0%)
Selective 43 11 2 8 64outsourcing (77%) (20%) (3%)
TOTAL 67 25 10 14 116
place developments in the last three years, and have beenseeking to improve IT management, replicate vendor practicesin house, compete with potential vendor bids, and benchmarkperformance against market developments.
Total outsourcing emerges as a distinctly high risk practice, areason why, on our evidence, most organizations have not beengoing down that route. As Figure 2.2 shows, we have looked atoutcomes from 29 of the 140 plus biggest IT outsourcing deals inthe world, all of them involving outsourcing infrastructure, andthey show a 35 per cent failure rate. Unsuccessful deals sharedcertain characteristics. Virtually all primarily sought cost reduc-tion. The organizations were in financial trouble, and saw totalIT outsourcing as a financial package to improve theircompany’s position, rather than as a way of leveraging IT forbusiness value, and keeping control of their IT destiny. All were10–12-year single supplier deals, initiated by the companyboard with little IT management input. The unsuccessful clientorganizations saw IT as an undifferentiated commodity, con-tracted incompletely and failed to keep enough requisite in-house management capability. They incurred significant hiddencosts, degradation of service, power asymmetries developing infavour of vendors, and loss of control over their IT destiny. Theydid little to build and sustain client–vendor relationships, yetwere reluctant to change vendor because of the high switchingcosts.
Success in total IT outsourcing has taken a variety of routes. Onthe evidence, it requires a lot of management maturity andexperience of IT outsourcing, as exemplified by BP Explorationin the early 1990s. It needs complete and creative contracting; aless long-term focus in the contracting arrangements, but amore long-term one in the relationship dimension, and veryactive and fully staffed post-contract management. Among thesuccesses shown in Figure 2.2, several were total outsourcing,long-term deals for IT infrastructure/mainframe operations.One involved a strategic alliance, where the company spun offits entire IT function in a shared risk reward and joint owner-ship joint venture with a software and services supplier. Oneinvolved a short-term contract to wind down a public sectoragency about to be privatized. Several went down themultiple supplier 5–7-year contract route, while several weresingle supplier deals that took on board the above prescrip-tions, had detailed contracts and were also high profile, with
23
Outsourcing IT and e-business
the vendors wary of adverse publicity in specific countries ormarkets.
2.4 Sourcing e-business: new rules?
How do these principles translate into the e-business world?Throughout 1999–2001 we studied over 100 major corporationsand their business internet strategies in depth, to identify thefactors that distinguished leaders from laggards.4 What followsis based on our findings. The need for speed to the net often dic-tated use of the external market for development and services.However, accomplishing effective e-sourcing is far from simple,and if not managed properly can result in competitive disad-vantage. The problems decompose into: ‘how can organizationseffectively leverage external service providers to get their web-based and e-business projects in place on suitable time-scales tocompete?’ And: ‘how do we participate in strategic sourcingwith business allies to more effectively compete on a “core capa-bilities” basis?’ As we shall see, the learning on IT outsourcingapplies directly into answering these questions, such that, in thefinal part of this chapter, we can bring together some funda-mental common management principles for outsourcing IT ande-business technologies and activities.
2.5 Sourcing internet implementation capability
To make a mark in e-business it is essential to have access tointernet implementation capability. The central dilemma formost organizations considering their sourcing options for e-business development is the trade-off between speed to marketand organizational learning. The fastest route to securing inter-net presence and capability – outsourcing – may well underminethe organizational need to build up internal understanding. Theconcern to develop internal knowledge is driven by anxiety thatinternet-based business processes will be fundamental in thefuture. Figure 2.3 provides a framework for selecting appropri-ate sourcing options based on the twin drivers of speed andlearning.
2.5.1 The in-house development path
The primary determinant of internal development is a credibleproject champion, usually an executive officer or CIO, who over-
24
The Make or Break Issues in IT Management
sees the ‘internet development group’. Success via this route isassisted by high level project sponsors who created space, facil-itated the necessary budget and resources to get off the ground,and protected the project at all times. Typically a project cham-pion provided and sustained the vision and the motivation tothe project, and the political influence needed to move itforward. Such projects are often dubbed ‘skunk works’ by theirdevelopers.
A clear example of the ‘skunk works’ internal developmentroute can be found at stockbroker Charles Schwab. Upon seeinga browser-based demonstration of the company’s traditionaltrading system, the co-CEOs created, protected and nurtured anew stand-alone internet development group in order toacquire, learn and adapt the technology to their needs.Ultimately recreating the company based upon internet tech-nologies, Charles Schwab was by 2001 the largest on-line bro-kerage company in the world.
The second step on the internal development route was to builda strong infrastructure. Seen as the key to technological andorganizational flexibility by many CIOs and executives, the ITinfrastructure was critical to the successful transition of theinternet presence from the static to the dynamic. The correctinfrastructure can be defined as one facilitating the implementa-tion of value-added services through different organizational
25
Outsourcing IT and e-business
Outsource,e.g. Alamo
Jamjar
Insource/partner
e.g. Tesco/RBS
'Cheap-source'?
In-house,e.g. MotorolaDirect Line
High
Low
Speed tothe net
Organizational learning
Low High
Figure 2.3 Internet development sourcing options
business drivers, so delivering a positive return on invest-ment.
The creation of a strong yet flexible infrastructure was a precur-sor to the third element of the development, that of businessprocess integration. This was the point at which companies hadto leverage the organizational learning and experience acquiredthrough the internal development route into customer addedvalue.
2.5.2 The cheap-sourcing path
An organization that is not pressured in its market-space to be atthe leading edge of internet presence would be advised to applya ‘cheap-sourcing’ principle to its internet development. This isoften the case with organizations that occupy niche market posi-tions, for example a New York-based jeweller, whose site did notfacilitate a direct sales model and that did not change with thefrequency of a retail site, could be managed at relatively lowcost. The primary driver for such organizations is the promotionof the brand; a direct sales channel would dilute the overall cor-porate marketing position rather than reinforce it. However, dueto the need for a sophisticated branding image to be maintained,the company may wish to outsource the site’s graphic designwork, marketing and site development to specialists. It may notbe in the long-term plan of the organization ever to have a directsales channel and therefore the need to internalize that learningis minimized. However, this may be to put a positive spin onwhat is, in fact, lagging practice. The jeweller mentioned above,for example, by 2001 had developed its site for selling its prod-ucts over the Web.
2.5.3 The outsourcing path
Many organizations find themselves in the position of needingto rapidly develop a net presence, yet do not see any immediateeconomic advantage in extending their internal IT capability. Inthis situation, the most advantageous policy is to outsource thedevelopment. Here internet use is developed by bringing inexternal consultants and service providers to inject the expertiseotherwise gained through skunk works projects. Such externalproviders offer services in a variety of forms including internetagencies, technical and application service providers, direct mar-keting agencies, and relationship marketers. However, owner-
26
The Make or Break Issues in IT Management
ship responsibility for the development should still belong withthe contracting organization and issues such as infrastructureand leadership still necessitate internal attention and action.Actual web development learning will be passed to the out-sourcer, however, though internal learning on contract manage-ment and allied skills will still take place. Some internaltechnology learning will also occur where the net technologiesand the existing infrastructure interface.
An organization in this situation was Jamjar, an on-line motor-ing information and car sale service, set up in May 2000 by UK-based insurer Direct Line. According to its IT director:
It’s a major development, and we went for external hosting,because it’s a huge system, with huge volumes, running 24hours a day seven days a week.
The Jamjar application was developed by Quidnunc and hostedby SiteHost, a Computacenter e-business outsourcing service. Inturn SiteHost uses the data centre facilities of web host Exoduswhere it has its own service operations centre.
2.5.4 The partnering and ‘insourcing’ path
Should the rate of change in an industry be rapid and theresources of the organization become stretched too far thencompetitive edge can be lost. This is counterproductive from anorganizational learning perspective and requires ‘partnering’ tobecome the primary development practice. Thus in several cor-porations we found that infrastructure building, balancing, anddevelopment were performed by an internal group. Graphicalinternet site design or other specialized tasks were externallysourced, and business process consultants were engaged to inte-grate the new channels created through the Internet with exist-ing processes in the most effective way possible. A successfulexample of this approach is provided by American Express:
It goes to our basic philosophy which is we do not have tobuild everything. The question is how do we get our prod-ucts and services integrated into internet interactive com-merce. And you do it through people who are alreadyworking on it.
(Amex senior executive)
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Outsourcing IT and e-business
2.5.5 Mixed development paths
We found organizations adopting different sourcing options atdifferent times, or for different purposes, in their moves to theInternet. As we saw above, insurer Direct Line took the out-sourcing route for its Jamjar on-line business. Direct Line was setup in the late 1980s to sell motor insurance direct via the phone.The business expanded into other types of insurance during the1990s. In the late 1990s it also set up Directline.com to sell insur-ance services via the net. However, this was developed in housefor less than £500 000. According to its IT director:
Directline.com is very much at the heart of our insurancebusiness. It’s totally and tightly integrated with our coresystems. We couldn’t have done it so quickly had it beenoutsourced.
Interestingly here, not only was the application seen as corebusiness, but also, because internal expertise and business-spe-cific knowledge were higher than that available on the market,the necessary speed could actually be achieved by in-housesourcing.
Another mixed approach was adopted by Tesco, the UK’sleading food retailer. In 1998 Tesco piloted its on-line shoppingbusiness, Tesco Direct (subsequently Tesco.com), with 20 000grocery products and six trial sites. It spent £21 million on devel-oping its internet offering in house, and in mid-2000 investedanother £35 million. However, in early 2000 Tesco also entered aless familiar, but faster moving market – on-line banking – inwhich it planned to leverage the power of its brand. The TescoPersonal Finance service was developed in three monthsthrough utilizing technology developed by its partner, the RoyalBank of Scotland (RBS), only needing to modify the software toallow customers to transfer money to and from their accounts atother banks. Both partners invested in a series of Compaq 3000servers, running internally developed software, allowing Tescocustomers to link in with the RBS IBM9672 mainframe, whichholds account details. Here the need for speed and the availabil-ity of a complementary partner in an unfamiliar businessbecame the key determinants of the sourcing decision.
One pattern frequently repeated in a number of organizations,e.g., Alamo, Ryder, has been early outsourcing to gain the
28
The Make or Break Issues in IT Management
advantages of speed to the net, followed by internalization dueto the rising business importance of the Internet and the needfor internal learning and capability. The pattern also seemed toreflect those organizations’ own increased learning about theadvantages and disadvantages of different sourcing options.This learning also sharpened their ability to make more selectiveand precise sourcing decisions, and also undertake selective lateoutsourcing of development and web operations, on criteria weshall look at in the next section. Figure 2.4 provides a summaryof the issues that leading organizations tend to take into accountwhen attempting to achieve trade-offs and mitigate risks in thechoice and management of their sourcing options.
2.6 E-sourcing: from projects and technology tostrategic partnering
So far we have focused on sourcing technical development fore-business projects. But e-business sourcing is also aboutmaking best use of the mix of internal and external suppliersthroughout the organization’s business processes. This involvesunderstanding who has what core competences. During the1990s a very strong literature developed, focusing on core com-petence business strategies. Commentators such as Pralahadand Hamel, and Quinn argued that an organization can only beeffective at relatively few core activities, and should concentrateon developing these to world class. Anything else should beeliminated, minimized or outsourced.5 Here core competencerefers to a distinctive, not easily replicable, assembly of skills,techniques, ways of organizing, technologies and know-howthat enable an organization to acquire, deploy and leveragepositioning and resources, including relationships, in pursuit ofbusiness advantage. How can we apply core competence think-ing to the e-world?
2.7 External sourcing around the customer resourcelife cycle
In order to exploit the massive e-opportunity, many havestressed the criticality of gaining repurchase decisions by man-aging the customer’s total experience in such ways that the cus-tomer would regularly prefer the organization’s products/
29
Outsourcing IT and e-business
services. If the customer resource life cycle of an on-line businessis broken down into eight major activity areas, it is clear that thetechnical means and businesses exist for each area to be ade-quately sourced by an external service provider.
1. Attracting customers – services like Link Exchange and Befreecan provide fully developed customer affiliate programmes.
30
The Make or Break Issues in IT Management
Outsource
Advantages• Taps into existing expertise• Variety of external services offered• Quickly get up to speed
Disadvantages• Does not immediately facilitate
internalization of learning• Builds vendor expertise, not yours• Vendors may not be skilled in
organizational processes• Organization may lack basic
infrastructure• Requires in-house skills to manage
the supplier• Cost (includes vendor profit margin)• Ensuring technological alignment
with strategic alignment• Coordination of content owners?
‘Cheap-source’
Advantages• Low investment• Low internal effort and resources• Gains from a ‘follower’ internet
strategy (?)
Disadvantages• Little internal learning, or from
market• Functional only in relation to a
specific type of business strategy• Does ‘followership’ pay with internet
applications?
Insource/partner
Advantages• Taps into existing expertise• Wider variety of external services on
offer• Quickly get up to speed• Share/build expertise with vendor• Facilitate internalization of learning• Organization can focus upon other,
e.g. infrastructure, issues
Disadvantages• Requires in-house skills to staff and
manage the project – availability?• Requires business managers’
commitment to achieve business andtechnology alignment
• Contract management costs tocoordinate project
Internal development
Advantages• Internalize organizational learning• Understanding of organization’s
processes and integration issues• Understanding of internal IT
infrastructure
Disadvantages• Opportunity cost of mistakes• First mover expense• Scarce IT skills resources may inhibit
development• Will the business side commit
necessary resources?
Figure 2.4 E-development sourcing options: advantages and disadvantages
DoubleClick can offer targeted advertising. These and manyother companies basically provide technologies and servicesthat attract and deliver targeted audiences to your e-business.
2. Informing customers – organizations like OnDisplay.com andCardonet.com act as content mediators, serving up-to-date,relevant content to a website. Thus W.W. Grainger, in themaintenance, repair and operations business offers hardgoods supplies to US businesses. It partners with OnDisplay,which utilizes the information from 2000 plus supplier data-bases to develop on-line interactive catalogues for Grainger’sthree websites. Grainger’s on-line sales exceeded US$150million in 2000.
3. Customizing (self) service – companies like Firepond.com,Selectica.com and Calico.com build configuration softwarethat is such a strong feature of the Dell site offering build-to-order computers, and the Cisco Systems and CabletronSystems sites selling routers and networking gear.
4. Transacting – there are many companies, notably Ariba,CommerceOne, Oracle, Moai Technologies, that offer market-making platforms. Ariba offers shared commerce services inB-to-B marketplaces. Its key customers included (as at 2001)Federal Express, Cisco Systems, Charles Schwab andChevron. CommerceOne offers web-based B-to-B procure-ment and platforms for creating vertical trading communi-ties. Moai Technologies provide B-to-B exchanges andauction platforms.
5. Securing payment – many organizations and customers haveconcerns over the security of payments over the web. Theseconcerns have encouraged the development of companies tolook after the payment and financing functions of on-linetransactions. Thus eCredit.com provides real-time creditunderwriting engines, while Paylinx offers systems thatsupport credit and debit card transactions.
6. Customer support – many organizations new to e-businessmay well feel unable to provide the necessary level of infor-mation, problem resolution, advice and order tracking fortheir customers. As a result external service providers havedeveloped offerings for, for example, call centre facilities, liveon-line services and the checking of order status.
7. E-fulfilment – we found many examples of companies provid-ing such services included Celarix, Manugistics and i2. Inaddition many e-fulfilment companies had developed for thebusiness-to-consumer market.
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Outsourcing IT and e-business
8. Adaptive customer profiling – rather than developing the neces-sary software and internal capability, companies can now hirecollaborative filtering and data mining services from providerssuch as Verbind.com, Datasage.com, and E-piphany.com.Verbind, for example, provides American Express, Reel.comand Furniture.com with its LifeTime product.
At one level these would appear to be exciting and highly func-tional developments. However, outsourcing extensivelythroughout the customer resource life cycle does raise a numberof issues. Handing over control of activities creates exposure torisk. What level of exposure is judicious, and how can the risksbe mitigated? Does increased dependence on suppliers meanthat deeper relationships are required? At what stage mightcooperators become competitors? In answering these questionsone conclusion is clear – whatever the line of business, extensivefee-for-service outsourcing and the treatment of every activity asa commodity to be outsourced are rarely appropriate.
A particularly profound problem occurs with a firm’s ownershipof the relationship with its end customers. If this relationship iscompromised through outsourcing, then so is a potential sourceof competitive advantage. Consider one company (A) westudied. Throughout 2000 it employed an e-fulfilment firm (B) todeliver goods but insisted that these be delivered to A’s ware-house and not to the end customer. At no time did B know whothe end customer was; it was only given enough information todeliver goods in the right quantity and at the right time to A.These goods were then relabelled by A and delivered to the endcustomer. In this scenario, conditioned by previous experiences,A’s behaviour was designed to protect its customer database andcustomer relationships.
2.8 The virtual organization – effective managementapproaches
The virtual organization made possible by the development ofinternet-related technologies relies heavily on outsourcing.Cisco Systems and Dell provide clear examples of virtual inte-gration. Consider Dell.
Dell has explicitly described its strategy as that of virtual inte-gration. During 2000 it made more than US$40 million a day
32
The Make or Break Issues in IT Management
(over 50 per cent of total sales) via the Internet. Its continuingsuccess is invariably put down to its customer focus. However,an underlying vital component has been sourcing strategy andmanagement. According to CEO Michael Dell: ‘I don’t think wecould have created a $12 billion business in 13 years if we hadtried to be vertically integrated.’ With fewer physical assets andpeople it has fewer things to manage and fewer barriers tochange. Through IT-enabled coordination and control of itsvalue network of suppliers and partners, Dell has operated witha 20 000 rather than an 80 000 workforce. In the supply arena ithas focused on making long-term deals and commitments withas few leading suppliers as possible. Datalinks measure andfeed back supplier performance in real time. Close ties with sup-pliers (‘their engineers are part of our design and implementa-tion teams’) mean that Dell buys in innovation from itssuppliers. Information technologies allow speed and informa-tion sharing and much more intense forms of collaboration. Italso means that suppliers can be notified precisely of Dell’sdaily product requirements. This has also allowed Dell to focuson inventory velocity, and keeping inventory levels very low.
Dell has also sought strong partnering relationships with keycustomers. Seen as complementors, customers are ofteninvolved in research and development, where Dell’s focus is onrelevant, easy-to-use technology, improvements in the customerbuying process, keeping costs down, and superior quality inmanufacturing. Dell also offers service centres in large organi-zations to be close to the customer. Thus Boeing has 100 000 DellPCs and 30 dedicated Dell staff on the premises.
For present purposes, what is interesting are the criteria such acompany has used to make sourcing decisions. The Dell criteriawould seem to be six-fold:
1. Dell focuses its attention on all activities that create value forthe customer. This includes R&D involving 1500 people anda budget of US$250 million, which focuses on customer-facing activity and the identification of ‘relevant’ technology.It tends to outsource as much as possible all other activitiesthat need to get done.
2. Dell carefully defines its core capability as a solutionsprovider and technology navigator. It uses partners/suppli-ers as much as possible to deal with such matters as products,components, technology development, assembly.
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Outsourcing IT and e-business
3. A key core task is coordination as against ‘doing’ tasks suchas manufacturing and delivery.
4. A key core capability is control of the value network throughfinancial and informational means to ensure requisite speed,cost and quality. What does Dell control? Basically thecompany appoints and monitors reliable, responsive, leadingedge suppliers of technology and quality.
5. Dell takes responsibility for seeking and improving allarrangements that give it speed and focus in the marketplaceand in its organizational arrangements.
6. Dell sees information management and orchestration as acore capability. This is an outcome of two strategic moves onits part. The first is to convert much of the physical assets(‘atoms’) it manages into digital form (‘bytes’). The secondmove is to outsource as much as possible of the remainingphysical tasks and assets, while rendering management of thedigital world a core set of tasks.
2.9 Towards effective IT and e-sourcing decisions
In this section, to assist IT and e-sourcing decisions, we bringtogether our thinking and learning into two summary matrices.Our research has made clear that, whether at the IT, project orstrategic alliance level, fortunately, we can apply to e-businesssourcing many of the principles learned in other contexts in the1980s and 1990s. Cisco and Dell are not so far removed fromwhat has been called the original virtual organization, clothingmanufacturer/retailer Benetton. Moreover many of the practicesobserved in IT sourcing over the last decade can apply directlyto the e-world. Let us bring these principles together.
IT and e-business sourcing must start with the business impera-tive. In Figure 2.5 we identify two dimensions of business activ-ities. The first is in terms of its contribution to competitivepositioning. In IT, mainframes and payroll applications are fre-quently perceived as commodities, while British Airways’ yieldmanagement system gives the company a competitive edge inticket pricing and is regarded as a differentiator. The second is interms of the underpinning it provides to business operations. Asa broad example one website might be critical – as is the case forAmazon (no website, no business) – or it could be merely useful– for example, the New York jeweller cited earlier. These twodimensions create four quadrants.
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The Make or Break Issues in IT Management
Let us use the Dell example to illustrate the thinking here.‘Order winners’ are those business activities that critically andadvantageously differentiate a firm from its competitors. The sixDell items listed in the previous section fall here. The strongmessage here is to carry out these core activities in house,buying in resources to work under internal control whereexpertise is lacking and a build-up of internal learning isrequired. ‘Qualifiers’ are business activities that must be carriedout as a necessary minimum entry requirement to compete in aspecific sector. For airlines, aircraft maintenance systems arevital but do not differentiate the airlines from each other. Oftencritical differentiators can become commodities and move tothis quadrant. Thus, were Dell’s excellent customer service everto become an industry standard, it would be redefined as a‘Qualifier’. As at 2001, assembly, manufacturing and deliverywere being defined by Dell as ‘Qualifiers’. These should be best-sourced and can be done by third parties, where they meet theright cost and competence criteria (see below).
‘Necessary evils’ are tasks that have to be done but are not coreactivity and gain no strategic purchase from their fulfilment.Dell has tended to cut down on administration, inventory and
35
Outsourcing IT and e-business
"Qualifiers'
(Best-source:in-house/partner)
'Order winners'
(In-house/buy-in)
'Necessary evils'
(Outsource)
'Distractions'
(Migrate or eliminate)
Critical
Useful
Commodity Differentiator
Contribution to competitivepositioning
Contributionto businessoperations
Figure 2.5 Strategic e-sourcing (A) by business activity
payroll tasks, for example, and would seek to outsource as muchof these sorts of activities as possible. ‘Distractions’ are failed orfailing attempts to differentiate the organization from its com-petitors. The goal here must be to eliminate the activity ormigrate it to another quadrant. Thus in 1989 Dell opened retailoutlets, but soon discovered this development was not going tobe successful, and fell back on its direct business model. It alsoduring the early 1990s suffered from ‘functionality creep’ in itsnotebook designs, a practice ended when it was realized thatthis attempt to differentiate meant little to customers.
It is not enough, however, to identify a potential use of serviceproviders or business allies. What is available on the market alsorequires detailed analysis. If the market is not cheap, capable ormature enough, then the organization will need to seek a largelyin-house solution. A second matrix is needed to fully capture themajor elements for consideration.
In Figure 2.6 we plot the cost efficiencies and the capabilities themarket can offer against carrying out tasks internally. Where themarket can carry out a task cheaper and better, then outsourcingis the obvious decision but only for ‘Qualifiers’ and ‘Necessaryevils’. An example is Federal Express providing customer deliv-ery for Dell. Where the market offers an inferior cost and capa-
36
The Make or Break Issues in IT Management
Cheap sourcefor non-key
activities androles
Outsource
In houseBuy-in for
key activitiesand roles
Marketsuperior
Marketinferior
Market costefficiencies
vs.internal
Marketinferior
Marketsuperior
Market capabilitiesvs. internal
• Managementpractices
• Economies ofscale
• Experiencecurve effects
• Expertise• Service• Speed• Complementarity
COST
CAPABILITY
Figure 2.6 Strategic e-sourcing (B) by market comparison
bility then in-house sourcing will be the better alternative(assuming that ‘Distractions’ are best not sourced at all). Wherethe market offers a better cost deal, then this should be taken,but only for non-key activities (‘Necessary evils’). Where themarket offers superior capability but at a premium price abovewhat the in-house cost might be, then there may still be goodreasons for insourcing or close partnering with the third party,not least to leverage and learn from their expertise, and apply itto ‘Qualifying’ and ‘Order winning’ tasks.
Thus Figures 2.5 and 2.6 help to summarize the main criteriathat can be used for making e-sourcing, and, in fact, many otherbusiness sourcing decisions. Use of the matrices requires deci-sions on trade-offs in order to establish the least risky waysexternal parties can be leveraged to organizational advantage.But as this chapter illustrates, making the right sourcing deci-sions does not guarantee their successful implementation. As inthe cases of Dell and Cisco, internal capabilities must be devel-oped to manage the risks, relationships and performance issuesinherent in the extensive use of external service providers andbusiness allies.
2.10 Conclusions
In many countries in the world private and public sectors havewaded into a series of further potentially large IT outsourcingwaves, stimulated by moves to e-business, application serviceprovision, business process outsourcing and the like, as well asmore familiar forms of, and reasons for, outsourcing. It is usefulto stand back and look at what has been learned so far about IToutsourcing practices. It should be said that good and bad IToutsourcing experiences, like everything else in IT and its man-agement, are not sector specific. For example, financial institu-tions in all countries do not manage IT outsourcing any worseor better than any other organizations or sectors.
Organizations fail when they hand over IT/e-business tech-nologies without understanding their role in the organization,and what the vendor’s capabilities are. One rule of thumb is:never outsource a problem, only an IT/e-business activity or setof tasks for which a detailed contract and performance meas-ures can be written. Too many client companies see outsourcingas spending – and as little as possible – and ditching their prob-lems, not managing. In fact outsourcing requires a great deal of
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Outsourcing IT and e-business
in-house management, but of a different kind, covering elicita-tion and delivery of business requirements, ensuring technicalcapability, managing external supply and IT governance. A car-dinal insight from the research we have been reviewing up toearly 2001 is that organizations still expect too much fromvendors and not enough from themselves, or, put another way,vendors are still much better at selling IT services than theirclients are at buying them.
The key is to understand and operationalize four capabilitiesnecessary to pursue IT/e-business outsourcing effectively:
1. The ability to make sourcing decisions and arrive at a long-term sourcing strategy, building in learning, and taking intoaccount business, technical and economic factors. On thisfront, our research identifies two proven practices in out-sourcing. First, selective outsourcing decisions and total in-house/insourcing decisions achieve success more often thantotal outsourcing decisions. Second, senior executives and ITmanagers who make decisions together achieved success sig-nificantly more often than when either stakeholder groupacted alone.
2. The ability to understand the IT/e-business services marketplace, the capabilities and weaknesses of relevant vendors,and what their business strategies are and imply in any likelyoutsourcing deal with an organization. Our research showstwo proven practices here. First, informed buying is a coreIT/e-business capability for all contemporary organizations.Second, organizations that invite both internal and externalbids achieve success more often than organizations thatmerely compare a few external bids with current internal per-formance.
3. The ability to contract over time in ways that give suppliersan incentive and ensure that you get what you think youagreed to. Two proven practices here are that short-term (4years or less) contracts achieve success much more often thanlong-term contracts (7 years or more); and that detailed fee-for-service contracts achieve success more often than othertypes of contracts.
4. The ability to post-contract manage across the lifetime of thedeal in ways that secure and build the organization’s IT/e-business destiny, and effectively achieve the required serviceperformance and added value from the supplier. The evi-
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The Make or Break Issues in IT Management
dence is that this is one of the weakest areas in outsourcingpractice and is rarely adequately thought through at the frontof outsourcing deals. Typically, a minimum of nine core capa-bilities emerge as necessary in response to problems con-fronted during contract performance. These cover leadership,informed buying, vendor development, contract facilitation,contract monitoring, technical fixing, architecture planning,relationship building and business systems thinking.6
Institutions need to assess their capabilities against these fourvital components before outsourcing IT/e-business to any sig-nificant degree, and then build these capabilities where they arelacking. These capabilities form the only real long-term securityagainst disappointments in using the external market for IT ande-business services.
Notes
1. This chapter draws upon multiple sources. The first is a casehistory research database of over 250 organizations and theirIT/e-business sourcing practices assembled and studied acrossthe 1990–2001 period. We also draw upon three European and USIT/e-business outsourcing surveys carried out in 1994, 1997 and2000, and additional case work into over 100 e-business develop-ments carried out as part of ongoing research projects. The keypublications and researchers are detailed in the references below. 2. Lacity, M. and Willcocks, L. (2000) Inside IT Outsourcing: AState of the Art Report. Executive Research Briefing. TempletonCollege, Oxford. 3. Lacity, M. and Willcocks, L. (2001) Global InformationTechnology Outsourcing: In Search of Business Advantage. Wiley,Chichester. 4. See Willcocks, L. and Sauer, C. (2001) Moving to E-Business.Random House, London. Also Sauer, C. and Willcocks, L. (2001)Building the E-Business Infrastructure. Business Intelligence,London.5. The main popular texts on core capabilities and strategicsourcing are Quinn, J. (1992) The Intelligent Enterprise: A NewParadigm. Academy of Management Executive, 6, 4, 44–63;Pralahad, C. and Hamel, G. (1990) The Core Competence of theCorporation. Harvard Business Review, 68, 3, 79–91; Hamel, G.and Pralahad, C. (1994) Competing for the Future. HarvardBusiness Press, Boston.
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Outsourcing IT and e-business
6. For more detail see Feeny, D. and Willcocks, L. (1998) Core ISCapabilities For Exploiting IT. Sloan Management Review, 39, 3,9–21.
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The Make or Break Issues in IT Management
In this chapter-argue that organizations fail to realize the bene-fits of their IT investments because they believe that these bene-fits occur effortlessly. This is patently untrue. The benefits of ITare what Stephen Toulmin calls futuribles: futures that do notsimply happen themselves, but can be made to happen, if wemeanwhile adopt wise attitudes and policies. Realizing the ben-efits of new technologies is a form of learning, which requiresintelligent persistence. This is the make or break issue, which Idescribe in this chapter.
3.1 Some evidence of the missing benefits
There is much literature, both academic and journalistic, thatdocuments IT’s unrequited promises. I shall touch on just twoaspects of it. The first is the so-called productivity paradox – hasIT investment had an impact on national productivity? Thesecond is whether IT expenditure affects a company’s bottomline.
Stephen Roach, an economist for Morgan Stanley, raised the pro-ductivity paradox in 1984 when he observed that accelerating ITinvestment had no effect on US productivity. His commentssparked many studies. Most confirmed his remark. Recently, anumber of analysts, including Alan Greenspan, Chairman of theUS Federal Reserve, have argued that IT has begun to influence
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3 Learning to realize the benefits of IT
Brent Work
University of Cardiff, UK
productivity in the last few years. Table 3.1 shows the evidencefor this.
Table 3.1 Average US labour productivity growth
Period Business sector Manufacturing sector
1948–1965 3.25 per cent 2.92 per cent1965–1973 2.14 per cent 2.48 per cent1973–1979 0.61 per cent 1.37 per cent1979–1986 1.40 per cent 3.42 per cent1987–1994 1.36 per cent 3.07 per cent1994–2000 2.98 per cent 4.74 per cent
Since 1994 productivity growth in the US business sector hasaveraged nearly 3 per cent a year. This is more than twice thefigure for any of the four previous business cycles. During theyears 1998–2000 productivity growth in the business sector hasaveraged 3.7 per cent annually. This is the highest three-yearaverage since the period 1971–1973. While this is impressive, itis only slightly above the average of the post-World War Two era(1948–1965). Hence, it might be argued that this only reflects areturn to the long-term growth rate after 35 years of poor per-formance.
Since 1994 the productivity growth in the US manufacturingsector has averaged 4.7 per cent a year. This is almost 50 per centhigher than in any period since World War Two. This is due pri-marily to manufacturing productivity growing by 6.4 per centannually in the last three years – the highest three-year averagesince the 1940s. In 2000 manufacturing productivity grew by 7.1per cent alone, the greatest since the US government beganmeasurement. This consists of a 10.5 per cent growth for durablegoods, but a 3.2 per cent growth for non-durable goods. In shortthe only real productivity miracle is in durable goods. While thehardware industry has rapidly become more efficient, its cus-tomers’ productivity has grown more slowly.
The companies that produce durable goods account for a littleover 10 per cent of US Gross Domestic Product. Companies inthe business sector contribute 77 per cent. Hence, the rapidincrease in durable manufacturing productivity has had littleeffect on overall US productivity growth. Moreover, IT invest-
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The Make or Break Issues in IT Management
ment should have a greater impact on organizations whoseproduct is information, for example finance and professionalservices, which are within the business sector. While mostcapital investment in durable manufacturing has some IT com-ponent, IT’s impact on productivity is likely to be less in thissector than in the business sector. In short it is impossible todemonstrate after almost 50 years of investment that IT has sig-nificantly improved American productivity.
In the UK there has not been a similar growth in productivity. In1996 an average hour of work produced 28 per cent less outputin the UK than the US. In 1999 an average hour of work pro-duced 38 per cent less output in the UK. This 36 per cent declinein the UK’s relative productivity indicates that the impact of ITinvestment is not yet visible in Britain.
Paul Strassman, a consultant and former executive of Xerox,offers a second persuasive finding. He examined severalhundred North American and Western European companies, ina variety of industries, over a number of years, with the hope offinding a relationship between IT expenditure and a number offinancial indicators. In the end he concluded, ‘there’s no simplecorrelation between the money spent on computers and acompany’s financial results’.
3.2 IT investment as a religious salvation
If IT does not deliver significant benefit, why do we buy it? Ithink it is easier to explain if we look at individual organiza-tions. I offer four cases from my own recent experience. Theyrepresent a cross-section of organizations: public and privatesectors; large, medium, and small in size; developed and devel-oping countries; national and global in scope. Thus, they offer abasis for generalization.
3.2.1 Case one
A small aerospace manufacturer had only a mini-computer forits accounting department and a workstation for engineeringplanning. Five years ago, two of its largest customers warned itsdirectors that they must adopt Computer IntegratedManufacturing or lose their preferred supplier status. The direc-tors bought a software package, installed it, could not get it towork, and allowed the lease to expire. This cost them about
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Learning to realize the benefits of IT
£50 000. Then, they acquired another package and 20 compatiblePCs. The total expenditure was 5 per cent of annual revenue. Thedirectors proudly promoted the new system to their customers,but after three years it still was not fully operational. I asked themanaging director what their benefits were and without hesita-tion he said ‘we’re still in business’.
3.2.2 Case two
Since the mid-1980s technicians in the office of an Asian primeminister have developed over 30 EIS applications. None of thesehas been justified and there has been no evaluation of their ben-efits. Several have not been accessed in the last year and yet theyare still being maintained. When I asked the systems analystresponsible for these systems how this could be explained, shereplied, ‘we are behind the developed countries. Therefore, weneed to create as many systems as possible. Later we can worryabout their benefits’.
3.2.3 Case three
Two global pharmaceutical corporations have recently merged.One of the initiatives to integrate the companies is to place astandard PC on each employee’s desk, to load the same softwareon each machine, and to connect all of the machines by means ofa corporate network. The estimated cost for the project is US$450million. When I asked what was the purpose of the exercise, theresponse was ‘to improve communications between theseformer competitors so as to expedite the merger’.
3.2.4 Case four
A technological university sought an international reputation. Itdecided to install a state-of-the-art network throughout itscampus. The justification was that it would provide the infra-structure to support innovation in computer-based education.This would make teaching more efficient and allow staff moretime for research. The network proved to be slow, unreliable,and difficult to use. While large sums were spent on creating andmaintaining the network, the development of educational soft-ware received little funding. The students and staff rebelled. Thesenior professors who initiated the idea claimed that the projectwas successful because so many had come to marvel at the
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The Make or Break Issues in IT Management
network. They refused to allow any evaluation of the invest-ment because they argued that it is impossible to measure theeffectiveness of educational innovation.
In all four organizations the purpose of investing in IT was aspi-rational rather than beneficial. It was mostly spin. The aerospacemanufacturer wanted to stay in business. The IT staff in theAsian prime minister’s office wished to show that they were astechnically competent as their colleagues in developed coun-tries. The pharmaceutical corporation hoped to complete theirmerger as quickly as possible. The university desired prestige.In none of these instances did senior management require justi-fication, or even articulation, of benefits because they aspired toa general state, not a specific improvement.
In all four organizations there was an assumption that theexpenditure on hardware and software would satisfy these aspi-rations automatically. The directors of the aerospace manufac-turer were satisfied. They were not deselected and so they werein no hurry to implement. After 15 years the prime minister’sstaff could point to their many EIS applications and be proud oftheir technical sophistication. The pharmaceutical corporationbelieved that better communication would result in a fasterunion with old adversaries; the existence of a standardizedinfrastructure would eliminate communication barriers. Theuniversity assumed that being the first to implement new tech-nology on a wide scale would make its name. When the hard-ware vendors brought people from around the world to see theadvanced network, the top administrators knew that the projectwas working. Why bother with what the students and facultythought? In each of these four cases the aspirations were ful-filled, but it was impossible to identify the benefits arising fromthese investments.
Underlying each of these stories is a common theme, technophilia– the love of technology. It is one aspect of the modern dogma,which views everything that is new as good because it alwaysbrings improvement. All change is progress. Every innovationworks first time. The word revolution has no negative connota-tions. The idea of modernity requires optimism because everyday, in every way, we are getting better and better. Technologyis the embodiment of the new and the modern. Therefore, themore of it we have, the better off we will become. We shouldlove technology because it is transforming our lives. Those whowish to show that they are truly modern must buy ever new
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Learning to realize the benefits of IT
technology. For the individual, as well as companies, being a‘first mover’ is a lifestyle statement as much as a competitivestrategy.
Not surprisingly, post-modern critics conclude that IT is the reli-gion of the late twentieth century. Like any religious fundamen-talists, technophiles do not question their belief for fear ofturning to salt, or is it sand? Like the mediaeval church, IT com-panies are getting rich by encouraging believers that salvationlies in IT.
3.3 IT investment as exploration
I think that comparing IT to a religion is misleading. IT isdemonstratively different from religious belief. Religion, likemagic, deals with the vicissitudes of life by seeking the inter-vention of the gods. Technology allows us to attempt to controlour own destinies. If we understand how IT works, we canproduce desirable results consistently. The problem is that wenever know how new technologies work. We have to learn whattheir benefits are and how to achieve them. I think that realizingIT benefits is more like exploration than religious salvation.
The first explorer of a new land will have no idea what to expect.He will have neither directions nor guides. He will wander acrossthe terrain, jotting down observations or making a crude map.He may have come for glory or for treasure. Certainly, if he findsany riches, it will be a happy accident. At the end of his journeyhe may publish his reminiscences. The next visitor to the newworld will find life a little easier. He may have read the accountsof the original explorer and decided that there is wealth – gold oroil or ancient artefacts – awaiting him there. He should take acopy of the original map in order to assist his search. While hemay find traces of riches, he will probably not find the motherload. In the meantime he will learn more about the land, itspeople, and its geography. He will probably even improve on theoriginal explorer’s map. After him more will come, spurred on bythe promise of wealth. Little by little, the location and extent ofthe riches will be discovered. As a result, local industry will beborn. This may even provoke the colonial government to fund ascientific survey in order to map the region and to determine thefull extent of its resources. Eventually, all of the trappings of adeveloped economy will arise – roads, railways, banks, a govern-ment – in order to exploit the wealth systematically.
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The Make or Break Issues in IT Management
Of course, the story does not necessarily have a happy ending.Exploration is fraught with risk and even danger. Not everyonewill find riches in the new land. The most likely way to make afortune will be to transport people to this new region or to sellthem supplies. There may be nothing of value there to discover.In this case all hope will be false. Some may even contractdeadly diseases or be eaten by cannibals.
The process of moving from initial exploration to systematicexploitation is an illustration of enacting a futurible. The discov-ery of a new continent has never led automatically to untoldwealth. Just spending money on an expedition is not enough.Exploitation happens slowly because it depends on trial anderror. Funding a succession of expeditions that does not accu-mulate knowledge of the territory is wasteful. Learning must bethe aim. Blind persistence may be heroic. It may make your rep-utation, but it is usually folly. Intelligent persistence is crucial tosuccess. True intelligence is not knowing more, but learningbetter. As Toulmin observes, this means the adoption of wiseattitudes and policies in order to make the desired futurehappen.
3.4 Benefits realization as organizational learning
The successful realization of IT benefits closely mirrors themoving from exploration to systematic exploitation. Imaginethat you want to adopt a new technology. You want to send asignal to customers, competitors, or markets. This may satisfyan aspiration, but in itself it is unlikely to create much benefit.Realizing benefits is much harder work. How can you do thiswisely?
At the outset you will be prospecting. The most important thingthat a prospector needs is a map that shows the terrain. If youare the first to use the technology, then finding a map may bedifficult. You may speak to the people who created the technol-ogy. Their sales force will always suggest the kind of benefitsyou should realize. Of course, they have an incentive to thinkwishfully. You might also consider similar, but more mature,technologies. For example, those wanting to understand thebenefits of adopting business-to-business e-commerce might doworse than to examine the extensive literature on the benefits ofEDI. Of course, if you are not the first to use the technology, youmay learn much about potential benefits and where they lie
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Learning to realize the benefits of IT
from looking to other industries, to consultancies, to scholars, oreven to competitors. With this information you can make yourown map or modify someone else’s.
Using your map as your guide, you can set out on your searchfor the benefits that are marked on the map. If you have done agood job of research, you may find a little treasure. However, inthe case of a completely novel technology, your map is likely tobe poor. You should not be discouraged because, at least, yourapproach to prospecting is not haphazard.
The important thing is that at the end of the project you need toevaluate your map. Why did you fail to find any (or so) few ben-efits? How well does your map represent the actual terrain?How can it be improved? Then the next thing to do is to beginplanning a new journey immediately. You may not be a memberof the next expedition, but it does not matter because they willhave your updated map. They will benefit from your learning.As a result, the second journey will almost certainly be more suc-cessful than the first, even if it only produces an even more accu-rate map.
As this cycle of quest and reflection progresses, your organiza-tion will become increasingly adept at realizing the benefits ofthis technology. The lessons learned on a later project may indi-cate that a small investment in a previous, less successful onewill unlock latent benefits. Eventually, it will become possible toinvest in this technology with near certainty that its benefits willbe realized efficiently. It is only at this point that your organiza-tion understands how to use the technology. The latest mapembodies this knowledge. It is a tangible product of organiza-tional learning.
In this manner the means by which the benefits of this new tech-nology are realized will take shape. By intelligent persistence, bythe application of these wise attitudes and policies, the futurewill gradually unfold.
3.5 What is a benefits map?
The idea that underpins the exploration metaphor is the benefitsmap. What is a benefits map? What does one look like?
Technology should be deployed to make things cheaper, faster,and better. This usually happens when newer technologyreplaces older technology, for example substituting robots for
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The Make or Break Issues in IT Management
people. We hope the benefits of automation will appearinstantly, but they never do. Why?
This belief assumes activities take place in a vacuum. It ignoresthe existence of an organization. Substitute the old technologyused in the activity with a newer, better one and productivitymust grow. But an organization is a network of related activities– a system. A change in the way one activity works may haveunforeseen effects on other activities. The most elementary illus-tration is that improved productivity in the factory is likely tocreate additional inventory and lower profits unless there is acorresponding increase in sales. Hence, it will be necessary tomake alterations to activities throughout an organization inorder to realize the benefits of a change of technology in one.
This is particularly true of IT because information plays a role inevery activity while production technology is limited to shopfloor tasks. In fact many information technologies, especiallythose depending on databases and networks, are systemic andaffect the operation of the whole organization rather than a fewactivities.
A benefits map traces all of the alterations that must be madethroughout an organization if a technology’s benefits are to berealized. Figure 3.1 shows a generic benefits map. At the left-hand side the capabilities of the technology are represented.These are the features of the technology that may be exploited inorder to create benefits. At the right-hand side of the figure arethe benefits that the new technology should produce. The threecategories in the middle – individual characteristics, organiza-tional architecture, and organizational competencies – are thefactors missing from many organizations’ understanding ofbenefits realization.
The new technology may enhance the existing characteristics ofindividuals or even require them to adopt new ones. The orga-nizational architecture may have to be restructured to assistemployees in acquiring these new characteristics. The architec-ture is more than just the system of relationships that shape it. Itincludes the organizational knowledge and behaviour neces-sary to maintain these relationships. The new technology maydirectly allow the architecture to be restructured. It may also dothis indirectly. This occurs when individuals are able to use theirenhanced characteristics in order to do their work in new ways.The value created by any organization arises from its compe-
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Learning to realize the benefits of IT
tencies. The benefits of any new technology depend on improve-ments in an organization’s competencies, particularly ones thatare unique. These competencies are the product of the workingsof the organizational architecture. The best types of benefits donot simply increase the bottom line. They are those that improvean organization’s competencies and the characteristics of itsindividuals. Such benefits create a virtuous circle.
In order for the benefits of technological improvements to berealized, they must be channelled through individuals’ charac-teristics and an organization’s architecture in order to improvecompetencies. It is very likely that this will cause friction, ifeverything remains the same. This will dampen the benefits.However, if the points of constriction in flow can be anticipated,blockages may be avoided. It may even be possible to amplifythe benefits. An accurate map shows exactly where these pointsare and what is needed to bridge them.
3.6 An example of a benefits map
A specific example of a benefits map will help to clarify howthey work. Two of the organizations that I have mentioned havesystems that allow executives to scan information bases, i.e.databases that incorporate statistics on foreign trade, financialbudgets, materials prices, etc. Their purpose is to allow execu-tives to keep up to date with things. These information bases are
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The Make or Break Issues in IT Management
Figure 3.1 Generic benefits map of any information technology
Organizationalarchitecture
Technologicalcapabilities
Organizationalcompetencies
Organizationalbenefits
Individualskills
systems that help executives to assimilate news about what ishappening inside and outside of their organizations. Essentially,they assist learning. Since the benefits of learning are difficult toquantify, this is an interesting illustration of the use of benefitsmaps.
With the help of people in these organizations I developed abenefits map for information bases. It appears in Figure 3.2. Weproduced this map by surveying the research on executive scan-ning. We also identified qualitative indicators and, where possi-ble, quantitative measures for evaluating each feature on thisbenefits map. For example, we identified the organizationalbenefits of scanning in terms of increased market share andprofit growth in the public company. Within the government wefound more precisely addressing the interests of particular con-stituents to be the benefit.
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Learning to realize the benefits of IT
Individualcharacteristics
Acceleratedcognitiveprocessing
Tolerance forambiguity
Innovativeness
Technologicalcapabilities
Easy-to-useinterface
Analyticfeatures
Improvedinformation
Technical
Domain
Scanning
Wider range ofvariables used
Analyticcomprehensiveness
Confidence to act
Early identification ofproblems/opportunities
Organizationalcompetencies
Responsiveness
Depth ofunderstanding
Benefits
Higherperformance
Organizationalknowledge
Organizationalbehaviour
Social influence
Figure 3.2 Benefits map for scanning information systems
The upper half of the diagram indicates the technical capabili-ties, the individual characteristics, the organizational knowl-edge, and the organizational behaviour needed if executives areto scan effectively. The lower half shows what organizationalbehaviour and competencies must be developed if scanning is tobe converted into higher performance, the ultimate benefit of allIT investment.
Researchers have concluded that there are three capabilities thatany information base should have if it is to encourage scanning.The first two – an interface that is easy to use and features thatallow data to be analysed – make the technology flexible. Thethird capability is improved information. Specifically, this meansthat the information included in the system should be morediverse, more current, more detailed, more relevant and/ormore integrated than that which an executive now has.
Researchers have found that there are three skills that executivesneed to scan effectively. The first is the ability to assimilate theincreased amount of information. The interface and the analyticfeatures make this possible. However, most executives requiresome technical assistance in order to scan successfully. Carefulscanning is also likely to raise questions about the nature of theinformation, such as definitions of terms and ways in which cal-culations are performed. It is important that an executive is ableto consult someone who knows about the application. Thesecond skill is tolerance for ambiguity. An executive who feelscomfortable dealing with vague, equivocal, and qualitative datais more likely to scan. The third skill is innovativeness.Executives who like to tackle new problems are more motivatedto scan and better able to prosper from it.
Researchers have emphasized the role of culture. In organiza-tions where scanners are highly regarded, scanning will beencouraged. This is a self-reinforcing activity since social influ-ence can increase scanning and intensive scanning shouldincrease social influence.
Scanning should lead executives to use a wider range of vari-ables to develop an appreciation of a situation. This has threeimportant consequences. First, the organization should produceinterpretations that are more analytically comprehensive. Thisoccurs when several alternative interpretations are created andevaluated before deciding which one to adopt. Second, execu-tives should have greater confidence to act since their decisions
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The Make or Break Issues in IT Management
are based on better data. Third, executives identify problemsand opportunities earlier and so may act faster. These threebehaviours result in better responsiveness to customers or citi-zens and a deeper understanding of their needs. The result ishigher performance.
3.7 A case study in benefits realization
When we examined the utilization figures for each of the infor-mation base systems, we found significant differences in usage.To test our benefits map we selected the most popular system.Many of the features of the proposed benefits map were foundin this system. As a result, we were able to explain why it wasso successful. We could also suggest some inexpensive ways inwhich its benefits might be increased. The executives who usedit were impressed.
Next, we chose a system that had the lowest utilization. Weapplied the benefits map to it in order to explain its unpopular-ity. Two factors stood out. The first was that the interfacerequired executives to write SQL commands. The second wasthat executives did not understand the information that theyretrieved. We rectified these two problems. We replaced the SQLinterface with one that was GUI and we included an expert inthis application within the EIS support group. We argued forboth of these changes by reference to the benefits map.
A third problem was subtle and took us longer to discover. Itwas obvious that there was little encouragement to use thissystem. After making the improvements, we gave a personaltutorial on the system to a senior executive. She was enthusias-tic, so we asked her to promote it. She wrote an article for the in-house newsletter. We also learned that the first system that wehad examined was being demonstrated, as an exemplary EIS, inan introductory course for new employees. We asked that it bereplaced in the demonstration by the second system, which hadbeen improved. Again, we justified our request with the benefitsmap.
We found the executives in these organizations natural scan-ners. Most were good at cognitive processing, were innovative,and had a tolerance for ambiguity. They were also very confi-dent and acted with determination. However, they did not showa high degree of analytic comprehensiveness. They were ‘satis-
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Learning to realize the benefits of IT
ficers’. They adopted the first way of looking at things thatworked. They rarely questioned it. They were somewhat intoler-ant of alternative views. Of course, this probably has as much todo with their lack of time as with their personalities.
We have tried to address this by developing additional interpre-tations in order to show executives that considering more possi-bilities will increase their depth of understanding. Someexecutives responded better than others to this tactic. We are stillexploring this feature in order to improve the flow of benefitseven further, but this remains an area of the benefits map thatneeds further exploration.
The overall result of these initiatives has been an increase in useof the previously unpopular system and an improvement in thesupporting features of the organizational structure, behaviour,and competencies. The cost of realizing these benefits has beensmall since most of the investment had already been incurred.
We have now begun a programme to apply this ever improvingbenefits map to other information bases in these organizations inorder to see whether we can exploit their latent benefits inex-pensively. Moreover, new information base projects now requirea justification that shows how each of the features in the benefitsmap will be addressed. Projects must also conclude with anassessment of whether the benefits have been achieved and howthe map can be further refined. One of these companies will soonbegin a project to encourage executives to scan the Internet.Initially, we shall use this benefits map.
3.8 Learning to learn how to realize IT benefits
This case study illustrates the use of a benefits map for a specifictechnology within two companies. However, it is clear how thisapproach to benefits realization can be generalized. Of course,this account of using a benefits map is misleading because of itsbrevity. Learning to make use of a benefits map is not so easy. Ifit were, everyone would do it. It requires wise attitudes and poli-cies to make it happen.
In my experience IT professionals are a major obstacle. Theirmost common criticism of my exploration metaphor is: ‘By thetime we have created a detailed map, most competitors will havemoved on to a new territory where the riches are even moresplendid.’ My response is that even if this were true, these com-
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The Make or Break Issues in IT Management
petitors are just as unlikely to realize the benefits of this newparadise as they are to capture the advantages of the currentone. As we have seen, technologists want to learn about newtechnologies, not about benefits.
I have found that the most effective way to deal with their scep-ticism is to begin by examining an existing system that isregarded by users as a failure. Because it does not depend onnew technology, it is easier to create a benefits map. A wellresearched benefits map will show what the impediments are.Often, this will suggest inexpensive improvements, which canlead to the realization of latent benefits. This is a very convinc-ing justification for the technique.
On the other hand, managers usually find benefits maps arefreshing initiative. They like being able to see how an invest-ment should affect their organization. It helps them to appreci-ate the difficulties in managing IT investment better. In fact theyare often uninterested in measuring the benefits of an invest-ment precisely. Most of those who use or support the systemagree on whether the necessary capabilities, characteristics,behaviours, structures, and competencies are being developedwithout quantifiable measures.
Benefits maps also present problems for those who have tomanage benefits. At the beginning the maps are generic. Theymust be tailored to an organization. In some organizations cre-ating a system that has the required technical capabilities maybe a serious problem. In others encouraging scanning may bethe difficulty. In a third it may be the characteristics of the exec-utives that are the stumbling block. The qualitative indicatorsand quantitative measures change from organization to organi-zation and from technology to technology. The devil is certainlyin the detail. Unfortunately, IS practitioners are wont to take ageneric benefits map as gospel and make the organization fit it,rather than make the map fit the organization.
Most organizations find it difficult to learn together. Benefitsmaps provide a focal point for organizational learning. In fact Iam testing a benefits map for realizing the benefits of benefitsmaps. Nevertheless, benefits maps are not the Holy Grail. Theyonly work to realize future benefits when they are employedwisely. This requires intelligent persistence. The only alternativeis to rely on the intervention of the gods of IT.
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Learning to realize the benefits of IT
4.1 Introduction
A typical business today spends 3–4 per cent of its turnover onits information systems. In some service industries, this figurecan exceed 20 per cent. One partner in a professional servicesfirm described its cost base as payroll, professional insuranceand computing. The public sector spends vast sums on its com-puter systems and whether in the public or private sectors, asubstantial proportion of this spend is on bought-in productsand services. Where IT is outsourced, the external component oforganizational IT spend can approach 100 per cent. Purchasingof IT is big business.
Not only is IT procurement big business, the use of IT to pur-chase is also a significant and growing business in its own right.From the earliest days of commercial computing, IT has beenused to support the purchasing function. From basic, nuts-and-bolts internal purchase order processing systems, IT-enabledpurchasing has evolved through Electronic Data Interchange(EDI), on-line catalogues, Web-based order, purchasingextranets, intelligent agents and business-to-business (B2B) elec-tronic trading. All of this now falls under the general name of e-procurement. Electronic purchasing has become an integral toolin the development of lean manufacturing, just-in-time inven-tory and supply chain management. Indeed it is difficult toimagine such concepts as supply chain management being
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4 Purchasing and information technologyBuying IT and using IT to buy
Frank Bannister
Trinity College, Dublin, Ireland
workable at all without powerful electronic purchasing systems.This chapter considers both of these aspects of purchasing. Thefirst part of the chapter considers policies and some proceduralaspects of purchasing IT. The second part looks at some currentdevelopments in e-procurement and at possible future direc-tions for purchasing in the internet age.
4.2 Purchasing IT
4.2.1 Primary objectives of purchasing
The classic definition of the objectives of good purchasing are toobtain:
The right goodsAt the right timeIn the right quantityFrom the right sourceAt the right price.
As a statement of mission, this is well suited to routine pur-chasing, particularly of such things as raw materials or officesupplies. It can also be applied to much purchasing of IT.However, it does not work quite so well when applied to non-routine procurement. In order to develop sound IT purchasingpolicies and procedures, it is important to understand to whatextent IT purchasing is different from other types of purchasing.There are five characteristics of IT which collectively make pur-chasing IT different:
Much IT purchasing is once off – notwithstanding the trend ininformation technology towards an ever larger number of lessexpensive components, many IT purchasing decisions areunique in the sense that companies do not buy ten PCs amonth or a new accounts package once a year. One conse-quence of this is that organizations’ normal purchasing pro-cedures do not always work properly when applied to IT.Standard requisition forms don’t fit, approval procedures areinappropriate and so on. Much IT purchasing falls into an ambiguous category that is half waybetween capital and current expenditure – sometimes purchasingthat is essentially capital in nature (e.g. a major developmentproject) is treated as current expenditure and sometimes expen-
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diture that, in this day and age, is (to all intents and purposes)current, such as a desktop printer, is treated as capital. Changing suppliers of major IT components (such as the corporatedatabase) can be painful and expensive – notwithstanding all ofthe advances in open systems and de facto standardization(such as Microsoft’s domination of the desktop and Intel’snear monopoly of the processor), supplier lock-in remains anissue. There is frequently a strong disincentive/barrier tochanging suppliers. IT purchasing decisions are rarely isolated – buying a new printermay not have any knock-on effects, but a decision to changethe network protocol or install an intranet may have all sortsof implications, not all of which are easy to anticipate. Withinany organization, IT can be considered as a living system thatneeds day to day maintenance, continual improvement andreplacement and continuing enhancement and expansion. It is often difficult to determine what constitutes good value – ITvalue is complex to assess and rarely simply a matter of lowestprice. Quality can also be difficult to assess, particularly whenbuying IT services.
IT is like a never ending capital construction project. Few deci-sions can be taken in isolation. A wide range of technical skillsmay need to be involved in a decision, particularly in a majordevelopment project. As IT becomes more integrated, both intoan organization’s operations and with other technologies such astelecommunications and robotics, the range of skills necessary tocontrol and manage IT systems widens. Even the very largestorganizations may not be able to justify retaining people with allof these skills on the payroll. As a result, IT acquisition tends torequire not only management of an expanding group of internaltechnical specialists, but also management of outside advisersand suppliers. No other aspect of most organizations’ purchas-ing operations exhibits all of these features and, as a conse-quence, requires such a complex mix of purchasing procedures
4.2.2 Secondary objectives
In addition to the broad objectives set out above, IT purchasingpolicy has a number of other specific objectives.
First, it is important to ensure that all purchases conform to ISstrategy and IT policy. There is a close link between IS strategy
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and IT purchasing. For public sector bodies, this may includegovernment guidelines or EU regulations. Second, purchasingprocedures should assist management to monitor and controlexpenditure. IT expenditure is notorious for running overbudget. Third, the purchasing process itself needs to be efficient.Some organizations manage to spend thousands of poundsdeciding how to spend hundreds. As well as being efficient,purchasing procedures should be easy to work with. Undulycumbersome procedures can be self-defeating as staff willquickly find ingenious ways of bypassing them. Fourth, pur-chasing needs to achieve a balance between local/user andcentral/IT management control. This issue has become progres-sively more important and more complicated with the evolutionof distributed computing technologies and the Internet. Fifth,purchasing procedures should help organizations track andcontrol their IT inventory. Some organizations have no ideawhat their IT inventory is. The best point to trap informationabout inventory is at the point of purchase. This is much simplerthan carrying out a periodic census to try to establish whathardware and software are in the building. Finally, purchasingpolicies and procedures should be as flexible as is compatiblewith meeting all of the preceding objectives.
An unduly rigid purchasing system is expensive, tiresome tousers and likely to be subverted sooner rather than later. Evenwhere an organization is operating in a stable business environ-ment, rapid changes in technology or the market can presentmanagement with unexpected decisions at short notice andorganizations cannot afford to stand on ceremony waiting forsome convoluted purchasing system to run its course.
4.3.3 Complications
Purchasing of IT is complicated by a number of additionalfactors.
The first and most important of these is the speed at which thetechnology itself changes. It is sometime said, only half jokingly,that the half life of knowledge in the IT industry is about twoyears, i.e. of all the things known about the technology at themoment, half will be out of date or of no value within two years’time. Managers must not only keep abreast of technologicaldevelopments, but also be able to judge the right time to replaceequipment and systems. A modern passenger aircraft will give
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between 20 and 30 years of normal service. Properly maintained,a modern car will give at least 10 to 15 years’ service. PCs havea practical life (as opposed to a physical life) of under three yearsin a ‘normal’ organization and less than two years in organiza-tions where leading edge IT is an integral part of the product orservice. Managers are continually faced with user pressure forupgrading systems; they therefore need access to up-to-date,accurate and independent information and advice.
A second difficulty is costing. There are several problems intrying to compute exact costs for IT. Traditional costing methodsare often inadequate and new techniques such as Value ChainAnalysis and Activity Based Costing may be needed to obtainmeaningful decision information. On the other side of this coinare the difficulties in assessing the benefits derived from ITexpenditure. Because IT is integral to the day-to-day operationof most organizations, it can be extremely difficult to assess itsprecise impact. Some commentators hold the view that much ITinvestment gives a poor return. Others argue this only appearsto be the case because of the failure of conventional accountingand economics to measure the real impact of IT on organiza-tional performance.
A third issue that takes on its own peculiarities when IT isinvolved is control of expenditure. Most capital expenditureprojects are directly under the control of a manager or a smallgroup of managers. IT, by its nature, is used in every aspect ofthe business. Because the individual components of IT are bothnumerous and relatively inexpensive, it is easy for individualusers and managers to circumvent normal IT purchasing con-trols.
A further aspect of the cost control problem is ‘scope creep’. Thiscan be due to a lack of completeness and/or precision in thestated requirements. Users are sometimes unable (or unwilling!)to state their IT requirements precisely. They may be unsure ofwhat they require or unaware of what the technology can do forthem. The result is a gap between what the system provides andwhat the users expect. Such a gap can also be caused by changesin perception as knowledge and expectations, based on increas-ing familiarity with the new system, grow. As new requirementsemerge, demands for modifications and enhancements creep in,frequently even before the system goes live, and costs run out ofcontrol.
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In the light of all of the above, it is not surprising that textbookpurchasing procedures do not always work well when it comesto IT. Prior to considering what are appropriate purchasing poli-cies for IT, a brief discussion of the relationship between IS strat-egy and purchasing is in order.
4.2.4 IS strategy and purchasing
There is a close relationship between IS strategy and IT pur-chasing. IS strategy impacts on IT purchasing and acquisition ina number of ways. There may be strategic decisions on productsor product ranges (e.g. that the corporate database will beOracle or that all servers will use the Linux operating system).Typically organizations will, for example, standardize on oneword processing package or have a minimum specification forany PC purchased. There may be more generic strategies such as‘best of breed’ acquisition.
The relationship between IS strategy and purchasing policy isshown in Figure 4.1.
IT purchasing policy is always important; in the absence of an ISstrategy, it becomes critical. In normal circumstances, IT pur-chasing policy is derived directly from the IS strategy andcovers matters of operational detail with which the strategy isnot concerned. Strategy may simply lay down broad criteriawithin which purchasing policy can be formulated. Whereorganizations do not have a formal IS strategy, a good purchas-ing policy provides very considerable benefits, saves time andavoids many problems that might otherwise occur.
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Companypurchasingprocedures
Companypurchasing
policies
ITpolicies
ITstrategy
ITplan
IT purchasingpolicies
IT purchasingprocedures
Figure 4.1 Relationship between IS strategy and IT purchasing
4.2.5 Components of IT purchasing policy
Good management practice requires clear purchasing policies.The factors influencing IT purchasing policy are shown inFigure 4.2.
Apart from IS strategy, purchasing policy will be influenced bythe scale of the expenditure involved. It will also be determinedby the need for control of not just short-term expenditure, butalso of the implicit long-term costs of IT purchasing decisions.There is a wide range of potential implicit costs including dis-ruption, loss of service elsewhere, training costs, delays to otherprojects and so on. Purchasing needs to be efficient. Procedureand controls should be commensurate with the importance ofthe purchase being made. IT purchasing policy will be influ-enced by the organization’s standard purchasing policies and bypractices and trends in the business in which it operates (for
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The Make or Break Issues in IT Management
Efficiency &effectiveness
Scale ofexpenditure
Businessenvironment
Suppliers
Continuingcost
implicationsIS
Strategy
Nature ofexpenditure
Generalpurchasing
policy
ITpurchasing
policy
Figure 4.2 Factors influencing IT purchasing
example, B2B type industry arrangements). Policy will varywith the nature of the expenditure and the supplier with whichthe company deals. Suppliers may have their own agenda.
4.2.6 The elements of policy
IT purchasing policy consists of the three main elements:
Approved productsApproved suppliersPurchasing procedures.
Other aspects of purchasing management such as monitoring,review and audit are outside the scope of this chapter.
4.2.7 Approved products
A simple and effective way of controlling a large proportion ofexternal IT expenditure is to have an approved product list.Approved products can be hardware, software, services and/orconsumables. They may be specific or generic. A specificapproved product policy states the exact piece of equipment,software version, type of consumable, etc. that a user may buy.This may specify not only the supplier/manufacturer, but themodels or version numbers approved. A generic approvedproduct policy comprises a general technical specificationwhere no brand or model is mandated. For example, a genericpolicy might state that all laser printers must have a minimumresolution of 600 dpi, print at a speed of not less than 16 pagesper minute and be PostScript compatible. Generic policy onlyworks well with hardware although it can be applied to certainclasses of standardized software. To run an approved productpolicy, an organization must have in place a procedure forvetting hardware, software, services and/or consumables. Allsuch products must be evaluated and approved by IT manage-ment and be in line with the organization’s IS strategy.
An additional layer is made up of different authorization. Forexample, some products may be approved for general purchase.These are products that can be purchased by anyone with therequisite authorization without prior reference to the IT depart-ment. Small items, such as a zip disk, may not even need priorclearance or authorization from a budget holder. Other non-con-trolled items such as stand alone laptops or local printers may
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require departmental approval, but need not involve the ITdepartment. At the next level are purchases that are designatedas ‘controlled’. This is the most important category. Controlleditems are those that meet the organization’s technical require-ments, but because of possible knock-on cost or enterprise levelimplications, must be cleared in advance by IT management.There may, for example, be licence fee issues, network or otherimplications. The concept is illustrated in Figure 4.3.
By definition, any products that fall outside of these two cate-gories are unapproved and if they are to be purchased, a specialbusiness case for them must be made. Apart from being out ofline with IS strategy, such products may carry unacceptable cor-porate costs or risks (e.g. compatibility problems, etc.). Theapproved products list should be circulated to all managers withIT purchase authorization.
Clearly an approved product should be suitable for the purposefor which it is required. However, there are several other desir-able characteristics of any approved product. It should:
Conform with the company’s IS strategy and policyBe reliableBe well supported either internally and/or externallyCome from a reputable and (in the case of strategic products)a financially sound supplier(Normally) not be high risk or unduly innovative (this is notto say an organization should not purchase such products,only that they would not normally be on an approved productlist)Be value for money.
Approved product lists need to be kept under constant review.New products and new versions of existing products appear allthe time. There needs to be a mechanism in place for both mon-
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IT department authorization
Departmental authorization
No authorization needed
Specific Generic
Figure 4.3 Dimensions of purchasing policy
itoring the announcement/release of new products and trackingindustry standards and any implications these may have for thecurrent systems or architecture. For smaller organizations, andeven many larger ones, external advisers may be needed.
4.2.8 Approved suppliers
Effective purchasing and good supplier management go hand inhand. At a further remove, purchasing may have a link into sup-plier chain management. In all purchasing, organizationsshould aim for good and mutually beneficial long-term rela-tionships with their suppliers. This is particularly true in ITwhere an organization can be critically dependent on one ormore of its IT suppliers, even without any significant outsourc-ing in the conventional sense. Specific approved products orproduct lists may imply that the suppliers of these products areapproved. Sometimes it is convenient to have a generallyapproved supplier for a particular class of equipment or service. Approved suppliers should have a number of characteristics.They should:
Have appropriate technical expertiseBe businesslikeBe reliableBe able to support their productsBe stableBe responsiveWhere appropriate, have good relationships with their ownsuppliersHave a responsible attitudeHave an interest in the customer’s businessHave a good reputationIdeally operate to an acknowledged quality standard such asISO 9001.
An approved ‘supplier only’ policy can work for well-definedproducts or product groups such as desktop hardware or certainservices. The extreme variant of this policy is total outsourcingwhere one supplier provides, directly or indirectly, all IT prod-ucts and services.
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4.2.9 Purchasing procedures
All purchases, apart from the very trivial, must be requisitioned,approved, placed, sometimes chased, received and checked.There should be a simple, tight and easy-to-follow set of proce-dures for this. All expenditure can be classified either as expenseor capital expenditure. When it comes to IT, the differencebetween these is not always clear. In general, expense expenditureis routine and includes, for example, expenditures involved inkeeping the current systems up and running. It may include oper-ations, maintenance, consumables, insurance, security, backup,etc. Capital expenditure is normally related to investment in newsystems and equipment. This may include replacement of currenthardware or software, acquisition of new hardware, or communi-cations, development of new applications and so on.
A traditional problem in IT budgeting has been to regard ITexpenditure as a business overhead rather than an investment.Although these perspectives are not mutually exclusive, manyresearchers and commentators consider that to regard IT costsimply as an overhead leads to poor decisions. A full under-standing of the nature of IT expenditure is therefore important.
Ideally all purchasing should be based on agreed budgets. Inreality, purchasing procedures need to be able to deal with fourdifferent situations:
Budgeted expense expenditureBudgeted capital expenditureUnbudgeted expense expenditureUnbudgeted capital expenditure.
Where there is an agreed budget and the proposed expenditureis within the agreed budget tolerance, purchase procedures, bethey for capital or expense items, should be as simple as is com-patible with proper control. A standard procedure shouldinvolve the following steps:
The item is requisitioned and submitted together with thebusiness case for the purchase.The required item is costed, usually by the IT department orthe purchasing department, occasionally by the user. For stan-dard items there may be internal price lists with discountsand/or bulk purchase arrangements. If direct on-line purchas-ing is in operation, these prices may be on the supplier web-
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site (e.g. in the form of an electronic catalogue). In certain cir-cumstances, it may be appropriate for the user to obtain aquotation, but this should always be double checked by IT orpurchasing management. The purchase is approved by the departmental manager orbudget holder. For phased expenditure, the requisition should show thecumulative position. Particularly useful here is the concept ofcommitment accounting (see Example 4.1). The purchase requisition should also show whether there isany deviation from budget and if there is, an explanation whythis is so. Finally the requisition should be signed by the person mak-ing the request and the person authorized to clear theexpenditure.
Example 1: Commitment accounting
This shows some or all of the following for each budget heading or code:
• Budgeted amount
• Expenditure to date
• Amount of budget not yet spent (or overspent) to date
• Committed expenditure
• Orders actually placed
• Amount of budget remaining (overspent) after commitments
Records Department
Project: Document Image Archive
Position as at 31 July
Budget Actual Committed On order Amountto date remaining
CD Servers 40,000 23,000 11,000 6,000 6,000
Main server 10,000 10,500 0 0 (500)
Scanners 8,000 4,000 4,000 4,000 0
Workstations 35,000 12,500 14,500 14,500 8,000
Cabling, etc. 4,500 5,200 0 0 (700)
Software 7,500 7,500 0 0 0
Development 50,000 25,000 27,000 n/a (2,000)
Implement 6,000 0 6,000 0 0
Data uptake 20,000 0 20,000 0 0
Project Total 181,000 87,700 82,500 24,500 10,800
In general, the IT department should purchase all goods onbehalf of the user. This is desirable for a number of reasons
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including most efficient and effective management of suppliers.Apart from the trivial, goods should be delivered to the ITdepartment and not to the user. There are several good reasonsfor this. First, the IT department can check that the correct goodshave been delivered. Often the IT department will be in a betterposition to do this than the user. Second, where appropriate, thegoods can be checked, if necessary tested and set up. Forexample, for a PC this might include setting up company soft-ware, creating a network address and adding virus protection.All items received can be logged at point of receipt and enteredinto the IT inventory. This is the surest way of keeping track ofequipment and software. For software, licences can be checked,quantity or corporate discounts confirmed and any necessaryregistration or site licence agreement compliance procedurescarried out. Finally the IT and/or purchasing department cancheck the invoice, ensure that it is correct, that all appropriatediscounts have been given and pass it to accounts for paymentwith a copy to the user department for information.
This ensures that all acquisitions have been budgeted, that theycomply with IT purchasing policy, that costs are in line with (orunder) budget or, if not, that approval is given at the appropri-ate level to exceed the budget. It also ensures that all hardwareand software is logged and that inventories are up to date andaccurate and that all licence terms and other legal requirementsare met. These procedures can be used for budgeted capitalproject expenditure with some minor modifications that showfor each item of expenditure so that the total project expendituremust be monitored and all requisitions must be signed by theproject manager.
Purchasing procedures should not only prevent unauthorizedexpenditure occurring, they should also provide a mechanism forhandling necessary, but unanticipated, expenditure. Unplannedexpenditure arises for one of two reasons: a significant costoverrun on budgeted expenditure or a requirement for newexpenditure. In such circumstances, the case for exceptional treat-ment must be clear and contain all the necessary facts for man-agement to make a decision. Users should be required to explainthe reason for the request, why these items/services requiredwere not in the original budget and why they are now needed.Users should also be required to state the implications of not pro-ceeding (if appropriate). It is essential that this be an exceptionalprocedure and that it does not become regarded as routine.
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Good purchasing policy and procedures can do much to ame-liorate many of the problems that plague IT systems, even insmall organizations. Problems of compatibility, loss of control,cost overruns, high maintenance costs and so on can all be sig-nificantly reduced if not eliminated by a well-thought out ITpurchasing policy. It is well worth the investment.
4.3 Using IT to purchase: e-procurement
4.3.1 Traditional tools
Use of information technology for purchasing can be dividedinto the traditional and the trendy. The purpose of this seem-ingly frivolous distinction is to highlight the fact that much ofthe recent hyperbole and excitement about e-procurement isabout technologies that in some cases have been established forwell over a decade. There are new and exciting developments inprocurement – for example, the emergence of intelligent agentsand electronic auctions. There are also major implications in theexpansion of supply horizons for smaller enterprises and forsupply chain management in hitherto non-vertically integratedindustries. Nonetheless, much of what is currently promoted asrevolutionary is far from new. Before considering what currentdevelopments in technology may offer and what the future mayhold, it is worthwhile reviewing what has been achieved so far.
Internal applications of IT in purchasing, varying from demandforecasting through operations such as purchase order genera-tion to goods matching and invoice clearance, date back to the1970s. Lysons (2000) lists 24 internal purchasing processes thatcan be automated. Few organizations of any size today wouldnot use at least partially automated purchase order processing(POP). Developments during the 1980s, including bar coding,electronic point of sale equipment, manufacturing resourceplanning, tele-ordering, hand-held terminals, automated stockreplenishment and so on have all been deployed by organiza-tions to improve the efficiency and effectiveness of their pur-chasing operations. Automated purchase order processingsystems saved staff, shortened cycle times, reduced inventorylevels and shortened lead times. In the most sophisticated appli-cations, internal computer systems (host or network) connectedeverything from the invoicing matching system to the weigh-bridge.
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4.4 EDIIn the 1980s, a further dimension in computer aided purchasingemerged in the form of Electronic Data Interchange (EDI). At thecore of EDI is a series of standard documents (orders, invoices,acknowledgements, receipts, etc.) that can be exchanged electron-ically. For this to work, documents must to adhere to strict formatsfor content, order and syntax. EDI enabled customers to link theirpurchasing and goods receiving systems with their suppliers’price lists, inventory, sales and distribution systems. While theconcepts of just-in-time ordering and materials requirement plan-ning were developed independently of EDI, EDI gave furtherimpetus to these and to the concept of supply chain management.If customer and supplier systems were not yet tightly coupled, atleast communication between them was greatly speeded up,numerous routine operations were automated and much paperwas taken out the system. Linkage of point of sales equipment toinventory and through the EDI system to suppliers’ inventory andordering systems enabled companies to further reduce inventorylevels, eliminate the costs involved in the old paper-basedmethods and negotiate better deals with suppliers. From a sup-plier perspective, it saved cost as well as providing a barrier toentry by competitors. EDI for Administration, Commerce andTrading (EDIFACT) was adopted as an international standard,though the ‘one size fits all’ concept proved tedious for special-ized industries and a number of variants soon emerged such asEDIFICE for the electronics and EDI-CON for the constructionindustries. Related technologies and spin-offs of EDI includedElectronic Funds Transfer (EFT) and electronic mail (an importantcompetitive advantage in the days before the Internet).
However, as a purchasing technology EDI had and has a numberof drawbacks. Traditional EDI is a send-and-forward system. Itdoes not operate in real time nor does it facilitate the type of col-laborative computing that full supply chain managementrequires. Second, it is expensive and difficult to implement. Itcomes in the form of a complex procedures manual and softwarethat usually has to be installed by specialists and requires con-tinuing maintenance. Small suppliers were often less thanenthusiastic about this and implemented EDI only because amajor customer (such as a supermarket chain) demanded thatthey do so. Third, EDI runs on private, and consequently expen-sive, networks. As a consequence, EDI is only cost effective forregular, high volume transactions. It is simply not designed for
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small or once-off transactions between occasional trading part-ners. In such instances, it is far cheaper to send a fax. For small-scale purchasers, such as local shops or businesses with manysmall customers, it is just not economic.
It was not surprising therefore that, in industry terms, EDI isvertically organized. EDI has thrived in certain sectors such asthe automotive industry, health and the high volume retailtrade. It has been largely adopted by organizations that havelong standing, or at least potentially long-term, business rela-tionships. In most cases there are established contractual rela-tionships and often long-term agreements (LTAs). Establishingan EDI-based relationship with a new supplier or customer isexpensive and time consuming, and while the potential benefitsare large, so are the front end costs.
Despite these drawbacks, EDI has delivered substantial busi-ness and financial benefits for its adopters. Furthermore, theadvantages of this type of electronic procurement have beenvisible to all. The problem is that it remains a difficult game toenter. It was natural, therefore, that with the emergence of thecommercial Internet in the 1990s that other organizations wouldseek to use it to try to realize the benefits of EDI in a way thatwould avoid both the limitations and high costs. The concept ofInternet-EDI was floated, but it was soon realized that the strictprotocols and secure, closed world of EDI was not a natural fitfor the open prairies of the Internet. Internet-EDI was conse-quently soon overtaken by several new and more innovativeapproaches to and ideas about electronic purchasing.
4.4.1 Impact of the Internet – new technologies
While the Internet dates back to the 1970s, it was only in themid-1990s that it suddenly exploded into the commercial world.In the subsequent hysteria of the dot.com boom in the late 1990sa great deal of nonsense was paraded as new wisdom. Ill-defined terms such as ‘new business model’ and the ‘neweconomy’ were hawked around by a variety of gurus who pro-claimed the death of business as we know it and made suchludicrous statements as ‘if you are not in e-business, you are notin business’. While, most of the excitement and attention was onthe business of selling (almost all of the dot.coms were aboutretailing of some sort), the implications of the Internet and Web
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for purchasing were not overlooked. E-procurement became abuzz phrase and commentators talked about the business of pur-chasing being transformed by this technology.
As noted above, the reality was that much of what was touted as‘new’ was nothing of the sort, but the Internet/Web did opensome possibilities for purchasing that were hitherto either infea-sible or uneconomic. Initially, much of what was discussed wasmerely EDI without the cost base and use of e-mail to displacefax and phone, which was hardly revolutionary. Nonetheless,the Internet opened a number of important new possibilities thatfall broadly under the heading of e-procurement. Five ideas ofparticular importance are:
Business to business electronic commerceOpen electronic marketsCoupled systemsIntelligent agents andExtranets.
Each of these is considered briefly below.
Perhaps the most talked about of the new developments wasbusiness to business (B2B) electronic commerce. As elsewhere,much of the discussion has been in terms of sales rather thanpurchasing (it is curious, given that every sale implies a pur-chase, how little attention relatively speaking has been givento purchasing). B2B implies, amongst other things, that groupsof companies in the same industry could form electronicmarkets for trading with their suppliers. Groups that wereearly into this included the aviation and automotive indus-tries both of which announced major B2B initiatives.Whatever the technology, the concept was simple, a special-ized equivalent of any other electronic market would be set upwhere purchasers could seek and suppliers could offer goodsvia electronic catalogues or auction type markets. When theB2C (business to customer) business failed to ignite as the neweconomy prophets had forecast, they changed their tack andpronounced that B2B was where the e-business revolutionwould really take place. But after some initial excitement, theworkability and benefits of B2B have also started to be ques-tioned. Like EDI, B2B may work in focused and tightly knitindustries; whether it will become widespread is more doubt-ful. At the time of writing, the jury is still out on this develop-
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ment and many of the B2B software and consultancy firmsthat sprouted on the back of high expectations in the marketare now in difficulties.A variant on this is the open electronic market. This has grownvery dramatically in the specialized business of share tradingand some companies, such as E-Bay, have pioneered the on-line auction with considerable success. Attempts to emulatethis in other areas have been limited although the use of intel-ligent agents (see below) could well accelerate developmentsin other markets. It is likely that e-auctions and markets willthrive in certain sectors. Any sector where the products areeither commodities or close to commodities is a candidate, asis any business where brokers currently provide the marketmechanism. Examples of the latter are travel (particularlyairline travel) and insurance. The combination of on-linemarkets and intelligent agents (see below) has the potential tochange radically much of purchasing, particularly of highvolume consumables.Coupled systems is the use of the Internet to link purchaser andsupplier computers directly. This has been done successfullyfor some time on a one-to-one basis. However, for a supplierto allow any potential purchaser to place orders directly intoits system, or to examine its stock levels is a different ques-tion. Some companies, such as Dell and Apple, have sophisti-cated, purchaser-driven, make-to-order systems. Smart havetried the same approach with automobiles, but with limitedsuccess. Customer-driven production is fine when you areselling individual PCs (and possibly cars). It is more difficultto see how it will work in large-scale purchasing. What mighthappen if you were selling components by the thousand?How does one manage the risk that a saboteur might place alarge order and then cancel it as soon as it was manufactured?All of which raises the questions of trust and security. Theseare discussed briefly below. Given the vast range of offerings now available on the Web,the intelligent agent, a piece of software that will search theWeb looking for what the purchaser wants, is a logical, indeedan inevitable, development. The use of such agents is likely togrow. In future, it is likely that agents will not only knowwhat the purchaser wants, but may even have some ‘room fornegotiation’ built in. It is not difficult to envisage a worldwhere, for certain products and commodities, computers buyand sell from each other, bypassing humans entirely. The
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extensive deployment of agents is likely to lead to more effi-cient markets for purchasing as they are not constrained bythe limits that time and energy impose on human searches forsuppliers of a given requirement. There will always be purchases that cannot be automated andwhere humans prefer or need to make the decisions. For someof these, the logical technology is the extranet. This enables thepurchaser to look at what a supplier has to offer, find outdetails such as specification, price and delivery time and toplace orders directly at his discretion. Companies can set uparrangements with suppliers whereby employees can orderdirectly from the supplier’s website. Controls on such pur-chasing are executed by the supplier, which can confine anemployee to certain product types or even within authorisa-tion or budget limits set by the customer. This type of arrange-ment can be loose or tight, depending on the business needs.
These are likely to be the key developments in the coming years.The tools for as much automation of purchasing as organizationsrequire are available today. The problem is that, as of now, theinfrastructure is not yet in place to make e-procurement on alarge scale take off and this chapter concludes with a brief lookat one aspect of this issue.
4.4.2 Security, legal issues and trust
Central to the workability of on-line purchasing are the conceptsof security and trust. Where there are established commercialrelationships, as in an EDI network, trust is not an issue and theprivate networks used for EDI have meant that security hasnever been a major concern of EDI users. The same is not true ofthe Internet. When purchasing from an unknown supplier (orsending as yet unpaid-for goods to a hitherto unknown cus-tomer), there is an element of risk. E-procurement raises a wholehost of legal and security issues that are beyond the scope of thischapter, but a brief account is in order.
From an e-purchasing perspective, trust involves three issues:
Authenticity – is the supplier who he purports to be? Forexample, a third party may pose as a supplier to obtain infor-mation including confidential company details.Confidentiality – is the information exchanged between me andmy supplier secure from authorized readers?
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Non-repudiation – having accepted an order, can I be certain thatthe supplier will deliver it? This is normally more of a concernto the seller than the buyer, but it is an issue when purchasing.
Where there is no established relationship, trusted e-purchasingwill increasingly depend on trusted third parties known asCertification Agencies. These both operate and police a systemof encrypted digital signatures, which ensure that parties to atransaction are authentic and provides a reasonable guaranteeof contractual integrity. The future of e-purchasing will dependon the ability of states to organize Public Key Infrastructure(PKI). This is not a trivial task given the complex mix of techno-logical and legal issues involved. Without an effective PKI,widespread open market e-procurement will be stunted andmay end up confined to closed or private e-communities of thetype found in traditional EDI.
Finally there are the problems of law. Buying from existing sup-pliers with long-standing relationships is one thing. Purchasingfrom hitherto unknown suppliers in countries that may havedifferent legal systems and taxation rules, is an altogether dif-ferent matter. Living in the UK and buying a few books fromAmazon in the USA may not raise many corporate concerns;purchasing a sophisticated machine press or an aircraft enginefrom an unknown supplier in Taiwan or Russia requires aclearer business and legal footing than current internet systemsprovide.
4.5 Conclusion
Purchasing is a vast industry in its own right. It is a natural can-didate for automation and is now extensively automated.Developments in telecommunications and artificial intelligencewill continue this process, but there are limits to what will workin practice, due to the underdeveloped state of the technical andlegal infrastructure and to the limitations of the medium. Somemuch touted ideas have failed to materialize; others remain asyet untried. Even if it were technically possibly, it seemsunlikely that purchasing will ever be fully automated. Theprocess of human control remains critical here as elsewhere andthe art of negotiating with suppliers is unlikely to be handedover to machines in the foreseeable future.
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Purchasing and information technology
Reference
Lysons, K. (2000) Purchasing and Supply Chain Management. 5thedn, Financial Times/Prentice-Hall, London.
Bibliography
Bannister, F. (1996) Purchasing and Financing IT. GEE, London.Barnes, R. (1995) Good Buys in IT: A Manager’s Guide to Effective
Spending. McGraw-Hill, London.Bayles, D. (2001) E-commerce Logistics and Fulfilment: Delivering
the Goods. Prentice-Hall, New Jersey.Central Computer and Telecommunications Agency (1995) TAP
Systems Guide: Information Systems Procurement. HMSO,London.
Central Computer and Telecommunications Agency (1995) TAPServices Guide: IS/IT Services Procurement. HMSO, London.
Farrington, B. and Waters, D. (1996) A Practical Guide to World-class Buying. Chapman and Hall, London.
Giuniipero, L. and Sawchuck, C. (2000) ePurchasingplus. JGCEnterprises, Goshen, New York.
Guilfoyle, C., Jeffcoate, J. and Stark, H. (1997), Agents on the Web:Catalyst for e-Commerce. Ovum, London.
Jones, M. and Goldberg, H. (1991) Information SystemsProcurement: A Guide to Procurement Within The TotalAcquisitions Process. CCTA, Norwich.
Nash, T. (ed.) (1999) Managing Desktop IT: How to Select Providersof Distributed IT Systems and Services. Kogan Page, London.
Neef, D. (2001) e-Procurement: From Strategy to Implementation.Prentice-Hall, New Jersey.
The Chartered Institute of Purchasing and Supply (1998)Purchasing Policies and Procedures. Stamford, UK.
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The Make or Break Issues in IT Management
5.1 Introduction
IT management does not have an impressive reputation when itcomes to fulfilling promises. Of course, IT never builds identicalinformation systems in an identical organizational context and,therefore, IT projects always involve risks and uncertainty.These risks and uncertainty, however, decrease during theproject. Unfortunately, so do the possibilities to adapt the infor-mation system to the wishes of the organization. Often, manyrequirements only become apparent when the informationsystem is already in use.
The problem described above is here defined as the ‘IT manage-ment paradox’. At the beginning of a project when there are stillmany possibilities to change the functionality of an informationsystem, members of the organization often insufficiently under-stand these possibilities and their implications. At the momentthat the information system is operational and the implicationsbecome clear, substantial modifications are hardly possible.
Many techniques, such as prototyping, have been developed toresolve this problem and these work to some extent. However,incremental or spiral development techniques are alwaysfocused on delivering the best possible information systemgiven the approved project. The important link between theidentification and approval of these projects and the actual
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5 Full life cycle management and the IT management paradox
Egon Berghout
University of Groningen, The Netherlands
and
Menno Nijland
London School of Economics, United Kingdom
implementation and subsequent operations is, however, oftenmissing. In other words, in many cases we are simply develop-ing the wrong systems, or justifying proposals against incom-plete analysis. Prototyping techniques have too narrow aperspective of the system life-cycle to be able to actually resolvethe IT management paradox.
The fact that this is often the case can be illustrated with howcost/benefit analysis is regularly used. In practice, costs oftenonly include development costs. Sometimes costs are evenlimited to the costs of developing the hardware and software ofthe information system. Development costs typically include20% – 40% of the life-cycle costs of an information system (mostcosts are incurred in the operational stage of the informationsystem). Hardware and software development costs typicallyinclude 5% – 10% of the life-cycle costs of an information system.
In cost/benefit analysis these costs are compared to the per-ceived benefits of the information system and normally includeestimations of strategic benefits and organizational efficiencies.Benefits, by definition, can only be derived during the opera-tional stage of the information system (because there are no ben-efits during development). Consequently, we are currentlyevaluating systems on the basis of less than half of their lifetimecosts and, consequently, a lot of the information systems that arecurrently built should never have been approved. The notion offull life-cycle management is introduced in this chapter tosupport resolving these types of problems.
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The Make or Break Issues in IT Management
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Figure 5.1 Incomplete cost/benefit analysis in practice
5.2 Full life-cycle management
In full life-cycle management a comprehensive set of methodsand techniques is offered to manage information systems alongthe system’s life-cycle. Furthermore, information is sharedamong life-cycle stages. A number of approaches to life-cyclemanagement have been published (Swinkels, 1997; Willcocks,1994; Thorp, 1998). This chapter draws upon work of Swinkelsand Berghout, Klompe and Nijland (Centre of IT EconomicsResearch, University of Groningen).
The three major life-cycle activities are defined first. These activ-ities are:
planning stagedevelopment stageoperation stage.
In the planning stage the importance of IT is compared to thatof other business investment opportunities, new IT projects areidentified and priorities between individual IT projects aredetermined. In the development stage the prioritized proposalsare subsequently designed, built, tested and implemented. Inthe operation stage the information systems are kept opera-tional and maintained. All three stages have their own typicalcost/benefit problems and in order to establish an efficient andeffective IT management, one needs extensive informationexchange.
In this chapter the life-cycle activities are subsequently dis-cussed, together with their interrelation. Furthermore, a state-of-the-art overview is given using nine case studies in thefinancial services industry. There is insufficient space for an in-depth discussion of the various techniques that should prefer-ably be used for the particular life-cycle activities. Thesetechniques are only referred to.
We will argue that excellence of operations in only one or twolife-cycle activities is relatively pointless, and efficient and effec-tive use of IT can only be achieved through full life-cycle man-agement. Figure 5.2 illustrates the concept of full life-cyclemanagement and the most prominent cost/benefit issues.
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Full life cycle management and the IT management paradox
5.3 Planning stage
In the planning stage the priority of IT compared to other busi-ness investment opportunities is determined, new IT projects areidentified and priorities between individual IT projects aredetermined.
Data of the current status of operational systems are an impor-tant input for this activity. How well do current operationalsystems perform, what is their current technical and functionalquality, and what is the estimated effect of improvements? Ananalysis of the current operational systems provides a bottom-up analysis of IT planning. Besides a bottom-up approach, Earldefines two other approaches, the top-down and inside-outapproaches (Earl, 1989).
In a top-down planning process, priorities regarding IT areestablished on the basis of organizational goals. In an inside-outplanning process, priorities are established on the basis of newIT developments. A top-down analysis starts with a strategicanalysis of the environment of the organization. Porter’s frame-work of competitive forces can be helpful here (Porter, 1980).
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The Make or Break Issues in IT Management
Figure 5.2 Three main activities of full life-cycle manangement
Typical questions that need to be addressed are:
What business are we in? What differentiates us from ourcompetitors? Why do customers actually buy from us?What will be the major changes in our line of business in thecoming few years? To what extent will products or marketschange? Is our market rivalled by other products or new com-petitors?What will be our strategic focus for the coming years? Willthis goal primarily be achieved through product innovation,new markets or efficiency of operations?To what extent can IT assist in this strategy? For example, canwe use an e-market strategy, or add new services to products,or establish major cost savings in labour.
The method of Bedell is suggested to be used for the bottom-upanalysis and prioritization of IT and non-IT (Bedell, 1985).Inside-out strategies are typically supported by external IT con-sulting groups. Deliverable of the planning activity is a rankingof IT project priorities.
The planning stage supports the notion that IT resources shouldbe directed towards the most beneficial areas. Consequently,this is also true for the planning activity itself, where most of theeffort to identify project proposals is directed to those organiza-tional areas where the expected gains are the highest. Bedell’smethod supports this notion.
The identified project proposals can be prioritized usingmethods such as Information Economics (Parker et al., 1988);Balanced IT Scorecard (Grembergen, 2000) and InvestmentPortfolio (Berghout, 1997).
5.4 Development stage
In the development stage the prioritized proposals are subse-quently designed, built, tested and implemented. Suggestingthat development simply means working through the list of pri-oritized proposals would, of course, be an enormous oversim-plification. This would require indefinite resources ofdevelopers that are perfectly skilled in any technology and anybusiness area, and users who precisely define what they require.Unfortunately, the planning problems in information systemdevelopment are complex and priorities will change as systems
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Full life cycle management and the IT management paradox
develop and so will the business environment.
In order to keep track of the cost and benefits of the informationsystems under development, at least the following activitiesshould be managed:
management of cost, through active resource managementmanagement of benefits, through active management of thefunctionality of the information systems under developmentmanagement of the time schedule.
5.4.1 Management of cost
The resources required to build the information system comprisethe cost of the information system. The resources typicallyinclude hardware, software and all labour time associated withthe project (both IT and non-IT). As the system develops, a betterunderstanding of the cost will be established. There will be fewoccasions where the actual costs are similar to those envisioned,as there will always be technical problems, functional changes orplanning problems.
Gathering cost data throughout the development phase has,therefore, several objectives:
assembling data for future projectscontrolling the development activitiesevaluating cost and benefits of the project under development.
The last point is often of major concern in an IS project, asincreases in the development cost of a factor three or more regu-larly occur. Often, the rational of a project should be reconsid-ered.
This reconsideration is identical to the investment analysis of theplanning activity of full life-cycle management. In the planningstage the overall costs and benefits of projects are evaluated andcompared to those of other proposals. Consequently, this is not aproject management activity. Project managers are rarely in aposition to compare their projects to others, let alone compare allprojects to the strategic objectives of the organization. When costand benefits change to a certain extent, the project requiresanother review, which is similar to the justification that is part ofthe planning stage. There is, however, no golden rule to deter-
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mine this ‘certain extent’. Regular reporting of project managersto management are an essential element here.
5.4.2 Management of benefits
The benefits of information systems are associated with theenvisioned functionality. In other words, the informationsystem performs particular tasks, these tasks have particularefficiency or strategic consequences and these consequencesresult in benefits that should outweigh the anticipated cost. Thisalso implies that cost and benefits appear in a very dissimilarform in an organization and this complicates management ofbenefits and comparison with costs throughout development.Both these issues will be subsequently discussed.
As the information system develops, there will normally berequests for other (additional) functionality. Normally, theserequests will also imply additional benefits and, therefore, theyshould often be granted. However, granting additional func-tionality normally also implies delaying the delivery of theinformation system and this could imply major costs. As theinformation system is under development, the competitive situ-ation of the organization changes: companies merge, or com-petitors may launch new products. These changes mightchallenge the original rational or priority of the system underdevelopment. Short delivery cycles are therefore a commonlyaccepted principle in the management of IS projects and shouldbe given a high priority against adding functionality.
Senior management should be involved when conditionschange to such an extent that the original cost/benefit appraisalcould be challenged. From a managerial perspective the coststhat have been incurred until that point in time are irrelevant.The (new) anticipated benefits should be compared with theremaining development costs and operating costs at all times.
5.4.3 Management of time schedule
The final element that requires management attention is thetime schedule. As delivery time is a major issue when develop-ing information systems, so is the allocation of people to proj-ects. Planning both milestones and final goals is essential, notonly for the realization phase of the project, but also for the
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exploitation phase. During realization, milestones are used tomonitor the outcomes of the project, while during exploitationthey can be used to monitor investment results, for example tocheck whether qualitative goals have been reached. Experiencedata from previous projects is one of the few means to help in theplanning stage.
5.4.4 Conclusions regarding the developmentactivity
Managing information system development from a cost/benefitperspective requires control of functionality, resources and plan-ning. The actual functionality determines the benefits, theresources determine the costs, and planning influences both costand benefits.
Senior management cannot be bothered with all changes thatwill definitely occur during development. However, at a certainpoint these changes will also affect the priority of the projectcompared to those of others or even the rational of the project.Management of system development, therefore, also includessenior management attention. However, it is hard to draw anexact line between operational project management and strate-gic reconsideration of projects.
5.5 Exploitation stage
The exploitation of information systems differs from develop-ment in many ways:
the organization of this stage is production-likesystem changes are normally minor (since major changes areconsidered new investments)‘disabling’ functionality is often of major concern, such assecurity and availability issues (compared to ‘enabling’ func-tionality during the development stage).
From a cost/benefit perspective the exploitation activity is ofmajor concern as all benefits are reaped during exploitation andthe majority of the costs are then incurred (normally between60%–80% of the overall life-cycle costs). However, although thecost figures might be impressive, the possibilities to restrict thecosts or increase the benefits could very well be minimal. Most
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costs and benefits will be lump sum and changes would endan-ger the continuity of the various information systems. Researchindicates that on average approximately 10% of the costs andbenefits can be influenced in this stage (Klompé, et al., 1999).Cost allocation and charge out are the most obvious methods tomanage costs in this activity. Service-level agreements are themost obvious method to manage benefits in this activity. InFigure 5.3 an evaluation method for the operational activity isillustrated, which is developed by KPMG and Delft University(Kesarlal, 1997).
Information systems also have an end of life. Identifying thispoint in time is part of the exploitation stage. Evaluating alloperational information systems and removing those that are nolonger used or cost-efficient has proven to be a very economicalactivity.
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Figure 5.3 Cost/benefit managent of operating activity
Costs management Benefits management Business average score
IT budget ing
5.6 Full life-cycle management revisited
In the previous sections of this chapter the concept of full life-cycle management was discussed. This concept consists ofvarious interrelated activities. Throughout the development ofthe information system, from first conceptualization throughexploitation to abolishment, the notion of the costs and benefitsof a particular information system will improve. However, thenumber of possibilities to influence these costs and benefits will,unfortunately, decrease. This is referred to as the IT managementparadox: by the time the contents and consequences of the infor-mation system are clear, few possibilities are left to influencethem. This paradox should encourage and not discourage themanagement of information technology.
A more detailed life-cycle is illustrated in Figure 5.4. The plan-ning stage consists of prioritization of IT against non-IT and theprioritization between IT projects. The development stage con-sists of designing, building, testing and implementing IS proj-ects. The exploitation stage consists operating, maintaining andabolishing operational information systems.
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Figure 5.4 Overview of life-cycle management activities
The various activities can only be adequately performed wheninformation from other activities is available. For example, oper-ational costs typically make up 60%–80% of the life-cycle cost ofan information system. Not including these cost in the invest-ment appraisal of the planning stage implies that many uneco-nomical projects will be approved. Building up experience datais, therefore, an important element of full life-cycle manage-ment.
Aiming for excellence in only parts of the life-cycle seems to berelatively pointless, as excellence can only be realized on thebasis of information about the various other activities.
5.7 Full life-cycle management in practice
One might ask: to what extent concepts of full life-cycle man-agement are currently applied in practice? This sectiondescribes the state of the art in IT management at nine financialservices institutions. Overall, we concluded that althoughorganizations want to improve their IT cost/benefit manage-ment, they allow many opportunities to pass by. It is remark-able, for example, that still few organizations take theopportunity to evaluate their IT investments after implementa-tion. The attitude towards cost/benefit management remainsprimarily incident driven.
The outline of this section is as follows. First, the researchmethod is discussed. The model used is based on the life cycle,divided in to five parts: identification, justification, realization,exploitation and evaluation. These five parts are described indetail in the appendix to this chapter. Second, the researchresults of the nine case studies are given. The paper ends withconclusions regarding the quick scan tool and general findingswithin the area of IT cost and benefit management.
5.7.1 Research method
The presented overview is based on quick scans, which wereheld at nine major financial services organizations in theNetherlands. The quick scan consists of semi-structured inter-views. Three interviews were held at each organization, with:
strategic management, among other things responsible for
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Full life cycle management and the IT management paradox
organization-wide IT deployment, as well as responsible formaking general strategic decisionsIT management, with the main responsibility to offer IT serv-ices which are in conformity with the marketline management, among other things responsible for the real-ization of benefits from IT in the business processes
All these management types have a direct link to the IT invest-ment process and therefore are included in the research(Rockart, 1991; Applegate, 1996). By involving three individualswithin one organization, each with a different role and differentperspectives on IT, a broader and more informed view of the ITcost/benefit management is obtained.
5.7.2 Research findings
Using the quick scan in the three interviews, it is determinedwhether an organization addresses all requirements of a partic-ular life-cycle activity. The three quick scan results are eventuallycombined in one conclusion about the IT cost/benefit manage-ment of the organization. According to the number of require-ments it has implemented, an overall diagram of theorganization can be drawn which represents how well itmanages costs and benefits of IT. A typical outcome of the quickscan is illustrated in Figure 5.5.
In addition to Figure 5.5, a detailed explanation is presented toelaborate on the scores for the five activities. It explains whichaspects present themselves for cost/benefit managementimprovement. Presenting the results in a diagram provides agood base for communication within the organization. To imple-ment all aspects of the quick scan is not meant to be an absolutegoal for every organization, but rather the quick scan can givesuggestions how to improve parts of IT cost/benefit manage-ment. Since improvements themselves are investments, theyshould be analysed for appropriateness given the particularcontext of the organization. The overall findings of the ninefinancial organizations are elaborated upon in the remainingsections of this chapter. All major life-cycle stages will subse-quently be discussed.
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89
Identification
Evaluation Justification
RealizationExploitation
Performance Maximum
Organization
Strategic management involved in justification of IT proposalsCosts of exploitation are not consideredFormal investment method is absent
+ Periodical analysis ofinformation systems+ Assessment of marketand competition+ Clear guidelines for ITinvestment proposals
Operational costs of systems are knownSystem failure reports are availableNo Service Level Agreements between IT and business operations
Detailed project planningCosts, time and functionality are managedConsiderable exceeding of time and costs
– No comparison between investment results and set goals– No IT cost/benefit improvement due to experience
++–
+––
++–
Figure 5.5 Example of diagram resulting from a quick scan assessment
5.7.3 Identification activity in practice
An overview of the conclusions regarding the identificationactivity is given in Figure 5.6. All organizations have a bottom-up as well as a top-down identification process. This means thatIT investment proposals come from both an operational leveland a strategic level. At the operational level ideas are generatedby examining the business processes and (shortcomings in)existing information systems. Changing business strategies alsohave their impact on the IT strategy, which initiates new ITinvestments. Lastly, most organizations consult external advi-sors to inform them about new technologies and their possibleimpact.
However, most organizations do not distinguish a distinct iden-tification activity, which is separate from the justification activity.As a result, proposals are not gathered at a single point in time.Identification is rather a continuous process. Moreover, in theseorganizations IT proposals emerge either out of problems anddifficulties with IT, or from spontaneous ideas which are notwell thought out. The proposals are justified directly afterwards.What takes place is not pro-active explicit searching for IT pro-posals, but purely reactive activities. As a result many opportu-nities are missed, either because they were not discovered orbecause resources had already been given to necessary invest-ments to resolve problems. Discovered ideas are so-called must-do investments. There is no choice: the organization is forced toinvest in the proposals. In this line, strategic management isseldom involved in the identification of IT investment proposals.It waits for the IT ideas and proposals to emerge from the organ-
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– The identification is reactive insteadof proactive.
– Stratetic management is not involvedin the identification activity.
– IT proposals come from one part ofthe organization.
– Guidelines for IT proposals aremissing.
+ All organizations have a bottom-upidentification process.
+ Most organizations have a top-downidentification process.
+ Almost all organizations use externalsources to find new IT proposals.
Figure 5.6 Conclusions regarding identification activity
ization. Consequently, IT proposals often come from only oneside of the organization. This side is either the IT side, whichpromotes IT investments but often lacks the insight in real needsfor business processes, or the business side, which often lacksunderstanding of IT limitations. Lastly, the research shows thatnone of the organizations make use of proper guidelines for ITinvestment proposals. As a result the proposals are of varyingquality, and are difficult to compare.
5.7.4 Justification activity in practice
An overview of the conclusions regarding the justification activ-ity is given in Figure 5.7. The research shows that in contrast tosome years ago (Keen, 1991), nowadays strategic managementis involved in the justification activity. The increasing costs andrisks of IT investments demand the participation of the strategicmanagement during the justification. In this justification tangi-ble and intangible costs and benefits are considered. An illustra-tive example of this is a major bank deciding to give priority toan investment to improve the layout of their bank receipts (aninvestment which would bring in no direct financial benefits),rather than opting for an investment which would yield consid-erable financial profit.
However, due to a lack of general criteria for investment pro-posals, organizations find that it is difficult to compare the pro-posals. Priorities are therefore determined on the basis of(incomplete) information about the proposals, and the ‘vision’that the strategic management has of a proposal, instead of onthe basis of a formal decision process with clear criteria that
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– Goals are not verifiable ormeasurable.
– Criteria are not used or different foreach proposal.
– IT cost/benefit analyses are oftenincomplete.
+ All organizations have an eye fortangible and intangible costs andbenefits.
+ In all organizations strategicmanagement is involved in thejustification activity.
Figure 5.7 Conclusions regarding justification activity
apply to all proposals. Besides that, cost/benefit analyses areoften incomplete. Examples of this are missing estimations ofexploitation costs. Furthermore, only a small number of organi-zations estimate the costs that occur due to implementation ofthe information systems in the business processes.
A substantial problem in most justification processes is thatinvestment goals are not set in such a way that it can be checkedafterwards if these goals have been achieved. They are not veri-fiable or measurable. There is a tendency to state goals in a qual-itative way (‘better than the current situation’) instead of aquantitative way (‘an improvement of 15%’). Consequently wesee in the evaluation activity that it is very difficult to saywhether an investment was successful or not. IT cost/benefitmanagement improvement remains difficult if it is not clear ifand why IT investments failed.
5.7.5 Development in practice
Although all organizations make detailed time schedules andestimations of budgets, most IT projects exceed these time andcost estimations. Especially sizeable projects often run behindtheir initial schedule. The research shows three majors causes:
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– Project plans and time schedules aretoo optimistic.
– Financial estimates are incomplete.
– Documented experiences are notreused
– Subsequent calculations areuncommon.
– The quality of delivered systemsleaves much to be desired.
– Project goals are not fixed.
– Operational risks are not identified.
+ All organizations make time schedulesand plan budgets.
+ Most organizations use formal devel-opment methods to structure the real-ization process.
Figure 5.8 Conclusions regarding realization activity
project goals are not fixed, and change during project execu-tionthe estimates of time and costs are not realisticrisks are involved that were not anticipated.
As seen in the justification activity, goals are not set properly.Because of their vagueness they change during the project,resulting in projects that never reach their goals. These ‘ever-lasting projects’ do not deliver an operational system. One wayto tackle this problem is to deliver the system before majorsystem adaptations are made. Although this approach givessystems that have to be adapted to new needs, at least there aresome products which can be used in the business. Beside the toooptimistic estimates of time and costs, another cause of delays insystem delivery is the problem that operational risks have notbeen identified properly before an IT project is started, and thusunexpected problems arise during realization.
Opportunities to improve realization by doing subsequent cal-culations and use of documented experiences are uncommon.Lastly, the quality of most systems is regarded to be of a lowlevel at the time they come into exploitation; they seldom meetthe high expectations held by the end users or line management.
5.7.6 Exploitation in practice
The majority of organizations register exploitation costs for eachinformation system. However, two out of nine organizationsonly know the overall exploitation costs. They do not know howmuch each information system contributes to the total sum.
Almost all organizations had appointed somebody to eachinformation system, this person being responsible for the effec-tive use of the system. It is, however, remarkable that in generalno connection between the system and the initial goals is made.A well performed exploitation should focus on achieving the setgoals, not only on keeping the system operational.
Most of the organizations do not use Service Level Agreements.There is no formal agreement which states how systems shouldperform. Furthermore, in general there is no charging of IT coststo the business processes. Consequently it is difficult to knowwhich costs are made to support the business process. Becausebenefits and costs are not considered at the business process, it
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Full life cycle management and the IT management paradox
is difficult to determine whether the system is still profitable. Anoverview of the findings regarding the exploitation activity isgiven in Figure 5.9.
5.7.7 Evaluation in practice
Most organizations do not evaluate. For example, they seldomlook back whether the IT investment has really met expectedgoals. The three main reasons for this are:
due to vague project goals it is difficult to determine if goalshave been reachedThe results of one investment, so it is said, cannot be isolatedfrom other investment resultsDue to limited IT resources, IT capacity is rather used for newprojects than for evaluating old investments.
Consequently, organizations do not know if a particular ITinvestment can be called a success. However, such an evaluationis necessary to determine how IT cost/benefit management canbe improved. An analysis of the investment could lead to systemimprovement proposals or better IT economic processes for ITdecision making, system development and system exploitation.
A small number of organizations, who evaluate slightly better,make use of a formal method to evaluate some aspects from theIT investment process. For example, they use the CapabilityMaturity Model (CMM) to evaluate and improve the realisationactivity. Or they use benchmarks or a Total Cost of Ownership(TCO) model to evaluate the exploitation activity. This way theyimprove their IT cost/benefit management.
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– Most organizations do not use ServiceLevel Agreements.
– IT costs are not charged to thebusiness processes..
– Exploitation is not focused onachieving the investment goals, buton keeping the system operational.
+ Most organizations know the exploita-tion costs per information system.
+ Most organizations have arranged theresponsibility of the informationsystems.
Figure 5.9 Conclusions regarding exploitation activity
5.7.8 Conclusions full life-cycle management
In this research the concept of full life-cycle management wasused to assess the management of IT costs and benefits. Basedon the observation that throughout the life-cycle of informa-tion systems, the costs and benefits become both more clearbut also harder to influence, a quick scan instrument wasdeveloped to present opportunities to get a better grip on ITcosts and benefits during the whole life-cycle of informationsystems.
The quick scan was deployed in nine financial organizationsand indicates that in contrast to a number of years ago, nowa-days senior management is actively involved in the ITcost/benefit management. This is probably caused by theincreasing costs, risks and potential benefits of IT investments.Although organizations confirm the importance of a well-per-formed IT cost/benefit management, in general quite a fewaspects of their IT cost/benefit management were open toimprovement.
The quick scan tool which is applied in this paper appears to bean efficient tool for analysis. In all cases, the case study conclu-sions were confirmed by senior management and the analysiseffort was experienced as worthwhile.
The most important conclusions regarding costs and benefitsmanagement are as follows.
Identification of project proposals: instead of a pro-activeidentification of IT proposals, most organizations have a morereactive attitude towards IT investments. Only when IT prob-
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Full life cycle management and the IT management paradox
– Evaluation is missing, due to the factthat goals are not measurable.
– Influences of other investmentscannot be isolated.
– IT capacity used for new projectsrather than for evaluation.
+ Some organizations make use ofsome kind of format method to evalu-ate the investment process.
Figure 5.10 Conclusions regarding exploitation activity
lems arise, a clear identification process is visible. OtherwiseIT investment proposals are not sought. As a consequence,most IT proposals are necessary to solve a problem and thereis no real choice about investing or not.Justification of project proposals: investment goals are not ver-ifiable or measurable. It is therefore difficult to assess if an ITinvestment has been successful.Realization of projects: IT projects last too long and cost toomuch due to unclear project goals, too optimistic estimationsand the occurrence of unanticipated problems.Exploitation of operational information systems: in generalthe focus lies on maintaining the information systems opera-tional, not on using the systems to achieve investment goals.Evaluation of cost/benefit management: because the results ofmany IT investments are not assessed, organizations do notknow how to manage their IT costs/benefits better.
Though these results are interesting in their own right, the realbenefit of the quick scan tool is not to arrive at general findings,but to suggest specific points for improvement to particularorganizations. The merit of the quick scan tool is the possibilityto locate specific lacks in IT cost/benefit management, presentthem in a communicative manner, and give a basis for improve-ment.
The case studies support the assumption that excellence of oper-ations can only be achieved when all activities of full life-cyclemanagement are addressed. Simply, because information ofother activities is required to achieve some form of overview.The different parts in the life-cycle model require input fromother parts. For example, to come to a good evaluation (during‘evaluation’), information such as justification criteria (during‘justification’) is needed.
By using the quick scan, we address the IT management paradoxby influencing IT costs and benefits not only at an early stage ofthe life-cycle when the effect of influence is the most substantial,but also during the full lifecycle. Because of the dependenciesbetween the different elements in the lifecycle, this full life-cycleapproach presents the opportunity to use experiences over timeand thus to mature our management of IT costs and benefits.
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Appendix: Quick scan elements in detail
With the information economics life-cycle (Swinkels, 1997)approach as a basis, a quick scan instrument has been devel-oped with the purpose of gaining insight in the way organiza-tions handle IT cost/benefit management. The quick scaninstrument requires that the life-cycle is developed in moredetail. Using multiple general sources of literature on IT evalu-ation and IT economics (e.g. Willcocks, 1994; Farbey et al., 1993,Remenyi et al., 1993; Hogbin; 1987 Parker and Benson, 1988) andmore specific sources on the life-cycle model (e.g. Berghout et al.,1996; Irsel and Swinkels, 1992) and interviews with members ofthe Workgroup Information Economics, who initially developedthe information economics life-cycle concept, a model is createdwhich details the main activities of the life-cycle into a numberof requirements for a well-performed activity.
Identification
This activity is concerned with discovering all investment pro-posals where IT can benefit the organization. The ideas forinvestments can be found by a top-down, bottom-up and aninside-out approach (Earl, 1989). Examples of these approachesare: IT investment proposals derived from business goals (topdown), proposals due to failing information systems (bottomup) and proposals that are presented by innovative use of IT(inside out).
The importance of identification lies in the fact that during thenext activity (justification) a choice should be made from theideas and plans that have been discovered. When importantideas are overlooked due to bad identification, importantopportunities might be missed. Thus, the identification activityis necessary to identify all attractive IT investment proposals.
The main requirements for a well-performed identification areas follows:
Senior management should be involved in this stage and determinethe direction in which new IT investment proposals should besought. It is the role of the senior management to set thegeneral direction of the company. As these days IT is becom-ing more and more of strategic importance, the involvement
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of strategic management in this activity is essential.All operational information systems should be periodically checkedto see whether it is necessary to discard them or improve them. Tominimize the threat that operational systems suddenly fail, aperiodic check of systems is necessary. Such a check could givethe impulse for discarding an information system or for addi-tional IT investments to improve the current situation. Itenables a pro-active reaction to possible threats.A well-performed identification considers all three possible sources ofnew IT proposals: top down, bottom up and inside out. Though themajority of proposals may come from one source, all threesources should be referred to. This entails analysing businessgoals, existing business processes, operational informationsystems and looking for IT possibilities.Besides the internal IT opportunities, the organization should payattention to the external developments with respect to competition,customers, changes in society, government regulations and advicefrom external parties. External ideas, opportunities and threatsshould be identified. For example, for most financial compa-nies a change in the government’s policy can have a majorimpact on the organization of information.It is essential that one person (or department) is responsible for pro-active identification. If no one is responsible for identification,the identification process will be without structure (or nonex-istent). Most likely many IT investment proposals will beoverlooked: either they remain undiscovered or are carriedout without entering the IT decision process.Guidelines should be used which have to met by all IT investmentproposals. To attain a certain quality of proposals, clear guide-lines should be used which can specify defined norms (such afinancial norms) or norms concerning content (such a certainaspects that have to be addressed in each proposal). Theguidelines should be known by all who are involved in the ITinvestment decision-making process.Persons (or departments) should have the time and resources to gen-erate proposals. Clearly, only when people get the resources todraw up proper IT proposals, will the identification turn outthe best IT investment proposals.
Justification
The justification activity is used to justify IT investment propos-
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als and to weigh the different proposals against each other, sothat limited organization resources can be distributed amongthe most attractive proposals. To make an accountable decision,a number of (predefined) criteria can be used to score each pro-posal. The criteria can be financial (e.g. return-on-investmentfigures) and non-financial (e.g. strategic match).
The main requirements for a well-performed justification are asfollows.
Three aspects should always be regarded in each proposal: costs(including time), benefits and risks. One can have all kinds of dif-ferent criteria to justify IT investments, as long as the criteriacover the costs, benefits and risks of the investment.Distinctive criteria should be used to justify the execution of ITinvestments. Due to limited resources only a small number ofIT investment proposals can actually be realized. Thereforethe proposals should somehow be compared to each other todetermine which proposals should have priority. By distin-guishing criteria all proposals can be matched.A distinction should be made between the investment’s impact onthe business domain and the IT domain. Because there is a con-siderable difference between investments in informationsystems and in the technical infrastructure, there should be anawareness that investments can have an impact on differentdomains. Investments in information systems can result indirect benefits for business processes (the business domain),whereas investments in the technical infrastructure (ITdomain) mostly do not. However the investments in the ITdomain are crucial to do (future) IT investments.Consequently both types of investments are equally impor-tant, but may have very different kinds of benefits.Strategic management should be involved in justification. ITinvestments are characterized by high costs and high risks,but also high potential benefits. Furthermore, many IT invest-ments have a company-wide impact. These are reasons whythe strategic management should be involved in justificationand make clear decisions concerning IT.There should be well-founded (overall) estimations of all tangibleand intangible costs (including initial investment costs andexploitation costs) and benefits. All costs and benefits should bequantified as much as possible. This is especially difficult forthe intangible costs and benefits. A quantified estimation is
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often more usable in the justification process than qualitativestatements (such as ‘much more’ or ‘much better’). Thesequantified estimations do not always have to be financialfigures, but can also be estimations of numbers (like productnumbers), time estimations (like time to develop), etc.Although in this stage the estimations may be overall estima-tions, they have to be well-founded. Of course all costs have tobe regarded, including the initial costs and the annuallyreturning exploitation costs. Justification should be performed according to a formal justificationprocess. For an effective justification a formal process should beused. A formal process is characterized by documented proce-dures, which are followed in practice. The main benefit of aformal process is that it can be adapted using experiencesfrom previous IT investments so it becomes more effective.Project goals should be verifiable and measurable. It is importantthat it is possible to determine if goals have been reached.There are three reasons for this: firstly, during realization it isalways clear which goal should be reached and one can worktowards that goal. Secondly, at the end of the IT project it ispossible to say whether an investment was successful. Thirdly,if an investment was not successful, the reasons for failure aremore clear. IT and line management should be involved in justification. ITmanagement and line management both have different pointsof view on IT investments. IT management is mostly respon-sible for providing information about the possibilities and lim-itations of IT. Line management is mostly responsible forproviding information about the needs for the businessprocesses. Participation of both managements guarantees thesupport which is needed to bring the IT investment to a suc-cessful ending.It should be known how different proposals interact with each other.Most IT projects interact with each other, either as opposingfactors (because they share resources) or as complementingones (because one project has results, which can be used bythe other). The interaction of proposals should therefore betaken into account.
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Realization
During the realization of the investment, the aims and goals thatwere set during justification should be achieved againstminimal costs. The investment proposal is implemented duringan IT project. This not only implies a technical implementationof the system, but also the integration of the system in the busi-ness process. All related costs should be monitored. Thisincludes indirect costs such as the costs that occur due to thereorganization of the business processes.
The main requirements for a well performed realization activityare as follows.
A time schedule and well-founded detailed estimations of all costs.The overall estimations during justification should now bedetailed. As a result there will be a project plan with a detailedtime schedule and budget. Measurable targets with respect to functionality of the system. Theproject goals from justification should be translated to func-tional goals. The goals describe what functionality and per-formance the information system will have.Measurable milestones during the project. Milestones are neces-sary to monitor the project and be able to adjust whererequired.There should be continuous monitoring of costs, time and function-ality. To determine whether a project needs adjustment, oneneeds to measure the costs, time and functionality andcompare these to the preceding plan. These three aspects canbe used to steer a project. For example, in most cases one cancut costs by discarding functionality. Or, at the price of highercosts, a project can be delivered faster.Subsequent calculation. After the project has finished, a reportshould be made which explains the differences betweenactual costs and planned costs. This is not only useful to eval-uate the project, but also gives insight in the way things canbe done more effectively in the future.Operational risks should be assessed at the start of the project andmonitored during the project. Most project problems can only besuccessfully solved if they have been identified at the start ofthe project. They should be monitored during the execution ofthe project.A structured development method should be used (e.g. SDM).
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Developing an information system according to a structuredmethod has two advantages: firstly, none of the importantdevelopment stages will be overlooked. Secondly, the methodcan be easily adapted when results are not satisfactory. Problems and budget or time exceedings should be reported to man-agement. The sooner problems are known, the sooner actionscan be taken. There should be some mechanism during real-ization where management is informed about such problems. A structured scheduling method should be using while planning theproject (e.g. function point analysis). Methods like the functionpoint analysis, the COCOMO method or comparable methodsgive insight in the efforts an IT investment requires. By usingthe same method structurally, an organization can adapt it tomake increasingly better estimations.Problems occurring during project execution should be writtendown in reports, so that knowledge can be used. It is not uncom-mon for projects to encounter the same problems as past proj-ects. If knowledge about these problems is used, they can beavoided or corrected earlier on.
Exploitation
The primary target of the exploitation activity is to optimise thesupport of existing systems to the business processes. Thisentails minimising operation costs, and maximising the use ofthe possibilities of the systems. A well-performed exploitationaddresses the initial investment goals, while monitoring allexploitation costs. During exploitation the business reaps thebenefits of the system.
The main requirements for a well-performed exploitation activ-ity are as follows.
Operational systems should be kept operational, so that expectedbenefits can be realised. The investment goals should be reachedby making sure that the operational systems remain opera-tional and contribute to the set goals.The most important exploitation costs should be registered for eachinformation system. During exploitation operational systemsshould be kept operational, and thus guarantee thatexpected benefits can be attained. The costs of exploitationform a considerable part of all investment costs. Insight inthese costs can help to determine if an information system
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still is profitable by comparing resulting costs to benefitsand expected costs. Also this insight helps to determine allinvestment costs of future IT investments. Importantexploitation costs are costs of software, hardware, technicalstaff and costs that occur in the business process due toexploitation of the system.Differences between results of costs, benefits and performance andtheir expectations should be reported and documented. As was thecase with realization, the same applies here: an organizationcan only learn and subsequently improve its cost/benefitmanagement by reporting the problems that occurred. Onlywhen problems are highlighted can proper actions be taken toimprove the situation. The most important system performances of each information systemshould be registered. To monitor the performance of the informa-tion systems, several aspects of an information system shouldperiodically be recorded. Depending on the kind of informa-tion system, these aspects can be: response time, number oftechnical problems, downtime of the system, number of prob-lems reported to the help desk concerning the system, etc.Changing performances can indicate a problem, and canrequire changes to the systems and maybe even additional ITinvestments to increase the performance. In this last case, theexploitation provides an IT proposal as input for identification.IT costs should be charged to the business processes. To decide if aninformation system is (still) profitable, it is wise to study bothcosts and benefits at the same point: at the business processlevel. If benefits and costs are clear, it can be decided if thebenefits of the system still outweigh its costs. To gain insightin the actual costs, all IT costs should be charged to the busi-ness process, because that is the point where the benefits aremost visible. According to Earl (1989), charging the IT to thebusiness process does not always have to mean that the busi-ness actually pays for IT.Service Level Agreements should be formulated between the ITdepartment and user organization for each information system.They should be checked periodically. On the one hand the IT costsshould be charged to the business processes, but on the otherhand the information system should also perform in accor-dance with predefined agreements. Only when the systemworks as specified, it can be successfully exploited in the busi-ness process. Service Level Agreements are used to recordagreements about the performance of the system.
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Each information system should have an exploitation budget.Practice shows that operational systems often need someminor adjustments to make them fully functional. To be ableto make these adjustments a (small) budget should be avail-able to each information system.For each information system somebody should be responsible. Whenthe system is implemented in the organization, somebodyshould be appointed who is be responsible for ensuring thatthe system keeps running and who can assure its effective use.
Evaluation
By comparing the outcomes to the set goals, an IT investmentcan be evaluated. If goals are not met (any longer), systemsshould be discarded. Furthermore, by evaluation the wholeinvestment cycle and its outcomes, improvements can be imple-mented in the IT investment process. In this way, proposals canbecome more realistic, justification can be based on better crite-ria, realization can yield better results and exploitation can bemore effective. Through a thorough evaluation, an organizationcan learn about and improve its IT cost/benefit management.
The main requirements for a well-performed evaluation activityare as follows.
A quantitative analysis of the benefits should be carried out. Allbenefits which can be measured should be subjected to aquantitative analysis. Especially during justification the goalsthat where formulated in a measurable way should beanalysed.A qualitative analysis of the project benefits should be carried out.Effects that cannot be measured directly can be retrieved usingqualitative measures, including interviews with customers orusers, analysis of complaints or external benchmarks oraudits.The results of the system exploitation should be compared to itsgoals. Differences should be registered. The question to answer is:have we reached our goals by making this IT investment? Ifgoals are not met, the system may possibly be adapted so thatbenefits can still be derived. Additional investments may alsobe decided upon, to make the existing system more profitable.A cost analysis should be performed. By comparing the registeredcosts during realization and exploitation to the cost estima-
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tions during justification conclusions can be drawn about thequality of the IT cost/benefit management. Improvements ineither the decision process or the investment implementationcan be the result. The reports about realization and exploitation should be reviewed:what are the differences between the targeted and resulting costsand benefits, and where do these differences come from? Such ananalysis is used to improve IT cost/benefit management.Two possible conclusions can be: the estimations were notcorrect and should be adjusted in the future, or the imple-mentation of the investment failed and some activitiesshould be improved.Strategic management should be involved in the evaluation of ITcost/benefit management. Strategic management should alwaystake the initiative to evaluate and improve IT cost/benefit,because IT and line management do not take this initiative. ITmanagement is not directly interested in a cost-effective ITuse, because this means a shift of IT responsibility to linemanagement. Line management is also not interested in thisshift, because it becomes responsible for the results of ITapplications.A periodical analysis of the complete IT cost/benefit managementshould be carried out. All activities in the IE life-cycle should beperiodically analysed to see if they are performed effectivelyand efficiently. A good approach is to use formal methods toassess each of the five activities. An example of such a methodis the Capability Maturity Model (Paulk et al., 1993) to assessthe realisation activity. Furthermore benchmarks can be usedto determine if specific information systems are used effi-ciently.Written procedures should be used detailing how each of the fivestages should take place. Only when formal procedures exist, thatlay down how an activity should be carried out, it is possibleto actually improve work procedures so that they becomemore effective. Informal procedures are hard to adapt.
References
Ahituv, N. (1980) A systematic approach towards assessing thevalue of an information system, MIS Quarterly, December.
Applegate, L. M. et al. (1996) Corporate Information SystemsManagement: the Issues Facing Senior Executives. Irwin,Homewood, Illinois.
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Bedell, E.F. (1985) The Computer Solution: Strategies for Success inthe Information Age. Dow-Jones Irvin.
Berghout, E.W. (1997) Evaluation of information system proposals:design of a decision support method, PhD Thesis, Delft Universityof Technology.
Berghout, E. W. et al. (1996) Lecture notes: InformationManagement/Information Economics. Delft University ofTechnology.
Brynjolfsson, E. (1993). The productivity paradox of informationtechnology. Communications of the ACM 36(12): 67–77.
Clemons, E.K. (1991). Evaluation of strategic investments ininformation technology, Communication of the ACM, 34(1):23–36.
Earl, M. J. (1989) Management Strategies for Information Technology.Prentice-Hall, New York,
Farbey, B., Targett, D. et al. (1993) How to Assess your ITInvestment: A Study of Methods and Practice. Butterworth-Heinemann, Oxford.
Hogbin, G. and Thomas, D. (1987) Investing in InformationTechnology: Managing the Decision-making Process. McGraw-Hill, London
Irsel, H. G. P. v. and Swinkels, G. J. P. (1992) ‘Investeren in infor-matietechnologie: Take IT or leave IT (Investing inInformation Technology: Take IT or leave IT; in Dutch).’Informatie 34: 624–636.
Keen, P. G. W. (1991) Shaping the Future: Business Design ThroughInformation Technology. Harvard Business School Press, Boston,Massachusetts.
Kesarlal, J. (1997) Management and Control of OperationalInformation Systems, MSc Thesis, TU Delft.
Klompe, R, Berghout, E. and Looijen, M. (1999) Cost/benefitevaluation of operational ICT in large financial organisations.Proceedings 6th European Conference on Information TechnologyEvaluation, MCIL (Reading).
Parker, M. M. and Benson, R. J. (1988) Information Economics:Linking Business Performance to Information Technology. PrenticeHall, Englewood Cliffs, New Jersey.
Paulk, M. C., et al. (1993) Capability Maturity Model forSoftware, Version 1.1. Software Engineering Institute,Pittsburg.
Porter, M. (1980) Competitive Strategy, Free Press.Remenyi, D. et al. (1993). A Guide to Measuring and Managing IT
Benefits. NCC Blackwell, Manchester.
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Rockart, J. F., et al. (1991) The Information Technology Function ofthe 1990s: a Unique Hybrid. Center for Information SystemsResearch, Sloan School of Management, MassachusettsInstitute of Technology.
Swinkels, F. G. J. P. (1997) Managing the Life-Cycle of Informationand Communication Technology Investments for Added Value.European Conference on the Evaluation of InformationTechnology. Delft University Press, Delft.
Thorp, J. (1998). The Information Paradox: Realizing the BusinessBenefits of Information Technology. McGraw-Hill Ryerson,Toronto.
Willcocks, L. (1994) Information Management: the Evaluation ofInformation Systems Investment. Chapman & Hall, London.
Willcocks, L. (1996) The evaluation and management of infor-mation systems investments: from feasibility to routine oper-ations. Investing in information systems: evaluation andmanagement. Chapman & Hall, London.
Willcocks, L. and Lester, S. (1999) Beyond the IT ProductivityParadox. Chichester, England; Wiley, Chichester.
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6.1 Introduction
Legacy systems are computer systems, situated within a partic-ular organizational environment, which no longer meet theneeds of that environment. Such systems can cause considerableproblems in organizations, from high-profile cases such as themillennium bug to less widespread but equally serious caseswhere, for example, companies have been unable to adapt theircomputer systems sufficiently to support their customer base orchanging product profiles. Not all ‘legacy’ is bad, however.Many legacy systems contain a massive amount of historicalorganizational data, business process information and/or func-tionality. Yet these systems are often inflexible or run on out-dated hardware or software technology of which few peoplemay have knowledge.
In this sense, then, they can become a liability rather than anasset. Even so, the term ‘legacy systems’ has been overused andabused. A cynical view might suggest that the term is little morethan an artefact of late capitalism, intended to make establishedusable software look outdated and sell more products.However, this view is also rather narrow. To summarize, a moreholistic view of legacy systems would seem to suggest that theproblem is the gap between the capabilities of the system andthe needs of the business in which it is used (Brooke, 1994).
6 A framework for evaluating legacy systems
Carole Brooke
Faculty of Business and Management, University of Lincoln, United Kingdom
It is not enough to regard such solutions as purely technical,concentrating only on the software, which is a ‘problem’ – for ifthe problem concerns the relationship between software andbusiness, so must the solution. The study of legacy systems hastended to be biased towards a software engineering perspectiveand to concentrate on technical properties. This chapter sug-gests that the evaluation of potential change options for legacysystems can only be carried out as part of a holistic organiza-tional analysis. That is, the evaluation of legacy systems musttake place within a framework that combines business and tech-nical considerations. Evaluating the potential change optionsfor legacy systems can only be carried out as a joint process ofdecisions about business and IT strategy. In particular, businessstrategy must lead this process.
This chapter presents a framework for a more holistic evalua-tion of legacy systems. It is based on the generation and priori-tization of organizational change scenarios. The framework isdescribed and its use is illustrated within a large commercialcompany.
The Organizational Scenarios framework was developed by theauthor (Brooke, 2000) and inspired by the research of Clegg et al.(1996). The main trigger for the author’s research in this areacomes from years of teaching executive MBA students about thehuman and structural implications of information technology inthe workplace. In reviewing existing theories and concepts, itbecame apparent that some of the material could be combinedto form a more satisfactory approach to understanding theissues. Thus it was the conceptual ideas of authors like Zuboff(1988) that came to be combined with the more empiricallyfocused works of Scott Morton (1991) to form a practical evalu-ation technique that, nonetheless, gives serious treatment to thesocial and political values that are inherent in every organiza-tional decision-making process.
6.2 Getting started
This section gives a brief overview of the stages involved inusing the framework and then goes on to illustrate each step byreference to the work with CallCentre.
The technique presented here enables organizations to identifyfor themselves choices in the application of technology, espe-
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cially (but not exclusively) information technology in the work-place. Choices are indentified through a process of scenario gen-eration involving different stakeholder groups across and atdifferent levels of the organization. The use of scenario buildingin the context of technology is not new. It is an established qual-itative methodology for generating future scenarios and can beused as part of a wider forecasting activity.
Participants should include (but not necessarily be restricted to)technical and business experts in order to be able to generate theinformation required at each stage. Ideally, a participant groupshould consist of about a dozen people and include:
Senior directors (preferably including someone at board level)Managers from different organizational functions (includingHuman Resources)IT specialists (preferably including a software engineer)Front-line staff (including those at the external customer inter-face)End users (preferably including an external customer).
The Organizational Scenarios framework begins with helpingparticipants to describe their organization as it currently exists.An icebreaker exercise, such as asking participants to illustrateon paper their personal view of the legacy system, can be auseful way to begin. Once this is done, all the participants areasked to generate the first scenario, referred to as the status quo.Following this, participants are given three new scenarios toconsider, which are, in themselves, stereotypes but whichencourage participants to be creative in thinking about organi-zational change. On completion of the status quo exercise, par-ticipants are divided up into small groups and facilitated todevelop their own scenarios. Ideally each group should producethree or four additional scenarios. When this has been achieved,the facilitators bring the groups back together to evaluate thestatus quo and the new scenarios. Participants are asked to pri-oritize the scenarios in order to avoid an explosion of possibili-ties before moving onto the next stage. It is important to note,though, that the status quo scenario must always be carriedforward to the next stage of the model for comparison, as theobjective is to assess the gap between what is currently in placeand possibilities for the future, as well as to assess the feasibilityof any suggested changes.
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The empirical research took place within a large UK-basedcompany that is structured around a call centre operation. Theyare referred to hereafter as CallCentre. Major problems werebeing encountered with the flow of work through the businessprocess chain. The company thought that this was primarilydue to human error although CallCentre also made it clear thatthe technology involved was inadequate to support the com-plexity and size of the tasks being performed.
The work with CallCentre began with an icebreaker exercise.The exercise consisted of individuals expressing their personalview of the current set-up and its associated problems in theform of a picture or diagram. Discussion then took place in aplenary session of the different perspectives. Interestingly, therewas a general consensus concerning the nature of the problems.These focused around issues such as fragmented communica-tions, inaccurate information (their word), inadequate technol-ogy, and a general lack of quality control. After this the groupwas asked to generate a description of the status quo using amatrix (see Table 6.1).
This stage should be led by a facilitator (preferably some-one who is not a direct stakeholder) and begins with a groupanalysis of the existing organizational scenario (whichmay or may not already involve technology) against ninecriteria: boundary, vision, logic, structure, roles, view of infor-mation, costs, benefits and risks. This exercise was facilitated bythe author and recorded on paper how they viewed the currentset-up. A brief description now follows of the criteria in thematrix (more detail of the theoretical underpinning is given inBrooke, 2000) and is illustrated by reference to the CallCentreoutputs.
Boundary refers to the scope of the business area under evalua-tion. It could be a particular department, for example, or it couldbe the whole organization. The boundary for the analysis atCallCentre was a particular job management activity and thechain of processes associated with it. The information systemssupporting this activity ran in a virtuous circle from the cus-tomer through to professionals in the business and back outagain to the customer. The participants viewed the processes asa chain through which (ideally) information flowed speedilyand without error. They spoke a great deal about the fluidity ofinformation and problems were seen in terms of the interrup-
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tion of this flow-through and this perspective is echoed in thescenarios they produced.
Vision in this context does not refer to a mission statement or thelike. It refers to a global summary of how the organizational unitbeing evaluated actually exists. Participants were asked to con-sider why it was that the job management activity had beendesigned in its particular way. What was the vision behind itsdesign and function? Responses suggested that the design to a
Table 6.1 Status quo scenario
Boundary of the analysis How job management is effected and work isdelivered to the field and back.
Company vision Pure history. This activity is meant to deliver aservice.Deals with problems. Removes them so that pro-fessionals in the field can get on with the job.Seen as the flexibility point for the whole businessprocess chain. Measured on volume and speedand not on quality.
Explanatory logic Centrally controlled processes.Removes the dross from the professional teams.
Organizational structure A mix of centralized and regional job control roles.Specialised staff but with some multiskilling.No dependency in the system – it all runs in parallel.
Roles The more skilled people were moved into jobcontrol roles.Deskilling of professionals took place – i.e. theyused to manage their own work loads rather thanrely on controls.
View of information Information is seen as a resource but as frequentlyinaccurate.
Costs Poor information. Lost business. Failed activities.Rework. Compensation to customers for failure.
Benefits Cost of failure.Good at delivering customer service.
Risks Poor customer perception.No accountability for poor quality data (no qualitychecks).
large extent had simply followed history in a ‘because we do itthat way’ sense. It was recognized that the core of the businesswas about delivering a service and it was thought that design-ing the processes in this way enabled the service to be deliveredwith a minimum of problems. The vision had been to removeproblems away from the customer interface. It had become clearto the business though that the vision had lost its legitimacy;hence the need for a re-evaluation.
Logic refers to the rationale that underpins and drives thisarrangement. The organization centralized the control of its jobmanagement functions hoping, thereby, to achieve greater effi-ciency. Also, the intention was to ‘remove the dross’ from thehighly paid professional staff. The organizational structure flowsfrom this. The role of the job management function was tosupport professionals in delivering a service to the customer. Inorder to do this more quickly, service delivery was done on aregional basis, hence the whole process chain was a mixture ofcentralized and regionalized controls. A problem highlighted atthis point was that there was no dependency built into thesystem. Too much of the activity ran in parallel so that problemsoften did not become apparent until much later ‘downstream’ inthe process chain.
Work roles were fairly mixed. Some roles in the process weredeskilled (e.g. one group of technicians were no longer able tomanage their own individual job schedules) whereas for othergroups there was a certain amount of multiskilling. Specialistskills were still required, mainly only for the higher paid pro-fessionals. Key to an understanding of the role of informationsystems vis-à-vis people at CallCentre was their view of informa-tion.
View of information asks the participants to identify thecompany’s general approach to the concept of information. Theresearch team pointed to the difference between data and infor-mation and the difference between an objective view and onethat gives more importance to the role of the individual in itsinterpretation. The responses from organizational memberswere self-contradictory. Whilst individual members recognizedthat ‘information’ (i.e. not data) received on a terminal screenwould not be interpreted in the same way by everybody, theystill insisted that this was a result of ‘human error’ and that thesolution was to automate people out of the process as far as pos-
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sible. The assumption was that the technology was a neutralvehicle for transference of facts and that it could speed processesacross spatial and functional boundaries. The informationsystem’s role was to transmit what they called ‘facts’ unchangedfrom place to place and, therefore, with a high degree of accu-racy. Information was seen as an objectified, externally manage-able physical resource. This view of information is referred toshorthand in the framework as ‘a resource view’. Its theoreticalaspects are discussed in more detail elsewhere and it has linkswith the resource-based view of strategic management (Brooke,2000).
The last three criteria addressed in the status quo matrix arecosts, benefits and risks. These tend to be fairly familiar conceptsand usually focus on economic considerations. However, partic-ipants were encouraged to think more broadly about effectsassociated with the existing set-up and to articulate both tangi-ble (e.g. compensation pay-outs to customers) and intangible(e.g. damage to reputation) issues. The comments made in thematrix for these three criteria are fairly self-explanatory, exceptperhaps one: the cost of failure as a benefit. This refers to theeffect that failure has on the increased demand for customerservice. In other words, if the company delivers a service to acustomer but does so incorrectly then it has another opportunityto visit them to put it right. Since getting to the customer wasseen as a current strength of the business (even if not performingthe job entirely correctly) the company could maintain someaspects of its good reputation. This ironic situation, however, isreflected badly under the costs section, where it was clear thatrework was a major issue. As one participant put it:
We are good at fixing problems but we introduce a lotof problems, too. Fifty per cent of the work is actuallyrework.
Having assisted the participants to record their view of thestatus quo, the author led them to briefly consider three alterna-tive stereotypical scenarios labelled automate, informate andtransform (see Table 6.2). The purpose of these three stereotypeswas to alert participants to the different ways in which technol-ogy could be applied to support, change or enhance businessprocesses and, in particular, to pay attention to the different setsof values and assumptions that underpin the different strategies.The terms ‘automate’, ‘informate’ and ‘transform’ have become
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relatively well established in the literature, but a useful guide isgiven in Cash et al. (1994):
When information technology substitutes for human effort,it automates a task or process. When information technologyaugments human effort, it informates a task or process.When information technology restructures, it transforms aset of tasks or processes.
(Preface, p. v)
Table 6.2 The stereotypes: automate, informate, transform
Automate profile Informate profile Transform profile
Boundary Production department. Production department Whole organizationand customer-facingdepartments.
Vision Specialized manufacturing. Individualized products. Innovative products.
Logic Substitute human effort. Augment human effort. RestructureMaximize time/effort/£. Release new potential. Become more proactive.
Be more responsive.
Structure Specialized functions. Cross-functional activity Fully networked organization.Centralized. and use of networking. Groups formed as necessary.
Focus on intra- Focus on interorganizationalorganizational links: links: ‘loose–tight’.‘tight–loose’.
Roles Defined by technology. Expanded jobs/ Flexible/multiskilled.Streamlined. skills developed. Increase in contract staff.Tendency towardsspecialization.
View of Tangible/measurable resources, Intellective/analytical Hybrid staff and specialists information e.g. time, money, head count, skills emphasized. are key.
equipment. Individuals shape Intra- and interorganizationalWhat counts is what activities and knowledge are highly valued.can be measured. influence new direction; Emphasis is on coordination
bring alternative rather than direction (automate)interpretations. or individualism (informate).
Costs Hi-tech machinery. Loss of control. Depends on restructure but Capital intensive. Coordination. could be: relocation, redesign of Labour turnover. Decision risks. of systems, reskilling of staff
and management.
Benefits Cheaper labour. Quicker response times. Responsive to changing context.Predictable output. Job satisfaction. Develop new alliances.Greater control. Market sensitivity. Global positioning.
Risks Dehumanizes workforce. Misses potential. Exploitation of workforce.‘Leaves the brains at the door’. Failure to re-evaluate No economy of scale.Driven by the technology. the core business areas. Sense of insecurity.
Loss of planning and continuity.
An automate approach to IT is based on principles of the substi-tution of human labour and cost efficiency. The organization’svision will, therefore, tend to be limited to a view of the businessthat maximizes technological control, streamlines workprocesses, and reduces variability. Physical resources will bestressed: labour, machinery, finances, and so on. Benefits willtend to be short term, focused on reductions in overhead, labour,and increased management control. Similarly, automation doesnot recognize a primary role for perceptions.
The first conceptualization of the term informate is generallycredited to Zuboff (1988). An informate approach to IT is basedon the principles of augmenting human effort and helping indi-viduals to add value through the application of intellectiveskills. The rise of cross-functional activities, the ability to seerelationships between different parts of the business, and tohave more of an overview of the work context will enable indi-vidual workers to identify and anticipate new business oppor-tunities and novel ways of working. Job expansion, quickerresponse times, and improved market sensitivity are some of thecharacteristics that define the informate scenario. The vision ofthe business has moved beyond specialization and tightenedcontrol to an individualized approach that pushes more of thedecision and control mechanisms out from the centre and closerto the customer interface.
Transform takes the informate scenario to its extreme.Transformation became an established term following the workof the MIT 1990s research team (Scott Morton, 1991). The basicargument was that it was very tempting to apply IT in order toachieve efficiency through automation (and sometimes it wasalso the simpler route) but that long-term benefits could onlycome from applying it in a way that literally transformed thebusiness. The structure of the organization has become muchmore diffuse and difficult to physically identify. Staffing andgroupings are constantly changing to reflect the requirements ofthe business. Indeed, the very nature and purpose of the busi-ness itself requires re-evaluation. Management’s role hasbecome one of coordination rather than direction and control.The business needs to be very proactive in its approach to themarket place and, therefore, innovations in structure and roles,as well as in products and services come to the fore.
In Table 6.2 the transformate scenario represents a deeper struc-
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tural change than the informate scenario. Whereas informatingmight involve the restructuring of jobs and roles, full transfor-mation involves a re-evaluation of the very nature and purposeof the business itself.
These stereotypical scenarios encourage participants to think inprogressively more radical ways about the organization. It is alsoimportant that they identify both the positive and negative effectsof transformation, informating and automation, and articulatetheir views on these. The concepts described therein encouragedparticipants to be creative in thinking about organizationalchange.
The three profiles of automate, informate and transformateshould be explained to the participants by the facilitators of thescenario-generating exercise. It should not be assumed that anorganization’s approach to technology will exactly mirror one ofthe three profiles. Nevertheless, these (which are in essence)stereotypes have a useful function. They speed up the scenario-generating process and, when plotted against the dimensionsgiven on the vertical axis, provide a substantial foundation forgenerating and evaluating other alternatives. No upper limit isassumed but participants are usually encouraged to generate noless than three additional scenarios of their own, labelled as sce-narios two, three and four, etc.
These stereotypes were explained to the CallCentre participantsand then participants were divided into two smaller groups todevelop their own alternatives to the status quo set-up. Eachgroup was asked to generate at least three scenarios. Group Oneproduced three alternative scenarios and Group Two producedfour scenarios. For reasons of confidentiality the details of thesescenarios are not presented here. Each group was asked to ranktheir scenarios in order of priority. Returning to the plenary, theparticipants presented to each other the details of the seven newscenarios and their reasons for their relative prioritizations. Itbecame apparent that the preferred scenario from each grouphad some overlaps and were, in fact, fairly easily merged. Thewhole group felt that to produce this one final consensus viewof change was the best way to move forward into the next stage(the Technical Scenarios Tool) of the approach.
However, there is no need to reach a consensus before movingon in the way that is required, for instance, by the Delphi tech-nique (for a brief summary see Georgoff and Murdick, 1986).
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The purpose of the exercise is to elicit different perspectives andencourage mutual understanding of them, not to make judge-ments concerning their validity or to remove variability. Oneeffect of going through this process is the opportunity for man-agers and their staff to reassess the values that underpin theirdecisions. This is particularly important since for a long time theliterature has argued that there is a lack of self-awareness and aneed for assumptions that underpin management goals to bemade more explicit (Bailey, 1993; Buchanan and Boddy, 1983).
The scenario resulting from the end of this exercise at CallCentreis presented in Table 6.3.
The whole group then looked at the prioritized scenario andasked questions about what was preventing the organizationactually getting from the status quo to the new scenario. It isworth noting here the importance of the status quo scenario gen-erated at the outset. It should always be carried forward for com-parison because the objective of the method is to assess the gapbetween what is and what could be, as well as to assess the prac-ticality of suggested changes.
The plenary group generated a list of problems associated withclosing the gap between the status quo and the scenario in Table6.3. The issues were then grouped in order to tackle their solu-tions more easily. The groups that participants suggested were:technical problems, process issues, and organizational issues.For reasons of commercial confidentiality details are not pro-vided here but some general observations will be made to indi-cate the insights that the exercise provided.
To summarize, six technical problems were identified, 11 processissues and five organizational issues. It became apparent thatwhereas process issues were by far the most significant to tackle,the technical solutions were less serious than had been expected.Indeed, it seemed that some of the anticipated problems wouldbe eradicated once the process issues had been tackled. One ofthe most important insights from the exercise so far was thatwhat appeared on the surface to CallCentre to be an informationsystems problem turned out to be much more to do with a needfor change in work organization and organizational attitude.Although at one level this appeared to challenge their expecta-tions it also had positive outcomes as we will see.
By conducting the analysis in this way the participants came to
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Table 6.3 The prioritized scenario
Boundary of the analysis As before: i.e. how job management is effectedand work is delivered to the field and back.However, boundaries of this activity are nowclearer because it has been centred on onemachine type but longer because it now extendsto the customer because the service is now elec-tronically enabled at point of delivery.
Company vision A one-touch process. Many links in the processchain have been removed. Customers can nowdeal more directly through internet access. Thefront end has effectively been removed.
Explanatory logic Good customer perception. Speedier delivery endto end and responsibility for quality lies with oneunit, becoming more transparent and less frag-mented.
Organizational structure No staff involved except those professionals actu-ally delivering the end product. All organiza-tional resources involved are managed under onebanner and are, therefore, more easy to control.
Roles The professionals are now fully multi-skilled.This results in a more diversified ‘field force’. Theonly other associated roles in the process chainrequire maintenance and planning skills.
View of information Same as before: it is a resource and must be factu-ally accurate from end to end.
Costs Relocation and redeployment. Training.Combining two existing technical systems. Dataquality/cleansing.
Benefits Customer satisfaction. Speed of delivery.No job management. No telephone calls toanswer. Transparency of customer order rightthrough the process. Significant savings in over-heads (mainly staffing budgets).
Risks Very complicated to plan. Costly and time con-suming to implement. Staff may end up being‘jack of all trades, master of none’. Individualunits may become too big and too dependent –could become too vulnerable to system crashes.
see for themselves the social and organizational nature of theproblems. It also had the benefit of making the changes seemmore doable. There had been a concern at the outset that veryexpensive technological solutions would be necessary. It wasnow clear that this was not the case. However, many of thechanges needed depended on senior management intervention.Examples included adjustment of the scorecard methods ofweighting performance criteria, and adjusting priorities for indi-vidual target setting. The participants had been under pressurein their various work roles to come up with improvements inbusiness performance. Being able to present senior managementwith a detailed and holistic plan of actions that needed to betaken and which made senior management’s role explicit helpedto relieve some of that pressure. It was felt by the staff that agood business case could now be made for implementing thechanges.
6.3 Second iteration of the scenarios
The scenarios framework calls for a second iteration. The goal ofthis second iteration is to evaluate the implementation details ofthe preferred scenarios for their potential future businessimpact. Doing this helps an organization to assess its futureability to change. This attempt at ‘future proofing’ makes a sig-nificant contribution to the evaluation of organizational change,particularly at strategic levels. In the work with CallCentre, thisoccurred eight weeks after the first workshop was conducted.The length of the gap was partly due to availability of all the par-ticipants, and partly to give the CallCentre managers time toconsider the different scenarios and the technical problems andsolutions in greater depth. The gap in time should be kept to aminimum.
At the beginning of the meeting we revisited the prioritized sce-nario (Table 6.3). It was felt by the managers that in order tostrengthen the future-proofing exercise we should also return tothe other seven scenarios generated by the small groups to makesure that we did not miss something. When we did this, wefound that three scenarios presented themselves as helpful infurther developing the prioritized scenario. The result of thisfurther development is presented in Table 6.4. In the second iter-ation the objective was to future-proof the prioritized scenarioby examining the market in which CallCentre operates and
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Table 6.4 Organizational scenarios tool second iteration – ‘future proofing’
Boundary of the analysis All provision of service within the local section of thecustomer supply chain.
Company vision One workforce delivering to one customer serviceteam.Wholesale unit to equally support any retailers.
Explanatory logic Move from task focused to job focused (ownership).Minimum systems and costs. Efficient service delivery.Effective use of people. Transparency of process.
Organizational structure Central control of process. Regional implementation.Local innovations tried, and if successful rolled outnationally.
Roles One owner of process centrally (management team).One job one owner (no job management needed).Single multiskilled field force.Large customer service centres to have dedicated staffwho are empowered to manage their work.
View of information Information is still seen as a resource – information isa record of an actual physical resource (e.g. a piece ofequipment).
Costs Multiskilling and training especially of the field force.Some changes to IT systems and a lot of processredesign.
Benefits Reduced processes. Fewer systems to maintain.Better understanding of whole job. Worker satisfaction.Customer satisfaction leading to enhanced reputation.Dramatic cost reduction (potentially).Improved market share, due to improved customersatisfaction and costs.Start-to-finish time of customer orders is minimized.Fits with changes taking place in the external organi-zational environment.
Risks Inability of staff to grasp all the skills required. Industrial relations problems due to redeployment.Job queues start to build up.Regional centre could go down (contingency: becauseeveryone is following national processes work can bepicked up by other regions).
checking whether it would allow the company to meet the needsof that market. Looking at the combination of different changeoptions, technical feasibility and the wider organizational envi-ronment helped CallCentre to produce a final scenario that sup-ports their need for ongoing flexibility.
6.4 Conclusions
Over the years the author has found that organizations arebiased towards physical, tangible and technically oriented issuesand that this is reflected in an inherent bias in establishedmethods of information systems evaluation. It was, therefore,unsurprising that the mapping of the status quo at the beginningof the exercise revealed a tendency towards a resource view ofinformation within CallCentre. The framework presented in thischapter was developed with the objective of redressing thisimbalance by exposing the values underpinning differentchoices and by centring on human factors in the development oftechnology. The fact that the participants identified for them-selves the overriding social and organizational nature of theirproblems helped to make the case more convincing for them.However, it will still be largely dependent upon senior manage-ment to enable implementation of the changes. Also, full recog-nition of the human and social nature of their problems impliesthe need for a change in culture. This is a complex and sensitivearea but the author is of the opinion that without such recogni-tion, many beneficial effects of organizational change will belost. These issues were discussed with CallCentre during thefinal stages of the evaluation exercise.
This chapter has presented a framework that encourages organ-izations to consider different organizational scenarios and theirunderlying values and assumptions so that decisions can bemade in a more explicit and informed way. One advantage of theframework is that it is intended to be a tool-in-use. The precisesteps of the framework can be (and have been in practice) tai-lored to the needs of the organization. For example, the costs,benefits and risks criteria can be modified to reflect the organi-zation’s own project profiling methods, and criteria can beweighted accordingly. Most importantly, the outputs of such anexercise form a valuable archive of an organization’s decision-making activities. Opportunities for more in-depth and criticalpost-implementation review can be enabled.
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It is perfectly possible to identify a range of stakeholder groupsthat might be involved in an information technology develop-ment (Earl, 1989). Yet even where stakeholder groups areinvolved by management, it is often only during the develop-ment phase and not earlier in the evaluation process. Analysisand feasibility studies are considered the realm of the specialistor senior manager and not for stakeholder debate. Thisincreases the tendency for decisions to be based purely on theinterpretations of managers, who may have particular politicalagendas, and whose perspective is filtered through the organi-zation’s dominant logic (Hall, 1995). Other, perhaps less power-ful, stakeholder groups may not be adequately represented(Knights and Murray, 1994; Ezzamel and Hart, 1987: 348ff). Incontrast, the generation of organizational scenarios puts thesedifferent groups at the centre of the evaluation exercise.
The greatest management challenge presented by this methodof evaluation is the simultaneous letting go (being explicit aboutvalues) and taking part (alongside a variety of political stake-holders). Above all, a critical approach is needed. Conductingwhat amounts to a self-evaluation is not an easy task and it maybe tempting to avoid issues that make stakeholders feel uncom-fortable. If, as has been argued, established methods of evalua-tion are biased towards tangible and technical issues and awayfrom perceptual and human-focused issues, then it seems likelythat the mapping of the status quo will reveal a tendencytowards a resource view of information. The new frameworkpresented in this chapter contributes to redressing this imbal-ance by exposing the values underpinning different choices andby centring on human factors in the development of technology.
Acknowledgements
Special thanks are due to Dr Magnus Ramage, Open University,for his invaluable assistance with some of the workshop exer-cises referred to in this chapter. Also, mention should be madeof Professor Keith Bennett, Research Centre for SoftwareEvolution at the University of Durham, who, together with twoother academic colleagues, formed a research team between1997 and 2000, funded under the SEBPC Programme by theEngineering and Physical Sciences Research Council. Withoutthe support of the SEBPC funding some of the research workpresented in this chapter would not have been possible.
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Finally, thanks are due to the staff and management atCallCentre who invited me into their organization and con-tributed much of their time, skills and knowledge to theresearch.
References
Bailey, J. (1993) Managing People and Technological Change. Pitman,London.
Brooke, C. (1994) Information Technology and the Quality Gap.Employee Relations, 16, 4, pp. 22–34.
Brooke, C. (2000) A Framework for Evaluating OrganizationalChoice and Process Redesign Issues. Journal of InformationTechnology, 15, pp. 17–28.
Buchanan, D. A. and Boddy, D. (1983) Organizations in theComputer Age. Gower, Aldershot.
Cash, J. I., Eccles, R. G., Nohria, N. and Nolan, R. L. (1994)Building the Information-Age Organization: Structure, Control andInformation Technologies. Richard D. Irwin, Boston.
Clegg, C., Coleman, P., Hornby, P., Maclaren, R., Robson, J.,Carey, N. and Symon, G. (1996) Tools to Incorporate SomePsychological and Organizational Issues during theDevelopment of Computer-based Systems. Ergonomics, 39, 3,pp. 482–511.
Earl, M. (1989) Management Strategies for Information Technology.Prentice-Hall, London.
Ezzamel, M. and Hart, H. (1987) Advanced ManagementAccounting: An Organizational Emphasis. Cassell, London.
Georgoff, D. M. and Murdick, R. G. (1986) Manager’s Guide toForecasting. Harvard Business Review, January–February,pp.110–120.
Hall, R. (1995) Judgement and Hyper-Reality. Journal of GeneralManagement, 19, 4, pp. 41–51.
Knights, D. and Murray, F. (1994) Managers Divided: OrganizationPolitics and Information Technology Management. Wiley,Chichester.
Scott Morton, M. S. (Ed.) (1991) The Corporation of the 1990’s:Information Technology and Organizational Transformation.Oxford University Press, Oxford.
Zuboff, S. (1988) In the Age of the Smart Machine: The Future ofWork and Power. Heinemann, Oxford.
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7.1 Introduction
During the past few years a trend has been reversed. In the 1980sand early 1990s, as IT became more embedded within organiza-tions, more and more companies decided to invite their mostsenior IT person onto the main board. After all, this made sense.Just as human resources and finance needed their representationon the board, so IT had to make its presence felt at the highestlevels. More and more IT directors joined the ‘inner sanctum’.
Recently, however, we have witnessed an increasing number ofIT directors and CIOs being, once again, subordinated to othersenior board members, and being removed from their exaltedstatus. We also recognize that the number of IT people whomove into more senior roles, such as CEO or chairman, is signif-icantly lower than one would anticipate statistically. Comparedto their counterparts in finance and marketing, for example, rel-atively few IT people break into these most senior, general man-agement roles.
As we meet and talk to many senior IT people, we are hearingwhat we heard years ago: that IT is misunderstood, badlytreated, and undervalued. The role of the IT director or CIO isprecarious; and IT people are complaining of being under thethumb of their senior colleagues once again.
7 IT on board or under the thumb?
Robina Chatham and Keith Patching
Cranfield School of Management, United Kingdom
In this chapter we shall explore some of the reasons why thismay be. Is it true that IT remains misunderstood by IT-phobicsenior managers? Or is there something in the way in which ITpeople present and develop themselves that contributes to theirrelative lack of ‘success’ (Patching and Chatham, 2000).
7.2 The IT revolution – like, when?
As we become increasingly aware of the human side of progress,we in the western world are turning to non-technical disciplinesto help answer some of our more difficult questions. We are sur-rounded by ‘gurus’ who jostle with each other to foretell everstranger stories of the technological futures that await us, as weharness the microchip with greater and greater proficiency. Butso many of the predictions that have been made over the past 30or more years about the kind of society that technical progresscan offer have failed to materialize.
Do we really want, for example, a ‘paperless office’? If so, whyhave we singularly failed to achieve it, given how many years ithas apparently been within our grasp.
Just because something is possible it may not be desirable. It ispossible to run all our businesses electronically these days.Despite the complaints of IT providers that in the phrase ‘paper-less office’ what they really meant was ‘less paper’ and not ‘nopaper’, the vision that they often presented was paper free. Yet ithasn’t happened, and is highly unlikely ever to happen. Indeed,technology has given us the ability to generate more and morepaper, more quickly and more readily.
The Internet, virtual worlds, global positioning, instant commu-nications with anyone anywhere are all available right now. Aswe sit next to people at dinner, we can choose to talk to them, orby our mobile phones to people we would prefer to talk to. Co-location is now no longer a determinant of who we deal with,communicate with, or even (I suspect in the near future) procre-ate with.
For a while these opportunities will present us with a number of‘moral imperatives’. As an example of a ‘moral imperative’ con-sider travel. It is perfectly feasible for many people of our gen-eration to travel for their holidays anywhere in the world. Nolonger are people constrained by distance or expense; people do
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not have to be millionaires to go on safari to Africa, to visit theTaj Mahal, to go walkabout in the Australian outback, or to livethe nomadic life in Mongolia. The fact that one can means that,at least for the ‘chattering classes’, you must. To say that youwould rather not bother is to commit a new sin of omission.
Virtual reality and all the other manifestations of IT will sooncreate a similar ‘moral imperative’. Not to surf the Net will be a‘terrible waste of opportunity’.
But this wave of technophilia cannot suppress the underlyinghuman spirit, the patterns of culture laid down over thousandsof generations (Hallowell, 1999). Technology can give us almostlimitless freedom to have anything we want. So what dohumans really want? What will the anthropology of the twenty-first century look like?
7.3 Reforming the tribes – back to virtual nature
The clues are already there. The Internet is allowing clumps oflike-minded people to form new tribes. At present, these tribessuffer from terrible shortcomings. Members often cannot evensee each other.
But take all the IT-related capabilities of the twenty-first century;and take the long history of human evolution, living in small-scale societies, characterized by shared values and beliefs (oftenconfused with ‘primitive religion’); take the spirit of freedom;and take the persistent need for a sense of identity in a worldbent on making everything the same; and you soon realize thatthe anthropology of the twenty-first century is one of a re-emer-gence of difference.
Gaining their identity from shared interests (such as the‘worship’ of Jennifer Aniston, or a lifelong commitment to StarTrek), small ‘tribes’, physically distributed across the globe, butbrought into tribehood by the virtual reality of twenty-firstcentury IT, are already starting to form. In the early days, theywill be indistinguishable from each other. But as they providefor more and more of the members’ sense of belonging, they willbegin to drift apart from each other in language, values andcomprehension (Nicholson, 1998).
IT has the power to overcome physical limitations and barriers.It is unlikely, however, radically to change human beings. For a
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while, a generation or so, individuals will have the uniqueability to choose which ‘tribe’ they belong to. But after a while,it will be as hard for a Trekkie to marry a Wagnerian as it was fora Capulet to get together with a Montacute.
The IT, threatened for ever to eradicate small-scale societies, will,ironically, be the means by which small-scale (virtual) societiesare rediscovered. And yet another phase of human history,which, like all the rest, threatened to change our ways for ever,will have come and gone. The means will have changed, forsure; but the ends will be the same as they always were: tobelong, to identify with, to have meaning for others, and not fortechnology.
Over the years, technology ‘gurus’ have been very good at pre-dicting technological advancements, but the record shows theyare not so good at predicting how people will react to theseadvancements. Adaptable though we humans are, there aresome aspects of who we are that seem to resist the lure of tech-nology-induced change. Human societies have been evolvingfor millions of years; the microchip has been with us for less thana generation. Maybe we ought to look beyond technology forsome clues as to how we may adapt technology to ourselves,rather than the other way round.
7.4 Anthropology and society
The subject matter of anthropology is society in all its variousforms. One of the tasks of anthropology during the past centuryor so has been to record the multiplicity of ways in which thehuman spirit has manifested itself in culture after culture, fromAfrica to New Guinea, from South America to Greece. Its rolehas changed with the advent of the ‘global village’. No longerare there ‘lost tribes of the Amazon’; the question is, are there‘lost tribes’ hidden within our own societies?
But anthropology has not only been concerned with recordingdifference. It has also noted ‘similarities’. Many anthropologistshave observed that, despite differences of language and expres-sion, there are a number of patterns of human culture that recurin every recorded society: the use of language; some form ofpair-bonding; the telling of stories and myths to pass on theimportant truths, and so on.
It may be, therefore, that anthropology has a role to play in
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helping us to identify how we may respond to the opportunitiesof IT. Will IT transform us into yet more strange and new formsof society? Or will it simply have to fit into the universal patternsof culture that human evolution has established indelibly uponus?
7.5 IT people, the shamans of the twenty-firstcentury?
One way of exploring these questions is to turn the anthropo-logical lens onto those people directly responsible for deliveringIT to the rest of us: the IT professionals. In many cultures (butless overtly so now that ‘magic’ has been ‘replaced’ by science),the mystical ‘truths’ have been the preserve of groups or indi-viduals within society who do not form a separate ‘tribe’ buthave a special role or roles. These are generically referred to as‘shamans’.
Characterized as having access to powers most ordinary folkcannot get hold of, shamans have often had their own cult statuswithin their respective societies. They learn strange, oftenincomprehensible, dialects, and are treated with a mix of awefor their powers, and contempt for their often ‘anti-social’behaviours. Many are not allowed to marry or enjoy the normalpleasures of acceptance within society. They maintain their self-worth by becoming ever more distant and incoherent, lockingthemselves away until called on to cure some ailment, or dealwith some natural disaster. When they do emerge, their behav-iour is often unpredictable, so people not directly involved withthe immediate situation often steer well clear.
As western ‘civilization’ ‘takes over’ many indigenous cultures,shamans tend either to reintegrate themselves into the main-stream, or to set themselves even further apart, setting up exclu-sive cults, which are open only to the minority who reject theordinariness of the evolving culture.
The circumstances that allowed IT people to develop shamanis-tic roles within our organizations are fading away with the onsetof ‘chips with everything’. IT is no longer associated with the‘computer’; it lives in our cars, our video recorders, ourcameras, and our washing machines. Increasingly we are adopt-ing technologies in which ‘fuzzy logic’ operates.
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‘Fuzzy logic’ has its roots in eastern philosophy, rather than inthe essentially black and white logic which has dominatedwestern thinking since the time of the ancient Greek philoso-phers (Kosko, 1994). Consequently, while we in the west havestruggled unsuccessfully for years to create ‘artificial intelli-gence’ machines based upon the binary notation that lies at theheart of our computers, eastern technologists have been able toinvest cost-effective intelligences that break through the barriersof binary thinking.
The mainframe computer, like almost all western computers,was built on binary logic. Because of its size and complexity, itbecame the archetypal religious artefact of the shamanistic ITperson; the mystical manifestation of the IT shaman’s power.The supporting myths (the mainframe is down) and rituals (theFriday payroll run) have begun to lose their sway. Ordinary folkhave now learnt the arts of the IT shaman; we are (or can be, ifwe want) all shamans now.
7.6 IT people – a different kind of tribe?
So if IT people are unlikely to be ‘shamans’ within our ownsociety, are they, instead, a tribe apart from the rest of us?
One of the ways of distinguishing different tribes from eachother is by language. By this yardstick, IT people almost defi-nitely form a different tribe. Their language is hard to penetrate,and they seem to have very little inclination to learn our ownlanguage. This makes communication between us very difficult.And the anthropological record shows that poor com-munication is often associated with tribal warfare. Accordingto this observation, there should be frequent hostilitiesbetween business people and IT people. The evidence is unar-guable – the skirmishes that take place at every opportunity cansometimes spill over into full-scale war in the offices of ourorganizations.
Like most ‘aliens’ IT people have a number of characteristics thatmake them different from the rest of us; like many aliens, manyof these differences are based upon stereotypes rather thandirect observation. What we know about the French, theAustralian Aborigines, and the native North Americans is rarelybased upon painstaking personal research. It is based upon thelimited amount of data anyone needs before feeling sufficiently
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confident that he or she can pass judgements upon them.
Stereotyping is morally unwelcome in today’s politically correctwestern culture; but it is the same mental phenomenon thatallowed our forebears to recognize danger in an instant and livelong enough to breed. Taking time to check the validity of firstimpressions could be fatal in the wild. And the mental equip-ment that kept us in the evolutionary race for millions of yearsis not going to roll over and die just because it is not consideredpolitically correct to jump to hasty conclusions these days.
The human mind thrives on generalizations. The study ofalmost any subject (be it mathematics or sociology, history orbiology) depends upon generalizations. So when we study thepossibility of there being a ‘tribe’ of IT people, we focus uponthose generalizations. Calling them stereotypes is challengingbut accurate.
7.7 The IT stereotype
The IT stereotype, then, is a generalized description of ‘youraverage IT person’. Like any generalization, it may actuallydescribe no one individual at all. But its strength lies in its gen-eralizability; it allows non-IT people to be prepared to ‘know’ inadvance what to expect. Unfortunately, as we know only toowell, this tends to create a filter through which the actual ITperson is viewed. Self-fulfilling prophecies are created in thisway. It is a shame; but it is human nature.
In preparing for this chapter, and for much of the work we doprofessionally with IT people, we undertook some research. Wewanted to answer the age-old question, ‘Why hasn’t IT deliv-ered on its promises?’ But instead of seeking the answers in thetechnology or the structures of organizations, or in economics,or any other of those areas that had been thoroughly excavatedbefore, we asked about people.
We interviewed hundreds of senior managers. Some were ITmanagers, but most were not. Most were the business managerswho use IT rather than supply it. We asked these managers aboutthe people who deliver IT services to them. We asked them todescribe these people – to characterize them. As more and moredescriptions were recorded, it became more and more apparentthat many if not most business managers have a set of similar
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views about IT people in general. They may vary these views asthey describe each individual IT person, but these variations arejust that – variations on a theme. That theme is the IT stereotype.In some ways it is like the stereotype of the estate agent, theaccountant, or the second-hand car dealer. It is a shorthand car-icature. It may not apply in fact to any individual, but it preparesus for ‘the worst’. Moreover, it colours how business managersexpect IT people to behave. Expectations are often fulfilled (theybecome self-fulfilling prophecies) as business people interpretthe language and behaviour of IT people through the filters ofthe stereotype; constantly, largely unconsciously, looking forbehaviours that confirm their view, and dismissing behavioursthat do not fit in with the paradigm. Not surprisingly, eachencounter is both an example of the stereotype and a reinforce-ment of it.
So the following description is not our view – it is the collective(partly unconscious) view that many business managers holdabout IT people in general. If it offends, don’t blame us, blamethe collective unconscious of the business community.
Among the characteristics of the stereotypical IT person arecomfort with logic, facts and data, but a significant lack ofcomfort with ambiguity and unpredictability. Their world isblack and white, and one in which shades of grey are avoided.According to the stereotype, IT people are unimaginative, anddo not think laterally or creatively (Chatham and Patching,1997). They are poor at dealing with moral and ethical dilem-mas, and avoid making decisions where there are no ‘provable’right or wrong answers, preferring to follow clear and unam-biguous rules.
IT people are also perceived to be lacking in interpersonal skills.Particularly weak areas include:
Relationship building, and working as a team within a busi-ness contextInfluencing positively and constructivelyDealing with conflictSaying ‘no’Communicating in business languageNetworking among their peers and external business contactsLeadership.
What is more, they do not always create the right image; their
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dress and posture do not engender business confidence. Thisreputation is often reinforced by IT professionals’ behavioursuch as:
Flippancy and off-handednessPoorly timed campaignsPolitically naïve remarksFighting the ‘wrong’ battlesNot knowing when to back downUsing inappropriate judgements: intellectual rather thanmoral or ethicalFailing to canvass opinion, and to build relationships andpartnershipsNot knowing the difference between ownership of ideas andpossessivenessLack of sensitivity to and empathy for others’ feelings orneeds.
Many IT managers know they have an image problem, but areunable or unwilling to confront the issue. Some literally go intohiding to avoid hearing painful comments about themselves,and some escape into other professions (such as academia andcontracting). Many live out the self-fulfilling prophecy, ‘I can’twin, so there’s no point in trying.’
As a consequence, IT managers are often politically naïve. Theyperceive political behaviour as manipulative and unscrupulous,and many therefore engage in avoidance tactics.
7.8 Organizational politics
All managers, especially those senior enough to be responsiblefor entire sections of an organization’s activities, have to dealwith organizational politics. Organizations, being made up ofpeople, are essentially political institutions. But we have foundthat IT managers are often among the least well equipped tocope successfully in the political arena.
IT managers and their senior peers in other functions do nothave mutual respect for one another, nor can they talk to eachother in a common language. The quality of their dialogue is rel-atively poor.
This is no one’s fault in particular. But we do believe it is up toIT managers to take greater responsibility for resolving this
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problem. In many cases, this means that IT managers, to be ableto work effectively in the political arenas of the boardrooms oftoday’s businesses, will need to ‘unlearn’ many of the lessonsthey have learnt in becoming lifelong technical experts. Virtually all the training (both explicit and tacit) that IT peoplereceive throughout their IT lives works on the principle thatthere is a ‘right’ answer to everything. Many people go into IT(more or less consciously) because it is somewhere where theycan deal with certainties. The profession attracts those for whomgetting things right and being precise is important.
But organizational life outside the computer room is not likethis. Decisions have to be made on criteria other than the ‘purelyrational’. This causes many IT people a great deal of unease.Asked to venture away from their anchors of certainty, theycannot determine absolutely where right and wrong exist. Moredangerously, they cannot be sure whether other people’smotives are ‘pure’. In the absence of certainty, many withdrawfrom the battles, comforting themselves in the belief that organi-zational politics is no different from self-servingness – anotherphrase to describe the self-interested squabbles of people forwhom organizations are merely convenient places to grubaround for personal gain.
So many IT people are highly suspicious of the whole idea oforganizational politics. They equate it with dirty dealing, under-handedness and getting one over on one’s fellows. They see pol-itics as a competitive game that, because they have dedicatedtheir time to doing good for the organization through profes-sional devotion to IT service and project delivery, they have notaccepted its inevitability nor had the chance to develop skills inthis area. This puts them at an unfair disadvantage.
The ‘political game’ is not like chess (a game that many ITpeople are good at, incidentally). Chess is rational, logical, andabsolutely competitive. Computers have now learnt to be betterat chess than even Gary Kasparov. But because some IT man-agers interpret the ‘political game’ as though it were like chess,they bring to organizational politics some dangerous assump-tions. Amongst the most dangerous assumption is that organi-zational politics is competitive in the same way as chess iscompetitive:
There are only two sides
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There are a number of well-rehearsed and proven strategiesYou should never reveal your strategy to your opponentIt is the purpose of the game to beat the opposition (or theywill beat you)Whatever you do to enhance your own position naturallyweakens that of your opponentCool, logical, clever, unemotional people are best at the game.
For some IT managers, many of whom cannot bear to lose, thepreferred option is not to play, for fear of losing a game whosestrategies they do not understand.
But none of these features of games like chess apply to organi-zational politics – except in dysfunctional organizations. Manyvery successful ‘players’ of organizational politics are successfulbecause they know that, unlike chess:
There are many ‘sides’ – or shades of opinionThere is nothing well rehearsed or proven at the leading edgeof organizational changeYou should always discuss and share your views with thosewho may see things differentlyThe purpose of the game is for everyone to winWhatever you do to enhance your position can also enhancethe positions of othersCool, logical, clever, unemotional people are often worst atthe game; the political game requires intuition and feeling aswell as logicIt is about building relationships so that people will want todeal with you again.
7.9 Task, process and people
Our continuing researches into the nature and consequences ofthe IT stereotype have shown that there has been some progressover time in the relationships between IT people and others inthe business community (Chatham and Willcoxson, 2001). Ourdata show that business people have noticed:
Improved responsiveness to business needsImproved service deliveryImproved customer relationship managementImproved communication
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Increased credibility of IT managers.
At the micro level of individual service and communication theIT/business relationship is much healthier than it was. Yet con-siderable work remains to be done at the macro level in promot-ing understanding of IT’s capacity and potential across theorganization.
In our view, this work can be enhanced by IT managers con-fronting the stereotype, rather than pretending it does not exist,or is unfair. But to do so, they may also need to recognize thatthey continue to see their roles in different ways from their col-leagues.
In one element of our research we have used a number of psy-chological profiling instruments, which have identified a markedcontrast in leadership style and perceptions of needs for taskclarity, process-orientation and control. The data suggest a radi-cally different approach to the managerial role. In the case of ITmanagers this is one of task focus rather than people focus. Theevidence points to the conclusions that IT managers would findgreater difficulties in building human relationships than theirgeneralist counterparts, and would feel more comfortable fol-lowing orders and implementing strategy than devising strategythemselves.
In February 2000 a large seminar for senior IT people washeld under the title ‘Today’s CIO is Tomorrow’s CEO’.Clearly, the convenors and those who attended had someidea that senior IT people are poised to become the mostsenior business leaders of the future. During the seminar, the ITdirectors present were asked to list what they saw as the threemost valuable skills for the IT director today. Nearly halfanswered ‘technical expertise’; less than a third listed ‘under-standing the business drivers’. Meanwhile, ‘boardroom net-working’, ‘leadership’, ‘people development’, and ‘mentoring’scored extremely low. When asked to predict what the mostvaluable skills would be in two years’ time, they provided asimilar set of answers.
With these kinds of answers, it is not surprising that the ITstereotype persists. Assuming those who would bother to attendsuch a seminar would have aspirations to more senior positions,they have, themselves, reinforced the data we have gatheredregarding the stereotype. If so many senior IT people think that
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their primary skill should be technical, they are unlikely to chal-lenge accepted wisdom or their superiors in their thinking ordecision making regarding business matters (Chatham andWillcoxson, 2001). In other words, both the psychological analysis of senior IT man-agers, and the way they think about their own roles, suggests atype of person who is most comfortable in a supportive or sub-servient service role rather than a strategic one.
7.10 Conclusions
Despite the espoused ‘strategic importance’ of IT to so manybusinesses, it appears that many business people continue toview IT as a support function rather than part of the centre of thebusiness. This has led to senior IT people being excluded fromthe most senior decision-making bodies. Our suggestion is thatthis has a number of causes.
The first is the mismatch between many of the ‘opportunities’ ITprovides to transform our society and what people actuallywant from technology. Technology gurus continue to promotevisions of the future in which many of our deeper needs appearto be overlooked. This leads to a suspicion that technologistsreally don’t understand the human condition at all.
This suspicion is reinforced within the IT stereotype. It may notbe fair to each and every IT manager, but it is the filter throughwhich they are likely to be viewed. By failing to confront thestereotype, they allow it to persist.
Finally, many IT managers reinforce the stereotype by taking anaïve stance towards the relationships and networks that char-acterize how the most senior people in organizations operate.Hanging on to a much more ‘systems’ view of the world, andshunning organizational politics, IT managers fail to achieve theinfluence they need to enable IT to take its place on the mostsenior agendas of their businesses.
Better and better technology will not resolve this issue. It is up toeach and every senior IT manager to become more ‘streetwise’.This means focusing more on the consequences of technologicalchange than the possibilities. It means realizing that, at the verytop of organizations, there are few, if any, ‘right’ answers. It
means embracing ambiguity, uncertainty and human complex-ity. And it means acquiring political acumen to deal construc-tively with the complexities of life, rather than of technology.
References
Chatham, R. and Patching, K. (1997) IT Managers – Fighting theStereotype. Cranfield School of Management, Management Focus,9.
Chatham, R. and Willcoxson, L. (2001a) Testing the Accuracy ofthe IT Stereotype. Unpublished.
Chatham, R. and Willcoxson, L. (2001b) Progress in theIT/Business Relationship: A Longitudinal View. Submitted toJournal of Information Technology.
Hallowell, E. M. (1999) The Human Moment at Work. HarvardBusiness Review, January–February, 77, 1.
Kosko, B. (1994) Fuzzy Thinking: The New Science of Fuzzy Logic.Flamingo, London.
Nicholson, N. (1998) How Hardwired is Human Behaviour?Harvard Business Review, July–August, 76, 4.
Patching, K. and Chatham R. (2000) Corporate Politics for ITManagers: How to Get Streetwise. Butterworth Heinemann,Oxford.
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8.1 Introduction
Numerous newly launched e-business ventures have in thespace of a few years experienced hyper-growth cycles and thensubsequently, in many cases, either collapsed or had to faceradical restructuring to survive. The investment bank MorganStanley (Phillips, 2001) has estimated that about 70 per cent of alltechnology venture capital raised in the USA in the last 25 yearshas been invested in dot-coms in 1999 and 2000 alone. This hugeinflux of financing, accompanied by a migration of energetic andtalented professionals and managers into high technologyindustries in the 1990s, led to an almost unprecedented burst ofinnovation and entrepreneurship. However, in late 2000 and theearly months of 2001 it became apparent that such rapid growthwas unsustainable. A downturn in technology spending and theconsequent poor earnings of high technology companiesresulted in a huge stock market correction, most markedly in theNasdaq.
History compels both practitioners and scholars of managementto analyse the roots of these failures and disappointments.Although the term has rarely been defined, much attention hasbeen focused on the notion of a business model as a successfactor. In this regard, an example of anguish and corporate soul-searching is presented by Paul Allaire, CEO of Xerox Corp, whotold analysts that his company’s stock price collapse was
8 Why business models matter (and how they can make a difference in
internet commerce)
Stephen Drew
Henley Management College, United Kingdom
because ‘we have an unsustainable business model’ (Colvin,2001).
The present business environment is highly chaotic and ambigu-ous. It is difficult to construct detailed, reliable forecasts, or evenwell-developed future scenarios, of future consumer and marketbehaviour. The business viability of crucial future technologieslike 3G wireless phones or advanced broadband services is notclear. In such conditions strategists often focus on lessonslearned from successes, failures and similar patterns of industryevolution in earlier eras. A back-to-fundamentals approach toanalysis is also evident in the recent work of Michael Porter(2001), which challenges many of the tenets of the new economyand criticizes ‘artificial’ business ventures.
An argument is made here that a developed and integrated busi-ness model is an important success factor in internet commerce.The concept of a business model is distinguished from that of abusiness strategy, or value chain, and a framework for analysingbusiness models in fast-paced industry settings is presented.
8.2 Insights from e-retailing
Tesco.com is the internet food shopping service arm of thesupermarket chain Tesco Plc. It took its first on-line orders inDecember 1996. By early 2001 it had outdistanced all UK com-petitors and grown to become the world’s largest on-line super-market, filling some 60 000 orders a week. The operation made aloss of £14.7 million in 1999 but was reported to have becomeprofitable in 2000 after a cumulative investment of £52 million.In spring 2001, the UK customer base of over 500 000 was gener-ating revenues of £5 million a week
A visit to the Tesco.com website shows not only groceries andwine on offer, but also books, DVDs, CDs, videos, electronicsand flowers for sale. A typical grocery customer is a busyworking mother with a family. The average order is over £75,with a further £5 charged for delivery. On-line prices are thesame as those in Tesco stores. Distribution is by means of a store-based ‘pick and pack’ model, in which baskets of groceries arepicked directly from the shelves of 100 Tesco stores and deliv-ered, using a fleet of 700 vans, within a 2-hour time slot, until 10pm every weekday. The Tesco.com website is well designed,functional, and supported by 130 servers to ensure reliable
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access. Advertising and linkages to partner sites generatefurther revenues.
Webvan is a US counterpart to Tesco.com, established in late1996 by Louis Borders, founder of the Borders bookstore chain.Like Tesco.com, the Webvan site offers groceries and a diverserange of consumer products including electronics, books, CDs,wines, and household goods. Unlike Tesco, Webvan was not a‘first-mover’. Their on-line sales commenced in 1999, alongwith the appointment of high profile CEO George Shaheen,previously President of Andersen Consulting. By the end ofthat year the company was serving 21 000 customers in SanFrancisco, its principal market. Delivery charges were waivedfor orders over US$50 and average order size was US$71 in late1999. Drops to households were scheduled within 30-minutewindows. Prices were low and in most cases less than storeprices. Unlike Tesco.com the operations were built from theground up. Large (300 000+ square foot) and highly automateddistribution hubs, costing up to US$35 million each, were to beconstructed to store and pick groceries. A US$1 billion dealwas negotiated with Bechtel to build distribution centres in 26US cities after San Francisco. Webvan also expanded throughthe purchase of Homegrocer.com in June 2000 (6 per centowned by Amazon.com). Unfortunately Webvan lost US$144.6million in 1999, and in April 2001, when CEO George Sheehanresigned, it had not reached profitability. Webvan has nowceased trading.
Do these two well-known internet retailers have distinctivebusiness models, and do differences in their business modelmatter? Most clearly they do, since few observers wouldconfuse their respective approaches to e-commerce retailing.There are obvious differences in pricing, financing, and supplychain models. Tesco.com appears positioned to grow beyondthe bounds of the UK as its parent company generates aboveindustry-average profitability. By contrast, Webvan is strugglingto maintain a listing on the Nasdaq exchange.
Figure 8.1 summarizes Tesco.com’s business model ande-strategy, as well as the corporate strategy of Tesco Plc. It isapparent that the business model is an important means ofimplementing Tesco strategy; however, it is a part, and not thewhole, of that strategy. The model is a representation of how thebusiness manages its supply chain and creates value for cus-
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tomers and other stakeholders in ways that distinguish it fromcompetitors.
8.3 Business model versus value chain
A picture of a business using a value chain model (Porter, 2001)is a useful means of organizing and presenting the key activitiesof value creation in traditional industries. However, in practicesuch a model does not always convey or communicate thedynamic and distinctive way in which technology and businessinfrastructure can be melded to create a value proposition forinternet businesses. As an example, we can compare the valuechain representation of a traditional landline telephone businesswith that of a mobile phone network, as shown in Figure 8.2.
A study of these value chains does not disclose the fact that
Tesco: corporate strategy
Strong UK core business• Good quality at an
affordable price• Number one in UK
market share (15.5%)• Sales of £20.4 billion,
profits £1 billion (2000)• 650 UK stores, many
open 24 hours• Well-managed supply
chain• Uses technology for
competitive advantage• Loyalty card
International growth• International expansion
in Europe and Asia• Non-food business• Product diversification• Financial services• Follow the customer• Leader in e-business• New Tesco Express
convenience stores
Tesco.com: e-strategy
• ‘Bricks and clicks’ inB2C
• Early or first-mover• Alliance with Yahoo!• Entry into B2B through
partnership in theWorld-Wide RetailExchange
• ISP – Tesco.net• Internet investments
(£18 million iniVillage.co.uk)
• Mobile phone network• International expansion
of Tesco.com in the fareast
Tesco.com: businessmodel
• On-line sales of gro-ceries and diverse con-sumer goods
• £5 delivery charge perorder
• Same price as Tescostores
• Store-based ‘pick andpack’ model
• Own fleet of 700 vans• 2-hour delivery slot• Revenues from
advertising/linkages
Figure 8.1 The Tesco business model
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Why business models matter
these are quite different businesses in their key characteristics,nor does it elucidate critical factors leading to the recent explo-sion in growth of the mobile phone industry around the world.Such critical factors include the provision of a very personalmeans of communication, convenience, scalability of the infra-structure, rapid innovation and value-added digital servicessuch as text messaging. Admittedly value chains can be devel-oped to a finer-grained level of detail than shown in Figure 8.2;however, a value chain provides at best a limited picture, anddoes not focus per se on the customer value proposition, nor thecomplex integration of skills and technologies required to gen-erate a competitive advantage in dynamic industries.
This telecommunications example demonstrates a further limi-tation of the value chain model. It tends best to represent busi-nesses with linear process flows, where key activities are internaland controlled by the firm. However, many modern businesses,especially in service industries such as banking and telecommu-nications, are more appropriately modelled as networks, withcomplex linkages between processes. Therefore Cronin (2000)has proposed a new model of organization and value creation ininternet businesses, through what she terms a ‘digital value
Firm infrastructureFinance, ERP, business information systems, administrative systems
Human resource managementRecruitment, training, e-learning, reward systems, HR intranets, expenses
Technology developmentProduct and process design, new technologies, R&D, knowledge management
ProcurementEDI, extranets, B2B market places and auctions, contract management
Inbound Operations Outbound Marketing After-sales servicelogistics •Network of logistics and sales •Telephone/on-line•Management base stations •Management •Stores, on-line customer supportplanning and •Network of channels and telephone and servicecoordination management and business sales channels •Billingof suppliers partners •CRM and systems•Inventory and •Information advertising •Maintenancedemand and inventory •Marketmanagement management research and•EDI, extranets systems competitive
intelligence
Figure 8.2 Value chain for mobile telecommunications
system’, based on dynamic, external webs of relationships. Insuch a value creation system, key activities are shared betweenthe firm and its partners in a type of business ecosystem.
In defending his company’s dominance of the operating systemmarket, Microsoft founder Bill Gates argues that, in place ofdirect rivalry between software firms, the focus of competition inhis industry has now moved to rivalry between different busi-ness models. In this he may have been thinking about competi-tion between substitute technologies, such as PCs and the netcomputer, and the associated ecosystem of firms that typicallyevolve around alternative technological models.
A dramatic example of competition between different technolo-gies and business models is that of Motorola’s failure withIridium, a system of global wireless telecommunications usinglow-flying satellites, versus the success of digital networks basedon the GSM standard.
Iridium was a US$5 billion joint venture established by Motorolato build a mobile telecommunications network using 66 low-flying satellites. It was launched in September 1998. The valueproposition hinged on access to the network from almost any-where in the world, in areas where other coverage was unavail-able – such as the Borneo jungle. The system was meant toovercome the problem of incompatible mobile telephone stan-dards in different countries. Unfortunately, the telephonehandset was badly designed, as large as a brick and weighingalmost half a kilo. Furthermore, on launch it was priced in theregion of US$3000, although later reduced to US$1500. Airtimecharges could be as high as US$9 a minute. Quality of commu-nication was notably worse than other mobile phone networks,with frequent dropped calls. Ironically, reception might be goodin the jungle, but notably poor inside a New York skyscraper ormoving car, since a clear line-of-sight to a satellite was required.The system could only handle some 25 000 users at a time. About60 000 customers were needed to break even.
By contrast, modern digital GSM phones, as produced by Nokia,Ericsson, Siemens and other manufacturers, are lightweightfashion items that can be purchased at numerous retail outletsfor a modest price. Airtime charges are low and often bundledinto inexpensive pre-pay packages. GSM is not a universal stan-dard but is very widely available in many countries, notably theEuropean Union, and growing in North America.
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The Make or Break Issues in IT Management
Iridium filed for Chapter 11 bankruptcy nine months after launchin July 1999, whereas GSM networks provided by numerouswireless telecom companies continue to grow apace. Mainstreammobile phone users shunned Iridium’s offering, and there weresimply not enough globally travelling, price indifferent seniorexecutives and oil company exploration and mining profession-als to make the network profitable. The technology infrastructurewas extremely ambitious, complex, and expensive.
The Iridium failure had causes other than an unworkable tech-nology and marketing model. Finkelstein and Sanford (2000)suggest key contributing factors were the failed strategy andlapses of control and governance at the very top of the organi-zation, including the board of directors.
These examples demonstrate that the concept of a businessmodel can be a useful means of discussing the essence of busi-ness success or failure. A search of any electronic database willreveal many recent references to business models in discussingstrategy in internet and high technology firms. The term ‘busi-ness model’ has been widely adopted by the consulting and ITcommunities in practitioner and professional publications, andincreasingly by academics as well. The concept of a businessmodel might well be dismissed as faddish, poorly defined, andof limited utility (Porter, 2001). However, an equally plausibleargument might be made that the concept fills a real gap in thearmory of strategic models, in between that of a business strat-egy and value chain. As the examples of Tesco.com and thetelecommunications industry show, it can be particularly usefulfor analysis of strategies in fast-moving environments – henceits widespread adoption. Although sceptics have disparaged theconcept, it may prove more helpful in the long run to refine andclarify its meaning and appropriate applications, and to developuseful conceptual underpinnings.
8.4 Business model analysis
Only a few management scholars have attempted to definethe term ‘business model’, or to present a rigorous model foranalysis.
Timmers (1998) provides a definition of a business model as:
An architecture for the product, service and information
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Why business models matter
flows, including a description of the various business actorsand their roles; andA description of the potential benefits for the various businessactors; andA description of the sources of revenues.
He proceeds to address some of the limitations of the valuechain model, as noted earlier, by suggesting a procedure fordeconstructing and reconstructing the value chain. Timmers alsoidentifies 11 business models in use or in experimentation. Theseare: e-shops, e-procurement, e-auctions, e-malls, third partymarket places, virtual communities, value chain serviceproviders, value chain integrators, collaboration platforms, andinformation brokers.
Mahadevan (2000) defines a business model as:
A unique blend of three streams that are critical to the busi-ness. These include the value stream for the business partnersand the buyers, the revenue stream and the logistical stream.
Mahadevan proceeds to analyse three general models of e-com-merce: portals, market places, and product/service providers, interms of various building blocks under the three streams asshown in Figure 8.3.
Timmers, Mahadevan and other writers have presented modelsfor e-business that are typically classification schemes for typesof website, interactivity, and software application. However, thenotion of a business model is somewhat broader than, and neednot necessarily be focused on, the use of a particular web tech-nology or approach. Indeed the technology, while advanced innature, may not be the only factor contributing to success of theoverall venture, as in on-line financial services.
Hamel (2000) writes from a more strategic perspective andprefers to use the term ‘business concept’ as a synonym for busi-ness model. He presents many examples of business conceptinnovation based on breaking the rules of conventional strategyand applying a framework consisting of:
Core strategyStrategic resourcesCustomer interfaceValue network.
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The Make or Break Issues in IT Management
147
Why business models matter
Recent market events have underscored the importance ofaddressing profitability in e-business ventures. Indeed,in the present climate, a business plan presented to an institu-tional or venture capital investor without a reasoned financialcase would be unlikely to meet with success, despite an appar-ently compelling customer value proposition or steep growthprojections. Therefore, the framework presented here builds onthat of Timmers, Mahadevan, Hamel and others, but is focusedaround a core of long-term growth and profits, as shown inFigure 8.4.
A viable business model is defined here as a means of creatingprofit and growth for the firm by offering a proposition of valueto customers and business partners, supported by effectivesystems for delivery, sales and revenue generation.
8.5 A business model framework
Measures of profit and growth are assumed to be of central inter-est to both management and stakeholders of the firm, and nec-essary for survival. The engine to create profit and growth isdriven by systems for revenue generation and product/service
Figure 8.3 Business models in internet commerce (modified from Mahadevan, 2000)
Market structures
Business modelbuilding blocksValue streams • Virtual communities • Transaction costs reduction • Information asymmetries • Market-making processRevenue streams • Increased margins • Revenue from on-line communities • Advertising • Variable pricing • Information asymmetry • Free offeringsLogistical streams • Disintermediation • Infomediation • Meta-mediation
Y
Y
YY
Y
Y
Marketmakers
YYYY
YY
YY
Y
Product/serviceproviders
Y
Y
Y
Y
Y
Y
Portals
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The Make or Break Issues in IT Management
delivery, together with the value proposition offered to cus-tomers and business partners.
The description of the profit and growth engine in a businessmodel should not only present financial projections and break-even analyses, but also a strategic case to address questions suchas:
When and how can a positive feedback and growth cycle ofincreased sales, revenues and profits be created?What are the sources of advantage? How will the venture be able to protect its advantage andmaintain growth and profits? (For example, through barriersto entry, proprietary technology or switching costs)What are the sensitivities of the financial projections to riskand uncertainty?
This model itself can be deconstructed into constituent systemsand submodels, as follows.
8.6 Value proposition
Like ‘business model’, the term ‘value proposition’ is rarelydefined. In practice, it refers to a bundle of product and servicefeatures, delivered at a given price point and supported bycertain business processes. Amazon.com customers buy a choiceof reading material at a price that, including delivery charges, is
Figure 8.4 Business model framework
Profit andgrowthengine
Deliverysystem
Valueproposition
Revenuegeneration
system
often no different from that offered by local bookstores.However, Amazon.com’s website experience includes searchfacilities, access to book reviews, on-line communities, thecompany’s brand identity, and its technology platform. Thepurpose of deconstructing the value proposition, as shown inFigure 8.5, is to identify those significant components of thevalue proposition that truly distinguish the firm from its com-petitors and that help create a sustainable advantage.
Value propositions often include more than one of the modelsdescribed by Mahadevan and Timmers, such as portals, on-linecommunities, and e-stores.
8.7 Revenue generation system
Many dot-com ventures have struggled to generate revenue.Advertising and cross referrals have proven potentially viablesources of income for Yahoo! and a few other portals, but innumerous other businesses websites still need to prove them-selves capable of revenue generation through product or servicesales. In some cases the Web represents a loss leader for firms
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Why business models matter
Valueproposition
Product/servicemodel
Identitymodel
Technologymodel
Pricemodel
• Product selection• Support services
• Software/hardware• Architecture
• Pricing strategy• Bundling
• Brand• Reputation
Figure 8.5 Value proposition
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The Make or Break Issues in IT Management
who wish to promote or complement other existing businesses.This is arguably the case in many newspapers and journals.However, the Wall Street Journal and a few other more specialistpublications attempt to make their site a revenue centre bymeans of selling subscriptions.
There are several models of pricing and market-making on theinternet (Dolan and Moon, 1999), including:
Set pricing with periodic or dynamic updatingBuyer/seller negotiation with or without a specified startingpointAuctions, reverse buying and exchanges.
Examples of these can be found in the numerous private andpublic B2B exchanges that have been launched, includingFreeMarkets On-line, Transora and the World Wide RetailExchange.
Internet businesses often use a model based on giving some-thing away free, in hope of gaining real revenues later on, whengrowth has generated a critical mass of customers. This is theapproach of many software developers, including Netscape andAdobe. However, a demand for the revenue-generating productmust be well identified in the first place, before large invest-ments are made in such a model. ‘Free’ or advertising-basedmodels can work, as shown by the history of commercial televi-sion in the UK, and the success of many free local newspapersoffering pages of classified advertisements.
A potentially important future pricing and sales model is micro-payments, or ‘pay per view’, whereby web users may pay forcontent, searches, or other interactions on a usage basis.
As shown in Figure 8.6, the revenue generation system isdynamic, and includes a choice of technology model and busi-ness architecture, in addition to pricing and sales/marketmodels. The business architecture describes the venture’s rela-tionships with other partners, or with a parent company if it ispart of some larger grouping.
The revenue generation models of firms such as FreeMarketsOn-line include income from several sources, for example con-sulting, market-making, and advertising.
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8.8 Delivery system
Value America was one of the early dot-com companies to sellbrand name consumer goods at low cost over the internet. On IPOin 1999 it was valued at US$2.4 billion; however, the stockdropped from US$75.00 in 1999, to US$2.00 in mid-2000, when thefirm was taken over and CEO Craig Winn ousted. Major investorsin Value America suffered huge losses. For example, Paul Allen,cofounder of Microsoft with Bill Gates, reportedly lost US$50million, and Fred Smith, CEO of Fedex, lost US$8 million.
Value America generated huge demand, through a pricingmodel of low-cost provider, and a sales/market model based onhigh-profile advertising in newspapers like USA Today and theWall Street Journal. However, the company was unable to satisfyall orders through its supply channels, and had to resort tobuying toys off the shelves of competitive retailers such as ToysR Us to sell on at a loss to its own customers (Byrne, 2000).
Distribution and delivery can be a challenge for both B2C and B2Bventures when faced with success and the need to rapidly scale upthe business. However, as shown in Figure 8.7, the supply chainmodel must be complemented by appropriate cost management,technology infrastructure (such as EDI and extranets) and busi-
Revenuegeneration
system
Sales/marketmodel
Businessarchitecture
Technologymodel
Pricemodel
• Sales process• Marketing strategy
• Software/hardware• Architecture
• Pricing strategy• Bundling
• Partnerships• Alliances
Figure 8.6 Revenue generation system
R
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The Make or Break Issues in IT Management
ness architecture. The economics of delivery need to be wellunderstood before making decisions such as outsourcing or in-house manufacture. Business risks must also be considered inmaking any investments in high-tech distribution capacity, asdemonstrated by the Webvan example described earlier.
8.9 Profit and growth engine
A good value proposition, flourishing revenue stream and effec-tive delivery system are necessary, but not sufficient, compo-nents of the profit and growth engine. A financial model isneeded, to support growth without compromising managementor exposing the venture to unnecessary risks. Reliance on tradeor private financing from a limited number of investors can bean asset if times are good, but a liability when a downturnoccurs. European fashion retailer Boo.com collapsed, in part,because the original investors refused a second round offinancing when needed, and other sources of capital were notavailable.
A strong governance model is required. This means solid lead-ership from CEO, general managers and board of directors.Lack of oversight and conflicts of interest can arise when direc-
Deliverysystem
Supply chainmodel
Businessarchitecture
Technologymodel
Costmodel
• Supplier policy• Open or proprietary
• Software/hardware• Architecture
• Cost drivers• Economies of
scale and scope
• Partnerships• Alliances
Figure 8.7 Delivery system
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Why business models matter
tors are too few and become too personally entangled in thefirm’s affairs or too closely identify with a firm’s strategy, as inthe Iridium case.
8.10 The business model framework in practice
The business model framework proposed here is a foundationfor a business plan for an internet venture, or any business com-peting in fast-moving and complex markets. The purpose of thisframework is to identify and highlight the key features of a newbusiness on which competitive advantage, profits and growthare built. Therefore, it should be used judiciously and not treatedas a set of checklists. In the interests of brevity and clarity, theanalyst should only elaborate on the components of the modelshown to lead to sustained profits and advantage. These couldarise through, for example, barriers to entry by competitors,switching costs, first-mover effects, brand equity, inimitableresources, or complex integration of activities, technologies andskills. Other aspects of the model that may be common to com-petitors, or that are hygiene factors, or that can be easily imi-tated, should only be summarized.
Profit andgrowthengine
Deliverysystem
Valueproposition
Revenuegeneration
system
Financemodel
• Source of capital• Burn rate
Governancemodel
• Directors/investors• Separate/integrated
Figure 8.8 Profit and Growth Engine
8.11 An example in on-line financial services:Nordea
Nordea is one of the most successful internet banking operationsin both Scandinavia and the world. About two-thirds ofNordea’s clients in Finland bank on the internet. Although asmall bank by global standards, it is a leader in on-line financialservices, with more on-line banking transactions per month thanBank of America. Nordea can offer a full range of on-line serv-ices, including the brokerage and sale of mutual funds.
As indicators of Nordea’s on-line success (Echikson, 2001):
Costs have been reduced significantly by closing half of itsbranches in FinlandProfits jumped by 20 per cent in 2000, largely due to internetinitiativesBottom-line improvements of US$250 million are forecasted inthe next three yearsOnly US$18 million has been spent on internet initiatives,much less than pure on-line competitorsIt has proven much cheaper for an established and respectedbank to recruit on-line customers than in many new pure on-line venturesCustomers pay four times as much for a stock trade than withcompetitor E*Trade, yet E*Trade has been unable to matchNordea’s number of trading accounts.
Nordea has shown that on-line financial services can be a profitcentre, and that a model of ‘bricks-and-clicks’ banking cancompete vigorously with low cost pure internet operations.
A summary of the distinctive components of Nordea’s businessmodel is shown in Figure 8.9.
8.12 Summary and conclusions
The changing business environment has forced many firms to re-evaluate plans for exploitation of the Internet, and to delay orcancel projects launched only a matter of months ago. Amidsuch turbulence there is inevitably a search for quick fixes, andscepticism about the potential for e-business. Although thenumber of dot-com failures continues to mount, especially ofhighly speculative and opportunistic ventures, lessons can be
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Why business models matter
learned from the recent huge burst of high-tech innovation andweb entrepreneurship.
Firms such as Tesco.com and Nordea show that real benefits ofcost saving, enhanced revenue streams and profits can beobtained. The right choice of business model, at the right time,can make the difference between success and failure.
The concept of a business model fills a useful gap in the strate-gic armory between that of value chain (or value network) andthat of a business strategy. Unlike a value chain, a businessmodel relates to all components of a business operation, includ-ing value proposition, business processes, innovative applica-tion and integrative use of technology. It also explains thedynamics of revenue and profit generation. Unlike a strategy, itdoes not address broader issues of purpose and direction, suchas company mission or the need for diversification.
A business model should be made an explicit part of any strate-gic or business plan. However, a clearly defined business model
Value proposition
• Consumer, smallbusiness andcorporate on-linebanking.
• A trustedinstitution.
• ‘Killerapplications’such as bill-paying.
• Universal serviceofferings.
• Simple, buteffective, webtechnology.
Revenue generationsystem
• Fees lower thanat branches, buthigher than thoseof pure on-linecompetitors.
• An establishedsales andmarketingorganization.
• Customerloyalty.
• Goodtechnologicalinfrastructure.
Delivery system
• Low cost on-lineoperations.
• Goodtechnologicalinfrastructure.
• Off-the-shelfsoftware.
• On-line e-marketplaces.
Profit and growthengine
• Strong revenuestream andefficientoperations.
• First-moveradvantages.
• A well-plannedand conservativeapproach tointernet strategy.
• Nordea is aresult of bankmergers in fourScandinaviancountries andhas establishedinfrastructureand corporategovernance.
Figure 8.9 Summary of Nordea’s business model
cannot replace common sense or sound financial analysis. Othersuccess factors can come into play, notably the strength of abrand name or a firm’s reputation. Even so, a business model isan important part of corporate or business strategy.
References
Byrne, J. (2000) The Fall of a Dot-Com; Blinded by Net Fever,Big-Name Investors Poured Millions into Craig Winn’sChaotic Value America. Business Week, 1 May.
Colvin, G. (2001) It’s the Business Model, Stupid! Fortune,8 January.
Cronin, M. (2000) Unchained Value: The New Logic of DigitalBusiness. Harvard Business School Press.
Dolan, R. and Moon, Y. (1999) Pricing and Market Making on theInternet. Harvard Business School (case number 9-500-065).
Echikson, W. (2001) The Dynamo of E-banking; While OthersChase the Dream, Nordea is Making it Work. Business Week, 16April.
Finkelstein, S. and Sanford, S. (2000) Learning from CorporateMistakes: The Rise and Fall of Iridium. OrganizationalDynamics, Fall.
Hamel, G. (2000) Leading the Revolution. Harvard Business SchoolPress.
Mahadevan, B. (2000) Business Models for Internet-based E-commerce: An Anatomy. California Management Review, 42, 4.
Phillips, C. (2001) The Technology and Internet IPO Yearbook (7th)Morgan Stanley, April, http://www.morganstanley.com/techresearch/index.html, 4/22/01.
Porter, M. E. (2001) Strategy and the Internet. Harvard BusinessReview, 79, 3.
Timmers, P. (1998) Business Models for Electronic Markets.Electronic Markets, 8, 2, http://www.electronicmarkets.org/netacademy/publications.nsf/all_pk/949, 4/22/01.
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157
At the start of a new decade, the experts are divided aboutwhat will happen to IT in organizations. On one hand,pundits cite trends such as the growth of e-business and therise of application service providers as well as the increas-ing technical sophistication of users as the reasons why IT,as a separate entity, will likely disappear into the rest of theorganization in the future. On the other, research groups arepredicting dire shortages of IT staff. It has also been foundthat the scope and depth of the CIO role is expanding, thestatus of IT is rising in most organizations, and that theCIO’s formal power is increasing.
(Fazio Maruca, 2000)
9.1 Introduction
To try to make sense of the challenges that are facing IT, particu-larly over the next five years, and how they will shape the organ-ization that everyone loves to hate, the authors convened a focusgroup of senior IT managers from a variety of industries, includ-ing finance, retail, telecommunications, manufacturing andinsurance. Participants were asked to assess how technologyand organizational trends will affect IT in a number of areasincluding: IT’s mission, function, management, self-image,external controls, internal controls, staffing, systems develop-ment, hardware and software management, and use in the work-
9 Whither IT?A look at IT in 2005
James McKeen and Heather Smith
School of Business, Queen’s University, Kingston, Ontario, Canada
place. This chapter presents the findings of this focus group.After a brief overview of the environment in which IT will finditself in the not so distant future and a look at how IT haschanged over time, we then discuss IT’s evolving role andresponsibilities in each of these areas.
Yet another revolution has begun in the field of informationsystems. When it is over, IS departments as they are cur-rently constituted will be dismantled. Independent soft-ware specialists will dominate the development of systems,programming and other software. Users will completelycontrol individual information systems.
(Dearden, 1987)
Business processes will take center stage in eBusinesses,forcing the IT organization as we know it to disappear.Technology management will become the responsibility ofbusiness process owners – both inside and outside the cor-poration.
(Cameron, 2000)
At the beginning of the fifth (or sixth) decade of the ‘informationage’ – depending on how you count, it is both amusing and frus-trating to see the consistency of the pundits on IT. Predicting thedemise of IT seems to be a theme. At the start of the currentdecade, they’re still at it. Articles with titles like ‘IT DepartmentFaces Extinction’ (Marron, 2000) and ‘Are CIOs Obsolete?’ (FazioMaruca, 2000) are challenging the concept of a separate ITdepartment within organizations. The experts cite trends such asthe growth of e-business and the rise of application serviceproviders as well as the increasing technical sophistication ofusers as the reasons why IT, as a separate entity, will likely dis-appear into the rest of the organization in the future.
Conversely, other research groups are predicting dire shortagesof IT staff. The Gartner Group (1999) writes:
Through 2004, market demand for relevant and specializedIT skills and know how will continue to outstrip supply.
By 2006, nearly half the workers in developed globaleconomies will be employed by industries that eitherproduce IT or use IT intensively.
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Similarly, it has been found that the scope and depth of the CIOrole is expanding, the status of IT is rising in most organizations,and that the CIO’s formal power is increasing (Fazio Maruca,2000).
To try to make sense of the challenges that are facing IT, partic-ularly over the next five years, and how they will shape theorganization that everyone loves to hate, the authors conveneda focus group of senior IT managers from a variety of industries,including finance, retail, telecommunications, manufacturingand insurance. This has become a periodic exercise for theauthors who convened similar groups in 1990 and 1995. Weselected a five-year term as being the best time frame in whichto predict meaningful change. This has proven to be remarkablyaccurate in the past (see McKeen and Smith, 1995, 1996). Webelieve that to look further ahead than five years is not onlyextremely difficult, but is ineffective given the pace and rate ofchange in the business and IT environment. Participants in thegroup were given the two previous papers and asked to usetheir framework to assess how technology and organizationaltrends will affect IT in a number of areas including: IT’s mission,function, management, self-image, external controls, internalcontrols, staffing, systems development, hardware and softwaremanagement, and use in the workplace. This chapter presentsthe findings of this focus group. After a brief overview of theenvironment in which IT will find itself in the not so distantfuture and a look at how IT has changed over time, we thendiscuss IT’s evolving role and responsibilities in each of theseareas.
9.2 The changing IT function
More so than any other organizational function, IT has had toface pressures for continual change and challenge. For example,ten years ago we wrote: ‘It is evident that a more sophisticatedmechanism for delivering IS to the organization is nowrequired. Like the process of retooling an outdated factory toturn out products faster and more efficiently, the IS functionmust undergo a change that is no less comprehensive if it is tofulfil its organizational mandate … the risk of not doing so isincreasing inadequacy and eventual obsolesence’ (McKeen andSmith, 1996). Ten years later, we read: ‘IT needs to transformitself, the way it operates, the way it does business. Those who
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Whither IT? A look at IT in 2005
are not successful will disappear’ (Marron, 2000).
This kind of pressure stems from two sources: the changing busi-ness environment and the changing technology landscape. Tenyears ago, globalization, merger mania, deregulation, and elec-tronic commerce, not only didn’t exist, no one had evenpredicted them (Fazio Maruca, 2000). Similarly the relentless im-provements in all forms of technology, many of which were pre-dicted, have led to a huge variety of applications, which havecontinually surprised and challenged IT and business managersalike. Just keeping up with these vast and varied changes has lefteveryone breathless. And it is unlikely that the pace of change isgoing to abate. In fact if there is one thing that everyone agreeson it’s that change is going to increase.
While every organizational function has been affected by thesebusiness and technology changes, none has faced more of themthan IT. This is because as the function charged with deliveringtechnical solutions to business problems, it sits squarely at theintersection of these two massive forces. One way the IT organi-zation has coped is by dramatically expanding the scope andnumber of its responsibilities. Table 9.1 illustrates how thesehave changed over the last two decades.
Table 9.1 IT’s growing list of responsibilities
1980s responsibilities 1990s responsibilities 2000s responsibilities
Systems development Systems development Systems developmentOperations management Operations management Operations managementVendor relationships Vendor relationships External relationship management
Data management Knowledge management End user computing Infrastructure management Education and training Change management Managing emerging technologies Environmental scanning Corporate architecture Corporate architecture Strategic systems Strategic leadership Systems planning Strategy implementation
Network management E-commerce Business integration(CRM, ERP, etc.) Resource management Risk management
This ‘add-on’ feature is one of the most characteristic features ofthe changes affecting IT over the last 20 years. It also explains
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The Make or Break Issues in IT Management
why IT is becoming increasingly more difficult and complex tomanage. In fact, some organizations represented in the focusgroup are beginning to recognize that the demands of managingsuch an entity are so great that they require more than oneperson and have created a Chief Technology Officer as well as aChief Information Officer. Others are creating an ‘office of theCIO’ staffed with several senior people, each with very specificresponsibilities (Fazio Maruca, 2000).
Whatever the future holds for the IT department itself, it is clearthat information technology and its central place in the organiza-tion will get more important in the foreseeable future. To cope, ITdepartments will have to adapt. As Table 9.1 shows, IT’s influencenow encompasses not only much of the traditional organization,but is also expanding to include the new forms of organizationtowards which the world is evolving. Looking ahead to 2005, ourfocus group managers saw a critical and important role for IT inboth these areas, helping companies to adapt to the new businessand technological realities they are facing.
9.3 The IT organization in 2005
Focus group members face a wide variety of challenges in theirday-to-day jobs and each placed a different emphasis on whatwould be the most important one for their particular IT organi-zation in the future. For example, one manager believes that ITstaffing will be a driving issue behind the future of IT, whileothers feel it will be e-commerce or the major new technologiesthat are just hitting the market (i.e. wireless and unlimited band-width). However, together the members paint a compellingpicture of the shape and face of the IT organization in 2005.Table 9.2 summarizes their vision and contrasts it with that ofthe previous two decades. The remainder of this chapter willdiscuss each of the features of the IT organization of the future.
9.3.1 IT mission
The concept of the IT organization leading or driving corporatechange was introduced in the early 1990s, along with the notionof re-engineering. It was the first time that organizations hadrealized that technology could be used to dramatically changehow company processes worked. Instead of ‘paving the cowpaths’, IT could be used to eliminate or short-circuit many time-
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The Make or Break Issues in IT Management
honoured practices. With this realization came a growing recog-nition that it wasn’t enough to simply change a process withtechnology, one also had to change the human practices thatsupported it. Thus was born the concept of IT as a corporatechange agent or change manager. However, although corporatechange has become increasingly significant during the lastdecade, what has remained constant is the concept of the organ-ization itself. Today, most organizations are still the same recog-nizable entities they have always been. This is about to change.
Whereas in the 1990s change focused around processes, in thenext five years we will see the beginning of the radical transfor-mation of organizations themselves. The advent of the Internet inthe mid-1990s has opened up new possibilities for doing businessacross organizational boundaries. Tapscott et al. (2000) suggestthat as businesses come to recognize and exploit these opportu-nities, they will soon realize that technology can be used to createand enhance interenterprise effectiveness and efficiency. Over thenext five years, companies will initiate major experiments withinterorganization ventures to explore new ways of structuringenterprises to deliver value. Tapscott et al. predict that severalnew interenterprise business structures will emerge in the comingdecade, such as those that integrate across a value chain (e.g. DellComputers) or that aggregate goods for other companies (e.g.Amazon.com). IT will provide the means to facilitate such corpo-
Table 9.2 IT in 2005 will be different from the previous two decades
1980s view 1990s view 2000s view
IT mission Technology Corporate change Corporate transformationmanagement
IT function System automation Corporate re-engineering Mobilize strategyIT management Reactive Proactive AnticipatoryIT self-image Service provider Facilitator CatalystExternal controls Balkan states Federated republic Federated networkInternal controls Metrics Impact ValueStaffing Specialists Skilled generalists Business technologistsSystems development Structured Evolutionary AssembledHardware/software Planned Confused Minefield
managementIn the workplace Office automation Automated office Boundary-less office
rate transformations and IT staff will be instrumental both inidentifying the possibilities available and establishing the mecha-nisms whereby these new ways of business will operate.
Internally, too, businesses will begin to look significantly differ-ent, due to improving applications of technology, integrationand knowledge and to management’s increasing need for struc-tures and processes that can respond rapidly to external pres-sures and growing customer demands. There will thus be asignificant broadening of IT’s change management responsibili-ties as companies realize that technology can not only be used tomake its processes more effective and efficient but can also fun-damentally transform the way business operates.
In short, IT’s mission will grow to be more than facilitatingchange. Over the next five years, we will see organizationsexpecting IT to be front and centre in the drive to transformalmost every aspect of the business: from how it delivers value,to how it is structured, to how it operates internally.
9.3.2 IT function
In the 1990s, business automation for individual departmentsbecame increasingly passé. Instead, IT organizations were askedto work with business managers at higher and higher levels inthe corporation to develop corporate-wide applications toimprove organizational work processes. This involved changingmany of the fundamental ways in which work was done – elim-inating steps altogether, simplifying processes, integrating themwith related processes or by restructuring them. This corporatere-engineering function gave IT a new mandate to seek broadercorporate-wide synergies and to link existing functional areas innew ways. In the process, businesses cut layers of managementand began to see themselves in terms of processes rather thanfunctions. As the decade progressed, it became clear to seniormanagers that the IT organization and its staff had a muchbroader corporate perspective than other functional areas andwere thus able to suggest worthwhile new ways of deployingtechnology across departmental ‘stove-pipes’ to benefit theorganization as a whole. Thus, CIOs and IT staff came to be seenas having an increasingly strategic role to play in the organiza-tion. By 2000, more than three-quarters of CIOs were either onthe board or the executive committee of their respective organi-zations (Fazio Maruca, 2000).
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Whither IT? A look at IT in 2005
Over the next five years, the IT function will increasingly cometo be valued for its unique perspective on both the corporationand technology and its ability to use this perspective to facilitatestrategy development and mobilize strategy for the business. ITwill have two key contributions to make to strategy formation.First, as the Internet and electronic commerce becomes a greaterand greater portion of a business, IT will be expected to play akey role in developing and implementing the organization’s e-business strategies. Second, as technology continues to evolveand diversify rapidly, IT will be expected to become more strate-gic about its technology policy and to present this strategy tosenior management in ways that it can be effectively integratedinto business strategy.
These new strategic functions will require IT staff and manage-ment to develop new competencies, such as business acumenand leadership skills. They will also mean that, for the first time,IT decisions and actions will be in an area where they will havea direct impact on the corporate bottom line. Whereas in the pastthe influence of systems has been mediated by other companystaff, increasingly over the next five years, through the Internetand other customer-facing technologies, IT systems will interactdirectly with customers. Thus, the IT function will, of necessity,become more outward-looking and more concerned with busi-ness value than previously. It will also become more visible bothwithin the organization and externally. For example, focusgroup members noted that they have already begun to see theirstock prices vary as market analysts assess their company’s e-commerce strategies. This pressure can only increase in the nearterm as both customers and the market vote with their dollars onthe quality of IT’s work.
9.3.3 IT management
Focus group members believe that there is no question that thejob of the IT manager has got increasingly complex. As Table 9.1demonstrates, over the years more and more responsibilitieshave been heaped on IT’s plate. But the tone of management isalso changing. In the 1980s, responding to user criticisms that itwas inflexible and bureaucratic, IT tried to react to users’ needsby creating support functions and adopting client-centredmethodologies. However, in the 1990s this style of managementwas no longer enough. Many IT managers were dismayed to
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discover that their users expected them to be proactive in theirvision for how IT could help the company respond to businesschange by improving processes and developing new productsand services. During this decade, IT managers explored avariety of ways to develop this skill. For example, they lookedfor ways to effectively combine a client-centred, business orien-tation with the knowledge of how information technology canchange and improve company processes.
In the future, however, even more will be expected of IT man-agers. In the rapidly changing business and technical environ-ment in which they will be operating, IT managers will beexpected to anticipate coming trends and to propose businessstrategies to take advantage of them. As business cycles shortento become almost spontaneous and technology outstrips theability to assimilate it, IT managers will be expected to look evenfurther forward and develop strategies that will enable thecompany to fulfil needs as they develop. Thus, the key skill that ITmanagers will have to develop is the ability to ‘get ahead and stayahead of the curve’ in both business and technology strategy.
To do this, IT managers will have to dramatically increase theirenvironmental scanning skills so they can learn about new tech-nologies and new applications of those technologies. They willalso have to develop their research and development capabili-ties to explore and gain experience with these technologies andwhat they can do. Because of the difficulties involved in pre-dicting the future in such an unpredictable area, many IT man-agers will begin to use ‘real options’ thinking to develop anddesign hedging strategies for their organizations. This willrequire a more flexible approach to technology policy and archi-tecture than has been used previously.
IT managers will also need a more in-depth knowledge of busi-ness than in previous decades. As they realize that they need tobetter understand the business trends facing the company, ITmanagers will develop new links with the parts of the businessdesigned to monitor customer feedback, business trends anddevelop new products. Initially, IT will do this by assisting thebusiness to develop better tools to analyse and identify businessinformation such as customer reactions, patterns, incipienttrends and consumer needs. As they acquire a clearer under-standing of what business is looking for, a much tighter IT–busi-ness partnership will develop than has existed in the past.
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9.3.4 IT self-image
How IT views itself internally is key to how it performs. In the1980s, IT saw itself as a service provider to the business commu-nity and designed its processes, structure and metrics accord-ingly. In the 1990s, however, IT saw its major role to be that of afacilitator of business. Its main job became providing the tech-nology and tools that the business needed to do its work. Thus,IT infrastructure became much more important in the lastdecade. IT organizations developed PC ‘workbenches’ or suitesof software for users to access as needed, and large, integrateddatabases were developed (i.e. data warehouses) for users toexplore and do their own analysis, rather than having to rely onpreformatted information from an IT system. Over the lastdecade as well, IT organizations came to recognize that facilita-tion of business did not necessarily mean that IT itself had toprovide all IT services. Thus, IT organizations began to helpusers to find consultants and to outsource non-core functions(e.g. operations). By the end of the decade, many IT organiza-tions saw themselves as coordinators of technology delivery tothe business, rather than the sole providers of it.
In the future, IT will have to change its self-image yet again toaccommodate the more active role it will be taking in business.To underscore its responsibilities for business transformation, ITwill come to see itself as more of a catalyst in identifying anddelivering new forms of value to business. In adopting this self-image, IT will have to be careful if it is not to be perceived asarrogant. IT in and of itself will never be solely responsible forbusiness transformation and new business strategy, no matterhow important technology is to the business. Instead, IT mustview itself as a chemical agent that, when added to other sub-stances, will cause something completely new and different tooccur. As a catalyst, IT can start things happening in organiza-tions that would never have occurred without it; it can stimulatenew ideas and start people thinking about new possibilities. Thisis an exciting role but it is also one that requires considerablymore business acumen and leadership skill than being a merefacilitator. Therefore, it is essential that IT groom and develop itspeople to be prepared for the role. An effective catalyst must paymore attention to the mixture of relationships, politics, finance,business reality and technology potential than it has in the pastand use its judgment as to whether a new idea will create some-thing new and valuable or merely result in a chemical disaster.
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The Make or Break Issues in IT Management
9.3.5 External controls
As the IT function matured in organizations during the 1980s,companies experimented widely with different forms of gover-nance structures. By the end of that decade, IT functions typi-cally had a wide range of relationships with differentdepartments and very few controls and standards had beenestablished. Over the 1990s, most IT functions adopted someform of federal model of governance, which operated much likea country of united states. In this model, individual user groupswere free to make their own IT decisions until they wanted touse the corporate infrastructure. Then, they had to follow cor-porate standards. By the end of the decade, the need for corpo-rate IT standards and controls over such things as security,communications, and data for new applications had beenaccepted by most business groups, although IT organizationswere still playing catch-up with legacy systems developed inearlier years.
Over the next five years, the need for corporate standards willgrow as companies pursue ever greater levels of integration.The adoption of enterprise-wide software packages, such asERP and CRM, will reinforce this need, as will the need forhardware and software to be ‘plug and play’. However, the newchallenge IT will face will be how to establish such standardsand controls across the network of businesses and customerswith which the company will increasingly interact. This willreinforce the need for intra-organizational standards and con-trols so data and transactions can be easily exchanged. Alreadysome industries, such as the oil and gas industry, have adopteda common data model, which greatly facilitates mergers andacquisitions. Architecture standards are growing increasingly‘open’ too. This process will ultimately lead to a federatednetwork of standards and controls to which all groups mustascribe. There will, however, be no single set of external con-trols. Instead, they will be established in a variety of placesaccording to the type of control involved. Industry and technol-ogy groups will lead some standards efforts as will majorplayers in a particular field (e.g. Microsoft, the US government).In addition, concerns for security and privacy will hasten legis-lation and both government and self-regulation in these areas.Organizations of all stripes will begin to cooperate especially inthe area of security. Companies can expect some form of federalgovernment coordinating body will be established in this area
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Whither IT? A look at IT in 2005
by 2005. In short, standards and controls will increasingly comefrom a variety of places outside the organization for any type ofcomputing that involves using the network. While internal stan-dards and controls will still have a place, they will be relativelydiminished by the greater need to establish an open network.
9.3.6 Internal controls
In the 1980s, fed up with expensive systems disasters and unre-sponsive IT organizations, it was the accepted wisdom amongstmanagers that IT had to be brought under control (McKeen andSmith, 1996). Thus, began a fascination with IT performancemetrics, which has lasted (in some form) up until the presentday. In the 1990s, however, it became increasingly obvious thatfocusing on metrics alone resulted in some very poor systemswith great metrics. Therefore, executives and researchers alikebegan to look at what impact information technology was actu-ally having on the firm. They realized that simply deliveringsystems was not enough. The systems actually had to be benefi-cial to the organization. Thus, over the last decade, both IT andbusiness departments have been increasingly held accountablefor what a system contributes to the bottom line of the business.Unfortunately, this has all too often been interpreted as costsavings, which are considerably easier to measure, rather thanincreased revenues or new opportunities, which are often morenebulous and more difficult to attribute to the use of IT alone.
In the next decade, it is likely these simplistic measures will berefined and made more sophisticated. IT will be assessed notonly according to its impact on the bottom line or even accordingto whether or not applications were delivered on time and onbudget, although these will still be important. The major internalyardstick in IT’s future will be the value that it delivers to theenterprise. This will take many forms, such as the ability to offernew products and services, to become more competitive, to par-ticipate in new markets, to operate more effectively, and todevelop new capabilities. While value will frequently be definedas new value, companies will also begin to realize that the abilityto leverage existing people, technologies and information moreeffectively also delivers value. In the past once a system wasdeveloped, IT management saw very little significance in theongoing effort to maintain and upgrade it. Maintenance was seenlargely as an overhead function – a necessary evil. Over the next
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five years, IT management will begin to recognize that compa-nies can frequently exploit current applications of technologymore extensively. IT organizations will therefore look for ways touse existing infrastructure and applications more fully to deliversome ‘quick hits’ of value to the business.
Increasingly, delivering value will come to be seen as a teameffort – something that cannot be done without the unique skillsand abilities of both the IT and the business members of theteam. Interestingly, however, identifying value in advance willcontinue to remain an elusive skill. While there will be great suc-cesses in installing a particular piece of hardware or functional-ity in a particular company, there will be no guarantees thatadopting it will yield the same value in another company. Thiswill refocus management’s attention more fully on the non-tech-nical aspects of value. Capabilities, cultures, and managementthemselves will increasingly come under the microscope todetermine how they contribute to the value that can be derivedfrom IT.
9.3.7 IT staffing
It has always been a challenge for IT to acquire the right mix ofskills in its IT staff. During the 1980s, a number of different spe-cialists were developed as technology became more and morecomplex. Unfortunately, handoffs between them became prob-lematic. In the 1990s therefore there was a move to developmore skilled generalists who would be able to bring a set ofsystems skills and disciplines to specific situations and adapt,by learning, the specialized tools and techniques that arerequired. While this helped certain business-facing parts of IT(e.g. project management and systems analysis) the need forhighly skilled specialists in certain ‘hot’ areas remained. In 1995,we suggested that ‘careful attention must be paid to the peopleresource if IT is to excel’. Today, the rash of material around theIT ‘staffing crisis’ (Gartner Group, 1999), combined with thefocus group’s personal experiences, suggests that these warn-ings have not been heeded. Staffing IT is and will continue to bea growing problem over the next five years.
With the explosion of IT work taking place at present, mostorganizations will face serious skills shortages over the next fiveyears. As in the past, management will have to resort to hiringspecialists from consulting firms to fill the need for high
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demand technical skills. Over the next five years it will be essen-tial for IT organizations to develop individuals’ professionalskills and recognize different career paths for different types ofIT staff. The experts are predicting a growth in demand for such‘soft’ skills as relationship management, strategic and analyticalthinking and portfolio management (Gartner Group, 1999). Theyalso suggest that the competencies needed by IT staff areexpanding rapidly and include both technical and businessskills. While focus group members agreed that these are and willbe required, they also noted an ongoing need for specialists inkey technology fields. Thus, over the next five years, it appearsthat while the majority of IT staff in any particular organizationwill evolve to become business technologists, there will alsoremain a strong need for technical specialists which companieswill increasingly fill with skilled contractors.
9.3.8 Systems development
In the last two decades, systems development has moved from ahighly structured process to one that is more flexible and fluidaccording to the circumstances. During the 1990s, businessesplaced increasing amounts of pressure on IT organizations todevelop more adaptable systems in shorter delivery cycles. ITorganizations responded by developing systems in smallerpieces, making greater use of prototypes, and providing userswith more dynamic control over discretionary items, such asreport and display formats, and even process logic. Thus,systems came to be developed in a more evolutionary fashion.During this time, the older-style structured systems developmentlife cycle (SDLC) has been gradually abandoned in favour of anapproach that marries strong project management disciplineswith a much more eclectic and modular development approachthat may include: packaged software, custom software, legacysoftware, and end-user tools. Development teams also look veryunlike those of the past. Increasingly they are composed of equalnumbers of users and technical staff (including contractors).Pieces of systems are often developed separately by teams of con-sultants or specialists in a particular area (e.g. telecommunica-tions, web development) and then plugged in. Proprietary datafiles, owned by a system, are mostly things of the past.
In the new decade, these trends in systems development willcontinue to escalate as the pressures increase for faster develop-
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ment and more functionality. To address these, over the next fiveyears systems development will increasingly become a matter ofassembling system pieces rather than coding new software.More and more systems developers will try to cobble existingsoftware and tools together with new technology to create newvalue for the organization. In addition, knowledge managementwill become more and more important and a significant amountof development effort will revolve around acquiring or buildingthe means to manipulate corporate and customer information.To this end, ongoing efforts will be made to standardize corpo-rate data and processes so that the entire company has one lookand feel to its systems. As bandwidth becomes less of a restric-tion, companies will begin to add more multimedia features totheir systems. This, however, will not be a major feature ofsystems over the next five years. And, naturally, the Internet andits intranet and extranet siblings will play a huge part in allfuture development. Over the next five years, substantial effortswill be made to retrofit most existing corporate systems to makethem accessible over the Internet and to make the companyavailable to its customers around the clock.
With the IT staffing crisis looming large, IT organizations willalso have to modify their development teams – making increas-ing use of external contractors for technological components andusers to work on business requirements and interface issues. ITstaff, with their strategic perspective and business technologistskills, will be required for their ‘big picture’ view of the overallinitiative. More and more, they will be used to maintain the link-ages between the various parts of the development teamthrough relationship management, coordination skills, and intel-ligent integration. A company’s development staff will come tobe utilized more to pull a variety of disparate people and plat-forms together to achieve a desired result and to identify andresolve problems and issues that threaten the delivery of thesystem than for the actual development of software. Thus, theywill come to be seen much as general contractors in the con-struction industry. These people may do some of the actualbuilding work, but they may not. However, they always assumeresponsibility for deadlines, relationship management, projectmanagement, and risk management.
9.3.9 Hardware/software management
Over the last decade, hardware and software management hasbecome increasingly confusing for IT managers. The prolifera-tion of hardware available and the increasing number of vendorshave kept managers running hard just to keep up. Today, mostIT organizations interact with a network of vendors for a varietyof purposes. This has meant that the task of managing all of therelationships involved, and sometimes managing the relation-ships between two vendors, has become a larger and larger chal-lenge for IT.
Over the next five years, these trends will grow to a differentlevel of intensity because of the impact that IT architectural deci-sions will have on the business. In the past, infrastructure waslargely seen as a technical decision and best left up to theexperts. As organizations come to view infrastructure as strate-gic to the enterprise, hardware and software management deci-sions will become more and more visible in the organization.Thus, it will become a minefield for IT management, whichcould blow up in its face if it has made the wrong technologydecision. For this reason, IT managers will begin to pay moreserious attention to the development of technology strategy. Thisstrategy will not simply make architectural decisions for theorganization, however. It will also be devised to hedge againstthe wrong choices being made. Rather than investing in a singletechnology direction, organizations will begin to explore anddevelop options – to various degrees – in multiple technologies.Risk management will become much more fully refined in thisarea as a result and companies will begin to look at their tech-nology strategy as a portfolio of options rather than as a static,cast-in-concrete architecture.
9.3.10 In the workplace
During the 1990s, IT organizations focused on developing anautomated office. They ensured that all users were connectedelectronically in some way and had access to the basic softwarethey needed to function. Many IT organizations developed astandard suite of office software and integrated corporatesystems into office PCs when and where they were needed.Policies and standards were established to ensure that systemswere kept secure and that viruses and non-approved software
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were not introduced. These practices worked reasonably welluntil the later part of the decade when the Internet openedorganizations up to the world. Almost overnight, not only couldemployees communicate electronically with others outside thefirm, customers and other companies could access the company– both its people and its systems. All of a sudden, the concept ofa self-contained automated office appeared both quaint anddangerously out of date.
Over the next five years, the Internet will be the catalyst forchanging the workplace. While many features of the futureworkplace have already been introduced, e.g. e-mail, on-lineaccess, multimedia, integrated software, partnerships withexternal organizations, they have not yet come together tochange most offices in dramatic ways. This is about to change.In the near future, offices will open up more and more to theoutside world until the workplace becomes truly boundary-lessand work is conducted in cyberspace rather than the workplace.Remote workers, mobile workers, home workers, networkedworkers, virtual workers will all become a reality over the nextfive years in many companies. Similarly, as companies them-selves become boundary-less, the space in which they do busi-ness will also change from ‘bricks and mortar’ to ‘clicks andmortar’. IT will be kept busy enabling not only company func-tions, but also office support anywhere, any place, any timesince existing security and infrastructure will not be adequate tocope with the new demands. The workplace will perhaps seesome of the most observable changes in organizations over thenext five years. By 2005, through IT, the entire look and feel of acompany to both its customers and its workers will be funda-mentally changed and the virtual office will have arrived.
9.4 Conclusion
This chapter has explored the ongoing evolution of the IT func-tion in the organization. In particular, it has tried to identify theways in which key elements of the IT function will be differentin the future than in the past. It has shown that IT is becomingincreasingly central to corporate strategy in many ways. Notonly will IT be making a major contribution to a firm’s businessand technical strategic visions for the future, it will also have aprimary role in implementing and mobilizing these strategies.IT will therefore increasingly need to anticipate the company’s
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future direction and to provide the information and infrastruc-ture to ensure that the business will be in the right place at theright time. With the walls of the organization beginning tocrumble and firms exploring new ways of working and deliver-ing services to their customers, IT will be expected to act as thecatalyst for this transformation. IT itself will also be changing toaccommodate these needs with new ways of developingsystems and partnering with other companies to deliver value tothe organization. The pressures involved will place a significantstrain on IT staff and it is expected that recruiting the right typesof business technologists for a company will be a considerablechallenge. The next five years will not be easy ones but they willbe exciting as IT managers experiment with and explore ways tofacilitate the organization of the twenty-first century.
References
Cameron, B. (2000) The Death of IT. The Forrester Report, January.Dearden, J. (1987) The Withing Away of the IT Organization.
Sloan Management Review.Fazio Maruca, R. (2000) Are CIOs Obsolete? Harvard Business
Review, March–April.Gartner Group (1999a) The Role of the IS Professional in the
New Millennium. Conference Presentation, October.Gartner Group (1999b) Workforce Strategies. Conference
Presentation.Gartner Group (1999c) Compelling Workplace. Conference
Presentation.Marron, K. (2000) IT Department Faces Extinction. The Globe and
Mail, 30 March.McKeen, J. and Smith, H. (1995) The Future of I/S: Looking
Ahead to the Year 2000. IT Management Forum, 5, 1, March. McKeen, J. and Smith, H. (1996) Management Challenges in IS:
Successful Strategies and Appropriate Action. John Wiley andSons, Chichester.
Sevcik, P. (2000) Network Forecasts For 2005. Business Com-munications Review, January.
Tapscott, D., Ticoll, D. and Lowy, A. (2000) Digital Capital:Harnessing the Power of Business Webs. Harvard BusinessSchool Press, Boston.
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10.1 Introduction
Although the potential of IT is beyond dispute, it proves to bevery difficult to evaluate its true business value. IT spending hasincreased considerably and now represents one of the largestcapital items of many firms, across many industries. In thepresent competitive business arena, modern IT enables efficientand effective business operations, leveraging business improve-ments and securing a competitive edge. Capturing the value ofIT is often considered as the most critical and yet the mostcomplex part of managerial decision making. Many managersdo not try to justify their expenditure or measure whether theirmoney was well spent. This situation has become unacceptablein the light of the rising costs and uncertain benefits of thisincreasingly important type of business investment. The risk ofmaking the wrong decisions, selecting the wrong projects or – inbroader terms – of misalignment of IT and the business – issimply too great. The call for more financial returns and more‘value for money’ can no longer be ignored.
This chapter will present a model for taking and governinginvestment decisions concerning IT. The focus of this chapter ison the strategic and organizational dimensions of such deci-sions, and offers a synthesized perspective on how to managethese decisions. Many of the insights, viewpoints and concepts
10 Strategic decisions in the information ageTransforming technology promises into business
benefits1
Rapoo Bank and Theo Renkema
Eindhoven University, The Netherlands
presented are the results of several years of academic researchand management in the realm of IT evaluation and benefits man-agement (see Renkema, 2000). First, Section 10.2 discusses anumber of important developments in the area of organizationaland managerial decision making, with particular attention to theconcept of bounded rationality. Subsequently, Section 10.3 looksat four styles of decision making, based on a distinction betweenthe ‘product’ and ‘process’ dimension of decision making andinspired by the way firms take strategic investment decisions.These two sections set the scene for Section 10.4, in which amodel is presented – paraphrasing conventional businesswisdom in marketing coined the P4 model – which offers fourcontrol options to manage investment evaluation and to supportorganizational decision making. This chapter’s conclusions aregiven in the fifth and final section.
10.2 Investment issues and management challenges
Throughout the second half of the twentieth century, informa-tion technology (IT) has been permeating virtually every partof modern society. It has even been suggested that this marks adigital revolution that will have far reaching and profoundconsequences, perhaps even more than the well-known indus-trial revolution (see e.g. Negroponte, 1995; Thurow, 1999). Inthe last few years, the notion of the ‘New Economy’ has beenused to illustrate the perceived contribution of information andcommunication technology (ICT) to lasting economic growthand increased levels of business productivity (Kelly, 1998;Shapiro and Varian, 1999). In the present ‘information age’ itseems we are only at the start of a radical digitalization of busi-ness activities, which will have a profound impact on practi-cally every organization. Until recently, IT was mainly used torationalize routine business processes in the corporate ‘backoffice’. IT was considered an administrative expense or liabilityand the main thrust was to improve efficiency through costsavings and cost displacements. Today, long-term and capital-intensive business investments are made in the corporate ‘frontoffice’ in order to improve effectiveness, to gain and sustaincompetitive advantage and to transform entire businessprocesses. Nowadays, it is not so much the question whether toinvest, but more the question of how and where to invest inorder to get maximum business value and to increase return oninvestment.
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The increased importance of IT has meant that in many firms ITinvestments claim a major and increasing share of the availablefinancial resources. It is estimated that since the 1990s largeorganizations spend up to 50 per cent of their total capitalexpenditures on IT, while they constitute between 1 per cent and10 per cent of sales turnover (Banker et al., 1993; Weill andBroadbent, 1998). Information-intensive organizations – e.g. infinancial services or many governmental organizations – havethe highest spending figures, compared with other organiza-tions. Although subject to a slight downward trend in the 1980s,IT budgets rising with double-digit percentages a year shouldnot be considered as rare, while still up to half of the total ITcosts are not part of formal budgets. In many cases, IT spendingis on a comparative level with spending on, for instance,research and development (R&D) and marketing (Ballantine etal., 1995). US government statistics indicate that as of 1994 com-puters and related IT resources make about half of all businessspending on equipment, even excluding the massive spendingon programming and software (Sager and Gleckman, 1994). In1999 US corporations spent US$10 billon on building websitesalone. Driven by an increasing ‘electronic commerce’ applica-tion, at the turn of the century, the IT industry might wellaccount for some 10 per cent of world economic activity, a dou-bling of the 1990 figure (Willcocks and Lester, 1999). The finan-cial importance of IT makes it clear that investment issues withrespect to IT can no longer be ignored. Businesses that reallywant to get ‘value for money’ from IT-based infrastructure needto pay active attention to their management process of assessingand creating business value. This requires tighter managementcontrol and scrutiny towards IT investments across their entirelife cycle.
The value for money to be obtained from investments in IT,however, is far from guaranteed. IT investments have repeatedlybeen the subject of disappointed expectations and their evalua-tions raise many questions. The increased financial importanceof IT contrasts considerably with the difficulties encounteredwhen trying to assess the potential business benefits andmeasure the realized contribution to business performance.Many IT-based improvement projects are known for their over-shoots in time and budget, and for insufficient quality or unclearbusiness contribution. Although not all unsuccessful IT projectsare likely to be publicly known, there is a well-documented
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history of unsuccessful or even clearly failed investments and oftheir inability to generate sufficient business value. The cancella-tion of the Taurus project of the London Stock Exchange in 1993,e.g. cost £80 million and over £400 million of abandoned systemdevelopment costs of the securities industry. In 1994 the Britishinsurance firm Prudential stopped their Plato project to migrateto a client-server IT architecture, costing £40 million. In 1997 theUS Internal Revenue Service admitted their attempt to build asingle integrated system for processing 200 million tax forms wasa failure, and had already cost several billions of US dollars.Organizations estimate that around 20 per cent of their IT spend-ing is wasted and that 30 per cent to 40 per cent does not con-tribute to business performance (Willcocks and Lester, 1999).Around 70 per cent of all firm IT investment seems to give noadequate return on investment (Hochstrasser and Griffiths,1990). Only around 50 per cent of completed projects are consid-ered to be a true success (Lytinen and Hirschheim, 1987). Eventhe Gartner Group, one of the leading commercial IT researchfirms, sees only a 1 per cent net average return on IT in the years1985–1995.
10.3 Foundations for organizational decision making
Decision making plays an important role in organizationaltheory, both in a descriptive and prescriptive way. The decisionmaking approach to organizational analysis can even be consid-ered to be a specific school in organizational theory, and com-bines several disciplines such as psychology, economics,operations research and statistics. From a more practical point ofview, adequate control of decision making has become one of thekey factors for successfully managing and controlling firms instrategic, tactical and operational terms. In today’s turbulent andoften diffuse business environment an important differentiatingfactor in a firm’s ability to innovate and compete has becomemanagerial decision making.
10.3.1 Quality of decision making
In line with the increased importance of decision making inorganizations, much decision research efforts have been devotedto designing instruments that can increase the quality of organi-zational and managerial decisions. ‘Decision quality’ refers to
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aspects such as (see e.g. Vroom and Jago, 1988; Butler et al.,1993):
The ‘correctness’ of a decision, or in other words the extentinto which decision making stakeholders have confidence thatthe outcomes of a decision process reflect the aspired goals andthat all relevant aspects have sufficiently been addressedThe level of organizational commitment and the degree ofacceptation of a decisionLearning experiences, which are gained by taking a decisionand by having a learning-oriented decision processThe efficiency of the decision making process: taking a deci-sion with minimal efforts, both in financial and organizationalterms.
In their study of the behavioral aspects of organizational deci-sion making, Janis and Mann (1977) extracted the following cri-teria to judge whether decisions are of a high quality:
There are clearly defined and well-known goalsDecision makers have clear knowledge of a number of alter-native courses of actionThe projected advantages and disadvantages of a particularchoice are carefully evaluatedDecision makers are open to new information, even if theyhave preliminary ideas regarding a possible solutionEven if new information conflicts with preferred choices,there is sufficient room for correct interpretationThere is a re-examination of all known alternatives, beforemaking the final decisionWhen implementing the final decision, there is a definedimplementation plan, which allows for contingency measuresto mitigate risks.
The ultimate goal of improving the quality of decision makingshould always be increasing the chance of success of the invest-ment considered. As such, a distinction can be made between:
‘Good’ decisions – decisions that have a high degree ofquality (e.g. a comprehensive problem diagnosis, completecoverage of all decision alternatives, high organizationalacceptance, fast decision making)‘Successful’ decisions – decisions that are successful in terms
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of their outcomes (e.g. cash results, customer satisfaction orcompetitive advantage).
Devoting time and resources to improving the quality of organ-izational decision making can be considered an important requi-site for making successful decisions, and therefore for maximiz-ing the business value gained from IT. Apart fromwell-articulated investment goals and valuation criteria this alsomeans process-oriented issues such as management commit-ment, mutual trust and a common ‘language’. Special attentionfor the quality of decision making in order to arrive at good (andultimately successful) decisions becomes more important if, rel-atively speaking:
Investments have many (intangible) organizational and strate-gic impactsOf these impacts, many business impacts are human andsocial impactsInvestments require much funding and resourcesThere are high expectations and ambitious targets regardinginvestment resultsThere is much uncertainty concerning the possibility of realiz-ing the resultsInvestment stakeholders have many different interests andpower basesInvestments have an innovating nature, both in terms of tech-nology and business.
The more projects meet these investments characteristics, themore evaluations and decisions will have to rely on managerialjudgement, stakeholder assessment, at the expense of purefinancial and analytical techniques. This should not be consid-ered as detrimental for high quality decision making, but as anopportunity to motivate the use of more qualitative yet relevantmethods for decision making.
10.3.2 The classical model of rational decisionmaking
The classical economic model of the pure rational decisionmaker (the ‘Homo economicus’) plays an important role in theo-ries of organizational and managerial decision making. Thismodel can be characterized by three central premises:
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A decision maker knows exactly what he (or she) wants; i.e. hehas clear and unambiguous goals in mind. In economic theo-ries this usually means a maximization of utility or profitsA decision maker is omniscient, which means that he overseesall possible decision alternativesA decision maker has a unlimited capability to process infor-mation.
This rational model is very well recognizable in support of whathave been called ‘programmable decisions’ (Harrison, 1987) or‘well-structured problems’ (Bass, 1983). Often algorithmic,mathematical models from the field of operations research areused. A characteristic is that the contribution of different deci-sion alternatives is usually projected using historical data.Ackoff (1979) calls this the ‘predict and prepare’ paradigm,while Rosenhead (1989) speaks of ‘colonizing the future’. Thesekind of decision-making techniques are abundant withincontrol decisions of operations management for routine, pre-dictable decisions (e.g. for inventory management, materialsmanagement, sales analysis). This mathematical, statisticalapproach, however, falls short when supporting non-routine,more strategic management issues. These are characterized bylarge complexity, subjectivity, qualitative effects, uncertaintyand possible conflicts between interested parties and stakehold-ers. Therefore, these kind of decisions are difficult to structureand to program in advance. Management decisions regarding ITare typically decisions of the latter category. Advanced mathe-matical methods and techniques are thus of limited value tosupport capital-intensive infrastructure investment decisions.
10.3.3 Bounded rationality as a decision-makingparadigm
The central premises of the classical model of rational decisionmaking have proved to be very unrealistic for organizationaldecision making, both in descriptive and prescriptive terms. Infact, rational decision making can be considered nothing lessthan a utopian construct. Many empirical studies have madeclear that decision makers generally do not and, more impor-tantly, cannot act according to the rational decision makingmodel.2 Apart from evaluations that can more or less be consid-ered ‘rational’, decision makers are influenced by for instanceemotions, self-interest and prejudices. Much of the deviations
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from the classical rational model can be explained by its ‘holis-tic’ view of organizational decision making, which means thatdecisions are supposed to be taken by a single entrepreneur andowner of the firm whose main goal is to maximize profits.3Employees are assumed to be unlimitedly loyal to this profit ori-entation, and to the organization as a whole. Practical decisions,however, are generally bound up with the interests and goals ofseveral stakeholder groups, e.g. management, business units ordepartments, trade unions, financiers. Also firm goals are notalways unambiguous, but vague (e.g. ‘strategic advantage’) andeven contradictory (e.g. cost containment and marketing effec-tiveness). Organizations not only strive for financial returns andmaximal profits but also for continuity, power/stature and therealization of a good working environment and climate.Moreover, many firm goals are ‘constructed’ in the course of adecision-making process, and are therefore not necessarilydefined or known in advance (Weick, 1979; Checkland andScholes, 1990). In addition to this, human decision making isconstrained by cognitive limits: omniscience is nothing less thanan illusion, information processing capabilities are limited.Nobel laureate Herbert Simon has introduced the more descrip-tive and realistic view of the ‘administrative man’ in contrast tothe ‘Homo economicus’. The decisions of this ‘administrative man’are guided by what Simon (1977) refers to as ‘bounded rational-ity’, which means that:
Not all decision alternatives and their consequences areknown in advance. Every decision maker constructs in asearch process for alternatives a subjective and limited view(or using the German noun Weltanschauung, see Checklandand Scholes, 1990) of the relevant decision issues, alternativesand possible solutions. This view is highly dependent uponthe specific background, knowledge and experiences of thedecision maker. All kind of heuristics (i.e. rules of thumb),which have proved to be successful in past decision situations,are used in the search process.A decision maker does not look for all possible decision alter-natives in a process of problem resolution, but limits himself toa number of alternatives that are considered to be satisfactory.Subsequently a solution is chosen that best matches the aspira-tion levels. This is called ‘satisficing’ instead of ‘optimizing’decision behaviour. Consequently, decision support shouldfocus on structuring the steps that lead to a satisfactory
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solution. Simon makes a distinction between three consecutivesteps:
– Intelligence – situations in the direct operating environmentof a decision maker will prompt the need for taking deci-sions; a decision maker can look for these situations himselfor can be confronted with them, whether he likes it or not.In all cases the main characteristic is a perceived differencebetween an actual and an ideal situation.
– Design – a more detailed analysis of the perceived problem:decision alternatives are defined, analysed and evaluated.
– Choice – a decision maker chooses the decision alternative,which is judged to be most appropriate for problem resolu-tion.
Following the seminal work of Simon, several applications andextensions of the decision paradigm of bounded rationality canbe found in decision-making theory. These generally addressthe question of how bounded rationality works in an organiza-tional setting, with multiple decision makers, group interestsand goal conflicts. Cyert and March (1963) speak in this respectof ‘the behavioral theory of the firm’, while Lindblom (1959)introduces the ‘science of muddling through’. An importantconclusion of these studies is that organizational decisionmaking is highly dependent upon all kinds of routines andformal procedures in order to foster stability and to prevent con-flicts. Consequently, organizational change can only take placeincrementally, step by step.
In the ‘garbage can’ model of Cohen et al. (1972) the rationalityof organizational decision making has almost disappeared.Decisions are not necessarily considered to be resolutions forperceived organizational problems. Decisions are more or lessunstructured and uncontrolled meetings of problems, solutions,choice situations and persons. At first glance, the ‘garbage can’model offers little hope for the possibility of designing usefuldecision support tools. With the publication of the strategicdecision model of Mintzberg et al. (1976) – with the title ‘TheStructure of Unstructured Decision Processes’ – this line ofthought goes in a more hopeful direction. From this moment on,decision-making theory pays more attention to finding appro-priate methods and techniques to support organizational deci-sion making.
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10.4 The product and process dimension ofinvestment decisions
Accepting the concept of bounded rationality in organizationaldecision making has important consequences for the type of deci-sion support that needs to be given to organizations and man-agers. Not only are the content and goals of decision-makingrelevant (see the ‘choice’ phase in Simon’s model as discussed inthe previous section), but the focus of managerial support movesto the overall structure of the decision-making process. This hasfor instance been referred to as ‘meta decision-making’ (DeLeeuw, 1986), ‘the organization of decision-making’ (Verzellen-berg, 1988), ‘decision control’ (Van Aken and Matzinger, 1983),and ‘the rationality of control’ (Hickson et al., 1986). Theories ofstrategic decision making make a distinction between a prescrip-tive, goal-oriented view and a descriptive, process-oriented view(see e.g. Mintzberg, 1994). Idenburg (1992) follows this distinc-tion and speaks in his review of the strategy literature of the‘what’ and the ‘how’ of strategy development. He pictures thesedimensions in a 2 by 2 matrix, which results in four views onstrategy formation:
Emergent strategy (goal dimension weak, process dimensionweak)Rational planning (goal dimension strong, process dimensionweak)Learning process (goal dimension weak, process dimensionstrong)Incremental logic (goal dimension strong, process dimensionstrong).
10.4.1 Four styles of decision making
Inspired by the four types of strategy formation as defined byIdenburg, this section discusses a typology with four styles ofinvestment decisions. Figure 10.1 visualizes an adoption ofIdenburg’s matrix to investment decisions in the context of IT.This matrix will be of the basic building blocks for the design ofa model for strategic control of IT investment decisions. Thestarting point of this model is the division between the productand process dimension of investment decisions. Every invest-ment decision – essentially a choice to devote resources andfunds to a particular course of action – is the ‘product’ of a
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decision-making process (see Figure 10.2). In this decision-making process several steps are taken, within a certain taskdivision of the participants in this process and within a politicalcontext, resulting from different goals, priorities and use ofpower. Depending on the extent and direction of decisioncontrol, several styles of decision making can be used.
Act of faithWithout any structuring on the product or process dimension,investment decisions will amount to ‘act of faith’ decisions. Thisleads to what Shank and Govindarajan (1992) have called a‘technology roulette’. The decision to invest looks like gambling;
Learningexperience
Balancedcontrol
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Product dimensionP
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sion
Wea
kSt
rong
Weak Strong
Figure 10.1 The product and process dimension of strategic control of investment decisions
(adapted from Idenburg, 1992)
Decision-makingprocess
Investmentproposal(s)
Product:decisions
Limited funds
Decision stepsParticipants
Political context
INPUT OUTPUT
Figure 10.2 An investment decision as a ‘product’ of a decision-making process
there are no clear goals or expectations and one can only hopefor a successful outcome. After an investment has been made, itis also quite easy to qualify it as a success or as a failure, depend-ing on what someone wants to prove. This situation has becomeunacceptable in the present IT investment climate, in which not‘acts of faith’ but more rigorous analyses are required.
Rational planningToo much structuring on the product dimension will lead to‘rational comprehensive planning’ (Rosenhead, 1989); i.e. tryingto quantify as many aspects as possible, thereby ignoring themuch more complex and uncertain organizational reality deci-sion makers face. This reflects the classical view of the ‘rational’decision maker. The many finance-based evaluation methods areproduct oriented, concentrating on the consequences of ITinvestments that can be monetary valued. Also multi-criteriamethods, which are applied in a mechanistic way, often showthe characteristics of rational planning. Logical analyses ofinvestment criteria predominate; these generally take the formof cost/benefit analyses, in which there is no room for intuitionsor emotions.
Learning experienceAn exclusive focus on the process dimension does, wrongly,hardly account for the essence of organizational decision making:i.e. stating objectives and, given scarce resources, choosingbetween alternatives to reach these objectives. This implies thatan investment decision is merely regarded as a learning experi-ence. The prime purpose of supporting decision making is tomake involved stakeholders arrive at a decision (e.g. throughbuilding shared ‘mental models’, see Senge, 1990).4 Providingthem with relevant decision criteria to evaluate and choosebetween investment alternatives falls beyond the learning focus.
Balanced controlThe decision-making perspective taken here advocates a morebalanced approach towards the evaluation and management ofinfrastructure investment decisions, what Figure 10.2 refers to as‘balanced control’. It is aimed at structuring investmentappraisal through a dynamic alignment of both the product andprocess dimension. At the heart of any evaluation lies the estab-lishment of a set of investment arguments to assess the businessimpacts of investments. This establishment does not, however,
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The Make or Break Issues in IT Management
take place in isolation of its organizational context. It is theoutcome of a communicative process between involvedstakeholders.
10.5 The ‘P4’ decision-making model
As argued in the previous section, the aim of strategic control ofinvestment decisions is to improve and facilitate organizationaldecision making on its proposed investments. Therefore anexplicit view is needed of IT investment decision making as anorganizational and largely communicative process. It is not a‘method of pinning numbers on things to prove or disprove acase’ (Farbey et al., 1993). Decisions cannot simply be taken bydefining a firm’s strategic goals and by calculating the optimalinvestment strategy (see the previously discussed variant ofrational planning), although the general opinion in many firms isthat this characterizes good decision making. Investment deci-sions concerning infrastructure have more to do with eliminatingwrong solutions and assessing the risks of project proposals thanwith a ‘numbers game’ that uses advanced mathematical scoringtechniques. A group of decision makers, or a management team,generally is more successful in this than a single decision makeror top manager. Making the intuitions and experiences of thesedecision stakeholders explict is more important than calculatingas much as possible; business impacts should only be translatedinto financial figures when possible and appropriate. A decision-making process concerning IT therefore involves multiplestakeholders, who are through mutual consultation trying toassess the future value to be gained from a proposed investment.Establishing a common mindset for change will stimulate ashared investment vision and start a process to commit allinvolved stakeholders to the final decision and all of its conse-quences. The product of such a process provides the crucial stan-dards against which the investments business value can bemeasured and managed across its life cycle.
To further develop this view this section introduces a model forstrategic balanced control of investment decisions. Four aspectsare distinguished that can be used to improve investmentappraisal and to manage the underlying decision-makingprocess. Paraphrasing the well-known four Ps of conventionalbusiness wisdom in marketing (but with a different meaning),the resulting model is referred to as the ‘P4’ model. The P4
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model is grounded in four types of bounded rationality, eachleading to a different control option (see Figure 10.3). The dis-tinction between substantial rationality, procedural rationalityand structural rationality is made by Kickert (1979) and DeLeeuw (1986), and political rationality can be considered as anadditional type of rationality (Renkema, 1998).
The four strategic control options cover the main managementissues of decisions concerning IT (see Figure 10.4). The inner-most circle of Figure 10.4 refers to what in the previous sectionhas been called the product dimension of decision making, andconcerns the content of investment decisions (management ofthe product). The other three circles refer to the discussedprocess dimension and are concerned with the structure of thedecision process in terms of decision phases and steps (manage-ment of the process), involving the right (groups of) people indecision making (management of the participation), and han-dling the political elements of decision making (management ofthe politics).
Substantialrationality
Proceduralrationality
Structuralrationality
Politicalrationality
Managing theproduct
Managing theprocess
Managing theparticipation
Managing thepolitics
Figure 10.3 Types of rationality leading to strategic control options
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Strategic decisions in the information age
10.5.1 Managing the product
At the heart of the P4 model lies the ‘product’ of the investmentappraisal, i.e. the ‘business case’ or set of value metrics on thebasis of which the decision whether to invest or not is made.Every investment decision is made against the background andjudgement of business advantages, disadvantages and risks,which can be both financial and non-financial (see Table 10.1).
Although a general structure of value metrics can be given, ade-quate categorization of all possible and relevant impacts willrequire local adaptations, reflecting the specific goals and char-acteristics of the organization in which a decision is made (seeKusters and Renkema, 1996). As such they should be related tothe overall investment strategy of a firm (e.g. cost leadership,innovation focus, competitive positioning). In later stages of aninvestment, e.g. during realization and implementation, thedefined value metrics in a business case serve as performanceindicators to evaluate the realized business contribution of aproject. It is best to make the likely business impacts, and thusthe business case, as explicit and debatable as possible, sinceevery evaluation is generally subject to personal, informal and
Figure 10.4 The P4 model of strategic investment control
Politics
Participation
Process
Product
Stakeholder powerPolitical profits and losses
Negotiations
CoalitionsPolitical means
Senior management IT specialistsAffected employees
OwnershipFinancial executives
Projectchampion
Manageable stepsPost-implementation
reviews
Organizationallearning Value
management
EarningsExpenditures
Negative contributions
Positive contributions Risks
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implicit judgements of involved stakeholders. By explicatingdifferent views on an investment the final decision will, as arule, have more organizational support and commitment. If not,there is a risk that all involved stakeholders will create their ownimages concerning the possible impacts and the desirability ofthese impacts, without talking about them. Good communica-tions amongst involved stakeholders can extract and identifythe cause-and-effect relations between IT, business performanceand financial returns, with a focus on organization-specific goalsand priorities. What for one organization can be considered‘strategic’ does not have to be strategic for another organization,and strategic can mean a lot of different things to differentorganizations.
10.5.2 Managing the process
The second control option of the P4 model refers to the process ofinvestment appraisal. This process considers the different phasesthe evaluation goes through, both prior to, and during, projectexecution and investment management. It is recommended todecompose investment decision making into manageable steps,analogous to well-known decision-making models (see e.g.Simon, 1977; Harrison, 1987) that make a distinction between:
Table 10.1 General structure of the business case of an investment
Organizational characteristics Rational model Political model
Goals and preferences Consistent across participants Inconsistent, pluralistic within theorganization
Power and control Centralized Decentralized, shifting coalitions and interest groups
Type of decision process Orderly, logical, rational Disorderly, push and pull of inter-ests
Outcome of decision making Maximization of choice options Result of bargaining and interplayamong interests
Rules and norms Optimization of corporate actions Free play of market forces, conflictis legitimate and expected
Information use Extensive, systematic and accurate Ambiguous, information used andwithheld strategically
Beliefs about ‘cause–effect’ Known, at least to a probability Disagreement about causes andrelations estimate effectsCorporate ideology Efficiency and effectiveness Struggle, conflict, winners and
losers
Formulation of project goalsEvaluation of alternativesChoice of investment alternativeImplementation of the chosen solutionFollow-up and control of a decision.
Since IT investments provide the long-term foundation for manybusiness processes and products, decisions should be subject toa thorough preparation. This subdivision of steps is not meant asa sequential and rigid procedure, but more as a pattern ofthought, with possible feedback loops (Witte, 1972; Mintzberg etal., 1976). Another important recommendation lies in performingpost-implementation reviews of the investment decision in orderto monitor and control the investment across its life cycle. Thesereviews provide valuable information on whether the invest-ment actually delivers value for money and to what extent thereis still room for improvement. The initially defined investmentevaluation criteria in a business case then serve as performanceindicators to assess the actual contribution of an investment tobusiness performance. Unfortunately, most organizations do nottake the time to reflect on decisions that were taken in the past.Many reasons are given for this, but often heard are that some-thing that is a historical ‘fact’ cannot easily be changed, and thatproject ambitions, scope and conditions have changed too muchto be able to make an ‘honest’ assessment. If reviews of invest-ment projects do take place, these are more used as managementaudits in order to find ‘guilty’ employees and to settle up for aproject that is likely to become a failure. This bears the risk ofbecoming a ‘witch hunt’, instead of a vehicle for capturingimprovement and learning opportunities. Regular reviews of theinvestment also minimize the phenomenon of ‘investmententrapment’ (Van Dinther, 1993); a situation in which ever-greater resource commitments are made because of too muchemotional involvement, without sound evaluations of increasedinvestment. Post-implementation reviews can further be used toestablish an investment climate in which – often implicit –knowledge on investment outcomes is well managed and inwhich organizational learning is encouraged. Many investmentdecisions are made by ‘jumping from one project to the other’.Explicit knowledge of prior investments and their realized valuecan contribute greatly to improved decision making on newinvestment proposals. In terms of the organizational learningtheory of Argyris and Schön (1978), investment control after
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project implementation means ‘single-loop learning’ and usingprior investment experiences in new decision situations means‘double-loop learning’. Single-loop learning focuses on manag-ing an investment project in such a way that the defined invest-ment goals are met. Double-loop learning on the other handfocuses on questioning and critically assessing the way in whichan investment project is being managed; investment goals areassessed in terms of their viability and this may mean definingnew goals.
Managing the process of investment decision making is ulti-mately a process of investment planning and control, which, inorder to prevent a too mechanical view, can be conceptualizedusing the well-known cycle of quality management (seeDeming, 1986):
Plan – plan the desired investment outcomes and identify anyuncertainties surrounding themDo – perform project activities in line with the defined out-comesCheck – monitor whether actual project behaviour and out-comes match the defined outcomesAct – perfom adequate actions in order move project outcomesin the desired direction or ensure that the project keepsmoving in the current right direction.
Planning and controlling investment projects like this will leadto ‘value management’ of investments. Value managementmeans managing all financial and non-financial impacts of aninvestment (see Table 10.1), ultimately with the goal of findingan adequate balance between cost and risk management (mini-mizing efforts, expenditures and mitigating risks) versus bene-fits management (maximizing benefit opportunities anddelivery). The steps of ‘plan’ and ‘check’ are in fact the phases inwhich investment control is executed through managerial deci-sion making, while the steps ‘do’ and ‘act’ are part of operationalproject reality, guided by the decisions taken during investmentcontrol. Adjustments of project reality achieved like this areexamples of ‘single-loop learning’. If the planning phase issubject to a reassessment of initial goals and preferred outcomesthis can be seen as ‘second loop learning’. Figure 10.5 visualizesthis process of value management, using the above-mentionedterms and process structure.
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Strategic decisions in the information age
The initial stage of investment decision making, in which projectproposals are evaluated and eventually a go/no-go decision ismade, is a crucial phase since in this proposal stage the chanceof taking the wrong decisions can be minimized. ‘Wrong’ deci-sions are decisions in which a likely desirable project is rejectedor a likely undesirable project is accepted. Maximizing thequality of decision making gives a higher chance of making theright decisions (see Section 10.2). In many cases, however, thebusiness value of a project cannot be estimated with much cer-tainty in advance, as external factors (e.g. technology develop-ments, actions of competitors or market trends) may change thebasis upon which the decision is based, or because follow-updecisions on controllable project aspects (e.g. organizationalscope, ambition level or business process impacts) are made.Managing the process of investment decisions, thus, goes muchfurther than a one-off formalization of the steps in the proposaland feasibility stage of decision making. Adequate managementof investment processes requires value management across thefull life cycle of a project, which can be thought of as consistingof several life cycle stages, e.g. from conceptualization, design,realization, to implementation and managed operations.
Figure 10.5 Value management of investment projects
Managecosts,
benefits andrisks
Ex-ante:assessment of
businessimpacts
Ex-post:measurement
of businessimpacts
Improve orassure
investmentrealization and
operation
Realize andoperate
investment
1: PLAN
2: DO
3: CHECK
4: ACT
10.5.3 Managing the participation
The third aspect that gets special attention in the P4 model con-cerns the participation of the different project appraisal and deci-sion-making stakeholders. It is advisable to involve allappropriate (groups of) people in decision making with respectto the investment. These include senior management, IT special-ists, financial executives and the employees whose work isaffected by the investment. Organization of the collaborationbetween involved stakeholder parties and representatives is animportant means to increase adherence to and support for adecision. Special attention is needed to ensure senior businessmanagement ownership and sponsorship. Strategic IT decisionsshould be prepared and approved of at the highest level. It hasfurther been shown that the likelihood of success of investmentprojects is considerably improved when there are one or more‘project champions’ involved (Beath, 1991; Farbey et al., 1993).This championship refers to the special effort that is made bysome involved stakeholder to make the investment a success.This stakeholder does not necessarily have a formal role thatimplies such an effort. The more powerful this champion’s posi-tion is in the organization the better.
10.5.4 Managing the politics
The previously discussed control options of the frameworkmerely sketched a homogeneous, rational picture of an organi-zation. This view implies for instance that the different stake-holders in the investment appraisal share the same intentions,goals and priorities. A more realistic view is that of an organiza-tion in which different stakeholder groups have their ownwishes and preferences. In conflict situations the outer politicalring of the P4 model may totally overrule the other three rings.Such a view allows for the recognition of conflicting interestsand the use of political means to safeguards one’s interests(Pfeffer, 1981; Mintzberg, 1983). The extent to which a firm andkey decision stakeholders highly depend on the often-implicitview they have of organizational decision making. Two con-trasting views are the ‘rational model’ and the ‘political model’(Daft, 1986), see Table 10.2. In practice, both models willsomehow represent actual decision making, depending on thepolitical nature of investment issues and the organization inwhich the decision is made.
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Strategic decisions in the information age
As many of today’s IT investments are for common use andtherefore are subject to multi-stakeholder interaction, their eval-uation is generally subject to politics. Especially the division ofearnings and expenditures over the different involved stake-holder groups has an important impact on the political contextof investment decisions. Managing these politics – the fourthcontrol option of the P4 model – means that, after the initialrecognition of the political context of investment decisions, theintentions, wishes and preferences of stakeholders are explicitlytaken into account. Experience shows that agreement on theroute to follow and a common perspective among evaluationparties give a greater chance of a successful project (see e.g.Markus, 1983). This should preferably stem from the samemotives and a relationship based on equality. In order to reachsuch agreement, it may necessary to use such decision-makingstrategies as negotiation and coalition building. An investmentin IT can only increase in terms of its outcomes and value if it isdone from a shared perspective rather than from individual,diverse or even conflicting perspectives. Decision support withrespect to the politics of the evaluation lies in what has been
Table 10.2 The rational versus the political model (after Daft, 1986)
Organizational characteristics Rational model
Goals and preferences Consistent across participants Inconsistent, pluralisticwithin the organization
Power and control Centralized Decentralized, shiftingcoalitions and interestgroups
Type of decision process Orderly, logical, rational Disorderly, push and pullof interests
Outcome of decision making Maximization of choice options Result of bargaining andinterplay among interests
Rules and norms Optimization of corporate actions Free play of market forces,conflict is legitimate andexpected
Information use Extensive, systematic and accurate Ambiguous, informationused and withheld strate-gically
Beliefs about ‘cause-effect’ Known, at least to a prob- Disagreement aboutrelations ability estimate causes and effectsCorporate ideology Efficiency and effectiveness Struggle, conflict, winners
and losers
Political model
called ‘stakeholder analysis’. Boonstra (1991) suggests the fol-lowing steps in such an analysis:
Listing of stakeholders, their estimated power and impacts ofthe proposed investment
Assessment of possible ‘winners’ and ‘losers’ and their possi-ble (political) ‘profits’ and ‘losses’
Establishment of feasible strategies (e.g. financial compensa-tion) to influence the political account of profits and losses.
The appropriate use of specific decision strategies depends onthe specific political context of investment decisions. This canalso be conceptualized in terms of the degree of agreementamongst involved stakeholders regarding (see Butler et al., 1993;Deitz, 1997):
The goals of investments: the extent to which there are no dif-ferent views concerning the purposes of investing in IT
The relation between investment goals and decisions: theextent to which there are no different views concerning thecontribution of investment decisions to the defined purposesof investing in IT.
Different degrees of agreement will lead to different, moreappropriate, decision strategies, such as (see Figure 10.6):
Relative use of analytical and measurement techniques if thereis agreement on both goals and the relation between goals anddecisions
More reliance of managerial insight and stakeholder judge-ment if there is agreement on goals but not much agreementon the relation between goals and decisions
Deliberate use of negotiations and consensus finding betweenstakeholders if there is agreement on the relation betweengoals and decisions but not much agreement on goals
Room for organizational creativity and inspiration if there isnot much agreement on both goals and the relation betweengoals and decisions.
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Strategic decisions in the information age
10.6 Conclusions
In the present information age, IT investments are simply tooimportant and too expensive to be ignored, ill-managed or leftover to technology specialists. If organizations really want totransform the technology promises of modern IT into businessbenefits, decision control and investment assessment should beon the top management agenda. Given the business issues at thespending levels at stake, no organization or senior businessmanagers can in fact permit itself anything less than that.Strategic IT decisions are more than simply calculating financialreturns and assessing hard, measurable business impacts. If thiswere the case, managers could easily take refuge with one of themany standard capital budgeting textbooks. Above all, it is anorganizational process, in which multiple stakeholders interactto agree upon the value of an investment, from its initial feasi-bility stage to its managed operations. This chapter argued thatinvestment decisions concerning IT are generally not takenaccording to the classical, economic model of rational decisionmaking. It is therefore more realistic to base decision-makingsupport upon the practical consequences of the paradigm ofbounded rationality. In correspondence with the distinctionbetween the ‘what’ and ‘how’ of strategy formation, a distinctioncan be made between the product and the process dimension ofinvestment decisions. If both dimensions do not get the attentionthey respectively deserve, an investment decision will result inan act of faith, the consequences of which are unpredictable and
Negotiation andstakeholderconsensus
Analytical andmeasurement
techniques
Managerial insightand stakeholder
judgement
Organizationalcreativity and
inspirationLow
High
Agreement onrelation between
goals anddecisions
Agreement on goalsLow
High
Figure 10.6 Decision strategies based on level of stakeholder agreement
unmanageable. One-dimensional control of decisions on theproduct or product dimension will respectively lead to purerational planning or to considering an investment decisionmerely as a learning experience. Both variants fall short of takingstrategic investment decisions on IT.
In the P4 model, as introduced in this chapter, both dimensionsare simultaneously addressed, referred to as ‘balanced control’of investment decisions. This balanced control captures both theneed to arrive at a more sound, rigorous investment appraisal,which should focus on assessing business impacts, as well as theorganizational decision context in which this appraisal is takingplace. This decision context consists of a communication-inten-sive group process of stakeholder interaction and negotiation,with different steps, many involved parties and political impli-cations. The P4 model integrates four strategic control options,which, if managed adequately, will lead to a balanced control ofinvestment decisions. This required decision support along thefollowing four lines:
Managing the product – defining the (evolving) business casethrough value metricsManaging the process – following the several decision steps tomake a final judgement and to manage the evaluation life cycleManaging the participation – involving the right (groups) ofpeople in investment decision makingManaging the politics – finding common interests and manag-ing conflicts of interest.
Notes
1. All rights reserved. © T. J. W. Renkema. Parts of this chapterbuild on and draw from The IT Value Quest: How to Capture theBusiness Value of IT-based Infrastructure, ISBN 0 471988170, pub-lished by John Wiley & Sons Ltd, 2000. © John Wiley & SonsLtd.2. The classic model of rational decision is theoretically foundedwithin neo-classical economics. Within the academic commu-nity of economists many academicians admit this neo-classicaltheory is not appropriate for describing or supporting organi-zational decision making. Ryan et al. (1992) for instance argue:‘Neoclassical theory was developed by economists to predictgeneral patterns of economic behaviour. It was never intended
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to be an explanation of how individuals do or should behave.’3. The holistic model of an organization is also rooted withinneo-classical economics, in which a firm is conceptualized as aproduction function between supply markets of productionfactors and sales markets of products and services. 4. This variant in many respects has similarities with the inter-pretive school of IT evaluation research (see Symons, 1991;Hirschheim and Smithson, 1988; Walsham, 1993).
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203
We are merely reminding ourselves that human decisionaffecting the future, whether personal or political or eco-nomic, cannot depend on strict mathematical expectations,since the basis for making such calculations does not exist;and that it is our innate urge to activity which makes thewheels go round, our rational selves choosing between thealternatives as best we are able, calculating where we can,but often falling back for our motive or whim or sentimentor chance.
(Keynes, 1964 [1936])
This chapter considers a variety of different ways a business andespecially an e-business raises funds, expends these monies toproduce goods or services and then generates an income thatallows the organization to be able to pay its way and thus to stayin business. This is referred to as a model business or economicexplanation of how the organization sustains itself. This chapterdescribes seven alternative relatively traditional approaches toe-business models. These models are then reviewed in terms ofsustainability and risk. The chapter then considers the questionof whether there are any other more radical ways of creating aspecific e-business model.
11 E-business model optionsThe first challenge is how to sustain the business
Dan Remenyi
Trinity College Dublin, Ireland
11.1 Introduction
Whether it is web-enhanced1 or just a plain old-fashioned bricksand mortar organization, it is not easy to build and sustain a suc-cessful business that earns a suitable return on the fundsinvested in it. Looking at well-established household name busi-nesses like IBM, Holiday Inn, Kodak, ICI, Nestlé, Virgin Atlanticor Tesco it is possible to get the false impression that it is a cinchto be a great commercial success. With the enormous power ofhindsight it is easy to obtain the impression that it was obviousthat these businesses would flourish and that the businessmodel decisions such organizations made were pretty straight-forward, if not actually simple.
In fact deciding on an appropriate business model is a majorchallenge for all business organizations. If the business model isnot sound then the prospect of a successful outcome is not good.This is especially true in the case of both web-enhanced andweb-enabled2 businesses, which have had particular difficultywith this issue.
Although the business model is a central issue for success thereis surprisingly little understanding of what actually constitutesa business model and what processes are required to developthis important business dimension. As Timmers (1999) pointsout there is no universally agreed definition of the term ‘busi-ness model’. Authors often use this term without even botheringto define it. In the case of web-enhanced or web-enabled busi-nesses it sometimes appears that no attention at all has beengiven to the business model and this has been a contributingfactor to the high rate of failure of these types of businesses.Furthermore it is also worth pointing out that a business modelis not a one-time-only event, but rather an issue that needs to beaddressed from time to time in order to ensure that the busi-ness’s value proposition remains relevant (Earl, 2000).
11.2 Defining the business model
It is not a simple matter to define the term business model.Porter (2001) points out that:
The definition of a business model is murky at best. Mostoften, it seems to refer to a loose conception of how acompany does business and generates revenue.
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There is no doubt that the term business model is now wellgrounded in business and management literature and that thereare a large number of often conflicting ways in which it is usedespecially in the e-business discussion.
Timmers (1999) suggests that a business model is:
an architecture for product, service and information flows,including a description of the various business actors andtheir roles; anda description of the potential benefits for the various busi-ness actors; anda description of the sources of revenue.
This view of Timmers makes the business model a very com-prehensive and wide ranging statement of the main factorsunderpinning the business.
Mahadevan (2000) defines a business model as:
A unique blend of three streams that are critical to the busi-ness. These include the value stream for the business part-ners and the buyers, the revenue stream and the logisticalstream.
However, the term business model is often used in a more lim-iting sense and as such is seen as being synonymous with theconcept of the business case or the value proposition or an eco-nomic justification. In this context the business model is the way inwhich a business organization envisages what value, and specificallyeconomic value, it has to offer its customers and how it will make asuitable return from providing the product or service it offers.3 Thus,in this sense there are two parts to the business model – one iscustomer focused and the other is internal business processfocused. A business model may be developed for the organiza-tion as a whole or for a section or part of it. In fact a businessmodel may be produced for a particular line of business, or evenfor a specific product or service.
Specifically a business model needs to demonstrate a com-pelling and preferably unique reason why people want to buy aproduct or engage in the activity the business organization isoffering (Remenyi, 1999). The business model also needs toaddress how an appropriate fee or charge will be levied that willcover the organization’s costs and make a return for its
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investors. Furthermore a comprehensive business model willalso indicate how the venture will be initially funded and how itwill continue to be financially viable. As may be seen for thesecharacteristics of a business model, it is quite similar to a busi-ness strategy and therefore it is of considerable importance thatit is closely aligned to the corporate strategy. If it is not then therewill be inherent contradictions in what the organization is tryingto do and these will cause problems in the market place.
The business model focuses attention on the economics of thebusiness process but this is not to say that it is a simple costbenefit or financial statement. As Lacity and Hirschheim (1995)point out:
Much of the knowledge required to make efficient economicdecisions cannot be expressed as statistical aggregates but ishighly idiosyncratic in nature.
A comprehensive business model needs to address a series ofissues, only one of which is a statement of cost and benefits. Andwithin the cost benefit arena there are several different optionsand statistical measures available to the analyst to understandhow the business may perform. However, in this chapter onlythe high level issues and concepts of how a return is earned onthe investment are addressed.4
11.3 Components of a business model
As mentioned earlier this chapter considers the business modelfrom a macro or high-level perspective in which there are threedistinct components of a business model. These three compo-nents need to be considered separately before being broughttogether to represent the whole. These are the investment andhow it is funded, the ongoing costs and finally the revenue andhow it will be generated.
11.3.1 The investment
There are four generic types of investment, which nearly everyorganization will employ from time to time. These four generictypes of investment (Figure 11.1) are prestige investments, coreinvestments, corn-seed investments and must-do investments(Remenyi et al., 2000). Each one of these investment types has a
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particular role to play in assisting the organization achieve itsgoals and objectives and needs to be incorporated into the cor-porate strategy.
11.3.2 Core investments
Core investments are those that are by far the most frequentlyencountered in any organization. These are the backbone of thebusiness and it is for these goods and services, which are facili-tated or created using these investments, that the organizationattracts its customers or clients. In the e-business world these willbe websites that support the main thrust or the core of the busi-ness. These investments will seek to attract more business or theywill be used to reduce organizational costs. Such investmentsmay also open up a new line of business for the organization.
Core investments need to be the continual concern of the seniormanagement. If for any reason the core investments are notdelivering the required return, the business may be in serioustrouble. Where successful, these websites will play a major con-tribution to changing the main or core business processes of theorganization. The risk profile of this type of investment is notconsidered to be very high as the organization should know pre-cisely what it is doing and know how to manage the risks.
Dell and Cisco use e-business to focus directly on this invest-ment quadrant. They have both web-enhanced their core busi-ness processes and in so doing have directly improved theirefficiency and effectiveness and brought in new business.
PrestigeHigh risk
High profit
Corn-seedVery high risk
High profit
Must-doLow risk
Low profit
CoreMedium risk
Medium profit
High
Low
LowHighProfitability
Ris
k/v
isib
ilit
y
Figure 11.1 Four generic types of investment
11.3.3 Prestige investments
It is through prestige investment that the organization attemptsto make its presence felt in the market place. These are bigbudget website investments that are undertaken to show theexpertise of the organization and/or its commitment to a partic-ular project. These types of investments are not usually requiredto make an immediate return, but are believed to contribute tothe longer-term success of the business. Prestige investments arenot usually the daily concern of the senior management, but typ-ically are only considered as part of the business decision-making process from time to time.
The websites of organizations such as newspapers and maga-zines, major automobile manufacturers and some large financialinstitutions and retails who are not selling directly on the Webbut are using it as a public relations vehicle fall into this cate-gory.
The risk profile of this type of investment is normally consideredto be very high as this type of investment may be outside of theroutine of the business. When these investments are successfulthey can substantially help to increase the profit of the organiza-tion.
11.3.4 Corn-seed investments
Corn-seed activities are research and development investments.It is through Corn-seed investments that the organizationattempts to ensure its future. Here money is spent for the futuredevelopment of the business. These are experimental invest-ments where a website is being developed as part of the organi-zation’s research and development programme. Corn-seedinvestments are not expected to make a return on investment inthe short term. However, investment in this area may turn outeventually to be core to the business in the future. On the otherhand some investments in this quadrant will simply bescrapped.
All forms of research and development investment are generallyconsidered to be risky. But of course the returns from this sort ofinvestment can be very high indeed.
There is some considerable activity in this investment quadrantin the e-business world at present. ABN-Amro have been con-
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sidering a portal with KPN Telecom but have decided not toproceed. Lloyds and Vontobel, a Swiss Bank, abandoned webplans.
11.3.5 Must-do investments
There will be occasions when an organization undertakes awebsite investment that gives no return at all, or perhaps givesan intangible return that is difficult to measure. Websitesdesigned for training might be an example of these. Websitesthat are used to ensure that the firm complies with some legalrequirement will often be regarded as a must-do investment.When a website has become outdated then the replacement ofthat website is frequently a must-do investment.
Many of the brochure-ware websites were initially seen as must-do investments because organizations feared being left behind ifthey did not invest in them.
Must-do investments are generally not considered to be risky,nor do they usually produce a high return.
11.3.6 The funding and ongoing costs of theinvestment
Investments are normally made for the medium to long term.This means that the organization will not obtain a payback inthe immediate future. Investments often require substantialamounts of funding, which is not always available out of thenormal cash flow of the business. Thus investments are usuallyfunded either from equity or debt or a combination of both. Allthese four generic investments would normally require fundingof this form. The cost of the funding of investments is often acritical issue and needs to be specifically considered in the busi-ness model. In general, equity is usually considered to be morecostly than debt. On the other hand equity is normally regardedas being of lower risk than debt as equity does not bring with ita fixed obligation for an interest payment. As part of the busi-ness model the organization will have to decide from which ofthese sources to raise the funds.5
Once the investment is up and running the costs incurred there-after are considered to be ongoing costs, which are usuallyfunded out of ongoing revenues. One of the difficulties in the
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web and internet world is that in many instances e-businesshave been slow in generating ongoing revenues and thus on-going costs have had to be funded in the same way as invest-ment, i.e. from equity and debt. Thus slowness to produceongoing revenue has been at the heart of the problems on manye-businesses.
11.4 The term of the business model
Although it is not always necessary for all business organiza-tions to make profits from the first year of their operation, it isnot possible to sustain a business activity for any materialamount of time without there being some important contribu-tion, usually profit, being made to the overall business position.This normally means that the business model needs to showhow a profit will be made within the first few years of operation.Of course, there are exceptions to this general rule. Mining com-panies, organizations that build huge structures such as thechannel tunnel and companies that rely heavily on high-techresearch and development, may have longer periods before real-izing profits. But the vast majority of business enterprises, andespecially those that are based on trading, need to show a returnrelatively promptly.
11.5 High-level and detailed business models
There is a large range of approaches to developing businessmodels. Some business models are produced that only deliver ahigh-level view of the situation while others delve into a consid-erable amount of detail. Sometimes the high-level view is suffi-cient, especially for the purposes of initial concept filtering ordecision making, but usually, in the end, the business modelneeds to be expressed in some detail, at which point the businessmodel might be further developed until it actually becomes aprogramme action plan and then eventually a project or budget.Thus the high-level model is the starting point of the full plan-ning process.
11.6 Generic business models
There are a number of high-level business models that may beregarded as generic. These represent the different ways a busi-
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ness can look to being funded and how they will produce therequired return in order to be seen as successful.
The following are seven of the more frequently encounteredbusiness models:
1. Traditional trading model or the classic profit2. Classic cost reduction3. New trading model or the new economy4. Investor funded deficit model or the begging bowl5. Stock market funded deficit model or the casino6. Sleight of hand model or the Mr Mistoffelees7. The high stakes model or the maverick
11.6.1 Traditional trading business model or theclassic profit
The traditional trading, or for that matter manufacturing busi-ness model, sometimes referred to as the classic profit model isthe normal way in which most businesses operate. This is not anew approach to thinking about how business functions. Itsroots go back into antiquity. Here the organization raises fundsfrom both equity and loans or debt and uses this money to fundthe purchase or production of goods or services. The goodsand/or services are sold at a higher price than was paid toacquire or produce them. This revenue can thus pay all the costsinvolved as well as result in a surplus or a profit, which is usedto fund further development of the business.
The process underpinning this classic business model is shownin Figure 11.2.
Acquire capital –equity and debt
Set upbusiness
Makepurchases
Producegoods
Sell goodsat a profit
Earnsurplus
Dividends paid toequity holders
Figure 11.2 Traditional trading model or the classic profit model
The classic profit model has been by far the most common wayin which businesses have been funded during modern times.
After the original capital has been acquired and the physicalbusiness is set up, this business model is essentially self-funding.Sales are made at a price, which allows a profit to be made.Profitable sales pay all costs, including the costs ofthe capital, which is paid by way of dividends to equity share-holders and by way of interest to the suppliers of the otherfunds.
An important issue with this classic profit model is how longdoes it take for profitable sales to generate enough income to payall the overheads required to operate the business. Few organi-zations have products or services with a sufficiently high pricetag and profit margin that the organization is in profit immedi-ately. Therefore there is usually some initial period of lossmaking. This period may be a matter of months or even years,but it is important that a time to profit is viable. For most busi-nesses this would be a question of months or maybe in the caseof large-scale operations, a couple of years at the most. In themain, organizations would not expect to have to wait manyyears to reach a level of profitability.
An important aspect of this model is how the organizationaccommodates growth in the business. Business growth alwaysrequires additional funding. This may be for working capitalsuch as inventories or debtors or operating expenses or it may befor extra fixed assets such as manufacturing facilities. Suchfunding is not always available from currently earned profits6
and thus depending on the profit margins and the required rateof growth the business may wish to return to the suppliers ofequity and debt for further monies. However, obtaining addi-tional capital for expansion in this way is not a routine event. Aspecial rights issue of shares is normally arranged if additionalequity funding is required or new loans may be arranged bymeans of debentures or mortgages etc.
The question of overtrading is often raised in conjunction withthe business growth issue when working with the classic profitmodel of business. Overtrading occurs when a business expandstoo fast and has not put in place the funds necessary to cover theincreased requirement for either working capital or fixed capital,as mentioned above. Overtrading is an important cause of busi-ness failure and therefore all organizations, and especially those
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who are recent start-ups, need to be on the look-out for thisproblem.7
In the web-enhanced or web-enabled business world the classicprofit model of business underpins quite a number of websites,especially those that are trying to trade in the business to con-sumer arena.
Figure 11.2a shows the classic profit model as it may be appliedto e-business. The organization attempts to provide a product ora service or distributes something or creates a portal. It does thisat a fee, which generates a profit.
Most of the web-enabled shop businesses are based on thismodel. The travel reservations websites also use this type ofthinking, as do the players in the retailing and wholesalingsectors. Timmers (1999) refers to these as e-shops and also pointsout that e-malls and e-auctions operate in essentially the samesort of way.
An example of a classic business to consumer e-shop would beeLuxury.com and a classic business to business e-shop would beMerck-ltd.co.uk. A classic e-mall would be Britannica.co.uk anda classic e-auction would be e-Bay.com.
The web-enhanced business of Dell Computers also operates onthis basis.
Provided the price at which these websites sell their goods orservices exceeds their costs, then this business model is perfectlysustainable as it is effectively a continuous self-funding modelthat only needs extra money or funds for unusual growthrequirements.
Acquire capital –equity and debt
Set upbusiness
Makepurchases
Produce goodsor services, setup portals ordistribution
Sellat a profit
Earnsurplus
Dividends paid toequity holders
Figure 11.2a The classic profit model applied to e-business
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In a sense all other business models need ultimately to referback to this one as it is the conceptual cornerstone of appliedeconomic logic.
11.6.2 The classic cost reduction model
It has been suggested by Rosen and Howard (2000) andBerryman et al. (1998) that cost reduction is a major driver of e-business, especially business to business e-business.
The classic cost reduction business model operates in a similarway to the classic profit model and may even be considered bysome to be a subset of it, except that in the case of the latter therewill generally be no attempt to look for additional revenuesources or streams. In this case the model is based on the reduc-tion or the avoidance of a range of current costs or potentialcosts. This may be thought of as business process re-engineeringor business process improvement.
The process underpinning the classic cost reduction businessmodel is shown in Figure 11.3. Like the classic profit businessmodel at the start-up the organization acquires sufficient fundsto set the business up and running and to initiate the trading ormanufacturing processes. Then the additional profit generatedby the cost reduction activities pays for the investment andkeeps the company going.
In the web-enhanced or web-enabled business world this modelunderpins many of the business to business websites thatattempt to reduce their users’ transaction costs or improve theefficiency or the effectiveness with which they service their
Figure 11.3 Classic cost reduction model
Acquire capital –equity and debt
Set upbusiness
Makepurchases
Changeprocesses
Reducecosts
Earnsurplus
Dividends paid toequity holders
clients in their industry supply chain. Websites such asCommerceOne.com, J2C.com, Buildersonline.com, andIngredients.com use this type of thinking (Norris and West,2001). Therefore, websites that create collaborative platforms orthird-part market places or value chain integrators (Timmers,1999) all fall into this category.
Just like the classic profit model this business model is also per-fectly sustainable. This type of model may or may not requireexternal funding in the form of equity or debt. It is also effectivelya continuous self-funding model that only needs extra money orfunds for unusual transformation or growth requirements.8
11.6.3 New trading model or the new economy
The new trading model, which is sometimes referred to as thenew economy model takes only a slightly different approach tothe classic profit model to the continuing funding of the busi-ness. However, there is one very important difference. In thecase of the new economy model the goods or services that areproduced by the business are not sold at a profit, but are eithergiven away or sold at a loss. The revenue gap created by thisdeficit sale, at a loss, has to be closed.9 Unless this gap is closedthe business is not sustainable.
Applying this type of model the organization attempts to earn asecondary fee10 from some activity such as advertising. It isthrough the secondary income that the organization earns suffi-cient revenue to have a surplus and thus make a profit and stayin business. This type of organization does not attempt to run ata loss, but tries to balance its income and its costs through mul-tiple streams of income.
The process underpinning the new economy business modeland the recycling of the business activities is shown in Figure11.4.
Financial advisers in the e-business world were strongly recom-mending websites to seek multiple income streams. Theseincluded trading, selling advertising banners, selling dataacquired from their clients and prospects etc. However, it is nowbeing suggested that one of the causes of the failure of e-busi-ness is that some organizations dissipate their energies on toomany different income streams and have not focused ade-quately on what should have been their core business.
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This business model is in essence not as different to the classicbusiness model as is sometimes suggested. It calls for profit tobe made pretty well immediately, but from a secondary orperhaps several different sources or streams of income (Dayal etal., 2000).
The type of thinking described by this model also underpins theidea of the loss leader. In this case a product or service is sold ata loss for a limited amount of time in order to establish a newproduct in a competitive market, or to attract a new segment ofan already established market away from a competitor. In thissituation the gap between the revenue produced by the lossleader and its cost to the organization needs to be carefullyfunded. In traditional business this can seldom be done througha secondary stream of income such as described above. In thecase of loss leaders the organization’s advertising and promo-tion budget, or perhaps in some cases its public relations budgetwill be called upon to fund this deficit. It is important to noticethat loss leaders are seldom sustained for any length of time. Itis simply not in the interest of the business to deliver productsor provide services at a price that is less than the cost,11 otherthan for a brief time period with a very specific corporateobjective.
In the web-enhanced or web-enabled business world this modelhas underpinned many portal websites. Originally Yahoo! andAlta Vista were examples of this type of business model, buttoday they have grown into organizations that are directlyfunded by their primary business or revenue stream, which isselling advertising, although they do make money out of otheractivities as well.
Acquire capital –equity and debt
Set upbusiness
Makepurchases
Produce goodsor services, setup portals ordistribution
Give goodsaway or sell
at a loss
Earn othersecondary fee
(like advertising)and thus
make a surplus
Dividends paid toequity holders one day
Figure 11.4 New trading model or the new economy
When the secondary income stream is strong this businessmodel is sustainable. However, it is certainly a fragile or vul-nerable model. If the secondary income stream is reduced thenthe business may suffer severely and even collapse. This modelserved many websites quite well in the early days of e-commerceand e-business when there was a great belief that web-basedadvertising would probably outperform television-based adver-tising.12 However, faith in web-based advertising has been sub-stantially diminished and e-businesses that relied on this sourceof secondary income have been affected accordingly.
Relying on web-based advertising is now regarded as a veryrisky or even dangerous strategy for the generation of adequatefunds to stay in business. Rather, web-based advertising is seenas a potential additional cream on the top, for more secureincome streams. According to David Wessel writing in the WallStreet Journal on 11 January 2001, advertising will not reallywork for internet companies and this is proven, he suggests, byYahoo!, which has been hit by reduced advertising incomes andis already looking for alternative sources of funds.13 Wessel sug-gests that Yahoo! and other websites have been looking in thewrong direction for financial security. He points out that ‘a keyfeature of the Internet is its support for customized content, andbusiness models must take that fact into consideration’.However, Wessel does not spell out exactly how this can bedone and how the profit may be made from this sort of service.
Despite the difficulties experienced by Yahoo! and others thenew economy business model is very important to the current e-business world as it is used to fund a number of ‘free’ services.To some extent this type of business model may be seen as acommercial or economic experiment. Of course it is an experi-ment that always has to eventually keep its eye on the bottomline. As Peter Senge pointed out in The Fifth Discipline (1990):
Business has a freedom to experiment missing in the publicsector and often in not for profit organizations. It also has aclear bottom line, so that experiments can be evaluated, atleast in principle, by objective criteria.
11.6.4 Investor funded deficit model or thebegging bowl
The investor funded deficit model that is sometimes referred toas the begging bowl is an approach that is used when it is
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believed it will not be possible to earn a profit in the short termand the sponsors of the business do not have, or are not pre-pared, to put all the funds required into the business from dayone.
This is an especially high risk business model for both theinvestors and the e-business entrepreneur.
The idea here is that the business is set up with a limited amountof funding and that the management of the business will fromtime to time, perhaps even over an extended period of time goback to the original investors, or maybe even to new investors toobtain additional funds to continue the project.
These rounds of fundraising become a central issue in how theenterprise is run. The term ‘the begging bowl’ is used becausethe entrepreneur has to go back to the investors and ask – pleasemay I have some more funds!
In between fundraising initiatives the organization tries tomanage the business in such a way that the cash utilization,which is now commonly referred to as the ‘cash burn’, is con-trolled as effectively as possible. Numerous organizations havefound it necessary to cut back on expenses such as advertisingand staff, not to mention growth plans in order to slow downtheir cash burn.
The process underpinning this business model is shown inFigure 11.5.
The money raised in this model is often by private placements.A private placement occurs when a wealthy individual or anorganization with surplus funds supplies money to a fledgling
Figure 11.5 Investor funded deficit model or the begging bowl
Acquire capital –equity and debt
Set upbusiness
Makepurchases
Produce goodsor services, setup portals ordistribution
Give goodsaway or sell
at a loss
Go back toinvestors andobtain more
capital
company. This may be in the form of equity or debt or both.Thus the investors can actually acquire either shares or options,or can simply lend money to the company. These investors aresometimes referred to as venture capitalists, a term that morethan anything else signifies the high risks involved in theseenterprises. It is sometimes said that venture capitalists willinvest in several new business ventures in the expectation thatone or more of these fledgling businesses will fail, but that theone that succeeds will be so successful that it will more thancompensate for the losses incurred in the others. Thus venturecapitalists are sometimes described as playing the numbers bytaking calculated gambles on a range of investments. On theface of it this is a fairly extravagant way of finding successfulbusiness investments, but if the upside potential is truly enor-mous and if the original cash requirement is controlled then itcan be an effective way to operate.
This business model is quite different to the other three businessmodels previously described here. It calls for medium- to long-term funding before any profit is expected. The problems hereare to do with the difficulties in forecasting when the organiza-tion is likely to stand on its own two feet and start to turn inprofitable business. It has always been the case that someorganizations have needed funding for quite some time beforebecoming profitable. However, some web-enabled businessesseem to have thought that there was no need to be concernedabout profit for quite an extended period of time. Althoughthis may have been sustainable to some degree in the very earlydays of the e-business phenomenon, it is certainly not true anylonger.
A danger for the business using the begging bowl type of modelis that the original investors can lose interest in the business orthey can just run out of available investment funds for theproject.
Another risk with this approach to funding a business is that themarket can turn against the product or service being promoted.Furthermore, there can be a flood of competition, all of which canmake it very difficult to find more money to fund the business.14
All of these issues can affect the investment climate, which inturn affects the ability of the company to obtain the fundsneeded. Scores if not hundreds of websites have closed duringthe past few months because investors have refused to produce
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more funds. These include ZedZed.com, MangoClick.com,Boo.com to mention only a few.
ZedZed.com is a very interesting case in point. ZedZed.comcreated what its cofounder, Mr Edward Johnstone, a charteredaccountant, called an independent travel website. They sawthemselves as being the answer to Lastminute.com. Despitehaving initial funding from investors of £800 000 and establish-ing what Johnstone referred to as an award-winning website thisdot.com was forced to close down after a few months.ZedZed.com was simply caught in the downturn of sentimentagainst dot.coms. Its prospects were not any worse when itattempted to go back to the investors for additional cash.
In the eulogy for ZedZed.com, Mr Johnstone correctly points outthat their worst mistake was ‘to believe that Internet businessesshould be valued on the number of subscribers, rather than thetransactions that they make’. It is generally believed thatFreeserve.com, which had been very successfully floated a fewmonths earlier, had been valued on its number of subscribers,but within a few months the market sentiment moved againstthis approach to understanding business value.15
It is clear that the begging bowl type of model is not sustainablein anything but the short term. The entrepreneurs using thisapproach need to urgently move to a breakeven point and toensure that their cash flow will soon cover their outgoings. If thisis not achieved then this business model will not produce viableresults.
Investors who participate in this type of business situation arenot usually looking to a return in the form of dividend income,but rather are looking to obtain shares in the business. Theyexpect that the shares will come on the market at high prices andthat the price of these shares will then rocket. Some of theseinvestors have been disappointed.
11.6.5 Stock market funded deficit model or thecasino
The stock market funded deficit model, which is sometimesreferred to as the casino model, works on the basis that the busi-ness has been funded at least in part, by becoming a public listedcompany on a stock exchange. The issuing of shares on the stock
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market results in the organization acquiring a large pool of cash.In the same way as the investor funded deficit model the man-agement of the organization tries to manage the cash burn aseffectively as possible.
In this model the business is not expected to reach a state ofprofitability in the short term, or perhaps even in the mediumterm. However, in this situation it is asserted that the losses donot matter while the business is growing and the organization isbecoming more and more established. This is because while theshare price of the business is high the issue of additional equitycapital can fund operating deficits. The company can go back tothe stock market again and again to fund the deficit.
There are, however, two important limitations to this approachto funding a business even when the share price stays high in abull stock market. The first problem is that equity share capitalis a notoriously expensive way of funding a business. This islargely due to the growth expectations of the current sharehold-ers in particular and the stock market in general. This meansthat dividends, when they are available, are expected to be con-tinuously growing. The second issue is the one of control. Thecontinuous issue of ordinary equity share capital leads to theoriginal owners holding a smaller and smaller percentage of theshares. This could mean that in the end they may not have asmuch control over the business as they may wish.
This returning to the stock market is how Amazon.com has sus-tained itself during the five years in which it has continued tomake very substantial losses. Thus as long as there is stockmarket enthusiasm for the business and as long as the shareprice continues to rise, funds are available to sustain the busi-ness despite its operational losses.
Stock market enthusiasm for some companies applying thisbusiness model has in some instances been enormous.Amazon.com’s share price rocketed to US$110 per share withoutthe company ever making a profit. This made its founder JeffBezos a paper billionaire. Of course market sentiment can alsochange, and within a year of Amazon.com’s highest share priceit had fallen to about US$10, relieving Jeff Bezos of his billion-aire status. Similar share valuation crashes occurred to many ofthe well-known e-businesses quoted on the Nasdaq during theyear 2000. This volatility in the share price has had very seriousconsequences for the companies that were relying on obtaining
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additional funding from the stock market and indeed hasresulted in some of these firms being declared bankrupt. Otherorganizations such as Amazon.com have had to curtail theirexpansion plans and even reduce their staff complement inorder to survive on their own cash flow.
It is this intrinsic uncertainty of stock market prices that fre-quently depends on investor sentiment, rather than any clearlyrational economic or corporate behaviour or performance thatleads to this model being referred to as the casino model. Insimple terms the management of an organization has actuallyvery little control over its share price, which can decrease evenwhen profits are made and can increase when a loss occurs.
The process underpinning this business model is shown inFigure 11.6.
The stock market funded deficit model works perfectly well aslong as the stock market value or share price is high, because ahigh share price means that the company shares are easily sell-able and that to raise any given sum of money fewer shares willhave to be issued. However, if the share price is low and declin-ing this stock market funded deficit model effectively collapsesand the business is either forced into liquidation or into amerger.
This model is not really sustainable. Of course in periods whenthe stock market is bullish it appears that these funds are virtu-ally unlimited. But inevitably stock markets take downturnsand there are numerous web-enabled businesses based on thiscasino model that are currently facing the negative side of thisapproach.
Figure 11.6 Shareholder funded deficit model or the casino
Acquire capital –equity and debt
Set upbusiness
Makepurchases
Produce goodsor services, setup portals ordistribution
Give goodsaway or sell
at a loss
Stock marketenthusiasm for the
business share pricecontinues to rise andfunds the business
Lastminute.com used a variation of this model in the early partof 2000 when the stock market was still very keen on dot.combusinesses. At Lastminute.com’s initial purchase offer,16 or IPO,a sum of about £250 million in cash was raised for the company.At the time the company was really quite small and not wellestablished in the market and the high value of its share priceonly lasted a few weeks. At its high the share price reachedabout £5.50. Thereafter the share price declined and has been aslow as 70 pence. However, the large cash reserve of some £250million, which was obtained at the time the company was listedon the stock market, represents the resource with which thedirectors intend to establish the company as a profit-makingmarket leader in its industry sector. Lastminute.com’s IPOtiming was perfect as the stock market started to have reserva-tions about the viability of dot.coms within a few weeks of theirgoing public.
11.6.6 Sleight-of-hand or the Mr Mistoffeleesmodel
The sleight of hand model, which is sometimes referred to as theMr Mistoffelees model, produces profit out of what appears tobe thin air. In this case the company offers a free giveaway, sup-posedly without any real strings attached.
The first example of this type of business model on the Web wasthe establishment of Freeserve.com, which opened up internetuse in the UK to a much greater audience than it had beenbefore. Instead of paying somewhere between £6 and £12 permonth as a basic charge to obtain access to the Internet, sub-scribers to Freeserve.com had no charge at all to pay. By movingover to Freeserve.com users of the Internet were able to savethemselves £70 to £120 per annum. This was at the time puremagic and thus the reference to Mr Mistoffelees, the magical catfrom T. S. Elliot’s famous poem.
Although Freeserve.com funded this service in a number of dif-ferent ways the primary source of money that underpinned theinitiative was a bounty or rebate that Freeserve.com was paid bythe national telecom company for the additional telephonecharges they were able to levy as a result of the increased usagemade of the telephone service by subscribers to Freeserve.com.17
In addition to the bounty or rebate Freeserve.com also obtained
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some income from advertising and eventually more still by con-verting its site into a shopping mall.
The process underpinning this business model is shown inFigure 11.7.
This model is reasonably high risk as it relies on keeping thetelecom company on side. In the turbulent Internet ServiceProvider (ISP) and telecom market there is reason to believe thatsuch arrangements are not likely to be sustainable in the longterm. It is also high risk because it is not difficult to copy andthis occurred rapidly with free internet services being offered byTesco, Waitrose and many others.
It is therefore not likely that this model will be sustainable in thelong term. It is more probable that in the medium to long termusers of the Web and the Internet will have to pay directly forthe services that they consume.
However, there is no doubt that this was a very creativeapproach and has been a spur to others to find new ways offunding web-enhanced or web-enabled businesses.
11.6.7 The high stakes model or the maverick
The high stakes model, which is sometimes referred to as themaverick model, is one in which there is either no intention tomake a profit at all or at least no intention of making a profit inthe short to medium term. In this case the investors and themanagement of the new business are simply trying to create amarket presence that is noticed by or may even be damaging toa large competitor. The rationale here is that if the newcomer to
Acquire capital –equity and debt
Set upbusiness
Makepurchases
Produce goodsor services, setup portals ordistribution
Give goodsaway or sell
at a loss
Obtain incomefrom a non-obvious
secondary sourcesuch as a telecom andthus make a surplus
Figure 11.7 Sleight of hand model or the Mr Mistoffelees
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the market is sufficiently visible and attractive to the customerbase, it will take enough business away from the current marketincumbents to cause them sufficient irritation that they will wantto dispose of this newcomer. The traditional way of achievingthis is to buy out the newcomer.18
The process underpinning this business model is shown inFigure 11.8.
This business model carries a very high-risk profile. It is neces-sary for the newcomer to have very deep pockets to be able tofunction for long enough to be a substantial irritation to themarket place incumbents. Then the management of the neworganization needs to be highly skilled at negotiation to be ableto obtain the price they require for their business.
Clearly this is not a sustainable business model, although anindividual could undertake this type of enterprise a number oftimes if he/she had the ideas, the energy and the funds avail-able.
11.7 The sustainability issue
From the point of view of sustainability the above seven busi-ness models may be placed within three groups. These are inter-nally self-sustaining, sustained by collaboration and sustainedby additional funding. Figure 11.9 shows where each of the dif-ferent business models falls within this taxonomy.
The classic profit and the cost reduction models are normally themost sustainable as they largely rely on the organization’s ownexpertise and resources to achieve their objectives. Management
Figure 11.8 The high stakes model or the maverick
Acquire capital –equity and debt
Set upbusiness
Makepurchases
Produce goodsor services, setup portals ordistribution
Give goodsaway or sell
at a loss
Ensure that the businessappears to be sufficiently
threatening to a largecompetitor that it is bought out
and the founders get rich
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has a high degree of control over the key variables in this typeof business model. The new economy and the Mr Mistoffeleesmodels are highly dependent on collaborative business relation-ships, which are not necessarily permanent and thus there is aquestion mark over the long-term sustainability of these busi-ness models. This is of course not to say that in the short termthey cannot be very effective. The begging bowl, the casino andthe maverick are simply not sustainable except over the shortterm. In all three of these models there is usually a need for quickwins, which may or may not be achievable.
11.8 Risk and the choice of business model
There are no hard and fast rules concerning which of these busi-ness models is more successful or appropriate than others. Anyone of these may be used to achieve business success. The choiceof business model is to do with the management and equityowners’ style, the industry sector, and the availability offunding, legislation, and the competitive environment.
It is not possible to say that one type of business model will bemore profitable than others. It has been pointed out, however,that some of the models are less sustainable as ongoing busi-nesses than others. In fact it is probable that only the classicprofit model will be sustainable in the really long term.However, it is quite possible that management have a greaterinterest in the short to medium term than the long term.19
It is clear that the classic cost reduction is limited in the sense
Internal CollaborationAdditional
funding
The classic profit
Cost reduction
The new economy
The begging bowl
The casino
The Mr Mistoffelees
The maverick
Figure 11.9 Business models and sustainability
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that it is only possible to squeeze a finite amount of cost out ofany system or improve the efficiency of an organization to acertain extent. The other business models that are market facingwill generally have greater upside potentials. On the other handfor the classic cost reduction model to be a success the organiza-tion does not have to find a client base, which is probably thegreatest challenge that the other situation faces.
It is possible to say that each of these business models bringswith it a specific risk profile and that some of these models areconsiderably more risky than others.
Figure 11.10 shows the varying degrees of risk associated withthe different business models.
The classic profit and classic cost reduction models face the leastdegree of risk. These situations may be regarded as having tosimply manage normal business risks. The classic profit modelneeds to focus on normal competitive market risks while theclassic cost reduction model has to ensure that all the changemanagement issues associated with business process improve-ments are controlled.
The new economy, the begging bowl and the casino models areall higher risks than the first two because they require the busi-ness to focus on setting up deals with one or more outside agen-cies, which will not be under their direct control. This is morechallenging and more risky.
The Mr Mistoffelees and the maverick business models repre-sent even higher levels of risk primarily because the organiza-
Business risk High risk Very highrisk
The classic profit
Classic cost reduction
The new economy
The begging bowl
The casino
The Mr Mistoffelees
The maverick
Figure 11.10 Risk and the choice of business model
tions that pursue these approaches may have even less controlover their own fortunes.
Of course high risk is not in any sense intrinsically bad. There isa direct relationship between risk and profit and the businessmodels, which have the higher risk profiles, should have ahigher profit potential. Of course high risk projects need to bemanaged in a different way to low risk projects but that is asubject beyond the scope of this chapter.
11.9 The next generation of business model
The above describes seven different approaches to businessmodels that are found underpinning a variety of e-businesses.These approaches to business are not only relevant in the webor internet-enhanced or -enabled e-business world, but are actu-ally found in many different business environments. For thisreason they are sometimes thought to be too old fashioned andthus not entirely suitable for new business on the Internet andthe Web. It has been said that traditional economic analysiscannot be used to create a definitive business model for the Webor the Internet. In this view of the world it is the new economythat will describe how money can be made from the Web andthe Internet.
According to David Wessel, writing in the Wall Street Journal on11 January 2001, ‘the winning business model for the Internet hasnot yet been identified, and many dot-coms have failed whilesearching for the right strategy’. Wessel points out that it will taketime for an appropriate web or internet oriented business modelto emerge. Thus clearly Wessel believes that there will emergesome new business logic that is applicable to e-business, whichwill open the door to much greater success in this arena. CharlesLeadbeater, who believes that much of what is now done on theWeb does not deserve to be regarded as being innovative, tookthis point further. He suggests that Amazon is only a bookshopthat uses the Web to sell and that it will require collaborativepeer-to-peer applications20 before the real power of the Web andthe Internet is accessed. It will be in this sort of application thatnew business models will be developed.
It is not altogether obvious why there should be a new way of cre-ating business models or a new economic logic that will bebrought into existence by the Internet or the Web or by e-business
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and it is certainly not at all clear what such a business modelwould look like. It is worth noting that in the Harvard BusinessReview for March, Professor Michael Porter points out that ‘thephrases “new economy” and “old economy” are rapidly losingtheir relevance, if they ever had any. Retiring these phrases canonly be healthy because it will reduce the confusion and muddythinking that have been so destructive of economic value duringthe Internet’s adolescent years.’ Thus in reality there may not bea next generation of business model and thus perhaps conceptsdescribed in this chapter are the only ones available.
11.10 Discussion
E-business has offered a number of very interesting challengesnot the least of which has been to understand the variouseconomy justifications that may be used to direct these businessenterprises towards profitability. In this chapter seven classicbusiness models have been discussed in which a variety ofdirect and indirect approaches to the realization of profit havebeen described. These business models seem to be too conser-vative for those who are of the view that there is somewhere anew economic logic that can be applied to e-business. Costello(2000) provides a clear example of this type of thinking when hepoints out that:
Three laws of economics are driving rapid growth in busi-ness-to-business e-commerce. These are Metcalf’s law ofnetwork utility,[21] Coarse’s (1937) law of transactioncosts[22] and the law of Socio-Technological Distribution.[23]
However, it is not at all certain that these are actual laws ofeconomy nor is it clear how they may be used to understandbusiness investment and to help organizations achieve anappropriate level of profitability.
It was probably the concept of the learning curve costing thatstarted the idea that new economic logic, which was not basedon immediate profit, could be used rationally in business. Thebasic idea of learning curve costing was that the cost of manu-facturing and distribution in the early years of a product arehigher than those a few years later. So if the product is sold at aprice based on the average cost over a five-year period the firmcan undercut the competition now. Although the firm would be
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losing money in the early years, it will be adequately profitablein the later years to make up these losses and the overall situa-tion will make the required return in the medium to long term.This was one of the novel ideas that impacted the traditionaleconomic logic of the later years of the 1970s. But like manyother management ideas the learning curve costing concept didnot stay long in fashion. It is a similar sort of change to tradi-tional economic logic that is now being proposed by some of thepractitioners of e-business, which can be summarized as onlyworrying about the profitability of the business some time in thefuture.
A number of e-businesses have effectively resuscitated learningcurve costing thinking. This is evidenced by the creation of e-businesses that deliberately operate at a loss. The best knownexample of this is Buy.com whose critics describe it as ‘sellingdollar bills for 99 cents’ (Dolan and Moon, 1999). It has beenargued that e-businesses intrinsically cause prices to decline andthat this phenomenon is at the core of the profitability problem.The argument used here is that the tendency to need to sell atlow prices is due to the Web and the Internet abolishing theignorance premium.24 Websites such as MySimon.com,Bestbookbuys.com, Kelso.com and Compare.net offer immedi-ate price comparison across a wide range of goods. However, itdoes seem that despite these effective cost comparison websites,there are still a substantial number of individuals who prefer topurchase from the better known higher priced websites. There isno doubt that the issue of trust plays an important role here.Therefore it does appear that whatever pressures the Web andthe Internet exert for prices to decrease, it is not universal and itsinfluence in the marketing mix has largely been overemphasized(Roberts, 2000).
But whatever this new economic logic might be there is no doubtthat profit is at the centre of business, whether it be e-business ortraditional business. Normal business sense applies to this sectorand these web companies have to pay their way with profit andinternally generated cash flow just like everyone else. In simpleterms e-businesses and dot.coms come under our capitalisticsystem and capitalism, as it is currently practised, is based on thenotion of private ownership of the factors of production onwhich all business relies. Because these factors of production arein private ownership they have to be directly paid for. To changethese economic realities it would be necessary to change the
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notion of the private ownership, which would need a new polit-ical system. The fact that some e-businesses and dot.coms seemto have got away without earning a profit and without an inter-nally generated cash flow for some years does not mean thatthey will be able to do so for much longer.
11.11 Summary and conclusion
The subject of business models for e-business investment is anarea that has been neglected. This is one of the reasons why therehas been so much disappointment and failure in the e-businessworld. Some e-business entrepreneurs seem to have simplyignored this subject deliberately, perhaps believing that it wasnot important or maybe too difficult to get right. The words ofJohn Maynard Keynes (1964 [1936]) come to mind when he said:
Our knowledge of the factors which will govern the yieldof an investment some years hence is usually very slightand often negligible.
This chapter addressed the issue of the different businessmodels or sets of economic logic that can currently be used tounderstand how an e-business may be directed to earn a suit-able return on investment. This discussion has been conductedat a macro or high level and has not focused on the planningdetail that is required to convert a high-level business modelinto a practical plan. Therefore this high-level view needs to befollowed by a second discussion of the detailed components,which actually represents the day-to-day activities of the e-busi-ness as it moves towards profitability. From this next level ofdetail an e-business plan and budget may be developed that willprovide specific direction to the management of the enterprise.
Having defined what is meant by a business model the chapterlooks at the fact that a business model requires an understand-ing of the investment required, the ongoing cost and therevenue. A taxonomy of investment is provided and e-businessexamples or types discussed in this context.
Seven different business models are described and examples areprovided. These models are then reviewed in terms of sustain-ability and risk.
The chapter also discusses the suggestion that there may be anew economic logic, which has not yet been established and
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which may become available for internet- and web-enabled andweb-enhanced businesses. This new economic logic might beable to break out of the confines of investment, revenue, costand profits and the discipline that these concepts impose on allbusiness. However, this type of thinking does seem rather hypo-thetical and perhaps not a realistic suggestion at present.
References
Berry, K., Harrington, L., Layton-Rodin, D. and Rerolle, V. (1998)Electronic Commerce: Three Emerging Strategies. CurrentResearch, IMI, UK.
Coarse, R. (1937) The Nature of the Firm. Economica, IV, pp.386–405, reproduced in Putterman, L. (1989) The EconomicNature of the Firm: A Reader, Chapter 5. Cambridge UniversityPress.
Costello, G. (2000) The Business-to-Business Boom. In: Willcockset al., Moving to e-Business. Random House, London.
Dayal, S. Landesberg, H. and Zeisser, M. (2000) Building DigitalBrands, Electronic Commerce The McKinsey Quarterly, 2, pp. 42–51.
Desmet, D., Francis, T., Hu, A., Koller, T. M. and Riedel, G.A.(2000) Valuing Dot-Coms. The McKinsey Quarterly, 1.
Dolan, R. and Moon, Y. (1999) Pricing and Market Making onthe Internet, Teaching Note. Harvard Business School.
Earl, M. (2000) Evolving the e-Business. Business Strategy Review,11, 2, pp. 33–38.
Keynes, J. (2000) A Tract on Monetary Reform, Chapter 3 (first pub-lished in 1923 by McMillan in London). Prometheus Books.
Keynes, J. (1964) The General Theory of Employment, Interest andMoney. Harcourt Brace Jovanovich, San Diego (first published1936), p. 149.
Lacity, M. and Hirschheim, R. (1995) Information Systems Out-sourcing, Myths, Metaphors and Realities. Wiley and Sons,Chichester.
Mahadevan, B. (2000) Business Models for Internet-Based e-Commerce. California Management Review, 42, 4, Summer.
Norris, M. and West, S. (2001) eBusiness Essentials, 2nd edn.Wiley, Chichester.
Patel, K. and McCarthy, P. (2000) Digital Transformation. McGrawHill, New York.
Porter, M. (2001) Strategy and the Internet. Harvard BusinessReview, March, pp. 63–78.
Remenyi, D. (1999) IT Investment Making a Business Case.Butterworth-Heinemann, Oxford.
Remenyi, D., Money, A., Sheerwood-Smith, M. with Irani, Z.(2000) The Effective Measurement and Management of IT Costsand Benefits. 2nd edn, Butterworth-Heinemann, Oxford.
Roberts, J. (2000) Developing New Rules for New Markets.Journal of the Academy of Marketing Science, 28, 1, pp. 31–44.
Rosen, K. and Howard, A. (2000) e-Retail: Gold Rush or Fool’sGold. California Management Review, 42, 3, Spring.
Senge, P. (1990) The Fifth Discipline. Doubleday, New York.Timmers, . (1990) Electronic Commerce. John Wiley and Sons Ltd,
Chichester.
Notes
1. The term ‘web-enhanced’ is used to describe a business whichis using the Internet and the Web in an attempt to improve itscurrent operation’s efficiency or effectiveness or to gain access toa new market. Web-enhancement is also referred to as ‘digitaltransformation’.2. The term ‘web-enabled’ is used to describe a business whichhas been created ab initio to take advantage of the improvementsin business process through the use of the Internet and the Web.These websites are sometimes referred to as ‘Born’ on the webbusinesses.3. In the March 2001 edition of the Harvard Business Review,Michael Porter describes economic value as follows: ‘Economicvalue for a company is nothing more than the gap between priceand cost, and is reliably measured only by sustained profit-ability.’4. It is interesting to note how strongly Michael Porter (2001)feels about the misleading way in which the term businessmodel has been made a central issue in the e-business environ-ment. Porter says: ‘Yet simply having a business model is anexceedingly low bar to set for building a company. Generatingrevenue is often a far cry from creating economic value, and nobusiness model can be evaluated independently of industrystructure. The business model approach to managementbecomes an invitation for faulty thinking and self-delusion.’5. The dot.com phenomenon has been spurred on by the avail-ability of venture capital which on the face of it appears to havebeen very inexpensive. According to Desmet et al. (2000), ‘In thepresent era of cheap and accessible capital, Internet entrepre-
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neurs have successed in quickly transforming their businessideas into billion dollar valuations that seem to defy the commonwisdom about profits, multiples, and the short term focus ofcapital markets. Valuing these high-growth, high-uncertainty,high-loss firms has been a challenge, to say the least: some prac-titioners have even described it as a hopeless tack.’6. Growth that is funded by internally generated profit and cashis sometimes referred to as organic growth and if this route istaken to funding an increase of scale then the business will notbe burdened by an additional share issue, which dilutes theequity base or by more debt, which in turn increases the finan-cial risk of the business.7. The issues related to global reach and global presence seem tohave at least temporarily overshadowed the issue of overtrad-ing. It has been assumed in some business cases that whateverlevel of activity that the web-enhanced or web-enabled businessachieves will somehow be funded. In fact it looks like the issueof overtrading has somehow been totally forgotten.8. The definition of unusual growth requirements is of course achallenge, which could be addressed by stating that it couldrefer to the occasional need to acquire extra fixed assets asopposed to additional working capital.9. It is certain that the gap between the revenue and the costs hasto be closed but as Mahadevan (2000) suggests the web entre-preneur may think that the gap will close in the future when thee-business is established.10. The term ‘secondary fee’ as used here does not in any wayimply that this income stream is less important than the primaryfees. To illustrate this it is interesting to note that in the case ofYahoo.com there is at present no primary fee as such. All theincome comes from the secondary activities, which in the case ofYahoo.com is mostly advertising related.11. The sales of goods or services at less than their cost are tan-tamount to a liquidation of the capital base of the company. Anysustained period in which this occurs undermines the resources,which are available for the company to pursue its objectives.12. It was at one time suggested that by the early years of thethird millennium more individuals would be surfing the webthan watching television.13. The problem of diminishing advertising income is said to bethe main factor in Yahoo!’s drop in share price from a high ofUS$240 to US$17 (at the time of writing) – a decline of 93 percent.
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14. This will have a double negative effect on the business inthat negative sentiment or extra competition will reduce incomeas well as making it harder to find additional funds.15. It has been suggested that there is a law of economics calledMetcalf’s law of network utility and that this law states thatthere is value in large networks independent of the revenue thatthey generate. It was thought that it was Metcalf’s law thatcaused Freeserve.com to be so highly valued at its IPO (initialpurchase offer).16. The term initial purchase offer, or IPO, is now commonlyused instead of stock market listing.17. This is a similar strategy to the one used by the highly suc-cessful television quiz show Who wants to be a Millionaire? Thistelevision quiz show funds itself by the use of high rate tele-phone charges to special telephone numbers. However, in thiscase it is made very clear to all potential callers that they will beasked to pay a high rate for the telephone call.18. There are a number of variations to this business model thatwere highly visible in the dot.com world during 1999 and 2000where start-ups were quickly sold to an established organiza-tion, which was looking for an e-business operation but whichdid not want to have to create one for themselves from scratch.19. It is important when thinking about the implications of theshort, medium and long term to remember the advice of JohnMaynard Keynes (2000 [1923]) who said that ‘Long run is a mis-leading guide to current affairs. In the long run we are all dead.’20. What is meant by peer-to-peer applications in this context isnot exactly certain. The term is sometimes used to describe e-auctions. It is also used to describe the Napster type applica-tions where music is shared across the Web.21. Metcalf’s law of network utility suggests that the greater thenumber of modes in a network the greater its utility and thusthe greater its value. It has been said that this law underpinnedthe value, which was associated with Freeserve.com when itwas launched on the stock market.22. Coarse’s law addresses the question of the efficiency of inter-nal production as opposed to the acquisition of goods or serv-ices externally. Thus this concept considers the classic buy ormake decision-making arena.23. The law of Socio-Technological Distribution discusses thedifferent rates of development of technology and change insociety and refers to gaps that can occur between these twoissues.
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24. The ignorance premium is the increased price that the organ-ization may charge due to the client or customer not knowingthat lower priced equivalent items or services exist.
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237
It is common knowledge that Information and Communic-ations Technology (ICT) has had a tremendous impact on societyat large in a way that defines our era. As far as businesses areconcerned, IT began its triumphal march into society with costand labour saving applications. The gains were mainly due tothe mechanization of clerical procedures; later came the additionof computerized management information systems; and evenlater many business process redesign initiatives were beingmade possible through the application of ICT.
Today ICT has become all-pervasive, and is interwoven with vir-tually all products, services, distribution and communicationchannels and processes in society. ICT changes the rules of thegame in traditional industries and blurs existing boundariesbetween sectors of industry. ICT is therefore not merely a tech-nology that supports and enhances the delivery of products andservices. It has become a major defining factor of the strategicenvironments of corporations.
Traditional methods for developing corporate, business andICT strategies cannot deal with ICT in a way that is appropriateto its defining role in the new economy. Nor can a chief infor-mation officer alone being held responsible for trying to aligndistinct and separate corporate, business and ICT strategies.This chapter argues that ICT needs to be considered a contextfactor, rather than merely a resource. Consequently, integrated
12 The CIO’s career is over … longlive the CIO!!
Han van der Zee
Nolan Norton Institute, De Meern, The Netherlands
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corporate, business and ICT strategies are necessary, aimed atfully integrating the capabilities of ICT with corporate andbusiness strategies and management’s expectations, and viceversa. This has profound implications for the role of the ChiefInformation Officer (CIO) in corporate strategy and manage-ment.
12.1 How ICT changes the economy and industries
It was only in the 1980s that some visionary companies demon-strated that ICT could be far more than just a cost saving tech-nology, as it had been before for 30 years or so. Since then, thename of the game has changed immensely. ICT:
Is developing at an incredible rateCurrently plays a dominant role in just about every definingcharacteristic of the new economyCreates new markets and sweeps others awayIs breaking down the borders between companies andbetween countriesIs the source of a new generation of products, services anddistribution channels and indeed a new generation of indus-tries.
With that, ICT:
Has become an important external factor in strategy develop-mentIs an important external factor in two important dimensionsof strategy: market attractiveness and competitive positioningChanges market attractiveness because it alters structures inthe economy, both those between industries and those withinindustriesInfluences competitive positioning because it changes con-sumer behaviour (for example, by allowing consumer accessto better information), selling approaches (such as electronicauctions), patterns of distribution (for instance, ECR –Efficient Consumer Response), as well as pricing mechanisms(for example, transparency).
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12.2 How ICT changes organizations
At the same time, ICT also shows certain characteristics thatappear to make it just a resource among others, albeit a verypowerful one. Because of the manifold uses to which it can beput, ICT is changing economies of scale and scope in a variety ofindustries. Its influence is ubiquitous, and it continues to boostefficiency, supporting individuals, teams and the organization asa whole. Simultaneously, ICT either enables firms to adopt newforms of operating logic or it forces them to. Most importantly,ICT, in conjunction with a liberalization of the market andimproved market efficiency, undercuts the assumption of thevertically and functionally integrated firm, enabling newdesigns and configurations of businesses and business networks(see Figure 12.1).
We turn now to the questions of why, and if so, how ICT shouldbe integrated in corporate strategy and management.
Enabling technology The changeThe promise
'The Net'
Interenterprisecomputing
Enterpriseinfostructure
Workgroupcomputing
Personalmultimedia
Wealth, creation,social development
Recasting externalrelationships
Organizationaltransformation
Business processand job redesign
Task, learningefficiency
The effectiveindividual
The high-performanceteam
The integratedenterprise
The extendedenterprise
The internetworkedbusiness
Figure 12.1 Implications of ICT on individuals, teams, the organization, business networks and society. © New Paradigm
Learning Corporation, 1996
12.3 Why integrate ICT in corporate strategy andmanagement?
In the previous section we have argued that ICT is driving newbusiness designs, business networks, and value propositions.This fact alone means that it would be a mistake to see the roleof ICT in corporate and business strategy and management asmerely that of ‘a resource among others’. Therefore, in thissection we first deal with five important observations regardingthe role of ICT in corporate strategy and its defining role in thenew economy.
First, ICT must be taken into account as a defining technology ofthe environment when developing a strategy for any business.As we have seen, ICT is changing the structures of the economywith respect to industries and segmentation of markets, and it isthus redefining what a business is. For example, internet com-panies selling books and CDs have already changed the attrac-tiveness of traditional markets and created new markets andbusinesses. The ‘power system’ in the market, where firmsmaster scarce resources, master access to consumers, andcapture value in the market, changes dramatically as a result.This implies that CEOs have to ask themselves what businessthey are in or want to be in.
Second, ICT offers opportunities for new products and services,and is a new technological carrier for existing products andfunctions as well. For example, newspapers can be read on theInternet, and books and MP.3 music can be downloaded. TVviewers can create their own personalized TV guide with webTV, and goods and services can be distributed on the Internet.The implication is that product managers must understand theopportunities ICT offers either to enhance existing products orto create new products and services, especially as these relate toshifting consumer preferences and spending.
Third, modern ICT offers new ways of marketing, in both tradi-tional and virtual electronic markets. New distribution patternsare emerging as marketing moves from broadcast to ‘narrow-cast’ and one-to-one approaches. ICT is redefining the role ofwholesale and retail selling: sales processes are changingbecause of the possibilities offered by electronic bidding andelectronic auctions, and market research is becoming an up-to-the-minute interactive process. Indeed, the changes are now so
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far-reaching that whole areas of marketing, such as brand build-ing and consumer response systems, have to be rethought. ICThas serious implications for many existing methods and con-cepts of marketing and channel management and the implicitassumptions underlying them. In short, marketing and distri-bution have changed. Marketing managers must understandthe implications and opportunities of ICT in their field ofresponsibility.
Fourth, having replaced traditional technologies in many areas,ICT is increasingly a product technology that underlies virtuallyall products and services in the economy, aside from being aproduct itself in the computer and software industry. This sug-gests that product designers, engineers and operations man-agers must understand the implications and opportunities ofICT.
Fifth, ICT will continue to be used to support organizations withrespect to systems for accounting, management control, report-ing and so on. However, much more data can now be collectedby automated production, sales and service processes than everbefore. Digital electronics, embedded software programs thatcan be downloaded via telephone lines, the Internet, extranetand intranet systems, and other consequences of ICT are funda-mentally changing logistics processes, purchasing and procure-ment procedures, international cash management, and manyother operational procedures. These developments enablecompany operating models to be adapted to exploit economiesof scale and scope. Cost savings can be achieved by linkingback-office processes and manufacturing facilities, for example.Clearly, general and line managers will have to understand ICT:what it is, what its implications are for their areas of responsi-bility, and what opportunities it offers.
With this, we assume that the question of whether ICT shouldbe positioned at the core of corporate and business strategy hasbeen sufficiently addressed. Still one important questionremains: how can that be realized?
12.4 How to integrate ICT in corporate strategy andmanagement
Traditional approaches to strategy development, such as thosedescribed by Anthony (1965) and Ansoff (1965) among others,
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have dominated the tradition of business policy and strategicmanagement for decades. Traditional thinking defines strategicmanagement as a systematic, top down, linear process of plan-ning, organizing, leading, and controlling the efforts of organi-zation members, and of using all other organizational resources,such as finances, equipment and information, to achieve statedorganizational goals. Today, however, more refined approachesexist that focus on specific dimensions of strategy formulation,such as:
Customer/market positioning, as for instance outlined byPorter (1980)Competitive positioning, as outlined by D’Aveni (1995)Core competencies, as outlined by Prahalad and Hamel(1990).
Some of these approaches address aspects of the dynamics of thenew information economy. Porter’s five forces model, forexample, takes account of the effects of ICT on switching costs.And his concept of the value chain, which is not so much atheory as a description, outlines a series of connections betweenactivities that can deal with emerging value networks, forinstance by breaking up the value chain and distributing itscomponents over a multiple network of contributors. Microsoftand Intel have used D’Aveni’s ‘building entry barriers’ strategy,among others, and the content generation industry can bedescribed in terms of his ‘deep pockets’ strategy.
However, each of these approaches has shortcomings withregard to the information economy and the role of ICT. Forexample, Porter’s theories for strategic management assumestatic and stable industry structures. D’Aveni’s concept of hyper-competition is based mainly on traditional economic relation-ships as defined by the manufacturing industry. In general,resource-based strategies, including Prahalad and Hamel’s, fallshort of addressing changes in market attractiveness.
In the past, ICT strategy followed business strategy. Untilrecently – and unfortunately in many organizations still today –IT (the ‘C’ wasn’t even addressed at all) used to be merely oneitem on the agendas of management teams, while an IT manageror CIO (chief information officer) would be appointed to imple-ment or manage it. He or she inventoried the functional require-ments of the various IT users in the company, established what
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data-processing capacities were required, and organized thedevelopment, implementation and operations of IT systems.Such traditional IT planning methods shared the assumptionthat the purpose of IT planning was merely to translate acompany’s business strategy and business objectives into newstructures and plans that took account of IT.
During the 1990s, then, the most important goal of ICT planningwas the alignment of ICT capabilities and activities with businessobjectives and business requirements, including decisionsregarding the scope, scale and pace of ICT projects. However,alignment approaches become increasingly irrelevant, or at leastredundant in the environment of the new information economy.Aligning ICT with business objectives requires a stable businessand a thorough, robust business plan. The relevance of suchbusiness plans is questionable today. Detailed business plans onthe traditional model are likely to be obsolete by the time theyreach the ICT planner, and who is this person anyway? Time isof critical importance in the competitive environment of the neweconomy. Today’s competitive and dynamic business environ-ment does not allow for lengthy alignment exercises. Real-timeintegration of ICT into the business planning process is one pro-posed solution to this problem.
It will be clear that all this has implications for the strategicagenda of management teams. An integrated business-orientedand ICT-related strategy must be formulated if one is to fullygrasp the opportunities of the information economy. Such astrategic agenda should encompass different issues and portfo-lios: portfolios of products and services, businesses, capabilitiesand complementors (relationships). This is shown in Figure 12.2.
The main source today of new business opportunities can no
Portfolio ofrelationships
Portfolio ofcapabilities
Portfolio ofproducts
Portfolio ofbusinesses
Verticalintegration
Virtualintegration
Figure 12.2 Portfolios that determine the strategic agenda
longer be rigorous market analysis and thick reports produced byarmies of strategic planners. New business opportunities comefrom people who think about what competitors do, how cus-tomers and consumers behave, what their preferences are, howlifestyles evolve, what (ICT) suppliers can offer, and what regula-tors and politicians are planning to do, among many relevantissues. New business opportunities can also be produced by cre-atively thinking through examples from other sectors of industry,other cultures and other geographical areas. Above all it is crucialto understand contextual developments (such as globalization,deregulation and digitization) and to link them with an imagina-tive and creative evaluation process that facilitates broad partici-pation if opportunities are to be successfully generated.
Strategy development is a continuous, dynamic and perhapsrather intuitive process that involves many different partici-pants. In our view, the information economy requires manage-ment teams to focus on five important aspects of strategyformulation.
12.4.1 Innovate
To innovate, companies need to maintain a portfolio of experi-ments, new initiatives, and original ideas in different stages oftheir life cycle. Here, it is important to apply portfolio manage-ment techniques: to push innovations, to evaluate at differentstages whether it makes sense to continue an innovation project,and to assess potential contributions to business objectives.
It is often difficult to decide when an innovation is ready to beimplemented in business and whether it has a reasonable chanceof succeeding. Sometimes it will be necessary to pull the plug oninnovations that do not seem to be going anywhere or havealready become outdated. And, of course, it will always beimportant to maintain focus in the first place on the market, cus-tomers and consumers, rather than on technology or otherresources. Naturally, working closely with partners and comple-mentors who can be trusted and who have specific and appro-priate competencies can also be beneficial.
12.4.2 Create new markets
New uses for technology will lead to new business and createnew markets. The Internet and the electronic commerce it makes
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possible are creating markets no one ever anticipated. Datatransmission has created a new market in the same way the tele-phone infrastructure did in the past. It is worth emphasizingthat it is advisable to cooperate with partners, especially thosewho ‘own’ additional parts of relevant value chains or haveaccess to different geographical, ethnic or cultural markets.
12.4.3 Work with partners and complementors
As we have already seen, establishing networks and partner-ships can help to quickly generate new business opportunities orto identify ones that are as yet untapped. Establishing differentkinds of partnerships can prevent an organization from becom-ing dependent on one partner, or on too few. If the product,service, distribution channel or customer portfolio offered by thepartner is specific and has a strategic value for the organization,it is a good idea to build a long-term relationship based onmutual trust and commitment, and to develop new businessopportunities together. In other cases, more distant relationshipsare desirable, because it is easier to manage such suppliers on aperformance/cost basis and switch when appropriate.
12.4.4 Develop ICT enabled businessarchitectures
Any efficient combination of a business model and an ICT archi-tecture comprises virtual and physical elements, as well as self-owned and outsourced components. Products, services anddistribution channels increasingly involve ICT components. Thecreation of fully integrated products, business models and ICTarchitectures will stimulate the generation of new businessopportunities, and even more so when ICT architectures, ICTstandards and ICT components are based on global standardsand developments. There will be advantage to be gained, forinstance, from the ideas of small, start-up entrepreneurs in thesoftware industry who accommodate ‘new economy initiatives’by developing plug-and-play products with e-commerce fea-tures.
12.4.5 Have business people manage ICT
Management, monitoring and control of ICT initiatives must bein the hands of people who are sensitive to market develop-
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ments. As we have seen, getting the most out of ICT depends onpeople who understand how it can create new business oppor-tunities and enable or integrate existing ones. It is also impor-tant that ICT investments be monitored by business people –not ICT technicians – with a mature financial investment man-agement approach. To regard ICT merely as an overhead expen-diture, as many companies still do, is obviously seriouslyinappropriate.
12.5 Implications for traditional ICT strategy andthe role of the chief information officer
Traditional strategy sees ICT as one resource among others inthe context of the business strategy. Paradoxically, firms,whether corporations or businesses, no longer need an IT or ICTstrategy. This is a logical consequence of the all-pervasivenessof ICT in the new economy. A firm’s strategy must now assumeICT as a pervasive and influential environmental factor thatredefines products and services, markets, distribution, salesprocesses, operations, operational models and internal gover-nance.
This is not to say that a firm should not have an integral view onICT, including issues such as mastering the technology, access tocritical ICT resources, and suitable partners. Resource strategiesmust see the rapidly developing ICT infrastructure as a plug-and-play environment, as it were, for business operations. ICT isincreasingly based on standardized software, and it is especiallyimportant that a firm knows its purchasing position as regardsthe relevant licences for software, which can incur tremendouscosts.
Firms should no longer have one budget for ICT, whether ascapital investments or operating costs. The pervasiveness of ICTsuggests that it should be an integral part of the budgets of thevarious operations, especially the costs of developing products,services and other applications. Economies of scale and scopecan still apply. The point is to see these from the viewpoint of thebusiness, not from that of the technology.
The CIO will no longer be the only executive expected to be incontrol of ICT-related operations. It might once have been justifi-able to allocate responsibility for ICT to a single CIO or IT
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manager, as the introduction of the position of CIO a number ofyears ago reflected the increasing importance of IT in businessoperations. The motivation was often simply the huge invest-ments in IT equipment and software involved. Nowadays, ICT isso pervasive in all aspects of business that it can be consideredsimply irresponsible to allocate responsibility to a single manager.Everyone on a management team must understand the role ofICT in the modern economy and its impact on all aspects of busi-ness. New generations of managers and management teamsindeed have a better understanding of the role and businessimpact of ICT. They will take responsibility for the control of newgenerations of IT projects, including defining the functionality tobe delivered and contracting activities to third parties.
The question remains what will happen to the position of theCIO, as the roles associated with it are changing. We believe theCIO will still have a major role to play in building and main-taining a technical and logical infrastructure, that is, a suitableplug and play environment for all the activities of the business.The project portfolio of the position will be ‘reduced’ to majorprojects in the overall infrastructure; the development of otherICT applications will be the responsibility of line managers. Insome kinds of business, the positions of CIO and the ChiefOperating Officer (COO) overlap or be entirely the same, espe-cially where ICT and digital technology permeate all operations.
In general, a separation can be expected between ICT gover-nance and ICT management (Figure 12.3). The managementteam as a whole, we believe, should deal with ICT governance,while ICT management should be the domain of the ITmanager, previously called the chief information officer.
It is sometimes argued that the IT manager should be moreinvolved in the process of strategy development of thecompany. Because of the all-pervasiveness of ICT in theeconomy, including markets, marketing, sales and other busi-ness processes, as well as the new landscapes of competitionthat are emerging, the argument seems to make sense. But ICTdoes not replace entrepreneurship; it is part of entrepreneur-ship. Corporate vice presidents of strategy and new businessdevelopment will have to master the full scope, opportunitiesand impact offered by ICT technology. ICT represents a power-ful new force, but entrepreneurship must put it to use in a worldof politics, social change and cultural development.
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12.6 Conclusion
ICT is a defining force in the strategic environments of corpora-tions, as well as a sophisticated delivery technology for prod-ucts and services in the information economy. ICT has been animportant contributor to the rise of the modern business net-works. However, traditional methods for developing corporate,enterprise, business network and ICT strategies do not dealwith the dynamics and rules of what we call the new informa-tion economy. New principles, new directions for strategydevelopment and corporate management are needed. Manage-ment teams must focus on three major tasks: generating newbusiness opportunities, building a strategic agenda and makingdecisions, and preparing to radically change the skills and com-petencies in the organization.
What is important here? First, the process involving the genera-tion of new business opportunities and the move toward new
Business
Service Technology
ICTgovernance
ICTgovernance
ICTmanagement
Understandbusiness impact
of emergingICT
Protect thebusiness's
contractualposition
Make andkeep ICT
work
Create and maintaincoherent blueprints
for systems,databases andinfrastructure
ICTmanagement
Integrate ICT with businesspurpose and develop the
'right' standards and policies
Ensure the'right' contracts
for the 'right'pruposes
Manage ICTsourcingstrategy
Figure 12.3 ICT governance versus ICT management
business models require a vision regarding the role of ICT in theorganization. Second, new business opportunities and newbusiness models can only be created and developed by theproactive, rapid, yet orderly selection and implementation ofcommon ICT standards. Third, learning to participate in acomplex network of businesses and find suitable partners willbe key to survival. Overall, new and different skills and compe-tencies will be needed, while the role of the CIO will change dra-matically.
Any forward-looking organization with a desire to stay alive inthe highly competitive new economy must fully integrate ICT inits business processes. In order to do so, it must make use ofstrategy development and management processes that are atleast current and reliable, if not leading edge and innovative. Inthis game, playing to par will simply not be enough.
References
Ansoff, I. (1965) Corporate Strategy. McGraw-Hill, New York.Anthony, R. N. (1965) Planning and Control Systems, a Framework
for Analysis. Harvard University Press, Boston.D’Aveni, R. A. (1995) Hypercompetitive Rivalries: Competing in
Highly Dynamic Environments. Free Press, New York.Henderson, J. C. and Venkatraman, N. (1993) Strategic align-
ment: leveraging information technology for transformingorganizations. IBM Systems Journal, 32, 1.
Prahalad, C. K. and Hamel, G. (1990) The core competence of thecorporation. Harvard Business Review, May–June.
Porter, M. (1980) Competitive Strategy. Free Press, New York.Van der Zee, J. T. M. and de Jong, B. (1999) Alignment is not
enough – integrating business and IT management with thebalanced business scorecard. Journal of ManagementInformation Systems, 16, 2, Fall.
Venkatraman, N. (1999) Nolan, Norton & Co. Conference,Wittenburg Castle in Wassenaar, the Netherlands, 21 June.
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13.1 Introduction
In 1639 John Woodall, a surgeon’s mate in the English Navy,observed that sailors who took regular quantities of limes didnot contract scurvy (the disease caused by lack of vitamin C). Inthose days this was a momentous discovery when you considerthat almost 50 per cent of sailors on long voyages died, mostlyfrom scurvy. And so it was that many sailors had to be press-ganged into the navy, because your chances of long-term sur-vival were limited.
In spite of this knowledge that limes prevented scurvy, theEnglish Navy did not adopt the use of the fruits as a standardpractice on their ships. In 1753 James Lind rediscovered thework of Woodall and published his findings widely. Still theEnglish Navy disregarded what was fast becoming commonknowledge. It was only the disastrous outbreak of scurvy thatcrippled the Arctic expedition of the HMS Discovery in 1877 thatspurred the Navy into adopting the policy of carrying and usinglimes on all naval voyages. (The English came to be called‘Limeys’.) But the English Merchant Navy adopted this stan-dard only some forty years later.
What does this have to do with managing IT in the twenty-firstcentury? Well, in the face of mounting evidence that the way wemanage IT no longer matches the way business works or indeed
13 Herding catsManaging IT in the twenty-first century
Terry White
Bentley West Consultants, Johannesburg, South Africa
wants their IT delivered, we steadfastly cling to the old waysand myths of IT management. These IT management myths takenames such as methodologies, the systems development lifecycle, projects, service level agreements, standards, the list goeson. Their usefulness is passed and each IT management tech-nique, process or organizational form needs rethinking.Underlying all of this is the way we manage. This requires thegreatest overhaul of all. We are still managing IT as if it were1975. But both the technology we are managing and the busi-ness that the technology should serve have changed irrevocably.
And the frustration is, that even though the need for change isoverwhelming, many IT managers steadfastly turn away frompotential answers in their faith in ‘traditional’ methods. But wemustn’t be too critical of just IT managers, many business man-agers are in the same boat. It is as if they are rowing into a risingwind, steadfastly refusing to learn how to sail, because after all,they are very, very busy rowing at the moment.
So why did the English Navy take some 240 years to adopt prac-tices that would have saved countless lives? Was it traditional-ism? Or the ‘not invented here’ syndrome? Or good oldresistance to change? All of the above may have had a place inthe equation, but the suspicion is that they really were too busywith the day-to-day minutiae of running a navy to pay attentionto potential answers. They were very, very busy.
Will managers of IT take 240 years to adopt new practices? No.They don’t have that much time:
A new Information Revolution is well under way … It willradically change the meaning of information for both enter-prises and individuals. It is not a revolution in technology,machinery, techniques, software or speed. It is a revolutionin concepts. It is not happening in Information Technology(IT), or in Management Information Systems (MIS), and itis not being led by Chief Information Officers (CIOs) …And what triggered this revolution and is driving it is thefailure of the ‘Information Industry’ – the IT people, theMIS people, the CIOs – to provide INFORMATION.
(Drucker, 1999)
It seems that one of the greatest commentators on business thiscentury believes IT people share their future with the dodo. Andthat’s not all he has to say: he has this prognosis for IT people:
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They will not disappear. But they may be about to become‘Supporting Cast’ rather than the ‘Superstars’ they havebeen over the last forty years.
13.2 The times they are a-changin’. But is ITmanagement?
There is a general crisis for the internal IT function. Researchsuggests that there is a wide dissatisfaction with the quality ofin-house IT.
The business of business is changing. The speed, focus, scope,strategies and even the definition of what makes a business arechanging. Businesses must respond to competitive pressures inmonths, weeks or even days (Stalk and Hout, 1990). Producingthe goods or services fast are the least that business has to do tobe in the game. These days quality, price, and ability to deliverto where the customer is are basic prerequisites of staying inbusiness. But business also has to contend with rapid imple-mentation of new ideas (Treacy and Wiersema, 1993; Pritchett,1994). Customer focus has changed, from a simple recognitionthat in some undefined way customers are important, to nowrecognizing exactly where customers need to be satisfied anddoing so, with a minimum of fuss – businesses need to makecustomers feel special. They also have to change from a primefocus on their internal operations to having both an inward andan outward focus. Looking at their customers is one form ofoutward focus, but keeping an intelligent eye on competitors,legislators, suppliers, shareholders and the environment isbecoming central to survival. Many concerns are also crossingboundaries, joining with their suppliers, competitors and cus-tomers to provide a specific solution. Companies are discoveringthat they need to move away from control of people andprocesses at a policy and procedure level, towards guidance ofactivities within a strategic context. Looser and less intrusiveforms of control are succeeding in the complex world of businesscompetition.
And the catalogue of change required by business is matched bychanges in the technology that makes it all possible.Organizational technology has moved through Zuboff’s (1988)‘automating, informating and transformating’ cycle and nowpossibly has arrived at the ‘creating’ stage of IT’s effect on busi-
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ness. The technology is arguably allowing business to createnew forms, models and frameworks in which a concern mayoperate. Arguably because the jury is still out as to whether thenew dot.com companies are indeed new or merely very fast,connected and compact old business models. Technology is,however, allowing business people to compress time, distance,data, and business rules into fast, extensive, and personalizedservices directed at customers anywhere on earth. Well that’sthe theory. Again, the critics sit in waiting to see whether thisnew technological freedom will add anything substantial toAdam Smith’s supply and demand doctrine of 1774.
But it goes without question that technology is extending thecapabilities and reach of business, with concepts such as supplychain management, business intelligence, knowledge manage-ment, e-commerce and the like.
But where is the management of IT in all of this?
Before we continue, however, some definitions need to be clari-fied. Technology, information technology, and ICT or informa-tion and communications technology are defined as the physicalinfrastructures and systems used by businesses to effect theirbusiness plans. The management of IT or ICT is what thischapter is concerned with. ‘Management’ has been variouslydefined as: ‘getting things done through others’, or the ‘plan-ning, organizing, executing and monitoring’ of businessendeavours, or the controlling of a functional area or process.We will see later that we need to redefine ‘management’ if weare to convert from rowing to sailing in IT waters.
So the management of IT concerns itself with the process ofbringing the technology to bear on behalf of the business. Andhow do most IT managers bring technology to bear? Throughmethodologies, the systems development life cycle, projects,service level agreements, standards – but you’ve seen this listbefore.
But business casts a very cynical eye at our methodologies (Earl,1992). They are seen as inflexible and cumbersome (Economist,1991), and not the way they want their IT solutions delivered atall. It seems that business also has a problem with the time takenand the cost of developing information systems solutions. Thesystems development life cycle (SDLC) is not business friendly:
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it requires accurate specification of business requirements, sign-off on specification documents, and (some time later, perhaps sixmonths, one year, two years or worse), user acceptance testing.Research suggests that businesses frequently do not knowexactly what they want, change their minds, and are more con-cerned with results and outcomes than with the production of asystem (Earl and Feeny, 1994).. Does putting in an ERP reallyimprove a business’s competitiveness? Ask a few businesspeople and their answer will be that in a whopping 80 per centof cases business is disgruntled, dissatisfied or downright dis-gusted with the solution (Beam, 1994). For whatever reason, theSDLC systems development method cannot claim to be success-ful.
Business executives are unable to assess whether they aregetting value for money from their IT dollars (Remenyi et al.,1995; Le Roux, 1997). They know that they need IT (if so manygurus keep on and on about it, they must need it surely?), butthey have a sneaky suspicion that things were better before theadvent of these so-called miracle machines. They’re wrong ofcourse, IT is probably the competitive tool of the era, but not theway their in-house IT people are delivering. There is a need todeliver IT services in another way.
13.3 Sailing the IT ship in the twenty-first century
There can be no doubt that the litany of business expectationspresents a complex picture. There is a need to balance opposingrequirements: business expectations of stability directly contra-dict the need to change quickly and often. There is a need tocontrol a myriad of differing driving forces: your operations staffare driven by efficiency and cost containment, while your busi-ness analysts are motivated by the need to provide the mosteffective IT solution to the business at acceptable cost. Not onlymust you provide leadership to the business, but you must alsofollow their lead. You need to deliver a robust IT solution whileat the same time allowing constant change to the specificationsof that solution. You need to run stable and efficient IT infra-structures that last for years, and yet be flexible enough toprovide these infrastructures at the drop of a hat. You need tokeep pace with technological change, and yet not change soquickly that your basic competence in the technology is lost.Amongst all this you need to offer highly intelligent and mobile
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IT people sufficient fulfilment, growth and material reward, sothat they stay with you and you can achieve all of the above.Can all of this be done? The answer is very definitely yes. But …
You will need to stop rowing against the tide and learn to usethe business ‘wind’ to propel your progress. And you will needto overcome your own internal beliefs that limes have nothingto do with the way you run your ship. These are tall orders, butthe rest of this chapter is intended to provide a taste of a sailingIT in the business wind.
13.4 Dealing with complexity
In 1687 Sir Isaac Newton proposed the law of universalgravitation, and set in place principles that would guide scienceand the world for the next three hundred years. He sawthe universe as ‘things’ that interacted with each other in auniform and predictable way. This mindset is prominent inmodern management thinking today: many managers stillbelieve that: ‘if you have a service level agreement then servicewill improve’, or ‘downsizing improves company performance’(the opposite has been proven in 75 per cent of cases),or ‘if we put in this application then we will be more competi-tive’ (indeed many software suppliers trade on this false belief).These are examples of Newtonian thinking – if this … then that.But you will know that this is not the case. A myriad of otherthings have to happen if information technology is to be effec-tive. And we are discovering that IT management methods aretoo limited to address all these factors in the ‘if this … then that’or linear thinking way. We need to be able to handle the com-plexities of IT differently. And there is no doubt that the provi-sion of IT services within organizations is complex. Andmanagement in a complex environment is the key to manage-ment in the twenty-first century. Not only IT management butall forms of management (Wheatley, 1993; Sanders, 1998; Zohar,1997).
While scientists have been studying complex environments forover a hundred years, the thinking that complexity science canbe applied to our management of our organizations has onlystarted to take shape in the last five years or so. And applicationof complexity science to the management of IT organizations isyet to be applied. Thus the ideas presented in this chapter arenew. While there is a growing body of evidence and examples of
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complexity thinking working in general business management(Lewin and Regine, 1999), there are few if any in the IT domain.But that shouldn’t daunt us.
Scientific thinking has led the way, understanding that linearthinking can take you just so far. But when you start dealingwith an environment where individuals are relatively free to actwithin broad parameters, then you need to use the science ofcomplex adaptive systems to explain and operate in these con-ditions. Linear thinking cannot answer questions on howecosystems operate, or how weather patterns form, or howpeople interact or most importantly how the new business envi-ronment will operate.
There is a difference between complicated and complex.Complicated systems have many parts but each system worksexactly the same way over time. Your watch is complicated, as isyour motor car, as is the space shuttle, and indeed your laptopcomputer. But they operate exactly the same way every time youuse them. Complex systems on the other hand react differentlyall the time. They appear to generate more than the sum of theirparts, and when viewed at a large scale they appear to be intel-ligent, learning systems that constantly change to meet new cir-cumstances. Which of course interests us in looking at how tomanage IT in a new way.
Very simply, complex systems have a large number of compo-nents or agents that interact with each other and their environ-ment according to a few rules. The sum of these interactionscreates a pattern or form that constantly adapts to conditions inwhich the system operates. That’s why they are called ‘complex’,because they exhibit many independent interactions, ‘adaptive’because they respond to their environment, ‘systems’ becausethey are linked in some way. Imagine if you could create an ITorganization that constantly adapted to the environment in acoherent yet independent way without the need for constantmanagement intervention?
Business is a complex adaptive system, not a linear complicatedone, and the management of IT within that business is the same.Axelrod and Cohen (1999) showed how the decentralization ofindividual inputs (the agents), with a central maintenance ofstandards (the rules), brought together thousands of volunteerprogrammers to produce an operating system called Linux thatcompetes with the best that Microsoft has to offer.
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What then are the principles that govern complex adaptivesystems? Axelrod and Cohen (1999) define the three drivingprinciples of these systems as variation, interaction and selec-tion. Variation provides the raw material for adaptation. It allowsfor different types of agents, who because of their differencerespond to particular problems in diverse and often ingeniousways. But there must be some limit to the variety of agents in thesystem, or the system would become too confused or boundless.Interactions are the events that occur within the system. Theyshape and are shaped by other interactions. A simple example isthe use of e-mail, particularly those nasty ‘send this e-mail tothree thousand of your closest friends, or get a wart on the endof your nose’ type e-mails. Less frivolous is the use of e-mail bybosses to communicate with staff. Their choice of interaction,rather than calling a meeting or one-to-one sessions, defines howmost people within the system will operate. Interactions are gov-erned usually by simple rules as well as by physical factors likeproximity and barriers (one-to-one sessions would be extremelydifficult in a global company), and also by the timing of the inter-action. If decisions take three months because of a tortuous ITsteering committee, then you can expect that certain interactionsin a project will take place at a slower rate. Finally, Axelrod andCohen discuss the role of ‘selection’ in complex adaptivesystems. Selection dictates which variations and interactions willbe deemed to be successful and thus will replicate, and whichwill be regarded as unsuccessful and so will not be repeated.These are the organizations’ criteria for success and reward.Often they are clearly defined by strategies, job descriptions,posters on the wall and any number of visible representations.However, actual behaviour often points to different selection cri-teria than those espoused in official documents. In highly politi-cal organizations, successful political manoeuvring will be onesuch criterion, while organizations in which no one takes deci-sions will have the negative selection criterion of autocratic deci-sion making, or a company in which everyone keeps their ideasand information to themselves is likely to shoot its messengers.
Employees interact with each other and the environment, andadapt to changing conditions. Outside of this, the economy isalso a complex adaptive system, as is society. In order to findsome way through this maze of complexity and chaos, forwardthinking business people are applying complexity science rulesto their businesses with gratifying results. It’s hard work, much
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harder than the old command-and-control management model,but the rewards are surprising. The emphasis is on the word‘surprising’. It would be good to say that the surprises arealways agreeable, but in some cases they are not. However, allbusiness people who have embarked on this route agree that therewards are ultimately worth it.
13.5 Managing complex adaptive systems
After reading the above discourse on complex adaptive systems,you would be forgiven for assuming that you need complexprocesses to produce complex adaptive systems. On the con-trary, scientists have found that a few simple rules that governthe behaviour of individual components of the system tend togenerate complex systems. Complex adaptive systems havecomponents or agents that interact with each other and theirenvironment according to a few simple rules. All of this occurswithin an overriding definition of the system. To manage acomplex system requires that you pay attention to three or fourlevers of control, and most importantly that you then resist thetemptation to interfere with people trying to get their jobs donewithin the system. To create and manage a complex adaptivesystem is difficult and takes time. The essential elements of suchsystems are as follows.
13.5.1 A driving sense of purpose
A driving sense of purpose that binds all system componentsand defines the system. What is in the system and what is out,and why that system exists. In the mundane world one mightterm these your vision (where you want to go) and mission (whythe system exists). But having a complexity science viewpoint onthis will allow you to view this ‘vision’ and ‘mission’ from aposition that examines the variation, interactions and selectionthat will occur in the system.
13.5.2 A few good rules
A few ‘rules’ need to be defined. Here leadership is important. Incomplexity science there is a concept of fractals. A fractal is thesmallest part of a system, which when multiplied by itself devel-ops into complex systems. Or looked at the other way, fractalsare components of the whole system that looks the same as the
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whole system. For example, the human circulatory system is afractal. If you look at the blood vessels in your hand, they resem-ble the overall shape that the complete system takes on. A treehas a fractal nature, because each branching twig is seen on dif-ferent scales throughout the tree. So the question is: what rule orrules, if multiplied throughout the organization, will result incomplex adaptive behaviour that serves the purpose of theorganization?
13.5.3 The environment
Constant attention to relationships and the environment inwhich the system operates, with particular attention to the selec-tion criteria, is critical to success of complex adaptive systems.This means that you need to look at what people need in orderto get their job done – equipment and systems as well as the per-formance management mechanisms that reward ‘successful’behaviour and penalize ‘unsuccessful’ behaviours. Now thisneed not be a draconian punitive environment, but where manyorganizational systems fall down is that they reward peopleequally (plus or minus a few percent) irrespective of whetherthese people show aligned behaviour or not. The managementof the environment in complex adaptive systems means thatyou must spend the time and effort in managing the selectioncriteria and process.
13.5.4 Emergent behaviour
If people have guidance in the form of a clear and drivingpurpose, and a few simple rules to channel their actions, theywill tend to organize themselves to get the job done. The conse-quent behaviours and actions may be unpredictable but pro-vided the selection process is sound, the result will be greaterthan the sum of the parts. It is doubtful whether Linus Torvalds,the originator of the Linux operating system, predicted the rich-ness and robustness of the system when he set out on the opensource software development path.
13.5.5 The new role of leaders
The new role of leaders in complex systems is to see through allthe complexity and chaos both inside and outside the organiza-tion and translate what they see into a compelling business
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direction. Then they draw the attention of employees to whatthey see. New leaders will choose the fractal rules that createnew and adaptive behaviour in the organizations, apply thesefew rules rigidly, and let behaviours emerge.
Finally the role of the leader in complex adaptive systems is tocreate an environment in which people can follow the fractalrules within a driving sense of purpose. And to ensure thatsuccess is rewarded and that unsuccessful behaviours peter out.
13.6 Complex adaptive systems in the real IT world
But how about managing IT as a complex adaptive system. Eachdomain in IT can benefit from thinking about them from acomplex adaptive systems perspective. The questions of drivingpurpose, fractal rules and environment and selection give criti-cal clues as to how each IT management method can be changedto accommodate a complex world. Here is an application of thecomplex adaptive approach to methodologies, and some otherareas of IT. Obviously the driving purpose, fractal rules, envi-ronment and selection criteria will differ from organization toorganization, and must be subject to further analysis.
13.6.1 Methodologies
(i) Driving purpose Why do we use methodologies in developing IT solutions? Astandard approach to solutions development is probably onekey reason, as is the advantage of having a checklist of activitiesthat has been tried and found to work in other implementations.You need to question the real reasons for having your particularmethodologies as against the usual reasons given by the sellersof the methodology. (As Forrest Gump said: ‘If you’re going todo something, try to have a reason for doing it.) This will helpyou identify the driving purpose for your methodological think-ing. Perhaps the checklist is the prime reason your IT depart-ment uses methodologies. So the driving purpose that may bindthe system components (the various agents and the interactionsthey will have) within your methodology system could be some-thing like: ‘Miss nothing’ or ‘Only the good stuff’ or ‘Method inour madness’. Now these are only slogans that describe thedriving purpose behind the methodology. Remember thepurpose has to inform all the components and agents at every
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stage of their interaction in the system. The driving purposeneeds to have more than a slogan. It needs to define the system,and guide people and actions in that system. Remember thatbusiness people find IT methodologies inflexible and cumber-some.
(ii) Fractal rulesWhat are the few rules that if multiplied again and again wouldcreate interactions that built up something greater than the sumof the parts? A methodological fractal rule might be somethinglike: consult the checklist every step of the way. Too manymethodologies are little more than ‘shelfware’, bought or devel-oped by somebody who is passionate about standardizing theway IT solutions are developed. But then no one refers to themethodology again. Another fractal rule for methodologiesmight be: ‘relationships with the business need methodicalmanagement’. This rule acknowledges that IT people often arenot good at relationships, and therefore the methodologyshould include visits to business staff and workplaces as part ofthe development activities. Often the opposite is the case – oncethe business requirements are obtained (often at meetings at theproject office), then the development team turns its back on theworld of mere business mortals to produce its work of art. Thereshould be a rule in methodologies that force the ongoing inter-action between the solutions developers and the wider business.
(iii) EnvironmentRemember that business people find IT methodologies inflexi-ble and cumbersome, so the above fractal rule must ensure thatconstant methodology consultation is easy. Perhaps you need togive thought to making the methodology not only as simple aspossible, but fully customizable to the job in hand, and easilyaccessible to everyone involved in developing the solution.
(iv) SelectionWhat is the definition of success in the domain of IT method-ologies? What reward process will replicate and strengthen theuse of your methodologies? Specifically your success criteriashould confirm and reinforce your driving purpose and fractalrules. Due to time constraints, people moving onto other activi-ties and many other reasons, many IT solutions processes do notcarry out the post-implementation review according to theirmethodology. However, this review may be just the selection
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process necessary to confirm and reinforce (or disaffirm andabrogate) the use of the methodology. Therefore your manage-ment of the selection process must include a post-implementa-tion review, and must also ensure that the follow-on actions takeplace. Easy to say, not easy to do.
13.6.2 And so it goes …
One can apply the same sort of thinking to specific tools,methods and techniques, or to functional areas like architecture,development, operations etc. Here the driving purpose, fractalrules and environment take on the nature of a managementprocess.
An example in an operations environment could be as follows.
The driving purpose of operations could be encapsulated in thewords: ‘availability and stability’. Availability requires that busi-nesses get the service where and when they want it, and stabil-ity specifies that whatever is available must be dependable anddurable. Fractal rules covering the operations environmentcould involve something like:
Prevention rather than cure. Be careful here, because althoughit’s easy and indeed desirable to say you want to preventproblems from happening, the cost of doing so is high – you’retalking about redundancy, sophisticated hardware manage-ment technologies and a mindset that is far from the usual ITtechnician’s. An alternative might be to take a leaf from PeterSenge’s (1990) book on systems thinking, which requires youto solve problems on two levels: first, solve the problem, thensolve the problem that caused the problem. This rule of ‘Twolevel problem solving’ supports a strong selection process,which makes the overall system stronger over time. Solvingjust the immediate problem does nothing about strengtheningthe general environment.Measure and report. IT people tend to be too busy to measureongoing performance, and even more so when it comes toreporting their results. But at the base of most IT success is nothow wonderful your systems are, or how stable, although thisis important. Real IT success depends on the relationshipbetween IT and the business (White, 1995). And relationshipsdepend on trust. And trust depends on delivering what yousay you will deliver. So you could be delivering great IT serv-
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ices, but if you don’t know it and the business doesn’t knowit, your relationship will suffer. Marketing is something ITpeople neglect to their ongoing detriment.
Other operations fractal rules exist. Remember that the purposeof a fractal rule is that when it is multiplied by every interactionthat occurs in the complex system, it creates something greaterthan the whole. Don’t be tempted to think about these rules aspolicies and procedures – that will kill your complex adaptivesystem. Fractal rules govern every interaction within thedriving purpose. They must be easy to understand and theremust be very few of them.
The operations environment, guided by a driving purpose andoperating according to a few simple rules, dictates a certain envi-ronment. Don’t have a fractal rule requiring prevention ratherthan cure if you don’t have the considerable and expensive toolsrequired to constantly monitor every device attached to yournetwork, to capture out-of-limit events and report on them sothat pre-emptive action can be taken. And if you opt for a fractalrule that requires two levels of problem solving, make sure thatyou train your problem solvers on how to resolve problems inthis way. And make sure that your selection processes identifyand reward pre-emptive action or two level problem solving.
You can apply complex adaptive systems thinking in the archi-tecture function (where the driving purpose might be ‘Flexiblefor the future’) or the development function (where the drivingpurpose might be: ‘Deliver in business timeframes’). This formof thinking is an attitude as much as a system. It requires you togo back and ask the really basic questions like ‘Why do we dothis? and ‘What are the rules for doing that properly?’
13.7 Managing in the complex environment
Remember that in managing a complex adaptive environment youhave to make a critical change to your thinking. Command-and-control management is no longer a clever way to do things, indeedthe style conflicts with the system at every turn. The old ‘line-of-sight’ management style in which you need to see everything thateveryone is doing in order to assess how they are performing needsto be revisited. Anew ‘out-of-site’ method is essential, in which youmanage by results, outputs and outcomes rather than by adjudgingfrantic activity as the criterion for success.
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Think of ‘management’ as an activity rather than a job. Then youcan devolve the planning, organization, execution and monitor-ing (POEM) into the system. As long as it is being done as anactivity somewhere in the system, you can rest assured. Yournew role is much wider than that. You need to move into a lead-ership role. This role involves the management of meaning,attention, self and trust (MAST). This MAST form of leadershipwas postulated by Warren Bennis (1993). He recommends thatyou manage meaning by examining the environment insideyour department, company and outside. Then as a leader youcreate meaning for all the people in your organization and trans-late that meaning into a driving purpose. This is not trivial. Aquestion like ‘What does customer service really mean to ourorganization?’ can upset numerous applecarts.
Then you manage attention: if your department has decided thattwo level problem solving is the way to go, then you need topick up on everything that pulls problem solvers away from theapproach and eliminate it from their environment. It’s importantto say ‘Pay attention to this, and stop paying attention to that.’Estimates of the amount of unnecessary work not aligned to thevision of the organization range between 30 and 50 per cent.Your new role is to manage attention.
Management of self requires that you behave in a way that isconsistent with the driving purpose and fractal rules.
And management of trust is the most difficult element of all. Ifservice is an important part of your driving purpose then it is upto you to ensure that those people who deliver good service arerewarded and those who don’t are not. This upsets manyHuman Resource departments, because their mindset is oftenabout fairness – hence the complicated grading and payrollsystems that keep everyone within tight bands. Management oftrust really comes down to saying you will do something, thendoing it.
13.8 The long and winding road
Whatever the application, the management of complex adaptivesystems is more a state of mind than a system. It believes thatpeople are important agents in the system of managing IT. Andif people are important, then their ideas are important, theirinnovations are important and their morale is important.
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Complex adaptive systems management puts people back intothe equation, where policies, procedures and regulations havetaken them out.
You can see that complex adaptive systems thinking can beapplied to many if not all areas of management in the IT envi-ronment. But be warned. Keep it simple. Do your thinking.Don’t be afraid to experiment with the driving purpose or rules,and especially the environment – that’s the nature of suchsystems. They evolve, there is no single answer, and if there is,then today’s answer will not answer tomorrow’s question.
References
Beam, K. (ed.) (1994) Software Engineering Productivity andQuality. IS Analyser, 32, 2.
Bennis, W. (1993) Learning Some Basic Truisms About Leader-ship. In: The New Business Paradigm. G. P. Putnam & Sons,New York.
Drucker, P. F. (1999) Management Challenges for the 21st Century.Butterworth-Heinemann, Oxford.
Earl, M. J. (1992) Putting IT in its Place; A Polemic for theNineties. Journal of Information Technology, 7.
Earl, M. J. and Feeny, D. F. (1994) Is Your CIO adding Value?Management Review, 35, 3.
Economist (1991) Too Many Computers Spoil the Broth.Economist, 30, 24 August.
Grindley, K. (1991) Managing IT at Board Level. PitmanPublishing.
Le Roux, D. C. (1997) A Model to Guide Management Questionson the Value of Information Technology. Unpublished Doctor-al research proposal, University of Pretoria.
Lewin, R. and Regine, B. (1999) The Soul at Work – Unleashing thePower of Complexity Science for Business Success. Orion BusinessPublishers.
Pritchett, P. (1994) New Work Habits for a Radically ChangingWorld p. 10. Pritchett & Assoc., Dallas, Texas.
Remenyi, D. S. J., Money, A. and Twite, A. (1995) EffectiveMeasurement and Management of IT Costs and Benefits.Butterworth-Heinemann, Oxford.
Remenyi, D. S. J., Sherwood-Smith, M. and White, T. (1997)Maximising IT Benefits: A Process Approach. Wiley.
Sanders, T. I. (1998) Strategic Thinking and the New Science. Simon& Schuster, New York.
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Senge, P. M. (1990) The Fifth Discipline. Doubleday, New York.Stalk, G. and Hout, T. (1990) Competing Against Time. The Free
Press, New York.Treacy, M. and Wiersema, F. (1993) Customer Intimacy and
Other Value Disciplines. Harvard Business Review, January–February, pp. 84–93.
Wheatley, M. (1993) Leadership and the New Science. Berret-Koehler, San Francisco.
White, T. (1995) Towards a Model for the Integration of NewTechnologies into Organizations. Unpublished Master’sThesis, University of the Witwatersrand.
Zohar, D. (1997) Re-Wiring the Corporate Brain. Berrett-Koehler,San Francisco.
Zuboff, S. (1988) In the Age of the Smart Machine: The Future ofWork and Power. Basic Books, New York.
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14.1 Introduction
The modern business world is flooded with the e-word: e-busi-ness, e-government, e-trading, e-learning, e-data, e-partners, e-banking. Underlying this buzz, lies a radical shift in theassumptions of the business model. No longer is IT the supportor enabler, it has evolved into being the very centre, the heart, ofthe business and initiatives that drive them. Modern literature inthe business and IT domains have much to say about long-termbenefits of incorporating IT into business strategies. The futureevolves around the e-hype. All of this is undoubtedly true.However, it is my contention that there is too much focus on thetechnology and not enough on the information, on the specificrequirements of the individual and of the business organization,before the acquisition of some technology system. This could inpart be one of the reasons for the dot.com tragedy.
One prime example of this is retail banking’s heavy investmentin ATMs since the early 1980s. With the belief that this was anessential aspect of customer service and critical to maintainingmarket share, ATMs fast lost their competitive advantage and,instead of reducing costs, banks were faced with the expense ofmaintaining and updating their ATM systems. With the newtrend towards internet banking, the banking industry is on theverge of disappearing in its current physical form and provides
14 Back to the futureA look at information deliveries
René Pellissier
Graduate School of Business Leadership, Pretoria, University of South Africa
but one example of the changing business model introduced byubiquitous IT.
Thus, it is important to carefully identify what the specifics ofthe demand for information are before appropriate systems areimplemented (sometimes at huge cost in terms of physicalresources and ROI). In fact, it is not enough merely to calculateNPVs and ROIs for the evaluation of the new system’s benefits.It is of far more benefit to determine needs and current state oftechnology in serving those before the decision for the IT invest-ment is made.
14.2 The I in IT
We are familiar with the IT hype. It is clear that our futures arethus defined. It remains our responsibility to make these work.Within the dynamics of an information driven society, there iscertainly no lack of data – raw, untarnished. Loads of it.However, behind the driving force of IT, lies a more compellingone – information (knowledge, business intelligence). It goes byall these names. Really, the IT is driving very little apart fromcost if it is not singularly focused on amassing appropriateinformation.
Davis and Davidson believe that, by 2020, some 80 per centof business profits and market values will come from thepart of the enterprise that is built around the businessof information. Thus, organizations that capture and applythe information at each point of contact with the customerwill be far better off than those who do not. Moreover,the last years have seen an overinvestment in technologyand the implementation of systems and the underestima-tion of the information needs and requirements. It is becomingmore relevant for businesses to realize that they should amassall relevant data, analyse that data and subsequently use theresultant forces to personalize products and services, thusexceeding customer expectations and thereby gaining competi-tive advantage face a huge window of opportunity (Lattig,1999).
Figure 14.1 summarizes the transformation of business data intoinformation and business intelligence, in terms of informationeconomics, i.e. the demand and supply sides of information.Raw data is transformed (using technology) into information
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which is data that is meaningful. Thus, one might propose as theinformation value chain:
data � information ��business intelligence/knowledge
Moreover, information economics works along the same princi-ples as general supply and demand economics. There is a needfor information (i.e. the demand or IS or systems side) and thedelivery of that need (the supply or IT or technology side). Thisis illustrated by Figure 14.1.
The figure illustrates the importance of transforming large setsof (raw) data into meaningful information (knowledge or busi-ness intelligence) for optimal decision making. The demand sideof information covers the information systems (IS) in which thespecific needs (operational or strategic) are identified and sum-marized, whereas the supply side of information covers the ITside where the needs are met using appropriate technology.Business literature generally does not distinguish between thetwo (i.e. IS and IT) with the result that decision makers tend toview them as very much the same. This confounds the IT make
Data
INFORMATION/BUSINESS
Demandfor
information
Supplyof
information
Establishing the detail ofbusiness requirements and
application needs
Creating systems thatsatisfy the needs of an
application
Creating theenvironment inwhich supply is
to take place
Creating anenvironment in which
the appropriate systemscan be identified tosatisfy the demand
Figure 14.1 Information economics highlighting the value chain of information
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or break decisions, since too much focus is placed on the tech-nology and too little on the information.
This chapter provides some practical tools to develop andexploit the window presented by the ambiguous IT. It providesdecision makers with some measure of evaluating their existingIT implementations (in terms of needs) and enables them toplan their future IT. Vendors are listed in terms of the informa-tion delivery landscape proposed. Finally, it links the demandfor information (or IS) to the specific supply (IT side) of infor-mation based on a study undertaken in South African business.
14.3 Proposed classification of informationtechnologies
14.3.1 Introduction
According to Riel (1998) the costs and benefits of IT within anorganization are far from obvious. Apart from tangible andintangible costs, Riel is of the opinion that there are also irre-ducible costs (in between the above costs). He defines irre-ducible costs as some form of opportunity costs that requiredifferent forms of modelling. He also mentions three broad cat-egories of costs associated by IT projects. These include hard-ware and software costs, labour hours, support fees and otherhard facts related to computer ownership:
Technological costsSystem costs andSupport costs.
Riel argues that, in classifying the cost of the IT investment intothe categories and forms above, a more comprehensive pictureof the effects (short term and long term) can be gained to evalu-ate the IT investment decision.
The justification for IT implementation and deployment deci-sions will be greatly enhanced by proper classification of possi-ble IT systems. This will be done according to the informationdelivery software classification presented below.
14.3.2 Classification of information deliverysystems
The history of IT has essentially been that of finding more effi-cient ways and means of getting data into systems to performsimple tasks. Greater efficiency results in less waste, fewerresources and reduced costs. Also, by standardizing and inte-grating systems, more waste is eliminated. One possible disad-vantage of this approach is that organizations all perform at thesame level. Thus, standard approaches to IT may deliver short-term competitive advantages, but, in the long term, may onlyensure competitive parity. Moreover, standard approaches to ITmay corrode differentiating strengths. In view of this, waysshould be uncovered to discover, develop and accentuatestrengths. The focus of future organizations will not be on col-lecting data, but rather on acquiring information (and businessintelligence) to support and enhance innovation. Competitiveadvantage comes from matching internal strengths to profitableopportunities to create and sustain advantages that competitorscannot easily copy. For this, they need information about theirown businesses, their customers and the external environment.The data that organizations collect over many years could act asthe source of that information. This is the notion of ‘informationdelivery’.
Information delivery may be defined as the end-to-end processof converting raw data, which large organizations have inabundance, into meaningful information, which is required tosupport and enhance successful decision making (after The SASInstitute, 1999). Such software may be categorized according tofour main categories:
Personal productivity tools and utilitiesTransactional databasesStandard operational applications andStrategic information delivery or business intelligence.
The first three categories above are primarily concerned withdata capturing, time saving and the achievement of day-to-dayefficiencies. Personal productivity tools have automated theprocess of creating documents and organizing personal infor-mation. Transactional databases provide an efficient means ofstoring substantial amounts of data that are continually chang-ing. Standard applications enable an organization (or organiza-
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tions) to integrate operational processes within and betweenthem, based on common software. The first three software cate-gories are essential to the organization’s survival and providean operational solution. However, the last category concernsmore than survival. It is essential only to those organizationsthat have set themselves more ambitious goals (such as marketleadership, exceptional levels of customer satisfaction, above-average ROI and sustainable competitive advantage), hence amore strategic focus.
One proposition in terms of the class of information required ispresented in Figure 14.2, representing the information land-scape (and ensuing IT) as four quadrants of the software indus-try (examples are given in brackets).
The first and most basic level is that of office automation. Theother three quadrants are discussed in the order in which Ibelieve they become pertinent to organizations and theirgrowing need for strategic information (or business intelli-gence). Thus, organizations will move through these quadrantsin the following order as a subsequent need for (strategic) infor-mation arises and corresponding to the evolution of informationneeds:
office automation � DB applications � on-line transactionprocessing � business intelligence
Quadrant 3: Systemsapplications (OLTP –
especially ERP)
Examples: SAP AG, peopleSOFT,BAAN, JD Edwards, SSA
Quadrant 4: Businessintelligence (data
warehousing and mining)
Examples: SAS, Hyperion,Cognos, Business Objects
Quadrant 2: Databaseapplications
Examples: Oracle, Excel, SYBASE,INFORMIX, MS Access, Lotus
Notes, DBASE, SOFTWARE AG
Quadrant 1: Officeautomation
Examples: E-mail, desktoppublishing, word processing,facsimile transmissions, video
conferencing
Figure 14.2 Proposed classification of information delivery systems (Pellissier, 2001)
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It should be noted, however, that there is evidence that the prod-ucts in the different quadrants of the matrix are continuouslyimproving and competing with those in other quadrants. Thiswill become clear in Figure 14.3.
14.3.3 Quadrant 1: Office automation (OA)
Spencer (1994) describes office automation as ‘the application ofcomputers and communications technology to improve the pro-ductivity of clerical and managerial office workers’. ‘[It] …involves the integration of all information functions in the office,including word processing, electronic mail, graphics, desktoppublishing, and data processing. The backbone of office automa-tion is a local area network, which serves as a pathway betweenusers and computers.’
The emphasis of office automation used to be on personal pro-ductivity as reflected by the above definition; however, it is nowrealized that substantial synergies can be derived from effectivegroup work. Thus the above definition is expanded also toinclude all software that enhances the efficiency of groups.Furthermore OA is one of the categories of software that has todo with data capturing, time saving and the achievement of day-to-day efficiencies.
14.3.4 Quadrant 2: Database applications
A database (DB) is defined by Laudon and Laudon (1997, p. 203)as: ‘a collection of data organized to serve several applicationsefficiently by centralising the data and minimising redundantdata’. They add: ‘Rather than storing data in separate files foreach application, data are stored physically to appear to users as
The evolution ofinformation needs:
office automation � DBapplications � on-line
transaction processing �business intelligence
Figure 14.3
being stored in only one location.’ Consequently, a single DBservices multiple applications.
Thus, these authors maintain that DBMS can be viewed as thesoftware that:
Permits an organization to centralize dataManages them efficiently and Provides access to the stored data via application programs.
Turban and Aronson (1998, p. 80) define a database as ‘a collec-tion of interrelated data organized to meet the needs and struc-ture of the organization and can be used by more than oneperson for more than one application’. They add that the data-base management system (DBMS) is the software program thatcreates the database, allows for easy single access to the data-base, and facilitates the adding, updating, deleting, manipulat-ing, storing and retrieving of data. This means that DBMSpermits organizations to centralize data and thereby managedata efficiently.
The DBMS acts as an interface between application programsand the physical data files. A multidimensional DB model repre-sents relationships between data in a multidimensional struc-ture. This principle is best viewed as cubes of data and cubeswithin cubes of data, with every side of the cube consisting ofanother level of information, in contrast to spreadsheet applica-tions, which consist of data of a flat nature. Thus a matrix ofactual sales can be stacked on top of a matrix of projected salesto form a cube with six faces. Cubes may be nested within cubesto build complex views of data.
The main advantages of DBMS are summarized in Table 14.1.
14.3.5 Quadrant 3: Systems applications (withspecial focus on ERP)
This quadrant consists of Online Transaction Processing (OLTP)of all aspects of business information provided within one inte-grated solution, and more specifically, the Enterprise ResourcePlanning (ERP) systems. ERP is defined by Deloitte Consulting(1998) as many information systems that work together with theaim of coordinating efforts throughout the organization in orderto share information, automate processes and produce andaccess information in a real-time environment.
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ERP entails the development and implementation of a total (on-line) software solution. All aspects of business information arepackaged within one integrated solution. The result is faster deci-sion making, since all information within the organization’sIT/IS structures is assimilated and summarized within onesystem. This enhances organizational efficiencies, since theycontain information about the organization’s customer base,inventories (and inventory build-ups, etc.). This quadrant’s focusis therefore on the enhancement of organizational efficiencies.This quadrant can also be classified as OLTP (or online transac-tion processing) consisting of a wider range of systems than thepopular ERPs. This will not be covered in detail here. Table 14.2shows issues pertaining to the implementation of ERP systems.
14.3.6 Quadrant 4: Business intelligence
This quadrant includes software that supports BusinessIntelligence (BI) in an organization. The definition for
Through central management of data,access, utilization and securityThrough the elimination of isolated files inwhich the same data elements are repeated(corresponding to the re-engineeringprinciple of capturing data once, at thesource) Through the provision of central control ofdata creation and definitions
Through the separation of the logical viewof the data from its physical elements
Through rapid and ad hoc queries fromlarge pools of information
Reduction of the complexity ofthe IS environmentReduction of data redundancyand security
Elimination of data confusion
Reduction of program-datadependence
Reduction of program development and maintenancecostsHigher flexibility of IS
Increased access andavailability of information
After Haag et al. (1998)
Table 14.1 Main advantages of DBMS
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business intelligence is taken from Richard et al. (1999,p. 108):
Competitive Intelligence or Business Intelligence can bedefined as both a process and a product. In the formersense, Competitive Intelligence involves the legal andethical means that a company uses to utilise information.On the product side, it provides insights into the activitiesof the competition. This information can also include thepresent and projected behaviour of suppliers, customers,technologies, markets, products and services, and thegeneral business environment.
ERP implementation is very costly and consumes alarge part of the IT budgetThere is a substantial need for IT resources duringthe ERP implementation and in terms ofmaintenanceThe decision should be made as to whether specificmodules only or the complete system will meet theorganization’s requirements – general informationor specific requirements have to be addressedManagement information is generally based onmultiple data sources (internal or external) – all ofwhich have to be availableStrategic information should be availablethroughout the organization (on intranet) – the ERPsystem is required to provide such an informationsharing and storage facilityTransaction data should be stored separately sincecalculations are not the main function in a reportingenvironmentSAP has a so-called family of add-ons that link ontotheir software and provide links from otherplatformsThe core functionality of ERP is not that ofinformation warehousing and ERPs have beenfound lacking in this area – although SAP AG ismoving into the competitive field of informationwarehousing
Table 14.2 Organizational issues in the implementation of ERP systems
Costs
IT resources
Functionality
Data availability
Information flows
No transactional facility
ERP systems are notopen to other systems
No provision for datastorage or informationreporting
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Data warehousing addresses the problem of fragmented data inseparate operational systems, thus not allowing decision makersto integrate complete knowledge bases. Laudon and Laudon(1997, p. 218) define a data warehouse as ‘a database, with toolsthat stores current and historical data throughout the organiza-tion’. The data may originate in many core operational systemsand are copied into the information warehouse when needed –striving towards a pull (or JIT) information delivery system. Thedata are standardized and consolidated to be used across theorganization for strategic analysis and decision making. Thus,an information warehouse includes query and analytical tools aswell as graphical reporting facilities. These systems mayperform high-level analysis of trends, but are also able to drilldown into more detail if so needed. They seek business intelli-gence. Thus data warehouse data may differ from operationaldata according to the platforms in Table 14.3.
Data warehousing includes important organizational strategies,such as Executive IS (EIS), Management IS (MIS), DecisionSupport Systems (DSS), marketing and financial strategies.
The technological framework for information delivery is thedata warehouse. A data warehouse is more than a store of data;it consists of an entire process of:
Extracting data from operational systems
Operational data
Isolated data
Contains current operational data
Original fields may be inconsistentacross the organizationData are organized from anoperational or functional perspectiveData are volatile to supportoperations within the organizationData are stored on multiple platforms
Data warehouse
Organization-wide integrated datacollected from legacy systemsContains recent data as well ashistorical dataA single agreed-upon definition existsfor every field stored in the systemData are organized around majorbusiness information subjectsData are stabilized for decisionmakingData are stored on a single platform
Table 14.3 Difference between operational and data warehouse data
Reconciling and organizing it in ways that make businesssense andExploiting it with knowledge discovery and analytical software.
Data mining is undoubtedly one of the fastest growing fields inthe information delivery arena. Once a small interest area withincomputer science and statistics, it has expanded into a field of itsown, providing strategic benefit from data and information forlong-term decision making. In broad terms the data miningprocess (from the data warehouse) tries to discover hidden pat-terns and trends, especially since:
Databases become large and multidimensional, making accessand analysis virtually impossibleStandard statistical methods may be impractical because ofmissing valuesThe large databases make it impossible for systems adminis-trators to know what information is pertained in the data orwhat is relevant to ask.
Information delivery covers a range of technologies concernedwith the end-to-end process of extracting information from rawdata to support meaningful decisions. On the other hand, thepracticalities of information delivery make it very difficult toimplement solutions unless they are based on an ‘end-to-end’approach to technology. In such an end-to-end approach, thesame family of software solutions performs all the essentialfunctions of information delivery. This quadrant may also becalled business intelligence, or OLAP (On-line ArchitecturePlatform) as this is what it provides to the business.
The main advantage of an end-to-end solution is the eliminationof integration issues. Selecting different modules of an informa-tion delivery solution from various suppliers (called ‘best-of-breed’) may:
Delay implementationCause vast expenseCause time-consuming maintenance problems andBuild inflexibility into the system (counter to the notion ofincreased responsiveness and market edge).
An end-to-end solution, on the other hand, is designed for rapidROI and sustainable competitive advantage.
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14.3.7 Extended classification of informationdelivery systems
As is often the case in the information arena, most models aredynamic and subject to change. There exists empirical evidenceto suggest that the classification of information deliveries(Figure 14.2) presented above is under change. The followingfollows on some recent research done on the model in the lightof vendor initiatives and new IT needs and applications. Theresearch design focused on South African medium to largeenterprises, targeting a stratified sample in order to determinestrategic use of IT and the corroboration of the informationdelivery matrix in Figure 14.2. Figure 14.4 presents the shift interms of evolving technologies within quadrant 3 and theensuing movement towards quadrant 4. This is mainly due tothe growing importance in Customer Relationship Management(CRM), Supply Chain Management (SCM) and e-commerce(called ERP extensions).
The above follows on trends by the major vendors to move theirproducts towards the strategic quadrant, making way for a‘hybrid’ quadrant, called ERP extensions. This new quadrant isthe direct result of vendors changing the applications of theirsoftware products because of new market trends.
ERP extensionsCRM Vaas (1999) describes CRM as a robust salesforce automa-tion application. She explains that, where salesforce applications
SYSTEMS APPLICATIONS(OLTP – ESPECIALLY ERP)
Examples: SAP AG, Peoplesoft, Baan,JD Edwards, SSA
DATABASE APPLICATIONS
Examples: Oracle, Excel, Sybase, Informix, Microsoft Access, Lotus Notes, DBase, Software AG
BUSINESS INTELLIGENCE(INFORMATION
WAREHOUSING AND MINING)
Examples: SAS, Hyperion, CognosBusiness Objects, Seagate, Oracle MS OLAP
OFFICE AUTOMATION
Examples: Groupware, EDMS, workflow,spreadsheets, e-mail, desktop publishing, word
processing, facsimile transmissions, videoconferencing, voice recognition
ERPextensions
Figure 14.4 Extended classification of information delivery systems
manage contracts and sales opportunities, CRM does all thatand more. It includes front-office applications that deal with cus-tomers, customer and product information, marketing encyclo-pedias, and product configuration engines. CRM also has theability to integrate back-end systems. Thus, CRM facilitates cus-tomer satisfaction and retention in that it provides better servicethrough analysis of data. The business is better able to anticipatecustomer needs, resulting in quicker reaction times and betterfocus on customer values.
Some CRM applications (Siebel, 2000) are geared for profes-sional service organizations that provide for resource assign-ment, contract management, risk management and subcontractmanagement. These systems provide consultants and serviceprofessionals with the necessary information to work moreeffectively. Most systems also provide for mobile computing,placing data right at the point of the sales activity. The e-CRMcomponent allows for customer interaction through theInternet.
Hill (1999) claims that CRM promises an understanding ofwhich customer is valuable in the present as well as in thefuture, thus enabling business to offer ultimate customer satis-faction, resulting in customer loyalty. Moreover, the customeralso benefits from CRM in that they receive meaningful, relevantmessages and promotional offers.
CRM benefits are both of an operational and a strategic nature,resulting in their classification above. As clickstream informa-tion is incorporated into the CRM systems, they will continue toprovide more relevant strategic components, possibly movingthem into quadrant 4 in the future.
SCM Naturally, it is important to maintain a customer focuswithout incurring costs of oversupply and inventory build-up.This is achieved through proper SCM. MacDonald (2000)describes SCM as anything to do with the planning, sourcing,making and moving of raw materials as they travel through thepipeline in order to become a finished product. The aim of SCMis mainly the elimination of unnecessary operating costs. Thiscan be attained through collaboration with partners along thevalue chain. Thus, SCM systems interact with the ERP systemslinking suppliers with the necessary information in terms of just-in-time quantities. Supply chain software may also facilitate the
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internal processes like planning and making and moving ofmaterials. Information obtained through the SCM can in turn befed to CRM applications.
E-commerce Turban and Aronson (1998, p. 857) define e-com-merce as ‘the buying and selling of products and services usingcomputers and networks’. The main focus points are B2C(business to clients) and B2B (business to business) solutions,thereby linking the traditional value chain directly to the enduser or distributor. By-products are manifold but the mainadvantage is certainly the power of the information obtained.This makes e-commerce a major tool in developing CRM andSCM.
In conclusion, both information delivery matrices are usefulto:
Analyse the organization or its competitors in terms of capacity ofinformation delivery systems – this analysis encompasses twomonitoring and analysis actions in terms of the informationtechnology classification matrix. The one area for periodicreview is that of the software industry and more specificallynew product developments in the original four quadrants.The second area is the benchmarking of the informationdelivery capabilities of rival organizations relative to one’sown. The advantage of applying the matrix in this way is thatorganizations will be able to develop the resource base of theirorganization by designing strategies to exploit IT strengthsand also to invest in the preservation of its information deliv-ery systems.Analyse information needs by monitoring customer behaviour –from Oracle comes the following: ‘If you don’t know yourcustomer and what they want, you won’t stay in business.’This comment emphasizes the need to monitor and analysecustomer behaviour.
14.4 Vendors and product applications in theextended matrix
Each quadrant in Figure 14.4 will now be discussed in terms ofcontent and major vendors and product applications.Subsequently, the extended matrix will be proposed.
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14.4.1 Quadrant 1: Office automation
Office automation products are classified according to certainfunctions that they automate in the office, and some are specifi-cally focused on improving personal productivity. These prod-ucts are general accounting packages, word processing,spreadsheets, desktop publishing, electronic mail, electronic fac-simile transmissions, video conferencing and speech recogni-tion. Products also exist where all the above functions areintegrated into office integration software. The last subject ofdiscussion is software that evolved from the increased focus ongroup productivity – known as workflow systems, documentmanagement systems and groupware. Table 14.4 provides asummary of all the product types classified under officeautomation.
Product type and definition
General accounting packagesSoftware that facilitates transaction processingof the general ledger, cash book, accountsreceivable and accounts payable (Turban andAronson, 1998).
Word processingA computer program that provides for manip-ulation of text. Can be used for writing docu-ments, inserting or changing words,paragraphs, or pages, and printing documents(Spencer, 1994).
SpreadsheetsA program that uses a matrix consisting ofrows and columns to perform calculations onnumerical data (Spencer, 1994).
Desktop publishingSpecifically designed software packages thatmix text and graphics into one document withthe ability to send the result to a laser printer(Seachrist, 1992). Today spreadsheets, data-bases, word processors, presentation graphicsoftware and DTP packages and more can fitinto this definition. This classification focuseson the professional desktop publishing prod-ucts.
Major vendor products
Accpac, Brilliant Accounting, Impact(These products are suitable for small tomedium businesses only.)
Microsoft Word (part of MS Office), CorelWord Perfect (part of Corel) and Ami Pro (partof Lotus Smart Suite).
Microsoft Excel (part of MS Office),and Lotus 1-2-3 (part of Lotus Smart Suite).
Quark with QuarkXpress, Adobe withInDesign, Photoshop, Illustrator, Acrobat andPageMaker. Plus also provides stiff competi-tion. Other major players are Corel Ventura,PageMaker (Aldus Canada Ltd) andFrameMaker (Frame Technology Corp.).
Table 14.4 Summary of OA product types and major vendor products
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Electronic mailThe process of sending, receiving, storing, andforwarding messages in digital form overtelecommunications facilities (Spencer, 1994).
Video conferencingA conference among people remote from oneanother who are linked by telecommunica-tions devices. Considered an alternative totravel and face-to-face meetings, a teleconfer-ence is conducted with two way video, audio,and as required, data and facsimile transmis-sion (Spencer, 1994).
Voice RecognitionSoftware that facilitates the process of voicerecognition by computers (Spencer, 1994).
Office integration softwareAn applications software package containingprograms to perform more than one function.A package typically includes related wordprocessing, spreadsheet, database, and graph-ics programs. Since the information from theelectronic spreadsheet with the databasemanager and the word processor (and viceversa), this software is integrated (Spencer,1994).
Workflow systemsA powerful business process automation toolthat places systems controls in the end userdepartments. It is highly flexible and can bedesigned to automate almost any informationprocessing system. Turban and Aronson (1998,p. 314).
Electronic document management systemsA system for capturing, indexing, storing,tracking revisions, and providing controlledaccess of electronic documents. The mostcommon types of documents within an EDMSare word processing files, but other types ofelectronic files can also be stored within asystem. Goodfellow (1999, p. 25)
GroupwareSoftware products that support groups ofpeople engaged in a common task or goal. Thesoftware provides a mechanism to share opin-ions and resources (Turban and Aronson,1998, p. 312).
Microsoft Exchange Server and Lotus-Domino are the major ones. Others are Eudoramail, Groupwise and Pegasus.
There are numerous players in this marketand VocalTec Inc., Intel Corp., IBM, LucentTechnologies Inc., and PictureTel Corp. aresome of the companies with video conferenc-ing products.
Dragon Systems (NaturallySpeaking), IBM(ViaVoice).
Microsoft dominates the integrated office soft-ware market for personal computers withtheir Office Suite followed by Lotus’s SmartSuite and Corel Office Professional Suite.
Range from high end systems to low endsystems and there are numerous players. High end: Action Technologies’ Action WorksMetro and Ultimus’s Workflow.Low end: Jetform Corporation’s InTempo andKeyfile Corporation’s Keyflow.
PC Docs/Fulcrum and Xerox with DocuShare.Goodfellow (1999) reports there are ±70vendors offering EDMS.
The three leading groupware server softwarepackages are Lotus’s Domino/Notes,Microsoft’s Exchange and Novell’sGroupwise.
14.4.2 Quadrant 2: Database applications
Databases are used for differing purposes and for that reasondatabase products are classified as desktop databases, hybridsystems and robust enterprise level database applications.Information regarding these databases is summarized in Table14.2. The main database technology in use today is in terms ofrelational databases, but there is a trend to implement object ori-ented database management systems and object/relational data-base systems. The major vendors in the enterprise DBMS arenahave opted for the object/relational database systems, but theyare not in full use yet. The pure object-oriented DBMS have spe-cific vendors and are indicated in Table 14.5. Another trend ofnote is that all database vendors are geared for mobile comput-ing and web databases.
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Product type and definition
Desktop databasesDesktop databases are relational databasesthat are priced for the lower end of the data-base market. These database systems offerflexibility and end user programmability andare found in all organizations because theInformation Technology (IT) departmentscannot possibly create and maintain all thesmall databases in the organization.
Hybrid databasesHybrid database systems are programs thatcan mainly be used for other purposes butalso have strong database functionality.
Enterprise DBMSRobust databases that are designed to accom-modate hundreds and thousands of simulta-neous users logging on from around theworld and that have the mechanisms toensure that users do not step on one another’stoes.
Major vendor products
The major players in this market are Lotuswith Approach, Microsoft with Access andCorel with Paradox.
Spreadsheets and Lotus Notes.
Oracle with Oracle 8I and Oracle 7IBM with DB2, Sybase with Adaptive ServerEnterprise, Informix with Informix DynamicServer, MicroSoft with Microsoft SQL Server.
Table 14.5 Summary of database product types and major vendor productsclassified according to use
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14.4.3 Quadrant 3: Systems applications (withfocus on ERP)
This quadrant consists mainly of ERP systems, new develop-ments such as the ERP extension software and EDI/e-commerce.The new trends in ERP systems and extensions are in integrationwith the Internet as the platform and improvements in the valuechain. These developments such as e-commerce, CRM andsupply chain management will be discussed below. The applica-tion of ERP and main vendors is summarized in Table 14.7 andthe main ERP extension areas and their main vendor products aresummarized in Table 14.8.
Object/relational DBMSThis is a hybrid database technology with a combination of object-oriented features with all ofthe abilities of standard RDBMSS to store, retrieve and analyse tables of the usual data primi-tives (text, integers, dates, etc.) using standard Structured Query Language. The OO quality ofORDBMSS extends to several aspects: you can use, even define data-type objects like images,maps and sounds; you can define methods of working with them, like compress, play or filterall the red out; and you can use objects from within the standard relational framework, likerunning a query on all audio objects to determine which ones are speech and which ones arejust music (The, 1994, p. 49).Main advantage: Provides some of the benefits of objects without forcing users to turn awayfrom well-proven familiar relational technology
Major vendorsOracle, Informix and IBM.
Object-oriented DBMSBest described by contrasting relational databases that are record oriented in that data areviewed as a collection of record types (or relations) whereas object-oriented databases consistof objects that represent real-world objects and entities. The goal of object-oriented databases isto maintain a direct correspondence between real-world and database objects (Larson, 1995). Main advantage: OODBMS outperform relational databases at handling complex relationshipsamong data.
Major vendor productsGemStone from Servio Corporation, Ontos from Ontos Inc., O2 from O2 Technology,ObjectStore from Object Design Bases, OBJECTIVITY/DB from Objectivity Inc. and Versantfrom Versant Object Technology.
Table 14.6 Object-oriented DBMS and object relational DBMS and majorvendors
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Product type
ERPERP vendor products provide many diversemodules, which cover almost all processes ina business. The financial modules are the mostwidely used. ERP vendors also focus on themanufacturing field with modules that areaimed at streamlining internal processes suchas inventory, material and resource planning,bill of materials and just-in-time ordering.ERP systems also include the supply chainmanagement modules that facilitate procure-ment and distribution of components, rawmaterials and other resources. Other processesin the enterprise are also covered such asproject management, treasury managementand more.
Major vendor products
Bylinsky (1999) reports that the largest ERPvendors in order of sales turnover in 1999were SAP (US$5 billion), Oracle (US$2.4billion), PeopleSoft (US$1.3 billion), JDEdwards (US$979 million) and Baan (US$743million).
Table 14.7 ERP system applications and major vendors
Product type
Customer relationship management (CRM)CRM systems are designed to bring businesscloser to the customer with better servicethrough the analysis of data that make it pos-sible for business to anticipate customerneeds, which results in quicker reaction timeand a focus on what the customer values.These systems consist of some or all of the fol-lowing components:• Salesforce automation application which
manages contacts, accounts and salesopportunities
• Front-office applications that deal with cus-tomers, collects customer and productinformation
• Marketing encyclopedia consisting of richinformation about products and pricing,competitors, decision issues, objection han-dling tools, brochures, presentations andvideos
• Product configuration engine and• Integration into back-end systems such asfinancials, inventory and ERP systems.
Major vendors products
The main vendor in this field is SiebelSystems. The big six ERP vendors (SAP, JDEdwards, IBMS, PeopleSoft, Oracle and Baan)all have CRM products. Other vendors thatprovide CRM products are Pivotal Software,Rubic Software, Clarify and Saratora Systems.
Table 14.8 ERP extensions and major vendor products
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14.4.4 Quadrant 4: Business intelligence
This quadrant consists of data warehouses, OLAP tools, datamining and strategic decision support systems. These systemsand the main vendor products are summarized in Table 14.9.
Table 14.9 BI product types
Data warehousingData warehouses are ‘databases consisting of cleansed, reconciled, and enhanced data inte-grated into local business subject areas for the purpose of improving the corporate decisionmaking process. Typically, they are enterprise-wide in scope so that executives can readilyunderstand company-wide sales or the complete business relationship with a given customer’(Graphic Arts Monthly, 1999, p. 71).
OLAPOLAP systems are high powered software front ends and data manipulation systems that siton top of data such as a data warehouse (Watterson, 1998). Lamb (1997) suggests that OLAPallows users to study data in a multidimensional manner, implying that they can drill down todetails or view summary slices of data as required. The software facilitates the slicing anddicing of data for ad hoc queries associated with decision support systems.
Data miningData mining consists of software tools that find patterns in data and infer rules from them. IBM(1998, p. 25) define data mining more comprehensively as ‘the extraction of implicit, previouslyunknown and potentially useful information in data’.
Strategic decision support systemsSoftware systems that specialize in specific areas of strategic planning and decision makingthat normally uses OLAP and/or data mining tools to analyse data. This includes ExecutiveInformation Systems (EIS) and data analysis of ERP extension systems.
E-commerceThe commercialization of the Internet changed the way we do business and in order to facili-tate this, all the ERP vendors and ERP extension vendors have added business to business(B2B) and business to customer (B2C) solutions to their systems. The New Straits Times (1999)suggests that with these B2B and B2C solutions, business will be able to connect its traditionalvalue chain directly with an end user or distributor.
Supply chain managementCSIPER Consulting (1999) explains that whatsupply chain management systems actuallydo is to interact with the existing ERP systemby providing linked suppliers with the neces-sary information to supply a company withinventory when needed and in the correctquantities. The supply chain software alsofacilitates internal processes like planning,making and moving of the raw material.
Component and supplier management soft-ware is provided by Aspect Development,Manufacturing execution systems software isprovided by Camstar, Oracle and Pivotpointand dynamic performance monitor software isprovided by Foxboro.
Table 14.10 is a summary of the BI vendors with BI technologiesused in their product offering.
Table 14.10 BI vendors and BI technologies used in productoffering
Vendor Data warehousing OLAP Data mining
Cognos 3 3 3Hyperion 6 3 6Seagate 6 3 6Oracle 3 3 3SAS 3 3 3NCR 3 6 3IBM 3 3 3Business Objects 6 3 3Microsoft 3 3 3Informix 3 3 6EIS systemsPilot Software 3 3 6Comshare 6 3 6
14.5 General trends in information delivery
14.5.1 Current and future usage of software
(i) Business in terms of the information delivery classification matrixFigure 14.5 presents average current and future expected usageof all the products within each quadrant, showing that about 50per cent of businesses use products in all four quadrants andthat the highest percentage of future implementation is plannedin the systems applications quadrant, followed by the BI quad-rant.
Figure 14.5, however, includes products at different stages intheir life cycle and this obscures important information. Theanalysis therefore proceeded with a classification of the productswithin each quadrant as either a growth product, a matureproduct or a hybrid product. The criterion for a mature productis a lower than average future implementation percentage rela-tive to the rest of the products in a specific quadrant. Time ofintroduction of the product to the market was also taken intoaccount based on information that was gathered during the
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theoretical research. Table 14.11 summarizes a proposed classifi-cation of the products.
Table 14.11 Proposed classification of products
Quadrants Products
Q1 – Mature products Word processing, spreadsheets, e-mail, generalaccounting, DTP, facsimile
Q1 – Growth products Voice recognition, groupware, workflow, EDMS,video conferencing
Q2 – Mature products Desktop DBMS, enterprise DBMSQ2 – Growth products Object relational DBMS, object-oriented DBMSQ2– Hybrid products NotesQ3– Mature products ERPQ3 – Growth products ERP extension, e-commerceQ4 – Growth products Data warehousing, OLAP, data mining
0% 10% 20% 30% 40% 50% 60% 70%
Average % usage
OA
DB
SystemsApp
BI
Qua
dra
nts
11%66%
6%54%
35%49%
20%53%
FutureCurrent
Analysis of Quadrants: Growth Products
Figure 14.5 Average current and future usage as per information delivery classification matrix
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Figure 14.6 narrows the analysis to the current usage of matureproducts of the four quadrants, showing that the four quadrantsare similar to the information delivery classification matrix inFigure 14.2. This diagram also illustrates that South Africanbusinesses have a very high average usage in mature officeautomation and DBMS. The mature products of the systemsapplication quadrant are used to a lesser degree which makessense as the sample included medium businesses and thisaccords with indications from the theoretical research that ERPsystems are only now penetrating the mid-size business market.BI products according to the above classification are all growthproducts and one must look at Figure 14.7 to see that BI has thelowest current use and therefore fits as the last quadrant of theinformation delivery classification matrix.
It is also clear from Figure 14.6 that the highest current usage isin BI products. Another interesting point is that the future
ERP ExtE-Comm
Work FlowEDMSVideo
DWVoice
OLAP/DMFax
ERPOR/DBMSOO DBMS
NotesEDBMS
GroupwareDTP
DDBMSAccountingWord Proc
SpreadsheetsE-mail
0% 10% 20% 30% 40% 50% 60%
0%0%0%0%
2%
4%
4%
4%
4%5%
10%12%
13%14%
17%20%
24%25%
26%28%
43%48%
% Planned
Soft
war
eFuture implementation of software
Figure 14.6 Current and future usage of mature products of information delivery classification matrix
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implementation plans are higher for systems applications prod-ucts than for BI. This is explained by the fact that e-commerceand CRM products are part of the systems applications quad-rant. e-commerce and CRM are among the most importantdevelopments in the software industry worldwide, which showsthat some businesses are planning to keep up with world trendsin the software industry. Another fairly high future implementa-tion percentage is the growth products of OA and the authorsbelieve this to be in line with world trends of enhancing groupeffectiveness as key to a successful business.
14.5.2 Highlights from each individual quadrant
Office automation
Most businesses have already invested in word processing,spreadsheets and e-mail.DTP, fax and accounting are not used by all businesses andthere are no significant implementations planned for the
0% 10% 20% 30% 40% 50% 60%
Average % usage
Q1
Q2
Q3
Q4
Qua
dra
nts
21%45%
11%30%
46%44%
20%53%
FutureCurrent
Figure 14.7 Current and Future Usage of Growth products of Information Delivery Classification Matrix
future. This can be explained by business using or planning touse substitute products in the case of fax and accounting andin the case of DTP outsourcing seems to solve the specializedskills dilemma. Groupware have a high installed base but the software is notused to its full extent and one can expect to see growth inimplementation of the individual group support softwaretypes or expansion initiatives regarding the extent of usage,which can include awareness training, or custom developedor commercial add-ons for existing groupware packages. Voice recognition is a bit of a dark horse and it is suggestedthat voice recognition will be incorporated as part of the oper-ating system of the computer and will not be seen as a soft-ware type on its own in future.
Database applications
Most businesses use at least one type of database system. Desktop databases and enterprise databases are the mostwidely used.Object relational databases and object-oriented databases arenot used widely, with OODBMS definitely the least knownand used by specific industries only. Of interest is that thefuture implementation for ORDBMS and OODBMS is almostthe same, which seems to emphasize that businesses are alsoinfluenced by the worldwide struggle between the standardsof ORDBMS and OODBMS.
Systems applicationsThe following interesting results from this quadrant are:
Most businesses that use ERP systems use the financialmodule. (For more detail see Figure 14.8.)SAP is the most popular ERP product of the big five vendors.(See Figure 14.9.) EDI/e-commerce is not currently used by all industries testedbut all those industries that have not yet implemented e-commerce have future implementation plans. Many busi-nesses plan to implement both business to business (B2B) andbusiness to customer (B2C) solutions but there seems to be aslight preference overall for B2B implementation, though insome industries the businesses seem to concentrate on B2Bonly or B2C only.
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ERP extension software does not have a high current usagerate but more implementations are planned for the future. Allthree groups of ERP extension software show a trend of futureimplementation plans that exceed current usage. The CRMsystems have the highest average usage and percentage offuture implementation plans. A point of concern, however, is that the focus of the current and future use of CRM is more operational than strategic in nature, which could lead to South African businesses falling behind their overseas com-petitors.
Business intelligenceThe following results regarding BI came to the fore:
The average current usage of both data warehousing andOLAP/data mining is just above 50 per cent.Average current usage for data warehousing versusOLAP/data mining is almost the same and BI future imple-
Major ERP modules used/planned
44%
86%
53%
55%62%
Financial Inventory HR MRP Scheduling
Figure 14.8 Major ERP modules used/planned
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Figure 14.9 ERP products used
SAP
BPCS
Oracle
JDE
Peoplesoft
Other
Impact Encore
Steamline
Baan
0% 10% 20% 30% 40% 60%
44%
15%
15%
11%
9%
5%
4%
4%
2%
% Usage
ER
P pr
oduc
ts
Data warehousing
Data mining OLAP
% Usage
BI c
ompo
nent
0% 10% 20% 30% 40% 50% 60%
24%54%
17%52%
FutureCurrent
Figure 14.10 Business Iintelligence current and planned usage
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mentations for the two groups show a slightly higher percent-age for data warehousing (see Figure 14.10). Kramer (1999), in a review of the three leading groupwareserver software packages, confirms that many corporationsuse groupware for little more than e-mail. The research resultsregarding the extent to which South African businesses areusing groupware show that groupware is used 78 per cent fore-mail followed by 57 per cent for information sharing – fromthere on the percentages for other functions drop to 30 percent and below.Many people believe that the facsimile technology is obsoletebut authors such as Banker (1999) and Purchasing (1999) believethat electronic faxes still have a future as large companies stillspend up to 40 per cent of their phone bills on faxing andurgent messages are still conveyed by facsimile. Fourteen percent of the companies tested plan to implement facsimile tech-nology, which shows that although it is a mature product somepeople still believe the technology to be useful in business. The influence of the battle between the hybrid database tech-nology, object relational DBMS and pure object-orientedDBMS can also be seen. Stedman (1998) stated that OODBMSstill makes up a sliver of the overall database business. Freedman (1999) states that the most broadly deployed ERPsystems worldwide are those that track financial data.Key (1999) and Boey (1999) report that SAP has the biggestinstalled ERP base in the world and from the research resultswe can see that SAP has by far the biggest ERP installed basein relation to the other ERP vendor products. Richard et al. (1999) reported that the results of an attitudesurvey performed on CEOs and CIOs in firms in the USAshowed a tendency to underinvest in business intelligence.The point was raised earlier in this chapter that the authors areconcerned that the future implementation percentages mightbe too low.Taschek (1999) stated that Cognos is in the top tier of the BImarket and that Seagate is another leader in this market.Seagate’s product Crystal Reports is used most and thecompany seems to be in line with world trends.
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14.6 Conclusion
It is vital to understand that, with the ever growing supply ofnew technologies, it is vital to identify first and foremost theappropriate information requirements – productivity, DBMS,OLTP or business intelligence – before endeavouring to acquireand implement the systems. This is the nature of informationeconomics – to deal with the two aspects of information, itsdemand (or IS) and its supply (the technology), where thesupply is becoming far more complicated than the demand jus-tifies. Can we decide what we need, now and in the future, inorder to make the IT investment work for us?
Connectivity in a global world means a focus on informationmore than on the technology. Information is embedded in somany spheres of our private and business lives. The challenge isto forge linkages between the different information deliveries inorder to obtain the appropriate information – in terms ofcontent, format and time. This can only be achieved through therealization that one should apply the appropriate technologyafter the decision on the information has been made. Only then
Customer
KM
Industry/market
R&C
SPM
Competitors
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Stra
tegi
c ar
ea
Average % usage
65%
58%
52%
34%
31%
18%
Current and planned strategic analysis with BI
Figure 14.11 Current and planned strategic analysis
can there be true advantage through information and knowl-edge. The metric suggested in this chapter determines the infor-mation needs in terms of a matrix of information deliveries: OA,DBMS, OLTP, ERP extensions (CRM, SCM and e-commerce) andbusiness intelligence. This provides some classification rule oninformation, the evolution of such needs and the technologiesthat can provide these.
In understanding these principles of information economics, busi-nesses can compete in the future spelled out by futurists. Unlesswe heed this, the future can never become our current reality.
THE AIM OF SCIENCE IS ALWAYS TO GAIN KNOWLEDGEOF REALITY;
WHILE THE GOAL OF TECHNOLOGY IS TO CHANGEREALITY.
References
Banker, S. (1999) Don’t Bury the Fax Yet. Your Company, 1October, 9, 7, pp. 90–93.
Boey, S. (1999) SAP Roll Out mySAP.com for Companies inRegion (800). Business Times (Malaysia), 2 November,BSMA8033137.
Bylinsky, G. (1999) Challengers are Moving in on ERP: ToRemedy the Shortcomings of Enterprise Resource PlanningSystems, a New Industry is Selling Easy to Install ERPModules and Loads of Extension Software. Fortune, 6December, 140, 11, p. S250.
CSIPER Consulting Information leaflet (1999) 10 December.Deloitte Consulting (1998) ERP’s Second Wave Maximising the
Value of ERP Enabled Processes. Deloitte Consulting, NewYork.
Freedman, R. (1999) ERP Beyond Y2K. PC Magazine, 22 June, pp. 219.
Goodfellow, S. F. (1999) Document Management and theInternet: A Perfect Match. OfficeSystems99, April, 16, 4, pp.26–30.
Graphic Arts Monthly (1999) Seeking Business Intelligence in adata warehouse. Graphic Arts Monthly, July, 71, 7, pp. 71.
Haag, S., Cummings, M. and Dawkins, J. (1998) ManagementInformation Systems for the Information Age. Irwin McGraw-Hill, Boston, Massachusetts.
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IBM (1998) The DB2 Family – an Analysis of Business BenefitsAvailable. White Paper Number 98.01, February (http://www.ibm.com).
Key, P. (1999) SAP’s Internet play. Philadelphia Business Journal, 27August, 18, 29, pp. 3–4.
Kramer, M. (1999) GroupWare: Unleashing the Power – CoverStory: Looking at Three Leading Packages – and How to Makethem Sing. PC Week, 3 May, 16, 18, p. 1.
Lamb, C. (1997) Introducing BusinessMiner. Business ObjectsTechnical White Paper 1–21 (http://www.businessobjects.com/global/pdf/products/bm).
Larson, J. A. (1995) Database Directions. From Relational toDistributed, Multimedia, and Object-Oriented Database Systems.Prentice-Hall PTR, New Jersey.
Lattig , M. (1999) Business Intelligence Tools make their Premiere.Infoworld, 14 June, 21 24 NA.
Laudon, K. C. and Laudon, J. P. (1997) Essentials of ManagementInformation Systems. Prentice-Hall, New Jersey.
MacDonald, M. (2000) Just Four Simple Words. Modern MaterialsHandling, 31 January, 55, 1, p. 134.
News Straits Times (1999) The Latest ERP Extensions. News StraitsTimes, 6 October, NSTP7605740.
Pellissier, R. (2000) Information Technology – Future Perfect.Southern African Business Review, 4 July, 1, pp. 66–79.
Pellissier, R. (2001) In Search of the Quantum Organization: The ITCircle of Excellence. JUTA, Cape Town.
Purchasing (1999) Growing Role for Faxes in Digital ConnectedEra. Purchasing, 17 June, 126, 16, p. 82.
Richard, G. et al. (1999) CEO and CIO Perspectives onCompetitive Intelligence. Communications of the ACM, August,42, 8, p. 108.
Riel, P. F. (1998) Justifying Information Technology Projects.Industrial Management, 40, 4, July/August, pp. 22–27.
SAP AG (2000) SAP AG Corporate Overview (http://www.sap.com).
Seachrist, D. (1992) Desktop Publishing Programs. ComputingCanada, 4 August, 18, 16, pp. 22–23.
Siebel Systems (2000) Products and Solutions (http://www.siebel.com).
Spencer, D. (1994) Webster’s New World Dictionary of ComputerTerms. 5th edn, Macmillan, USA.
Stedman, C. (1998) Objects still Face a Tough Sell. Computer-world, 9 February, 32, 6, p. 33.
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Taschek, J. (1999) BI Vendors Need to Prove their Wares areWorth Buying. PC Week, July, p. 53.
The SAS Institute (1999) Information leaflet.The, L. (1994) Wedding Bells Sound for Objects and Relational
Data. Datamation, 1 March, 40, 5, pp. 49–51.Turban, E. and Aronson, J. E. (1998) Decision Support Systems and
Intelligent Systems. 5th edn, Prentice-Hall, New Jersey.Vaas, L. (1999) CRM: Bright Idea; Don’t get Burnt. PC Week, 19
April, 16, 16, p. 115.Watterson, K. (1998) Enterprise Databases Battle On: Part 1. Byte,
June, 23, 6, pp. 97–99.
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300
Manipulating data for benefit has been the practice of indi-viduals and organizations for millennia. Contemporary elec-tronic communications media is not exempt from this practice.This chapter examines the principles of deception and some ofthe ways it is practised on the World Wide Web. The flexibil-ity of digital data makes deception an easy task.
15.1 Introduction
Manipulating data to produce desired outcomes has been rou-tinely practised since the dawn of history. Individuals andorganizations choose data that suits the image they want to beportrayed; soldiers camouflage weapons to avoid detection, ordisperse false information to conceal intentions. Photographicimages have been faked to alter history for many years(Brugioni, 1999). However, the advent of digital data has mademanipulation of images, text, sounds, and even smells mucheasier. Innovations in the creation of perceptual peripherals(Turk and Robinson, 2000) has made the impact of manipulateddata reach a profound level. The following sections will examinethe principles of deception and their use on the World WideWeb.
15 Manipulating realityDeception on the Web
William Hutchinson
Edith Cowan University, Perth, Western Australia
and
Matthew Warren
Deakin University, Victoria, Australia
15.2 Principles of deception
In this chapter, deception is defined as the deliberate alteration ofdata or a situation’s context to promote a desired outcome. Therefore,it does not include self-delusion, or a person’s natural tendencyto use mental models to interpret things in an individual way.The definition places emphasis on a second party beinginvolved, where that person or organization is consciouslytrying to create deception.
The word ‘deception’ tends to infer a negative motive. Forinstance the following words were derived from the thesaurusof the MS Word package used to create this document: illusion,sham, stratagem, hoax, cheat, lie, delude, trick, betray, swindle,hoodwink, defraud, con, dupe, and mislead. Many of thesewords indicate an action and/or a negative motive. However, itis the motive that ultimately decides the ethics of a situationwhere a deception is used.
To understand the fundamental of deception, it is necessary todefine data, information, and knowledge.
In this model (based on that used in Boisot, 1998), data isdefined as the attribute of a ‘thing’ such as its colour, shape, orits value. However, knowledge is an attribute of an ‘agent’(usually this means a human, although it can be argued thatintelligent machines can have knowledge). Knowledge is aproduct of experiences, education, age, gender, culture, andmany of the other factors that make up individuals. Thus,humans derive information by using their knowledge to selectappropriate data to provide them with information. This isachieved in a particular context. To execute a deception one ormore of these elements (data, knowledge, or context) must bemanipulated. Hence to deceive, it is necessary to alter data byaddition, deletion, or modification and/or alter the context inwhich the data are interpreted, and/or change the knowledgebase. Figure 15.1 outlines the basic elements of this model plusassociated strategies to deceive.
Thus data can be manipulated to only allow the target access tothe subset of data that will provide the best perceived outcomefor the attacker. The data are then interpreted using mentalmodels, which can be affected directly by such activities aspropaganda, or education. This is usually a long-term process.
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However, the context within which the mental models make thehuman decide an outcome can also be influenced by enhanc-ing/decreasing environmental signals. Of course, the ultimateaim is to alter behaviour. Thus, just changing thought patternsmay not be enough; changing behaviour is more difficult.
Bowyer (1982) classifies deception into two main types:
Level 1: Hiding the realLevel 2: Showing the false
Figure 15.2 details the types of deception. Whilst this chapter istoo short to go into each method of creating an illusion by‘feeding’ data to an unsuspecting person, the variety of tech-niques can be left to the imagination. Also, there is the potentialto manipulate the context by which data are interpreted. Figure15.2 also illustrates the process of deception. There must be anobjective, a target and a story to tell. The type of data, environ-mental, machine, or, direct digital, will determine the easiest and
Information
Knowledge
Data Context
Deception?
Deliver a subsetof the whole, to
enhance messagerequired
Alterenvironmental,and/or hapticsignals, etc.
Alter mentalmodels,
e.g. education,propaganda,
grouppressure
Figure 15.1 The relationships between data, context, knowledge, information, and the methods by
which deception can be practised
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most effective method at any given time. This process isongoing. Situations are dynamic, and so the methods used mustbe as well.
Of course, there are two sides to a deception: the deceiver andthe deceived. Organizations should have vibrant processes toensure the integrity of the data received, processed, stored, andused. There should also be an awareness of the ability of othersto manipulate perceptions. As such, the humans using the datashould interpret them in the context chosen by that organiza-tion; not another.
15.3 Deception on the Web
The digital nature of websites and their almost universal acces-sibility make them prone to attack. Some examples of the typesof deception listed above will be illustrated. However, it shouldbe noted that a really successful deception is one that is unrec-ognized. Therefore, the examples below are not truly successfuldeceptions but do serve to illustrate the point. Many of them areobvious and might cause embarrassment but not deception.Subtle attacks are far more destructive. The changing of aperson’s photographic image, or the insertion of small pieces oftext are techniques that may go undetected until the damage hasbeen caused. For instance one can only speculate about thedamage that could be caused by inserting the word ‘not’ in anemployment advertisement stating ‘Applications from womenespecially welcome’.
Camouflage/concealment/cover
Feint/diversion
Display/decoy/dummy
Mimicry/spoofing
Dazzling/sensory saturation
Disinformation/ruse
Conditioning
Means
Planning process
Objective Target Story
Source: Gerwehr and Glenn (2000)
Figure 15.2 Types of deception (Gerwehr and Glenn, 2000)
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The concept of camouflage can be practised on the Web. Here theuser is fooled into believing that something is what it is not.Figure 15.3 illustrates a website that purports to belong toKurdish rebels. In fact, Turkish government sympathizers run it.
Many deceptions on the Web camouflage their real intent. Acommon way to spread a computer virus is to have an attach-ment to an e-mail message apparently with desirable contents,which is just an unwanted or maybe destructive program.
Figure 15.4 shows an example of ‘repackaging’ a Serbian websiteto a NATO look-alike.
Propaganda and disinformation have always been a part ofmaking a point. Figure 15.5 gives an example of a rather obviousattempt. The contemporary term is ‘perception management’and, as websites become organizations’ face to the world, morecare will be needed to ensure that the data and their presentationon these sites give the desired image. Also, it is important thatpart of the corporate database shown does not allow its image tobe tarnished or its secrets revealed.
Dazzling is very much the same as an octopus releasing ‘ink’ to
Figure 15.3 A supposedly Kurdish web page
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distract a predator. It is meant to provide data overload to thevictim. The target’s resources are thus used up in coping withthe attack rather than its normal operating activities. Muchobvious and malicious hacking is of this type. Its intent is toembarrass and interrupt operations. ‘Spamming’ is one way togive this effect. Dazzling is also used as a feint to detract targets
Figure 15.4 NATO look-alike web page but obviously pro-Serbian
Figure 15.5 Some rather unsophisticated anti-NATO propaganda
from the real attack.Table 15.1 lists some of the more common types of deception incomputer networks.
Table 15.1. Examples of deception on computer networks
Deception Description
Honeypots/Honeynets Apparently authentic websites but really sites totrap hackers/crackers. Used to analyse attack strate-gies used by hackers.
Propaganda Sites used to espouse certain political, religiousbeliefs. They are often apparent, but many present‘facts’ that can lead to deception occurring.
Spamming Flooding a target site with data. This might just be anuisance, or a distraction for another attack.
Spoofing Messages appear to be derived from one source butare from another. Used to give credibility to ane-mail message, or to obtain network privileges.
Viruses Malicious programs that pretend to be somethingelse, by embedding themselves into innocuous code.
Steganography The art of hiding one message within another. Forinstance an image file might contain a message;whilst the image might be displayed the hiddenmessage goes undetected.
Virtual reality The combination of software and I/O devicesdesigned to create a whole perception not necessar-ily based on the physical world.
Encryption Encoding a message to make it unintelligible tothose who do not have the key.
Lying Sending deliberately false data (e.g. market informa-tion) to create an effect.
15.4 Beyond the present
When the French philosopher Jean Baudrillard (1995) wrote aseries of articles called ‘The Gulf War Did Not Take Place’, he didnot mean that the events of that conflict did not occur, but thatthe reality of the situation had been changed by the media. Theperception that what happened in the Gulf was a ‘real war’ was
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controlled by the data and context set by the media and fed tothe consumer. The implication is that our senses relating the‘real’ world to our brains is no longer the primary determinantof perception. The development of wireless technologies and itsassociated software and hardware has brought the spectre of thetrue human machine. A mobile set of gadgets could allow youto accentuate your senses (Marks, 2000; Gershenfeld, 1999;Kurzwell, 1999). Some examples are:
Infrared/star light visionAbility to ‘smell’ humansFace recognition software that could identify the personstanding in front of youThe ability to find out where you are, and call up a map to bedisplayed on your retinaThe ability to send real-time movie images of your own situ-ation, and so on.
Who could resist these extra abilities? The applications for thesetechnologies are enormous. Yet so is the ability to deceive. Ashumans become almost totally dependent on digital data fortheir personal operational lives the consequences of deceptionincrease exponentially.
Yet, the implications of contemporary technological develop-ment take digital data into another realm. At one level, theability to create a virtual world where you can have a conversa-tion with someone in Sydney whilst you are in Prague, and atthe same time touch and feel that person in the bubble of avirtual world (Davenport, 2000) can stretch the abilities of thosewho deceive but also provide enormous potential.
An even higher level of dependence is the creation of the truehuman-machine – the cyborg. The physical merging of mindand machine lifts the data processed by our brains fromphotons, volatile chemicals, and pressure to pure digital data. Inthe UK, a married couple have implanted microchips directlyinto their nervous systems (under the arm) to be able to ‘feel’their respective ‘feelings’ (Press Association, 2000). Digital datanow totally replaces ‘natural’ inputs; this is truly the digitalperson. Some of the consequences of this digital world, wheremany humans are networked and receive purely digital datainto their nervous systems, are easy to imagine. Feeding ‘false’or manipulated data into a system such as this would have
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enormous implications. Ironically in a networked world, thedigital enhancement of the individual would make each one vul-nerable to being turned into the clone (in terms of behaviour) ofeveryone around. Whilst the previous argument sounds morelike science fiction, many of the principles are not.
15.5 How do you identify a lie?
The previous sections have briefly described some principles ofdeception in action. They can be summarized by saying a poten-tial deceiver should:
Provide data you want others to knowProvide data that set the context for your aimsProvide data that develop biases of the target in your favour.
It is not necessary to provide all the data but just enough for thetarget to ‘join the dots’ (see Hutchinson and Warren, 2001).
The act of lying is rarely admitted in organizations. The distinc-tion between lying and such activities as advertising is alsoblurred. Perhaps the more neutral phrase perception managementprovides a vehicle to carry out meaningful dialogue in this area.In competitive organizational environments, it has always beena potential strategy to deceive competitors, regulators, clients,and even suppliers. It should be the aim of an organization toensure that it is in control of its image, not others.
As the reliance on digital devices increases, and the sophistica-tion of the data presented to their users goes beyond just thevisual and auditory, the potential for deception is increasedmany fold. So how do you tell when you are being deceived?The first element to examine is the context in which deceptionoccurs. Why do individuals and organizations ‘lie’? Ford (1996)states a number of categories of motivation for lying. They canbe attributed to both individuals and organizations. They can besummarized as:
To influence (negatively/positively) a public imageTo attract attentionTo extricate oneself from a bad public image situationTo impress public/clientsTo obtain market shareTo commit financial fraud or gain some other ‘valuable’ item
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(for example, confidential data)To promote/discredit.
Using this knowledge, data can be examined with a ‘suspicious’mind. Could these data fulfil any of these objectives for a com-petitor, if viewed in a certain light? Lie detection is predomi-nantly the realm of the human and use of knowledge. However,some of these tasks can be automated. For instance software candetect unwanted intrusions and check such things as the valid-ity of a user’s address, and so on.
Having stated the above, humans are very bad at detecting lies.Vrij (2000) explains that even those whose occupation relies onthem detecting lies (for example, the police) do not rate aboveany average person. Detecting lies is not easy, especially in adigital environment where the normal cues such as body lan-guage and voice tone are missing. Sporer (1998, cited in Vrij,2000, pp. 161–163) gives eight clues to ‘reality monitoring’, theyare:
Clarity – refers to the clarity and vividness of the data; is itclear, sharp, and vivid?Perceptual information – refers to sensory experiences, does itinclude such things as sounds, smells, tastes, tactile experi-ences, and visual details?Spatial information – do the data contain information aboutother locations? Do they set the context?Temporal information – do the data state when an eventoccurred? Another element that should set the context.Affect – are there any data about the ‘feelings’ created by anevent?Reconstruction of the story – is it possible to reconstruct anevent on the basis of the data given? Does it have a logicalstructure?Realism – are the data plausible, realistic, and do they makesense (in that context).Cognitive operations – are inferences made? If they are, then thedata should be treated with suspicion.
Of course, to create a much more plausible deception thedeceiver can use these criteria. The general rule is ‘give thepeople what they want’. In other words, people will tend tobelieve data if they best fit their preconceived mental models.
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The very flexibility of digital data should make everyone scepti-cal of it. Yet, many believe anything produced by a machine.Data, both input and output, should be pragmatically assessedby:
Attempting to find any motives the presenter might have todeceiveThe context of the data presentedThe plausibility of the dataHow important are the data in terms of decision making?Am I deluding myself in believing the data?
In this data rich world, it is difficult to decide a course of action.This is made much more difficult by deliberate deception occur-ring. It requires that much contemporarily discounted attribute– judgement. This factor is scorned in a world that believes inobjective reality. Data may or may not reflect objective reality.Information is not impartial; it is created by humans.
Heuer (1999, p. 3) best explains it:
People construct their own version of ‘reality’ on the basisof information provided by the senses, but this sensoryinput is mediated by complex mental processes that deter-mine which information is attended to, how it is organized,and the meaning attributed to it. What people perceive,how readily they perceive it, and how they process thisinformation after receiving it are all strongly influenced bypast experience, education, cultural value, role require-ments, and organization norms, as well as the specifics ofthe information received.
Heuer was writing about the need for intelligence officers toreflect on the way they interpret data. In a sense, we are all intel-ligence officers in our various roles, both personal and occupa-tional.
15.6 Conclusion
Deception is a part of life, and the Internet/World Wide Web arejust new tools for its practice. The flexibility of digital data is oneof its great benefits yet, this very flexibility, makes the alterationof data so easy.
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Security can be defined as the function that ensures the surviv-ability of an organization or individual, and it is within this rolethat deception should be studied. Knowledge of the methods ofdeception are essential to protect an organization’s interests.The authors carried out a survey of Australian information tech-nology in 1999 to determine perceptions of threats to theirorganizations (Hutchinson and Warren, 1999). Interestingly, 66per cent thought there was no threat of attack from competitors.This complacency might be reflective of high ethical behaviourin business or a dangerous ignorance of the risks involved.
On the other side of the coin, deception is also a part of strategy.Howard (1990) states that force is the strategy of the strong, anddeception the strategy of the weak. In this case, the Internet hasopened up the world to potential, ‘weak’ attackers. However,the use of deception as a tool in organizational survival shouldalso not be overlooked.
In a world where surveillance is the order of the day and isentrenched in all facets of life, deception may be the only way toescape the watchful eyes of those who wish to control. Deviceswatch citizens at work and at play. The locations of people, both inreal time and historically, can be determined by their mobile tele-phone records. Financial, tax, medical, insurance, social security,purchase records – any number of personal data can be integratedand processed. In this insidious world of data collection, the mosteffective response might just be another massive deception.
References
Baudrillard, J. (1995) The Gulf War Did Not Take Place. PowerPublications, Sydney.
Boisot, M. H. (1998) Knowledge Assets. Oxford University Press,Oxford.
Bowyer, J. B. (1982) Cheating. St Martin’s Press, New York.Brugioni, D. A. (1999) Photo Fakery: The History and Techniques of
Photographic Deception and Manipulation. Brasseys Inc., Dulles,Virginia.
Davenport, G. (2000) Your Own Virtual Storyworld. ScientificAmerican, 283, 5, pp. 61–64.
Ford, C. V. (1996) Lies! Lies!! Lies!!! The Psychology of Deceit.American Psychiatric Press, Washington.
Gershenfeld, N. (1999) When Machines Start to Think. Hodder
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and Stoughton, London.Gerwehr, S. and Glenn, R. S. (2000) The Art of Darkness Deception
and Urban Operations. Rand, Santa Monica.Heuer, R. J. (1999) Psychology of Intelligence Analysis. Centre for
the Study of Intelligence, Central Intelligence Agency, USA.Howard, M. (1990) Strategic Deception in the Second World War. W.
W. Norton and Company, London.Hutchinson, W. E. and Warren, M. J. (1999) Attacking the
Attackers: Attitudes of Australian IT Managers to RetaliationAgainst Hackers. Proceedings of ACIS (Australasian Conferenceon Information Systems) 99, December, Wellington, NewZealand.
Hutchinson, W. and Warren, M. (2001) Information Warfare.Butterworth-Heinneman, Oxford.
Kurzwell, R. (1999) The Coming Merging of Mind and Machine.Scientific American Presents, 10, 3, pp. 56–61.
Marks, P. (2000) Your Everything. New Scientist, 168, 2261, pp. 42–46.
Press Association (2000) Perfect Tango through Agony andEcstasy. The Western Australian, 7 October 2000.
Turk, M. and Robinson, G. (eds) (2000) The Intuitive Beauty ofComputer–Human Interaction. Communications of the ACM,43, 3. (This takes up the whole of the March 2000 edition.)
Vrij, A. (2000) Detecting Lies and Deceit: The Psychology of Lying andthe Implications for Professional Practice. Wiley, Chichester.
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313
ABN-Amro, 208–9accounting:
commitment accounting, 67general accounting packages, 282,
291–2‘Act of faith’ decisions, 185–6Adaptive customer profiling, 32additional funding, 212, 225–26‘administrative man’, 182–3advertising, 215, 216, 217affect, 309Allaire, Paul, 139–40Allen, Paul, 151Alta Vista, 216Amazon.com, 148–9, 221, 222, 218American Express, 27anthropology, 128–29anticipatory management, 165Apple, 73approved products, 63–5approved suppliers, 65architecture:
IT enabled business architectures245
organizational, 49–50Ariba, 31Aronson, J.E., 274, 281assembled systems development,
170–71attention, management of, 264attracting customers, 30–1authenticity, 74authorization, 63–4automate scenario, 114–117automated office, 172–3
see also Office automationautomated purchase order processing
(POP), 69automatic telling machines (ATMs),
4, 267Avison, D.E., 10Axelrod, 256–7
balanced control, 185, 186–7banking industry, 267–8Baudrillard, J., 306–7begging bowl, 217–20, 225–28behaviour, emergent, 259benefits of IT, 41–55
case study in benefits realization,53–4
evidence of missing benefits, 41–3IT investment as exploration, 46–7IT investment as religious
salvation 43–6organizational learning, 47–8, 54–5organizational scenarios and
legacy systems, 112, 114, 115,119, 121
benefits maps, 48–53example, 50–3testing, 53–4
Benetton, 34Bennis, Warren, 264Bezos, Jeff, 221binary logic, 130board of directors, 125Boo.com, 152, 220Borders, Louis, 141boundary, 111–12, 115, 119, 121
Index
boundary-less office, 173bounded rationality, 181–83, 188Britannica.co.uk, 213British Airways, 34business:
changing environment, 159–60changing nature of, 252corporate change, 161–2corporate transformation, 162–3redefining by IT, 240
business activities: and outsourcing,34–6
business to business (B2B) electroniccommerce, 72–3
business intelligence (BI), 268–70,271–2, 275–8, 279
current and future usage ofsoftware 288–91, 294–6
vendors and product applications,287–8
business models, 139–56, 203–236business model analysis, 145–7components, 206–10defining, 145–6, 204–6framework, 147–53
delivery system, 147–8, 151–2,155
in practice, 153profit and growth engine, 147–8,
152–3, 155revenue generation system,
147–8, 149–51, 155value proposition, 148–9, 155
generic, 210–225classic cost reduction, 214–15high stakes model, 224–25investor funded deficit model,
217–20new trading model, 215–17sleight of hand model, 223–24stock market funded deficit
model 220–23traditional trading, 211–14
high level and detailed, 210insights from e-retailing, 140–42next generation, 228–29Nordea, 154, 155risk and choice of model, 226–28sustainability, 225–26term of, 210vs value chain, 142–145
business people, 245–6business plans, 243business process re-engineering
(BPR), 5–6, 163business sector productivity, 42–3business strategy, 237–49
integration of IT in corporatestrategy and, 240–46
business technologists, 170Buy.com, 230
call centre, 111–22Cameron, 158camouflage, 303–4capability, 36–7capability maturity model (CMM),
85, 95capital expenditure, 57–8, 66–7Cash, J. I., 115casino model, 220–23, 225–28catalyst, 166certainty, 132, 134certification agencies, 75Champy, J., 5change:
corporate change, 161–2impact of IT on economy and
industries, 238impact of IT on organizations, 239IT management and, 252–4
Charles Schwab, 25cheap-sourcing, 26, 30, 36–7chess, 134–5chief information officer (CIO), 161,
242–3
314
Index
role, 158–9, 246–8chief technology officer, 161choice, 183Cisco, 32, 34, 204Citicorp, 3, 4clarity, 309classic cost reduction model, 214–5,
225–28classic profit business model, 211–14,
225–28cognitive operations, 309Cognos, 296Cohen, 256–7Cohen, M.D., 183collaboration, 225–26commitment accounting, 67communication, 130company vision, 112–3, 115, 119, 121competencies:
core, 29, 242organizational, 49–50, 51
competitive advantage, 3–4competitive positioning, 238, 242
e-sourcing, 34–6complementors, 245complex adaptive systems, 254–65
managing, 258–60managing in the complex
environment 263–4in the real IT world, 260–63
complicated systems, 256confidentiality, 74consultants’ role, 12–13context:
and deception, 301, 302IT as contextual factor, 237–49
contingency view, 10contracts, 20, 21, 38control:
balanced, 185, 186–7 of expenditure, 60external controls, 162, 167–8internal controls, 162, 168–9
controlled items, 64core competencies, 29, 242core investments, 206–7corn-seed investments, 206–7, 208–9corporate change, 161–2corporate strategy, 141–2, 237–49
integration of IT, 240–46corporate transformation, 162–3cost reduction business model,
214–15 225–28Costello, G., 229costs, 21, 270
costing and purchasing IT, 60costs and benefits management,
77–118e-sourcing and, 36–7ongoing costs of investment,
209–10organizational scenarios and
legacy systems 112, 114, 115,119, 121
quick scan and full life cyclemanagement 89, 92, 93
coupled systems, 73Cronin, M., 143–4Crystal Reports, 296culture, 52current expenditure, 57–8customer/market positioning, 242customer relationship management
(CRM) 279–80, 286, 291, 294customer resource life cycle, 29–32customer support, 31customizing service, 31cyborg, 307
data, 9and deception, 301, 302information value chain, 268–70
data manipulation, 300–312data mining, 278, 287, 288, 294–5data warehousing, 277–8, 287, 288,
294–5
315
Index
database (DB) applications, 272,273–4, 275, 279
current and future usage ofsoftware 288–91, 292–3
vendors and product applications,284
database management systems(DBMS) 274, 275, 284, 285
D’Aveni, R.A., 242dazzling, 304–5Dearden, J., 158debt capital, 209, 219deception, 300–312
detecting lies, 308–10future of, 306–8principles of, 301–303types of, 302–303on the Web, 303–306
decision making, 175–202bounded rationality, 181–3, 188 classical model of rational, 180–81IT and e–sourcing decisions, 34–7IT people and, 132, 134‘P4’ model, 187–97quality of, 178–80styles, 184–87
delivery system, 147–8, 151–2, 155Dell Computers, 32–4, 35–6, 73, 207,
213design, 183desktop databases, 284, 292desktop publishing (DTP), 282,
291–2detail, 210development teams, 171digital value system, 143–4Direct Line, 27, 28Directline.com, 28disinformation, 304, 305‘distractions’, 35–6dot.coms, 139, 223double-loop learning, 192driving purpose, 258, 260–61, 262
Drucker, P.F., 251–2
e-auctions, 213e-bay.com, 213e-business models see business
modelse-commerce, 281, 287, 291, 293–4economy, 238eCredit.com, 31EDI-CON, 70EDIFACT (EDI for administration,
commerce and trading), 70EDIFICE, 70e-fulfilment, 31electronic data interchange (EDI),
70–5, 293–4impact of the Internet, 71–4security, legal issues and trust,
74–5electronic document management
systems 283electronic funds transfer (EFT), 70electronic mail (e-mail), 70, 283, 291eLuxury.com, 213e-malls, 213emergent behaviour, 259emergent strategy, 184encryption, 306end-to-end approach, 278enterprise DBMS, 284, 292enterprise resource planning (ERP),
7–8, 274–5, 276, 293–4, 295–6extensions, 279–81, 294vendors and product applications,
284–87environment, 259, 261, 263e-procurement, 56–7, 69–75
EDI, 70–5traditional tools, 69
equity capital, 209, 219, 220–23e-retailing, 140–42e-shops, 213E*Trade, 154
316
Index
evaluation of cost/benefitmanagement 84–5, 86, 93–5
evolutionary systems development,170
expenditure, 66–7capital, 57–8, 66–7control of, 60current, 57–8spending on IT, 56, 177, 178unplanned, 68
expense expenditure, 66explanatory logic, 112, 113, 115, 119,
121exploration, 46–7external controls, 162, 167–8extranets, 74
facilitation, 166failure, IT, 11–12‘fashions’ in IT, 1–16
business process re–engineering,5–6
ERP, 7–8information systems development,
9–12knowledge management, 8–9outsourcing, 6–7role of consultants, 12–13strategic information systems, 2–4
fax (facsimile), 291–2, 295Federal Express, 3–4federal model of control, 167federated networks, 167–8financial services organizations,
77–118first mover, 3–4Ford, C.V., 308–9fractal rules, 258–9, 261, 262–3Freeserve.com, 220, 223–24full life cycle management, 77–107
benefits management, 83cost management, 82development stage, 81, 92
evaluation, 94, 104exploitation, 84–5, 93, 102identification, 90, 97justification, 91, 98planning stage, 80quick scan elements, 97 –, 105realization, 101research findings, 88research method, 87time schedule management, 83
function, IT, 159–61, 162, 163–4,252–4
future proofing, 120–22futuribles, 41, 47fuzzy logic, 129–30
‘garbage can’ model, 183Gartner Group, 158, 178Gates, Bill, 144general accounting packages, 282,
291–2generalizations, 131generic approved product policy, 63generic business models, 210–225
classic cost reduction, 214–15high stakes model, 224–25investor funded deficit model,
217–20new trading model, 215–17sleight of hand model, 223–24stock market funded deficit model
220–23traditional trading, 211–24
goals, 184–7Grainger, 31Greenspan, Alan, 41groupware, 283, 292, 295growth products, 288–90GSM networks, 144–5Gulf War, 306–7
Hamel, G., 146, 242Hammer, M., 5
317
Index
hardware and software management,162, 172
Heuer, R.J., 310high-level business models, 199
see also Generic business modelshigh stakes model, 224–25, 225–28Hirschheim, R., 206Homegrocer.com, 141honeypots/honeynets, 306human machine, 307–8hybrid databases, 284, 295hybrid products, 288–90
Idenburg, P.J., 184identification of project proposals,
78–81, 85–6, 87–8ignorance premium, 230impact, 168incremental logic, 184individual characteristics, 49–50, 51,
52industries, 238informate scenario, 114–17information:
deception and, 301, 302informing customers, 31value chain of, 268–70view of, 112, 113–4, 115, 119, 121
information bases, 50–4information and communications
technology (ICT) seeInformation technology
information delivery systems, 267–99
current and future usage ofsoftware 288–91
extended classification, 279–81general trends, 288–96proposed classification, 270–78vendors and product applications
in extended matrix, 281–8information systems (IS), 269
IS strategy, 58–9, 61–2
information systems development,9–12
information technology (IT), 157–74,237–49
changes in economy andindustries, 238
changes in organizations, 239changing IT function, 159–61 characteristics and purchasing,
57–8impact of change on business,
252–3integration in corporate strategy
and management, 240–46IT governance vs IT management,
247–8IT organization in, 2005, 161–73
external controls, 162, 167–8hardware and software
management 162, 172internal controls, 162, 168–9IT function, 162, 163–4IT management, 162, 164–5IT self-image, 162, 165–6IT staffing, 162, 169–70mission, 161–3systems development, 162,
170–71in the workplace, 162, 172–3
pervasive environmental factor,237, 246–8
purchasing see purchasing responsibilities of IT, 159–60revolution, 126–27speed of change and development,
59–60information value chain, 268–70infrastructure activities, 20in–house sourcing (insourcing), 19,
22–3, 27, 30, 36–7innovation, 244integrated strategy, 240–46intelligence, 183
318
Index
intelligent agents, 73–4interactions, 257internal controls, 162, 168–9internal development, 24–6, 30Internal Revenue Service, 178internal sustainability, 225–26Internet, 228–29
deception on the Web, 303–6e-business model options, 203–236impact on purchasing, 71–4security and trust, 31, 74–5sourcing Internet implementation
capability, 24–9interpersonal skills, 132investment, 206–10
funding and outgoing costs,209–10
IT investment see Investmentdecisions; IT investment
types of, 206–9investment appraisal process, 188,
189, 190–93investment decisions, 175–202
bounded rationality, 181–3, 188classical model of rational decision
making, 180–81investment issues and
management challenges,176–8
‘P4’ decision model, 187–97product and process dimension,
184–7quality of decision making, 178–80
investment entrapment, 191investor funded deficit model,
217–20, 225–28Iridium, 144–5irreducible costs, 270IS strategy, 58–9, 61–2IT costs and benefits management,
77–96IT department, 67–8, 158IT failure, 11–12
IT function, 159–61, 162, 163–4, 252–4IT investment:
benefits of see Benefits of ITdecisions see Investment decisionsas exploration, 46–7productivity paradox, 41–3quick scan and full life cycle
management, 77–118as a religious salvation, 43–6
IT mission, 161–3IT people, 125–38
IT staffing, 158, 162, 169–70organizational politics, 133–5as shamans, 129–30stereotype, 131–3, 136task, process and people, 135–7as tribe, 127–28, 130–31
IT purchasing see purchasingIT self-image, 162, 165–6IT staffing, 158, 162, 169–70
see also IT people
Jamjar, 27Janis, I.L., 179Johnstone, Edward, 220judgement, 310justification of project proposals, 102,
119
Keynes, John Maynard, 203, 231knowledge, 301, 302knowledge management, 8–9KPN Telecom, 209‘Kurdish rebel’ Web site, 304
labour productivity, 41–3Lacity, M., 206language, 130Lastminute.com, 223Laudon, J.P., 273–4, 277Laudon, K.C., 273–4, 277Leadbeater, Charles, 228leadership, 259–60, 263–4
319
Index
learning, organizational, 47–8, 54–5,191–2
learning curve costing, 229–30learning experience, 185, 186learning process, 184legacy systems, 108–124
evaluation framework, 109–120second iteration of scenarios,
120–22legal issues, 75life cycle:
customer resource life cycle, 29–32full life cycle management, 77–118
limes, 250line management, 78, 90, 94–5Linux operating system, 256, 259Lloyds, 209logic, 112, 113, 115, 119, 121logistical streams, 146, 147London Stock Exchange, 11, 178loss leaders, 216lying, 306
detection of lies, 308–10
Madigan, C., 12–13Mahadevan, B., 146, 205management:
integration of corporate strategyand ICT, 240–46
style, 263–4MangoClick.com, 220manipulation of data, 300–312Mann, L., 179manufacturing productivity, 42–3market attractiveness, 238market creation, 244–5marketing, 240–41mature products, 288–90maverick model, 224–25, 225–28meaning, attention, self and trust
(MAST) 264Merck.ltd.co.uk, 213methodologies, 260–62
metrics, 168mimicry (spoofing), 304, 305, 306mission, IT, 161–3mixed development paths, 28–9Moai Technologies, 31mobile telecommunications, 142–3,
144–5moral imperatives, 126–27Motorola, 144Mr Mistoffelees model, 223–24,
225–28multiple streams of income, 215–17multiple suppliers, 20–1Multiview approach, 10–11must-do investments, 206–7, 209
NATO look–alike Web site, 304, 305
‘necessary evils’, 35–6new economic logic, 229–31New Economy, 176new trading model (new economy
model) 215–7, 225–28New Zealand teachers payroll
system, 11Newton, Isaac, 255non-repudiation, 75Nordea, 154, 155
object-oriented approaches, 9object-oriented DBMS (OODBMS),
285, 293, 295object/relational DBMS (ORDBMS),
285, 293, 295office automation (OA), 272–3, 279
current and future use of software288–91, 291–2
vendors and product applications,282–3
office integration software, 283OLAP (on-line architecture platform),
278, 278, 288, 294–5omniscience, 181, 182
320
Index
online transaction processing(OLTP), 272, 274–5, 279
see also Systems applicationsopen electronic markets, 73operations, 21, 262–3‘order winners’, 35organizational architecture, 49–50organizational competencies, 49–50,
51organizational learning, 47–8, 54–5,
191–2organizational politics, 133–5, 188,
189, 194–5organizational scenarios, 109,
110–122second iteration, 120–22
organizational structure, 112, 114,115, 119, 121
organizations:impact of IT, 239rational model and political
model, 194–5O’Shea, J., 12–13outsourcing, 6–7, 17–40
capabilities for effectiveness, 38–9core competencies, 29customer resource life cycle, 29–32effective IT and e–sourcing
decisions 34–7overview of developments, 18–20sourcing Internet implementation
capability 24–9track record of using external
IT/e-business services, 20–4virtual organization, 32–4
overtrading, 212–3
‘P4’ decision making model, 187–97participation, 188, 189, 194politics, 188, 189, 194–7process, 188, 189, 190–93product, 188, 189, 189–90
‘paperless office’, 126
Parr, A.N., 11–12participation, 188, 189, 194participative approaches, 9partnerships, 245
outsourcing, 18–20, 27, 30, 36–7Paylinx, 31payments, security and, 31Pellissier, R., 272people, IT see IT peopleperception management, 308perceptual information, 309personal productivity tools, 271–2
see also Office automation plan, do, check, act cycle, 192–3planning, 9
rational, 184, 185, 186political model, 194–5politics, organizational, 133–5, 188,
189, 194–7Porter, M., 140, 204, 229, 242post-implementation reviews, 191,
261–2Prahalad, C.K., 242prestige investments, 206–7, 208prevention, 262, 263prices, 230
share prices, 221–22prioritised scenario, 117–8, 119private placements, 218–9proactive management, 164–5problem solving, 262, 263process:
approaches, 9dimension of investment
decisions, 184–7IT people, task and, 135–7‘P4’ decision model, 188, 189,
190–93productivity paradox, 41–3products:
applications in extendedinformation delivery matrix,281–8
321
Index
approved, 63–5current and future use of
information deliverysoftware, 288–91
opportunities for new products,240
‘P4’ decision model, 188, 189,189–90
product dimension of investmentdecisions 184–7
profit:classic profit model, 211–14, 225–28investment, profitability and risk,
207–9maximization, 182new economic logic, 230–31
profit and growth engine, 147–8,152–3, 155
programmable decisions, 181project champions, 24–5, 194propaganda, 304, 305, 306prototyping approaches, 9Prudential Insurance, 178public key infrastructure (PKI), 75purchasing, 56–76
purchasing IT, 56, 57–69complications, 59–61components of IT purchasing
policy 62–3elements of IT purchasing
policy, 63–9IS strategy and, 61–2primary objectives, 57–8purchasing procedures, 66–9secondary objectives, 58–9
using IT to purchase, 56–7, 69–75EDI, 70–5security, trust and legal issues,
74–5traditional tools, 69
purpose, 258, 260–61, 262
‘qualifiers’, 35
quality of decision making, 178–80quick scan tool, 77–118
elements, 86–95
rational decision making, 180–81bounded rationality, 181–3, 188
rational model, 194–5rational planning, 184, 185, 186realism, 309reality monitoring criteria, 309realization of projects, 112reconstruction, 309religious salvation, IT investment as,
43–6resource view, 113–4responsibilities of IT, 159–60retailing, 140–42revenue generation systems, 147–8,
149–51, 155revenue streams, 146, 147reviews, post-implementation, 191,
261–2Richard, G., 276Riel, P.F., 270risk:
and choice of business model,226–28
investment and, 207–9organizational scenarios and
evaluating legacy systems,112, 114, 115, 119, 121
Roach, Stephen, 41roles, 112, 113, 115, 121Royal Bank of Scotland (RBS), 28rules, fractal, 258–9, 261, 262–3
SABRE, 3, 4salvation, IT investment as, 43–6SAP, 7, 8, 293, 294, 295–6satisficing, 182–3scenario building, 109, 110–122scope creep, 60scurvy, 250
322
Index
Seagate, 296secondary income, 215–7security, 311
on-line purchasing and, 31, 74–5selection, 257, 261–2selective outsourcing, 18–19, 20, 22self, management of, 264self-image, IT, 162, 165–6Senge, P., 217, 262senior managers, 131–2sensing, technologies and, 307service level agreements, 93shamans, 129–30share prices, 221–22Sheehan, George, 141short-term contracts, 20Simon, H., 182–3single-loop learning, 192skilled generalists, 169‘skunk works’, 24–6sleight of hand model, 223–24,
225–28Smart, 73Smith, Fred, 151society, 128–29
virtual societies, 127–28software and hardware management,
162, 172software usage, 288–96spamming, 305, 306spatial information, 309specialists, 169–70specific approved product policy, 63spending see expenditurespoofing, 304, 305, 306spreadsheets, 282, 291staffing, IT, 158, 162, 169–70
see also IT peoplestakeholder analysis, 187stakeholders, 122–23
degree of agreement, 196–7investment decision making,
194–7
standard operational applications,271–2
see also Systems applicationsstatus quo scenario, 110, 111–14steganography, 306stereotyping, 130–31
IT stereotype, 131–3, 136stock market funded deficit model,
220–23, 225–28Strassman, Paul, 43strategic agenda, 243strategic decision support systems,
278strategic decisions see investment
decisionsstrategic information systems, 2–4strategic management, 77–8, 81, 87,
89, 94strategic partnerships, 18–20, 27, 30,
36–7strategy, 21, 237–49
emergent strategy, 184integration of IT in corporate
strategy and management,240–46
IS strategy, 58–9, 61–2IT functions, 163–4traditional IT strategy and role of
CIO 246–8strategy formulation, 244–6structure, organizational, 112, 113,
115, 119, 121suppliers:
approved, 65multiple, 20–1
supply chain management (SCM),280–81, 287
supply and demand, 268–70support costs, 270sustainability, 225–26system costs, 270systems applications, 272, 274–5, 276,
279
323
Index
current and future usage ofsoftware 288–91, 293–4
vendors and product applications,284–7
systems approaches, 9systems development, 162, 170–71systems development life cycle
(SDLC) 253–4
Tapscott, D., 162task, 135–7Taurus system, 11, 178technological capabilities, 49–50, 51,
52technological costs, 270technology:
changing and IT function, 159–60
and human perception, 307–8impact of change on business,
252–3see also Information technology
technology strategy, 172technophilia, 43–6temporal information, 309term of business model, 210Tesco, 28, 141–2Tesco.com, 28, 140–41, 141–2Tesco Personal Finance, 28Timmers, P., 145–6, 205‘Today’s CIO is Tomorrow’s CEO’
seminar, 136Torvalds, Linus, 259total cost of ownership (TCO) model,
85total outsourcing, 19–20, 22, 23traditional trading business model,
211–14, 225–28transacting, 31transactional databases, 271–2
see also Database applicationstransform scenario, 114–7transformation, corporate, 162–3
tribes, 127–28, 130–31trust, 74–5, 264Turban, E., 274, 281two level problem solving, 262,
263
unplanned expenditure, 68US labour productivity growth,
42–3
value, delivering, 168–9Value America, 151value chain, 142–5, 242value chain of information, 268–70value management, 192–3value proposition, 148–9, 155value streams, 146, 147variation, 257vendors, 281–8venture capitalists, 219Verbind, 32video conferencing, 283view of information, 112, 113–4, 115,
119, 121virtual organization, 32–4virtual reality, 306virtual societies, 127–28viruses, 304, 306vision, 112–113, 115, 119, 121voice recognition, 283, 292Vontobel, 209
Web sites, deception on, 303–6Webvan, 141Wessel, David, 217, 228Winn, Craig, 151wireless technologies, 307Woodall, John, 250Wood-Harper, A.T., 10word processing, 282, 291workflow systems, 283workplace, IT in, 162, 172–3
324
Index
Xerox Corporation, 139–40
Yahoo!, 149, 216, 217
ZedZed.com, 220Zuboff, S., 116
325
Index
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