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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-Heinemann Linacre House, Jordan Hill, Oxford OX2 8DP 225 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 (including photocopying 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 Data A catalogue record for this book is available from the British Library ISBN 0 7506 50346

Typeset by Avocet Typeset, Brill, Aylesbury, Bucks Printed and bound in Great Britain

Contents Computer Weekly Professional Series About the Authors Preface

xi xiii xxi

1 A word of caution Exploring fashions in IS/IT management David Avison ESSEC Business School, Paris, France 1.1 Introduction 1.2 Strategic information systems 1.3 Business process re-engineering 1.4 Outsourcing 1.5 Enterprise resource planning systems 1.6 Knowledge management 1.7 A strategy to develop IT applications 1.8 Success and failure 1.9 The role of the consultant 1.10 Conclusions References

1

1 2 5 6 7 8 9 11 12 13 14

2 Outsourcing IT and e-business Leslie Willcocks Warwick Business School, University of Warwick, United Kingdom 2.1 Introduction 2.2 Overview of developments 2.3 Using external IT/e-business services: a complex track record 2.4 Sourcing e-business: new rules? 2.5 Sourcing internet implementation capability 2.6 E-sourcing: from projects and technology to strategic partnering 2.7 External sourcing around the customer resource life cycle 2.8 The virtual organization – effective management approaches 2.9 Towards effective IT and e-sourcing decisions 2.10 Conclusions Notes

17

17 18 20 24 24 29 29 32 34 37 39

v

Contents 3 Learning to realize the benefits of IT Brent Work University of Cardiff, United Kingdom 3.1 Some evidence of the missing benefits 3.2 IT investment as a religious salvation 3.3 IT investment as exploration 3.4 Benefits realization as organizational learning 3.5 What is a benefits map? 3.6 An example of a benefits map 3.7 A case study in benefits realization 3.8 Learning to learn how to realize IT benefits 4 Purchasing and information technology Buying IT and using IT to buy Frank Bannister Trinity College, Dublin, Ireland 4.1 Introduction 4.2 Purchasing IT 4.3 Using IT to purchase: e-procurement 4.4 EDI 4.5 Conclusion Reference Bibliography 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 5.1 Introduction 5.2 Full life-cycle management 5.3 Planning stage 5.4 Development stage 5.5 Exploitation stage 5.6 Full life-cycle management revisited 5.7 Full life-cycle management in practice Appendix: Quick scan elements in detail References

vi

41

41 43 46 47 48 50 53 54

56

56 57 69 70 75 76 76 77

77 79 80 81 84 86 87 97 105

Contents 6 A framework for evaluating legacy systems Carole Brooke Faculty of Business and Management, University of Lincoln, United Kingdom 6.1 Introduction 6.2 Getting started 6.3 Second iteration of the scenarios 6.4 Conclusions Acknowledgements Refererences

108

7 IT on board or under the thumb? Robina Chatham and Keith Patching Cranfield School of Management, United Kingdom 7.1 Introduction 7.2 The IT revolution – like, when? 7.3 Reforming the tribes – back to virtual nature 7.4 Anthropology and society 7.5 IT people, the shamans of the twenty-first century? 7.6 IT people – a different kind of tribe? 7.7 The IT stereotype 7.8 Organizational politics 7.9 Task, process and people 7.10 Conclusions References

125

8 Why business models matter (and how they can make adifference in internet commerce) Stephen Drew Henley Management College, United Kingdom 8.1 Introduction 8.2 Insights from e-retailing 8.3 Business models versus value chain 8.4 Business model analysis 8.5 A business model framework 8.6 Value proposition 8.7 Revenue generation system 8.8 Delivery system 8.9 Profit and growth engine 8.10 The business model framework in practice

108 109 120 122 123 124

125 126 127 128 129 130 131 133 135 137 138

139

139 140 142 145 147 148 149 151 152 153

vii

Contents 8.11 An example in on-line financial services: Nordea 8.12 Summary and conclusions References 9 Whither IT? A look at IT in 2005 James McKeen and Heather Smith School of Business, Queen’s University, Kingston, Ontario, Canada 9.1 Introduction 9.2 The changing IT function 9.3 The IT organization in 2005 9.4 Conclusion References 10 Strategic decisions in the information age Transforming technology promises into business benefits Theo Renkema Eindhoven University and Rabobank Group, The Netherlands 10.1 Introduction 10.2 Investment issues and management challenges 10.3 Foundations for organizational decision making 10.4 The product and process dimension of investment decisions 10.5 The ‘P4’ decision-making model 10.6 Conclusions Notes References 11 E-business model options The first challenge is how to sustain the business Dan Remenyi Trinity College Dublin, Ireland 11.1 Introduction 11.2 Defining the business model 11.3 Components of a business model 11.4 The term of the business model 11.5 High-level and detailed business models 11.6 Generic business models 11.7 The sustainability issue 11.8 Risk and the choice of business model 11.9 The next generation of business model 11.10 Discussion 11.11 Summary and conclusion viii

154 154 156

157

157 159 161 173 174

175

175 176 178 184 187 197 198 199 203

204 204 206 210 210 210 225 226 228 229 230

Contents References Notes 12 The CIO’s career is over … long live the CIO!! Han van der Zee Nolan Norton Institute, De Meern, The Netherlands 12.1 How ICT changes the economy and industries 12.2 How ICT changes organizations 12.3 Why integrate ICT in corporate strategy and management? 12.4 How to integrate ICT in corporate strategy and management 12.5 Implications for traditional ICT strategy and the role of the chief information officer 12.6 Conclusion References 13 Herding cats: Managing IT in the twenty-first century Terry White Bentley West Consultants, Johannesburg, South Africa 13.1 Introduction 13.2 The times they are a-changin’. But is IT management? 13.3 Sailing the IT ship in the twenty-first century 13.4 Dealing with complexity 13.5 Managing complex adaptive systems 13.6 Complex adaptive systems in the real IT world 13.7 Managing in the complex environment 13.8 The long and winding road References 14 Back to the future A look at information deliveries René Pellissier Graduate School of Business Leadership, Pretoria, University of South Africa 14.1 Introduction 14.2 The I in IT 14.3 Proposed classification of information technologies 14.4 Vendors and product applications in the extended matrix 14.5 General trends in information delivery 14.6 Conclusion References

232 233 237

238 239 240 241 246 248 249

250

250 252 254 255 258 260 263 264 265

267

267 268 270 281 288 296 297

ix

Contents 15 Manipulating reality Deception on the Web William Hutchinson Edith Cowan University, Perth, Western Australia and Matthew Warren Deakin University, Victoria, Australia 15.1 Introduction 15.2 Principles of deception 15.3 Deception on the Web 15.4 Beyond the present 15.5 How do you identify a lie? 15.6 Conclusion References

300 301 303 306 308 310 311

Index

313

300

Computer Weekly Professional Series There are few professions which require as much continuous updating as that of the IS executive. Not only does the hardware and software scene change relentlessly, but also ideas about the actual management of the IS function are being continuously modified, updated and changed. Thus keeping abreast of what is going on is really a major task. The Butterworth-Heinemann–Computer Weekly Professional Series has been created to assist IS executives to keep up to date with the management ideas and issues of which they need to be aware. One of the key objectives of the series is to reduce the time it takes for leading edge management ideas to move from the academic and consulting environments into the hands of the IT practitioner. Thus this series employs appropriate technology to speed up the publishing process. Where appropriate some books are supported by CD-ROM or by additional information or templates located on the Web. This series provides IT professionals with an opportunity to build up a bookcase of easily accessible, but detailed information on the important issues that they need to be aware of to successfully perform their jobs as they move into the new millennium. Aspiring or already established authors are invited to get in touch with me directly if they would like to be published in this series.

Series Editor [email protected] Series Editor Dan Remenyi, Visiting Professor, Trinity College Dublin Advisory Board Frank Bannister, Trinity College, Dublin Ross Bentley, Management Editor, Computer Weekly Egon Berghout, Technical University of Delft, The Netherlands Ann Brown, City University Business School, London xi

Computer Weekly Professional Series Roger Clark, The Australian National University Reet Cronk, Harding University, Arkansas, USA Arthur Money, Henley Management College, UK Sue Nugus, MCIL, UK René Pellissier, School of Business Leadership, South Africa David Taylor, CERTUS, UK Terry White, BentleyWest, Johannesburg Other titles in the Series IT investment – making a business case The effective measurement and management of IT costs and benefits Stop IT project failures through risk management Understanding the Internet Prince 2: a practical handbook Considering computer contracting? David Taylor’s Inside Track A hacker’s guide to project management Corporate politics for IT managers: how to get streetwise Subnet design for efficient networks Information warfare: corporate attack and defence in a digital world Delivering IT and e-business value Reinventing the IT department The project manager’s toolkit

xii

About the Authors

David Avison David Avison is Professor of Information Systems at ESSEC Business School, near Paris, France, following nine years as Professor of Information Systems at Southampton University. He is also Visiting Professor at Brunel University, UK, and University Technology, Sydney, Australia. He is joint founder and editor with Guy Fitzgerald of the Information Systems Journal and also joint editor with Guy of the McGraw-Hillseries of texts on information systems. So far, 17 books are to his credit (plus one translation from French) as well as a large number of papers in learned journals, edited texts and conference papers. He is Chair of the International Federation of Information Processing (IFIP) 8.2 group on the impact of IS/IT on organizations and was past President of the UK Academy for Information Systems. He has chaired a number of international conferences. He is an active consultant as well as researcher in information systems. He has most recently been involved in IS/IT strategy formulation at a major intra-European manufacturing company.

Frank Bannister Frank Bannister PhD is a Senior Lecturer in Information Systems in Trinity College, Dublin, where he is also Director of Studies of the Management Science and Information Systems programme. Prior to joining Trinity in 1995, he worked in Operations Research in the Irish Civil Service and for 16 years with Price Waterhouse, Management Consultants. He is a Consulting Associate with PriceWaterhouseCoopers. He has written numerous articles and papers on Information Systems and Technology in IT Purchasing and Finance published by GEE. He is the Executive Editor of IT Policies and Procedures in Ireland.

Egon Berghout Egon Berghout is Professor of Information Management at the xiii

About the authors University of Groningen, The Netherlands, and Principal Associate at M&I/Partners. He is specialized in improving the efficiency and effectiveness of the information function (valuation). He has published over 40 articles and is a frequently invited conference speaker. He is a member of the executive committee of the European Conference on the Evaluation of Information Technology. He holds a PhD in Informatics (Delft University of Technology), and MSc in Information Management (Tilburg University).

Carole Brooke Carole Brooke is currently Reader in the Faculty of Business and Management at the University of Lincoln, UK. She was previously Lecturer in Information Technology at Durham University Business School for five years. Her background is interdisciplinary including a PhD in Information Technology and Business Administration from City University Business School and an MA in Archaeology and Anthropology from the University of Cambridge. She has ten years’ commercial experience spanning insurance, research and development, and recruitment consultancy. Work to date has focused on the human issues of organizational change, especially relating to information technology. Amongst Dr Brooke’s current research projects are research into the experiences of call centre employees (using critical management theories) and an exploration of community project methodologies as a way of improving stakeholder involvement in organizational change.

Robina Chatham Robina Chatham has 14 years’ experience in IT management, culminating in the position of European IT Director for a leading merchant bank. She started her career as a mechanical engineer within the ship building industry, where she pioneered the introduction of computing onto the shop floor. This sparked off an early interest in the people issues associated with IT. Now turned an academic and psychologist, she uses her real world experience to help senior IT managers improve their personal impact and influence within a business context.

xiv

About the authors

Stephen Drew Stephen A. W. Drew is Professor and Deputy Dean at the School of Management, University of East Anglia, UK. He is also Lead Tutor of e-Business at Henley Management College, Oxfordshire, UK, where he launched one of the first successful international on-line MBA courses in e-business. He is responsible for designing and teaching MBA and corporate courses in e-business and strategy for clients, including IBM and American Express. He has taught on international executive and MBA programmes in Europe, North America, the Middle East and Africa. He has also taught business policy at McMaster University in Canada, and global strategy at Northeastern University in the United States. Previous to his academic career, Dr Drew held senior roles with the Bank of Montreal, Ernst and Young, Royal Dutch/Shell, and IBM. He has advised many major international high technology, telecommunications, financial services and government organizations. His consulting and research expertise is in e-business, knowledge management, strategic management and scenario planning for fast-paced markets.

Bill Hutchinson Associate Professor Bill Hutchinson is the Associate Head of School of Management Information Systems at Edith Cowan University, Perth, Western Australia. He has 20 years’ experience in information systems in government, the oil and finance industries, and academia. He is a member of the Australian Computer Society and the Australian Institute for Professional Intelligence Officers. He has recently co-authored with Matthew Warren Information Warfare, published in the Computer Weekly IT Professional Series by Butterworth-Heinemann. E-mail: [email protected]

James McKeen James McKeen is the Founding Director of the Queen’s Centre for Knowledge-Based Enterprises, a research think-tank for the knowledge economy, and a Professor of Management Information Systems at Queen’s School of Business. He is a recognized authority on IT strategy, and is among the premier researchers and educators in the field. Along with Heather Smith, Dr McKeen xv

About the authors facilitates the networking of senior executives through three wellknown industry conferences, the Queen’s IT Management Forum, the Queen’s CIO Brief and the Queen’s KM Forum. He also has extensive international experience, having taught at universities in the UK, France and the USA Dr McKeen’s book (co-authored with Heather Smith) titled Management Challenges in IS: Successful Strategies and Appropriate Action was awarded the Book of the Month five-star rating by the Computer Bulletin (October 1997). His research has been published in a variety of journals, including MIS Quarterly, Journal of Management Information Systems, Journal of Information Technology Management, Canadian Journal of Administrative Sciences, Data Base, International Journal of Management Reviews, Information and Management, and Journal of Systems and Software. He received his PhD in Business Administration from the University of Minnesota.

Menno Nijland Menno Nijland is a doctoral candidate at the London School of Economics, UK currently researching the adoption of IS evaluation practices into organizations. Previous research has focused on life-cycle evaluation of IT investments at Delft University of Technology, The Netherlands, where he was awarded best graduate student Informatics in 2000. Apart from his research he is consultant at the Dutch company M&I/Partners and advises organizations on IT evaluation and related issues.

Keith Patching Keith Patching uses his background in psychology and social anthropology to understand how people learn and what makes one manager different from another. He specializes in management development through writing, teaching and one-to-one coaching and counselling, developing strategies that are geared to the psyche and style of each individual. Having been the manager of ICL’s management centre, he has significant experience of the particular problems and issues facing IT people.

René Pellissier René Pellissier holds a Masters Degree in Mathematical Statistics, and an MBA and a PhD in Industrial Systems. She is xvi

About the authors Professor in Information Technology at the Graduate School of Business Leadership of the University of South Africa, after having taught Mathematical Statistics and Re-engineering. Following on her strong views on the redesign of Statistics, she authored The Little Book of Statistics for Busy Business People and recently finished In Search of the Quantum Organization: The IT Circle of Excellence, based on her research of IT related issues. She has published numerous articles on the subject and is currently editor of the Southern African Business Review. René enjoys playing classical piano, reading, all things relating to 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 Systems Management at Trinity College Dublin, and an associated member of faculty at Henley Management College in the UK. He is also a management consultant working worldwide. He has spent more than 25 years working in the field of corporate computers and information systems. He has worked with computers as an IS professional, business consultant and as a user. In all these capacities he has been primarily concerned with benefit realization and obtaining the maximum value for money from the organization’s information systems investment and effort. In recent years he has specialized in the area of the formulation and the implementation of strategic information systems and how to evaluate the performance of these and other systems. He has also worked extensively in the field of information systems project management specializing in the area of project risk identification and management. He has written a number of books and papers on a variety of aspects of the field of IT management and regularly conducts courses and seminars as 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 the Netherlands, as a manager and senior advisor to the board for IT xvii

About the authors governance and business performance. Also, he is an affiliated research fellow in the Department of Technology Management of Eindhoven University of Technology (NL). After positions as a management researcher, he previously worked for Aegon insurance to improve management control of IT investments and was a management consultant for business management IT support in the corporate centre of Philips Electronics. As well as gaining a ‘cum laude’ masters degree in Business Economics, Theo Renkema has a PhD in Industrial Engineering and Management Science. Dr Renkema is an established authority in IT economics and control and has ample experience in IT governance and value mangement. He has written several books, numerous articles and regularly runs executive courses in IT economics and control. His latest 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 issues and holds a Masters Degree in the impact of IT on organizations. A former senior IT manager, for the past 15 years she has worked with organizations across North America to identify and document leading-edge practices and to bring the best of academic research to practising IT managers. Heather is a founder and cofacilitator (with Dr J. McKeen) of the Queen’s IT Management Forum, the CIO Brief, and the Knowledge Management Forum, which facilitate interorganizational learning among senior executives, and co-author of the highly acclaimed Management Challenges in IS: Successful Strategies and Appropriate Action. In addition, she is a Research Associate of the American Society for Information Management’s Advanced Practices Council and Chair of the IT Excellence Awards University Advisory Council. Her research has been published in a variety of journals including Journal of Information Technology Management, Database, CIO Canada, and Lac Carling Governments Review. Heather collaborates extensively on research projects with a number of top international researchers in IT management issues. At present, she is writing a book on virtual organizing with the Ecole des Hautes Etudes Commerçiales, completing research on transformational IT projects in the Ontario Public Service and collaborating on an international research project on new organizational models with Boston University. xviii

About the authors

Han van der Zee Professor dr. ing. Han T. M. van der Zee is director of the Nolan Norton Institute, an international research arm of KPMG/ Nolan, Norton & Co. Management Consultants in De Meern, The Netherlands. He is in charge of thought leadership and innovation of consulting approaches for business strategy, organizational development, and IT strategy and management. He is also a professor at the Dutch Tilburg University, where he teaches and researches on the impact of information technology on businesses and business transformation. Prior to rejoining KPMG/Nolan, Norton & Co. in November 1996, he has been managing consultant for Nolan, Norton & Co. from 1986 to 1991. He also worked for Arthur D. Little and the Index Group in senior consulting positions. Prior to that he worked in managerial IT positions for multinational companies. He is the author of several articles and books, and speaks regularly at public conferences on this subject. He has university degrees in Computer Science and Business Administration, and obtained a doctor’s degree on ‘Measuring the value of IT’ from the economic faculty of the Tilburg University.

Matthew Warren Dr Matthew Warren is a Senior Information Systems Lecturer in the Department of Computing and Mathematics, Deakin University, Victoria, Australia. He specializes in computer security and information warfare. He is a member of the Australian Standards Committee IT/12/4 Security Techniques and is the Australian Representative on IFIP 11 WG 11 – Security Management. E-mail: [email protected]

Terry White Terry White is a business consultant specializing in business strategy, IT management, knowledge management and change management in large corporate organizations. He has written extensively for numerous newspapers and magazines. He has recently completed his new book entitled Reinventing the IT Department in which he proposes that management methods in IT have been left behind by advances in both businessand techxix

About the authors nology, and offers radical new ways of viewing the management of IT. The book has been published by ButterworthHeinneman.

Leslie Willcocks Leslie Willcocks PhD has an international reputation for his work on e-business, information management, IT evaluation and information systems outsourcing. He is Andersen Professor of Information Management and E-business at Warwick Business School, UK. He is also Associate Fellow at Templeton College, Oxford, Visiting Professor in Information Systems at Erasmus University, Rotterdam, Professorial Associate at the University of Melbourne, and Distinguished Visitor at the Australian Graduate School of Management. He holds a doctorate in information systems from the University of Cambridge, and has been for the last 12 years Editor-in-Chief of the Journal of Information Technology. He worked for 12 years in accounting and management consultancy, for Touche Ross and several smaller firms, before heading a Research Centre at City University Business School, London. He moved to Oxford University in 1992 where he was for 9 years Fellow and University Reader at Templeton College. He is coauthor of 19 books, including Global IT Outsourcing: In Search of Business Advantage (Wiley, 1998), Moving to E-Business (Random House, 2001), Building the E-Business Infrastructure (Business Intelligence, 2001), Managing IT as a Strategic Resource (McGraw Hill, 1997), Beyond The IT Productivity Paradox (Wiley, 1999) and Investing in Information Systems (Chapman and Hall, 1996). He has published over 130 papers in journals such as Harvard Business Review, Sloan Management Review, MIS Quarterly, Journal of Management Studies, Communications of The ACM and Journal of Strategic Information Systems.

Brent Work Brent Work is a consultant, educator, and writer. His major interest is in improving information systems practice. He has conducted research, developed educational programmes, and managed major projects in this area for a number of international corporations and national governments. xx

Preface The Make or Break Issues in IT Management is a collection of papers which focus on a number of really important issues of which IT professionals need to be aware. The issues are wide ranging and include subjects such as the career of the CIO as well as strategic IT decision making and IT evaluation to name only a few topics. Furthermore the book also covers a number of e-business topics as well as addressing the subject of information warfare and security. In all, 15 distinctly different subjects are addressed. In choosing these subjects we have sought to include not only currently popuilar topics, but also important longer term challenges which every IT professional will face at some stage during his or her career. This is a reference book for IT professionals that we hope will be of use for some time in the future. The Make or Break Issues in IT Management draws on research conducted at leading universities and business schools in the United Kingdom, France, The Netherlands, Ireland, Canada, Australia and South Africa. We hope that you will find this book both interesting and useful.

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A word of caution

1

Exploring fashions in IS/IT management David Avison ESSEC Business School, Paris, France

1.1 Introduction IS/IT management theory and practice has been dominated by ‘fashion’ for more than 20 years. In this chapter we explore both the myth and the reality behind some of these fads and fashions. The more recent fashions of electronic commerce, enterprise resource planning systems, business process re-engineering and outsourcing follow those of strategic IS and expert systems of a decade or two before. The purpose of this chapter is not to suggest that such contributions are worthless. On the contrary, in almost all cases they have often made many a positive impact on organizations. However, perhaps more frequently, they have been seen to be largely a failure. It is little consolation for those people made redundant or suffering severe stress following the implementation of business process re-engineering, to quote one example, to hear its protagonists admit failure in over 80 per cent of cases and suggest it was a mistake that ‘we forgot the people’. The purpose of this chapter is to show that such onedimensional 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, which it has many times. Yet so often consultants offer such ‘solutions 1

The Make or Break Issues in IT Management to all your problems’ and will continue to do so because, worse still, decision makers buy into them wholly and absolutely. Equally damaging are the one-dimensional case studies used in teaching some IS management programmes. To refer to one example, having a ‘champion’ from management lead technical change is indeed an advantage, but it cannot be the sole criterion on which IS success or failure hinges. In this chapter, the exemplars of successful IT and good practice, as well as the onedimensional ‘solutions’, are questioned. Here, a more balanced view is offered, one that suggests that these movements can be a positive influence. But IS management practice will only be improved if these theories are followed appropriately, that is, contingent on the particular people and culture of the organization, amongst many other factors. We need to learn lessons from previous experience and incorporate new ideas appropriately. Suggestions are made in the chapter relating to a more balanced view of IS/IT ‘progress’. In particular, we look at organizational learning, incremental change and contingency. We also suggest taking up fashions after they have become fashionable, when they have been fully tested elsewhere and their appropriateness for your organization assessed fully. Whilst less spectacular than the ‘hype’ associated with ‘this year’s answer to all IT problems’, it is this author’s view that a more cautious approach is likely to lead 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 are potentially vital to top managers because they support their main task, that is, strategic decision making. Information systems people have long suggested that they can be valuable to organizations. They are different from the traditional data processing systems such as sales orders processing, payroll and the like (now called transaction processing systems). But over the years systems ‘providing support for management decision making’ have been referred to as management information systems, decision support systems, executive information systems and strategic information systems, amongst others. Although each term may differ in subtleties, for example in the claims made as regards ‘automating the decision-making 2

A word of caution: Exploring fashions in IS/IT management process’, ‘appropriateness for direct use by managers’ or ‘mining external and internal databases’, and in their sophistication, for example use of graphics, they are very similar in their goals and largely in their practice. They all aim to provide information understandable and relevant to their users, in appropriate levels of detail and accuracy, and in a timely manner. What will be the next term for very similar systems? Managers should beware, therefore, that ‘new’ ideas are not very similar to old ideas with new names. There is a widespread belief about the success of strategic information systems. The often-quoted strategic information systems are given in Figure 1.1. These are described in detail in Avison et al. (1996). This research suggests that the conventional exemplars of IT success may not be entirely valid. Sector/Company

System

Type

Airlines American Airlines United Airlines

SABRE Apollo

Reservation/booking Reservation/booking

Distribution Baxters (AHS) Federal Express McKesson

ASAP Order/stock control COSMOS Consignment/routing Economost Order/stock control

Financial Services Citicorp Merril Lynch

GTN CMA

Philadelphia National Bank

MAC

Global trading Integrated cash accounting ATM network

Figure 1.1 Cases cited as strategic information systems exemplars (Avison et al., 1996)

Let us consider these exemplars. They are all US cases, most analysed in the first few months following implementation, much to do with one-off circumstances that are difficult to generalize and based on anecdotal evidence. This ‘cynical’ view is supported by Senn (1992) in his aptly-named paper ‘The Myths of Strategic Systems’. Thus, in the case of the Federal Express system, which enables customers to track their parcel, the firstmover lead gave only short-term competitive advantage. 3

The Make or Break Issues in IT Management Another interesting observation about these cases is that most were not set up as strategic information systems but are referred to as strategic information systems because their implementation led to unexpected strategic benefits. SABRE, the airline ticket reservation system, was conceived as an internal data processing system, but turned out to be ‘strategic’ with the benefit of hindsight. Citicorp was the first to implement automatic telling machines, yet they were originally installed to automate small and low-turnover branches, so as to make them profitable. They were not originally installed to gain competitive advantage. They proved to give Citicorp competitive advantage, but this was an unexpected benefit. These classic cases proved ‘strategic’ in that they might have been successful, important or pervasive, not that they necessarily provided direct help to strategic management. In the literature and on courses, these classic cases are used to draw lessons about strategic information systems, for example: Be the first mover to gain competitive advantage Create new entry barriers. Further studies, for example the Harvard cases, such as Otis Lifts, draw other lessons, such as the importance of identifying a ‘champion’ to see the project through or identifying the ‘critical success factors’ when putting a project proposal together. Such one-dimensional cases suggest that computer applications can be a guaranteed success simply by following a simple edict. Such a view is simplistic and a myth: a one-dimensional view of success or failure can never be wholly truthful and following them will not necessarily lead to success. Of course cases can help bring a practical and tangible element to discussions, but they can only be part of the truth and are often overstressed in both the literature and in courses. Further, it does not take much analysis to see that there are contradictions, for example one case’s lesson that ‘you must be at the leading edge’ contradicts another one that argues that ‘you must sit back, observe and learn from your competitor at the bleeding edge’! Indeed, Ciborra (1994) argues that success is more to do with ‘chance’ and ‘serendipity’ than any of these ‘essentials’ discussed in case studies. The advice must be to take in all these lessons and then see what is most appropriate for your organization. 4

A word of caution: Exploring fashions in IS/IT management

1.3 Business process re-engineering The more recent ‘hype’ surrounding business process re-engineering has been even more pronounced than that for strategic information systems. Claims have been made that business process re-engineering provides the ‘silver bullet’ to IT. Having said this, as we shall see, BPR is one of only several such ‘curealls’ that have been suggested. In the case of BPR, advocates have argued that organizations have been sleepy, do not react to a changing environment, and are too concerned to ensure change is gradual. It represents: dramatic improvements in critical, contemporary measures of 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 opposed to what they currently are. Emphasis is placed on the business processes (and therefore information systems that reflect them and enable the change), but it also encompasses managerial behaviour, work patterns, values, beliefs, measurement systems and organizational structure. The role of information systems and information technology is particularly interesting in the case of BPR. It is seen as an enabler of change, supporting the running of the new processes that replace the old ones. As Jones (1994) points out, Hammer and Champy use rhetoric to ‘sell’ business process re-engineering. Thus they say ‘don’t automate, obliterate’, ‘sweep away job definitions’, ‘break away from outmoded thinking’, ‘conventional change is as effective as re-arranging the deck chairs on the Titanic’, ‘it is not about fixing things but starting again’ and business process re-engineering is the solution to the ‘bloated, clumsy, rigid, sluggish, non-competitive and uncreative organization’. Even if the hardened professionals do not mind the violent, masculine and uncaring imagery, it is surprising that organizations went along with this wholeheartedly and ‘threw away the baby with the bathwater’. 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 as BPR in the 1970s and 1980s) and Grint et al. (1996) further 5

The Make or Break Issues in IT Management suggest that claims of radicalism and novelty have been exaggerated in 1990s BPR. Now this ‘cure for all known organizational diseases’ becomes ‘a disastrous policy’ and even the original advocates are apologizing. This total change is almost equally inappropriate. It is indeed useful and important to take a fundamental look at the way organizations work and adapt to the changing environment. However, organizations are for people. A lack of consideration for people factors, be it employees, customers or the public at large, cannot be for the long-term benefit of organizations. The stress suffered by those employed undertaking BPR, to take one example, can be enormous. Ethical values should not be ignored in any change. Taking only a selfish view, it is often the most important employees (the ones that can get jobs elsewhere) that leave in such circumstances. Of course, consideration of business processes is vital, but any one solution cannot be ‘the answer’: there is never one IT strategy that should be followed totally and absolutely. It is vital for managers not to take a one-dimensional view of decision making.

1.4 Outsourcing The outsourcing of IT activities and services is increasingly being considered as a legitimate option in managing and organizing 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. In other words, it is argued that IT will be cheaper if carried out at an external commercial company than in house. Some organizations simply require any new work to be given out to tender (including an in-house quotation that, it is hoped, might lead to in-house ‘commercial realism’); others have moved all their IT activities to an external company (and there are many solutions within these extremes). Willcocks et al. (1996) suggest that 7 per cent of UK organizations outsource more than 80 per cent of IT and this figure is growing. Another ‘silver bullet’ is taken up as organizations see only the short-term cost implications. What, then, are the downsides? Ignoring the unusual cases, such as American Airlines, where the information system (in this case SABRE) became a core competence, first and foremost, the 6

A word of caution: Exploring fashions in IS/IT management organization is in danger of losing control of their information, a major organizational resource. It is surely essential that organizations retain ownership and exercise control of their key information. Further, keeping critical tasks internal is at least ‘desirable’. In any case, Willcocks et al. (1996) found that organizations in their study failed to keep track of benefits – 33 per cent of organizations did not know if any cost savings were being accrued through outsourcing. This indicates a loss of control. But there are other, long-term effects for the organization. The experience of developing and running systems is being lost for the future. The outsourcing supplier’s expertise and learning are increasing, not yours, with the result that the organization is increasingly dependent on the supplier. There is a danger that the organization fails to manage the supplier sufficiently well (the residual IT group might reduce further, as their morale worsens) 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 organization’s overall strategy. Of course, there may well be financial and other advantages in outsourcing some activities. An obvious example is companies outsourcing the development of their websites. In this case, the motivation is often gaining outside expertise and speed of implementing sites (see Plant and Willcocks, 2000). But, as with business process re-engineering, emphasis on critical success factors, the role of a champion in successful information systems development and so on, we should not get carried away with the euphoria and each should be only a contributor in a holistic view of IT strategy (or anything else). This reinforces our view that success or failure is a complex issue and following a simplistic, one-dimensional, approach is doomed to failure.

1.5 Enterprise resource planning systems Enterprise resource planning systems, including SAP, Oracle, JD Edwards, Baan and PeopleSoft, support the integration of IT systems within organizations. In the extreme, they include strategic planning, sales and distribution, marketing, financial controls, supply management, materials management, workflow and human resource management; indeed, all the business processes and functions of the organization. The ‘sales pitch’ is obvious – there is support for every aspect of the business, each 7

The Make or Break Issues in IT Management system is seen as the ‘best of breed’, top management can see the implications of one part of the business on others, ‘discipline’ can be imposed on the workforce as all activities can be costed and controlled. The market leader SAP has around 40 per cent of the overall market, over 15 000 installed sites worldwide and over US$6 billion in development. The temptation to join this bandwagon has been difficult to resist. It is even possible to have such software configured for certain sectors, including universities, 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 one key to a successful project! However, many organizations have found that it is not that simple. The long implementation time span, the huge investment, the impact of everything changing at the same time, the huge software burden that requires processes to change to fit the software (that is, minimal customization or ‘vanilla ERP’) and the sheer direct and indirect costs are just some of the complaints offsetting some of the claims. Implementation of ERP systems have often coincided with downsizing (in all but ERP expertise) as companies try to alleviate costs, and middle management in particular suffers. As Truex (2001) has shown in his case studies of 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 one which only counter-balances the claims made earlier. ERP is no different: it can make a useful contribution to organizations but it 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 the like, much interest has turned to knowledge management. Knowledge is difficult to define, but it can be seen as information plus intelligence, leading to new capabilities and providing extra value to information. It is often associated with organizational learning, as the core capabilities, work practices and experiences are shared. From an organizational point of view, making capabilities rare, valuable and difficult to imitate potentially gains sustainable competitive advantage. Knowledge management systems aim to help achieve this so that best practice is 8

A word of caution: Exploring fashions in IS/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 substantiate. People see the value of ‘their’ knowledge as their intellectual capital and resist sharing it. It is difficult to create a collaborative culture if, for example, the organization is bureaucratic. After all, to change a proverb, knowledge is power and sharing dilutes power. It is therefore important that rewards result from such sharing so that organizations can fully leverage their intellectual assets.

1.7 A strategy to develop IT applications We now turn to information systems development methodologies, that is, a strategy to develop IT applications. As Avison and Fitzgerald (1995) point out, there are a wide range of approaches: 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 development (Martin, 1991) Process approaches, such as structured systems analysis and design (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, process approaches are reductionist and simplistic in the way they structure problems, participation can be inefficient, soft systems approaches slow down the development process, prototyping limits user choice and object-orientation is yet another ‘panacea’ that does not add to data modelling in any fundamental 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

The Make or Break Issues in IT Management are sold ‘the answer’, and this give rise to another myth, but there is never one clear strategy for developing information systems. One observation about these approaches is that they are not slight variations of a theme. They are indeed fundamentally different 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 to commend a blended approach where tools and techniques are used (or not) contingent on the particular application situation. One expression of the approach is seen in Figure 1.2, and each general stage addresses the fundamental questions that they argue should be addressed in any information systems development approach. However, one criticism of the approach is that it suggests that information systems development continues in a series of stages with steps within these, but this is not based on most people’s experience. This gives rise to another myth: information systems development does not proceed in a stepwise fashion.

ter

4H

uman-activi 1 H nformatio ty n 2I -techni o i c c o 3 S an–comp al m u interface u 5 Technical

Q1 – How is the information system supposed to further the aims of the organization using it? Q2 – How can it be fitted into the working lives of the people in the organization using it? Q3 – How can the individuals concerned best relate to the computer in terms of operating it and using the output from it? Q4 – What information processing function is the system to perform? Q5 – What is the technical specification of a system that will come close enough to meeting the identified requirements

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 development are emphasized and de-emphasized and re-emphasized later as the information systems project develops, is expressed in Figure 1.3. Here, information systems development is seen as being socially constructed and that it is more an ‘exploration’ in information systems development for a particular organization than the application of a methodology as such. 10

A word of caution: Exploring fashions in IS/IT management

Information modelling

Organizational analysis

Information systems development

Socio-technical analysis and design

Technical design and construction

Figure 1.3 The Multiview2 framework

1.8 Success and failure Over-reliance on any information systems development methodology adhered to rigidly may be one reason for information systems failure, and well-known IT failures, such as London Ambulance, the Taurus system for the London Stock Exchange, the RISP system for Wessex Health Authority and the New Zealand Teachers Payroll system (Myers, 1994) suggest that failure may be due to a number of reasons, such as an overemphasis on keeping costs to a minimum, poor planning and control, not taking account of the views of the stakeholders or the ‘politics’ of the situation. The New Zealand study is particularly interesting because all the quoted reasons for failure seem to have been taken into account. The main reason for failure seems to have been a protest by the teachers about general government policies. In none of the more recent cases was failure associated with the technology. Although failure is often ‘thought’ to be caused by technological failure of some sort, IT failure is usually due to organizational and people factors, not the technology. Indeed, a study by Parr et al. (1999) suggested that IT failure can be due to numerous factors and is normally due to a combination of factors. They list the following as important critical 11

The Make or Break Issues in IT Management success factors for IT projects: Availability of skilled staff Champion supporting the system Management support User satisfaction User participation Project management Understanding of corporate culture Process change completion first Communication Multi-skilled project manager Balanced team Methodology Appropriate training Commitment to change Minimal customization Project team empowerment Use of modelling tools. It is noticeable that technology is rarely a major factor. Bicknell (1996) suggested that 250 000 development projects in large US companies were cancelled outright in 1995. ‘Bad management, carelessness and office politics’ get much of the blame. In other words, contingency factors related to the cultural, organizational and people aspects of information systems are much more important and fundamental than technological ones. Successful IT does not need to be at the leading edge nor necessarily related to any IT/IS fashion.

1.9 The role of the consultant Dangerous Company is the title of a series of books (O’Shea and Madigan, 1998, 1999) and a series of three BBC films (2000), which explore the potential impacts of consultants. There are a number of companies examined over the last 20 or so years. As these companies bureaucratized, upsized, re-engineered, diversified, returned to core business, downsized, deskilled, empowered, and the rest, it is the thesis of these authors that the consultant was not far away, and their effects on the companies were rarely very positive. The change brought about through the influence of consultants ‘to remain competitive’ can have major repercussions to the 12

A word of caution: Exploring fashions in IS/IT management culture of the organization. This may well lead to unexpected consequences, not least human resistance, which can result in ultimate failure. It is no coincidence that one mantra often leads to another, which is exactly the opposite, as there is an attempt to counteract failure of the first. Thus the move to bureaucracies led to the opposite move to flattened management; upsizing was followed by downsizing; the move to diversification was replaced by one to ‘stick to your core business’; the lack of consideration for employees is replaced by a charm offensive and the mantra of empowerment (if only the words were reflected in deeds!). Management theories have been taken to extremes and implemented without due care or consideration for people who are literally and metaphorically the lifeblood of the organization. However, consultants can support an organization, indeed help to turn it round. The key is to use consultants (and their latest mantras) with care. O’Shea and Madigan suggest that successful use of consultants is helped by well-defined goals, demandspecific rather than open-ended contracts, and retention of control and monitoring. Further, good change management practices are essential for change to be successful.

1.10 Conclusions In this chapter, it is suggested that there are a number of myths associated with IT. It is widely believed or assumed from management actions that: The conventional exemplars of IT success are valid A one-dimensional view of success or failure is truthful There is one IT strategy to go for There is one clear strategy for developing information systems Information systems failure is due to technology. It has been argued that these are fallacious and in general there are no ‘quick fixes’, and there has been far too much overselling. On the contrary, IT success is much more likely from a balanced view and a holistic approach taking in many aspects. We picked out strategic information systems, business process re-engineering, enterprise resource planning systems, outsourcing, knowledge management and information systems development, but we 13

The Make or Break Issues in IT Management could have equally chosen many other fashions and, especially, electronic commerce. We have avoided the latter because at the time of writing there is so much evidence to support the thesis of this chapter that it is hardly necessary to refer to this topic. Further, we do not need to ‘obliterate’ when we effect change, as incremental change can also lead to radical improvements. Situations differ, and following a contingent view, that is, one interpreted and honed especially for a particular organization’s culture, can be more fruitful than following a prescriptive approach. We should learn from our experiences and mistakes and develop a tradition for the learning culture in organizations. Outsourcing, ERP and downsizing each tend to reduce organizational memory. Knowledge management aims to increase it. One of the above fashions, business process re-engineering, is designed to obliterate organizational memory, and might therefore 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 enthusiastically 2. Many are disappointed, and enthusiasm turns to cynicism 3. 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 up the challenge in the third period of this cycle. Yet how many organizations will take up the next fad enthusiastically and forget about the lessons from the past?

References Avison, D. E. and Fitzgerald, G. (1995) Information Systems Development: Methodologies, Techniques and Tools. 2nd edn, McGraw-Hill, Maidenhead. Avison, D. E. and Wood-Harper, A. T. (1990) Multiview: An Exploration in Information Systems Development. McGraw-Hill, Maidenhead. Avison, D. E., Eardley, A. and Powell, P. (1996) How Strategic are Strategic Information Systems? Australian Journal of Information 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 14

A word of caution: Exploring fashions in IS/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. Information Week, 8 June. Checkland, P. and Scholes J. (1990) Soft Systems Methodology in Action. Wiley, Chichester. Ciborra, C. (1994) The Grass Roots of IT and Strategy. In: Ciborra, C. and Jelassi, T. Strategic Information Systems: A European Perspective. Wiley, Chichester. Coad, P. and Yourdon, E. (1991) Object Oriented Analysis. 2nd edn, Prentice Hall, Englewood Cliffs, New Jersey. Grint, K., Case, P. and Willcocks, L. (1996) Business Process Engineering Reappraised. In: Orlikowski, W., Walsham, G., Jones, M. and DeGross, J. J. Information Technology and Changes in Organizational Work. Chapman and Hall, London. Hammer, M. and Champy, J. (1993) Reengineering the Corporation: A Manifesto for Business Revolution. Harper Business, New York. 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 Organisations with 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 Systems Design: The ETHICS Method. Macmillan, Basingstoke. Myers, M. D. (1994) A Disaster for Everyone to See: An Interpretive Analysis of a Failed IS Project. Accounting, Management and Information Technology, 4, 4. O’Shea, J. and Madigan, C. (1998) Dangerous Company: Management Consultants and the Businesses they Save and Ruin. Penguin. O’Shea, J. and Madigan, C. (1999) Dangerous Company: the Consulting Powerhouses and the Businesses they Save and Ruin. Penguin. 15

The Make or Break Issues in IT Management Parr, A. N., Shanks, G. and Darke, P. (1999) Identification of Necessary Factors for Successful Implementation of ERP Systems. In: Ngwenyama, O., Introna, L. D., Myers, M. D. and Degross, J. I. New Information Technologies in Organizational Processes. Kluwer, Boston. Plant, R. and Willcocks, L. P (2000) Sourcing Internet Development. In: Willcocks, L. and Sauer, C. Moving to E Business. Random House, London. Senn, J. A. (1992) The Myths of Strategic Information Systems: What Defines Competitive Advantage? Information Systems Management, 9, 3. Truex, D. (2001) ERP Systems as Facilitating and Confounding Factors in Corporate Mergers: the Case of Two Canadian Telecommunications Companies. Systemes d’Information et Management, 2, 5. Willcocks, L., Fitzgerald, G. and Lacity, M. (1996) To Outsource IT or Not?: Recent Research on Economics and Evaluation Practice. European Journal of Information Systems, 5, 3. Yourdon Inc. (1993) Yourdon Systems Method: Model-Driven Systems Development. Yourdon Press, Englewood Cliffs, New Jersey.

16

2

Outsourcing IT and e-business Leslie Willcocks Warwick Business School, University of Warwick, United Kingdom

2.1 Introduction In the early 1990s, many company boards and government departments worldwide increasingly asked: ‘Why not outsource IT?’ Much of this was a questioning of escalating IT costs and a reaction to increased competitive and recessionary pressures. Vendors were seen as being able to provide the same or superior service cheaper, offer access to technical expertise in short supply, change fixed to variable costs, and/or through headcount reduction and purchase of IT assets, improve the financial position of a client organization. IT outsourcing has also been portrayed as an opportunity to apply a core–peripery model to managing and organizing. On this argument, an organization should focus on its key tasks and capabilities, and outsource the rest to world class providers. On this analysis, all IT is sometimes mistakenly characterized as an undifferentiated, albeit occasionally ‘strategic’, commodity that can largely be outsourced. This can be a particularly damaging assumption as we move into outsourcing e-business components and infrastructure, which by definition should be closely connected to the business. A further reason for outsourcing IT is all too familiar. Faced with rising IT costs and little demonstrable business value, senior managers have often given up on the internal IT function, and contracted out to third party management some or most IT 17

The Make or Break Issues in IT Management assets and activities. Finally, we are finding in most recent work into the IT needs for e-business that speed and access to scarce IT skills are becoming much more important influences on IT sourcing decisions generally, and not just for e-business activities. This chapter draws upon leading research into outsourcing to answer key questions.1 How has all this turned out? What practices have actually been adopted, and with what results? Are there proven, sound practices in IT outsourcing, and what are 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 management fad. Global market revenues have grown from US$9 billion in 1990 to a projected US$150 billion by 2004. The underlying compound annual growth rate has been 15–20 per cent in the 1992–2001 period. Despite dips in demand during 2000–2001, this buoyancy is likely to be maintained by further developments in areas such as e-commerce, applications service provision, business process outsourcing, managed network services, and supply chain management. From an initial main focus on cost reduction, IT outsourcing is fast moving to becoming a complementary or alternative, routine mode of managing IT. On average 30–35 per cent of most large organizations’ IT/e-business budgets will be managed by outsourcing arrangements by 2003. The question ‘why not outsource IT?’ is no longer, if it ever was, an adequate base from which to make and manage outsourcing decisions. The real question now has to be: ‘How do we exploit the ever maturing external IT/e-business services market to achieve significant business leverage?’ The high profile mega-deals are often referred to as ‘strategic alliances’ or ‘strategic partnerships’. One could be forgiven for believing this type of total outsourcing to be the dominant trend, but globally, this is the reverse of the case. In fact a rich picture emerges of organizations taking one of three main paths to IT sourcing (see Figure 2.1). Our recent US and European survey covered IT and e-business sourcing.2 It found that by far the dominant mode is selective sourcing, especially in the USA (82 per cent of organizations) and UK (75 per cent). A mixed portfolio, ‘best-source’ approach 18

Outsourcing IT and e-business In-house commitment

Selective sourcing

Total outsourcing

Total outsourcing

Core strategic asset

Mixed portfolio

Non-core necessary cost

World class provision

PROVIDERS

IT employees loyal to the business

Horses for courses

Vendor

'Strategic partner'

EMPHASIS

'Value focus'

'Value for money'

'Money'

'Added value?'

DANGERS

High cost Insular Unresponsive

Management overhead

Exploitation by suppliers

Unbalanced risk/reward/ innovation

ATTITUDE

Figure 2.1 IT/e-Business Sourcing: Main Approaches (Source: Feeny, Willcocks, Lacity)

typically sees 15–25 per cent of the IT budget under third party management, with other IT needs met through buying in resources under in-house management (insourcing), and through internal IT staffing. Many organizations (USA 10 per cent, UK 23 per cent) have no significant IT outsourcing contracts. Here IT is perceived as a core strategic asset; with IT employees loyal to the business and striving to achieve business value in a way in which external providers are deemed not to be able to do, total outsourcing (80 per cent or more of the IT budget under third party management of a single or multiple supplier(s)) is a distinctly minority pursuit. In the USA some 8 per cent of organizations take this route, in the UK about 2 per cent; worldwide we found there were just over 140 such deals. Figure 2.1 shows that all arrangements have inherent risks. A mainly in-house function needs to be continually assessed against the market if it is not to grow unresponsive and cost inefficient. One common underestimated factor is the management overhead cost of outsourcing IT and e-business. From reviewing over 300 case histories we estimate that this is falling typically between 4 and 8 per cent of total outsourcing costs, even before the effectiveness of the consequent management arrangements is assessed. Total outsourcing deals focusing primarily on cost reduction can achieve these, but often at the expense of IT operational service, 19

The Make or Break Issues in IT Management and business strategic inflexibilities – pretty big deficiencies where e-technologies are tightly coupled and critical to business success. Alternatively, incomplete contracts, or negligible profit margins through overtight contracts can, and have, promoted hidden costs or opportunistic vendor behaviour. Finally, in the 1990s ‘strategic partnerships’ were often high risk. Many experienced significant restructuring of the deal 18 months to 24 months in. Contracts were often found to need more detail, and more service performance measures. Sometimes the innovation expected from the vendor is not forthcoming. In others, the risk– reward element is too marginal to the overall deal to affect behaviours, and a more traditional fee-for-service arrangement becomes the basis of practice on the ground.

2.3 Using external IT/e-business services: a complex track record Too much of the discussion of the IT outsourcing track record is based on the opinions of interested parties, often arrived at before the ink on contracts is dry. Here we present two sources of evidence that consider actual practices adopted against outcomes. Firstly, our 2000 survey found 56 per cent of organizations rating supplier performance as ‘good’ or better. Many respondents were realizing benefits, primarily some mix of cost reduction (52 per cent), refocusing of in-house IT staff (45 per cent), improved IT flexibility (42 per cent), access to scarce IT resources (42 per cent), better quality service (41 per cent) and improved use of IT resources (39 per cent). The majority of respondents characterized problems/issues as ‘minor’, but some customers were having severe/difficult problems in some areas. Some qualifications are necessary, however. It is important to recognize that these results are positively conditioned by three characteristics of respondent practice: the vast majority pursue the selective IT outsourcing option; most use multiple suppliers, most have shortterm contracts (four years or less in length) and respondents generally targeted infrastructure activities, mainly mainframe operations, PC support, helpdesk, network management, midrange operations, disaster recovery. The least commonly outsourced IT activities involved IT management and applications – in particular IT strategy, procurement, systems architecture, project management. 20

Outsourcing IT and e-business The 79 per cent of organizations using multiple suppliers pointed to several main advantages – the use of ‘best of breed’ providers, risk mediation, and vendor motivation through competition. They also pointed to higher transaction costs, and hidden 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 subcontracting. In some large-scale contracts we have found up to 30–35 per cent of the work actually subcontracted to other suppliers, especially in the areas of technical consulting, desktop hardware and installation, e-business development, network specialists and software specialists. There was evidence of lack of contract completeness, with only 30 per cent of respondents including all ten major clauses cited by us as vital to any outsourcing contract. There was a noticeable negative gap between anticipated and actual benefits. In most cases organizations were getting benefits but invariably less than they had expected. Only 16 per cent reported significant cost reduction, while another 37 per cent reported ‘some’ cost reduction. Other main benefits, each reported by between 33 and 44 per cent of respondents, included: refocus in-house IT staff, improved IT flexibility, better quality service, improved use of IT resource and access to scarce IT/e-business skills. More worryingly, a number of organizations encountered ‘severe/difficult’ problems in six areas as a consequence of outsourcing. These were: Strategic – supplier does not understand our business (37 per cent); corporate strategy and IT no longer aligned (35 per cent); poor strategic IT planning (24 per cent) Cost – costs for additional services (38 per cent); cost escalation due to loopholes (31 per cent); cost monitoring/control (27 per cent) Managerial – poor supplier staffing (43 per cent); managerial skills shortage (28 per cent); in-house staff resistance (26 per cent) Operational – defining service levels (41 per cent); lack of supplier responsivenesss (38 per cent); getting suppliers to work together (35 per cent) Contractual/Legal – too loose (41 per cent); contract monitoring (41 per cent); inadequate SLAs (35 per cent) 21

The Make or Break Issues in IT Management Technical – suppliers’ IT skills shortage (33 per cent); outsourcing led to systems duplication (20 per cent); failure to upgrade IT (17 per cent). These outcomes provide a fairly detailed ‘worry list’ and preemptive agenda for action for any senior managers contemplating IT outsourcing. The second source of evidence is provided by a Lacity and Willcocks study.3 Selective IT outsourcing emerges as the most effective practice, closely followed by the in-house route (see Figure 2.2). Underlining the survey results above, we found successful selective outsourcers embracing several distinctive practices. They had more limited and realistic expectations, signed short (2–4 year) contracts for which the business and technical requirements remained relatively stable, kept in-house resource and knowledge to fall back on resulting in less power asymmetry developing in favour of the vendor and lower potential switching costs, often leveraged competition through using multiple suppliers, and found ways in the contract to give the supplier an incentive and to build in flexibility. The track record of total in-house IT sourcing has improved from that before 1996. At that time, one-third were found to be unsuccessful due to an amalgam of in-house complacency, little sense of crisis, lack of external benchmarking and lack of threat from an external vendor outsourcing bid. The evidence suggests that in-house functions have been actively responding to marketDECISION

Success

Failure

Mixed

Unable to determine/too early to tell

Total outsourcing

11 (38%)

10 (35%)

8 (27%)

4

33

Total in-house sourcing

13 (76%)

4 (24%)

0 (0%)

2

9

Selective outsourcing

43 (77%)

11 (20%)

2 (3%)

8

64

67

25

10

14

116

TOTAL

Figure 2.2 IT sourcing decisions and outcomes – 1991-2000 (Lacity and Willcocks, 2001)

22

TOTAL

Outsourcing IT and e-business place developments in the last three years, and have been seeking to improve IT management, replicate vendor practices in house, compete with potential vendor bids, and benchmark performance against market developments. Total outsourcing emerges as a distinctly high risk practice, a reason why, on our evidence, most organizations have not been going down that route. As Figure 2.2 shows, we have looked at outcomes from 29 of the 140 plus biggest IT outsourcing deals in the world, all of them involving outsourcing infrastructure, and they show a 35 per cent failure rate. Unsuccessful deals shared certain characteristics. Virtually all primarily sought cost reduction. The organizations were in financial trouble, and saw total IT outsourcing as a financial package to improve their company’s position, rather than as a way of leveraging IT for business value, and keeping control of their IT destiny. All were 10–12-year single supplier deals, initiated by the company board with little IT management input. The unsuccessful client organizations saw IT as an undifferentiated commodity, contracted incompletely and failed to keep enough requisite inhouse management capability. They incurred significant hidden costs, degradation of service, power asymmetries developing in favour of vendors, and loss of control over their IT destiny. They did little to build and sustain client–vendor relationships, yet were reluctant to change vendor because of the high switching costs. Success in total IT outsourcing has taken a variety of routes. On the evidence, it requires a lot of management maturity and experience of IT outsourcing, as exemplified by BP Exploration in the early 1990s. It needs complete and creative contracting; a less long-term focus in the contracting arrangements, but a more long-term one in the relationship dimension, and very active and fully staffed post-contract management. Among the successes 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 off its entire IT function in a shared risk reward and joint ownership joint venture with a software and services supplier. One involved a short-term contract to wind down a public sector agency about to be privatized. Several went down the multiple supplier 5–7-year contract route, while several were single supplier deals that took on board the above prescriptions, had detailed contracts and were also high profile, with 23

The Make or Break Issues in IT Management the vendors wary of adverse publicity in specific countries or markets.

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 corporations and their business internet strategies in depth, to identify the factors that distinguished leaders from laggards.4 What follows is based on our findings. The need for speed to the net often dictated 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 disadvantage. The problems decompose into: ‘how can organizations effectively leverage external service providers to get their webbased and e-business projects in place on suitable time-scales to compete?’ And: ‘how do we participate in strategic sourcing with business allies to more effectively compete on a “core capabilities” basis?’ As we shall see, the learning on IT outsourcing applies directly into answering these questions, such that, in the final part of this chapter, we can bring together some fundamental common management principles for outsourcing IT and e-business technologies and activities.

2.5 Sourcing internet implementation capability To make a mark in e-business it is essential to have access to internet implementation capability. The central dilemma for most organizations considering their sourcing options for ebusiness development is the trade-off between speed to market and organizational learning. The fastest route to securing internet presence and capability – outsourcing – may well undermine the organizational need to build up internal understanding. The concern to develop internal knowledge is driven by anxiety that internet-based business processes will be fundamental in the future. Figure 2.3 provides a framework for selecting appropriate sourcing options based on the twin drivers of speed and learning.

2.5.1 The in-house development path The primary determinant of internal development is a credible project champion, usually an executive officer or CIO, who over24

Outsourcing IT and e-business

High

Outsource, e.g. Alamo Jamjar

Insource/ partner e.g. Tesco/RBS

Low

'Cheap-source' ?

In-house, e.g. Motorola Direct Line

Low

High

Speed to the net

Organizational learning Figure 2.3 Internet development sourcing options

sees the ‘internet development group’. Success via this route is assisted by high level project sponsors who created space, facilitated the necessary budget and resources to get off the ground, and protected the project at all times. Typically a project champion provided and sustained the vision and the motivation to the project, and the political influence needed to move it forward. Such projects are often dubbed ‘skunk works’ by their developers. A clear example of the ‘skunk works’ internal development route can be found at stockbroker Charles Schwab. Upon seeing a browser-based demonstration of the company’s traditional trading system, the co-CEOs created, protected and nurtured a new stand-alone internet development group in order to acquire, learn and adapt the technology to their needs. Ultimately recreating the company based upon internet technologies, Charles Schwab was by 2001 the largest on-line brokerage company in the world. The second step on the internal development route was to build a strong infrastructure. Seen as the key to technological and organizational flexibility by many CIOs and executives, the IT infrastructure was critical to the successful transition of the internet presence from the static to the dynamic. The correct infrastructure can be defined as one facilitating the implementation of value-added services through different organizational 25

The Make or Break Issues in IT Management business drivers, so delivering a positive return on investment. The creation of a strong yet flexible infrastructure was a precursor to the third element of the development, that of business process integration. This was the point at which companies had to leverage the organizational learning and experience acquired through the internal development route into customer added value.

2.5.2 The cheap-sourcing path An organization that is not pressured in its market-space to be at the leading edge of internet presence would be advised to apply a ‘cheap-sourcing’ principle to its internet development. This is often the case with organizations that occupy niche market positions, for example a New York-based jeweller, whose site did not facilitate a direct sales model and that did not change with the frequency of a retail site, could be managed at relatively low cost. The primary driver for such organizations is the promotion of the brand; a direct sales channel would dilute the overall corporate marketing position rather than reinforce it. However, due to the need for a sophisticated branding image to be maintained, the company may wish to outsource the site’s graphic design work, marketing and site development to specialists. It may not be in the long-term plan of the organization ever to have a direct sales channel and therefore the need to internalize that learning is minimized. However, this may be to put a positive spin on what is, in fact, lagging practice. The jeweller mentioned above, for example, by 2001 had developed its site for selling its products over the Web.

2.5.3 The outsourcing path Many organizations find themselves in the position of needing to rapidly develop a net presence, yet do not see any immediate economic advantage in extending their internal IT capability. In this situation, the most advantageous policy is to outsource the development. Here internet use is developed by bringing in external consultants and service providers to inject the expertise otherwise gained through skunk works projects. Such external providers offer services in a variety of forms including internet agencies, technical and application service providers, direct marketing agencies, and relationship marketers. However, owner26

Outsourcing IT and e-business ship responsibility for the development should still belong with the contracting organization and issues such as infrastructure and leadership still necessitate internal attention and action. Actual web development learning will be passed to the outsourcer, however, though internal learning on contract management and allied skills will still take place. Some internal technology learning will also occur where the net technologies and the existing infrastructure interface. An organization in this situation was Jamjar, an on-line motoring information and car sale service, set up in May 2000 by UKbased 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 24 hours a day seven days a week. The Jamjar application was developed by Quidnunc and hosted by SiteHost, a Computacenter e-business outsourcing service. In turn SiteHost uses the data centre facilities of web host Exodus where 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 the resources of the organization become stretched too far then competitive edge can be lost. This is counterproductive from an organizational learning perspective and requires ‘partnering’ to become the primary development practice. Thus in several corporations we found that infrastructure building, balancing, and development were performed by an internal group. Graphical internet site design or other specialized tasks were externally sourced, and business process consultants were engaged to integrate the new channels created through the Internet with existing processes in the most effective way possible. A successful example of this approach is provided by American Express: It goes to our basic philosophy which is we do not have to build everything. The question is how do we get our products and services integrated into internet interactive commerce. And you do it through people who are already working on it. (Amex senior executive) 27

The Make or Break Issues in IT Management

2.5.5 Mixed development paths We found organizations adopting different sourcing options at different times, or for different purposes, in their moves to the Internet. As we saw above, insurer Direct Line took the outsourcing route for its Jamjar on-line business. Direct Line was set up in the late 1980s to sell motor insurance direct via the phone. The business expanded into other types of insurance during the 1990s. In the late 1990s it also set up Directline.com to sell insurance services via the net. However, this was developed in house for less than £500 000. According to its IT director: Directline.com is very much at the heart of our insurance business. It’s totally and tightly integrated with our core systems. We couldn’t have done it so quickly had it been outsourced. Interestingly here, not only was the application seen as core business, but also, because internal expertise and business-specific knowledge were higher than that available on the market, the necessary speed could actually be achieved by in-house sourcing. Another mixed approach was adopted by Tesco, the UK’s leading food retailer. In 1998 Tesco piloted its on-line shopping business, Tesco Direct (subsequently Tesco.com), with 20 000 grocery products and six trial sites. It spent £21 million on developing its internet offering in house, and in mid-2000 invested another £35 million. However, in early 2000 Tesco also entered a less familiar, but faster moving market – on-line banking – in which it planned to leverage the power of its brand. The Tesco Personal Finance service was developed in three months through utilizing technology developed by its partner, the Royal Bank of Scotland (RBS), only needing to modify the software to allow customers to transfer money to and from their accounts at other banks. Both partners invested in a series of Compaq 3000 servers, running internally developed software, allowing Tesco customers to link in with the RBS IBM9672 mainframe, which holds account details. Here the need for speed and the availability of a complementary partner in an unfamiliar business became 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

Outsourcing IT and e-business advantages of speed to the net, followed by internalization due to the rising business importance of the Internet and the need for internal learning and capability. The pattern also seemed to reflect those organizations’ own increased learning about the advantages and disadvantages of different sourcing options. This learning also sharpened their ability to make more selective and precise sourcing decisions, and also undertake selective late outsourcing of development and web operations, on criteria we shall look at in the next section. Figure 2.4 provides a summary of the issues that leading organizations tend to take into account when attempting to achieve trade-offs and mitigate risks in the choice and management of their sourcing options.

2.6 E-sourcing: from projects and technology to strategic partnering So far we have focused on sourcing technical development for e-business projects. But e-business sourcing is also about making best use of the mix of internal and external suppliers throughout the organization’s business processes. This involves understanding who has what core competences. During the 1990s a very strong literature developed, focusing on core competence business strategies. Commentators such as Pralahad and Hamel, and Quinn argued that an organization can only be effective at relatively few core activities, and should concentrate on developing these to world class. Anything else should be eliminated, minimized or outsourced.5 Here core competence refers to a distinctive, not easily replicable, assembly of skills, techniques, ways of organizing, technologies and know-how that enable an organization to acquire, deploy and leverage positioning and resources, including relationships, in pursuit of business advantage. How can we apply core competence thinking to the e-world?

2.7 External sourcing around the customer resource life cycle In order to exploit the massive e-opportunity, many have stressed the criticality of gaining repurchase decisions by managing the customer’s total experience in such ways that the customer would regularly prefer the organization’s products/ 29

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’

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 and technology alignment • Contract management costs to coordinate project

Internal development

Advantages • Low investment • Low internal effort and resources • Gains from a ‘follower’ internet strategy (?)

Advantages • Internalize organizational learning • Understanding of organization’s processes and integration issues • Understanding of internal IT infrastructure

Disadvantages • Little internal learning, or from market • Functional only in relation to a specific type of business strategy • Does ‘followership’ pay with internet applications?

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

services. If the customer resource life cycle of an on-line business is broken down into eight major activity areas, it is clear that the technical means and businesses exist for each area to be adequately sourced by an external service provider. 1. Attracting customers – services like Link Exchange and Befree can provide fully developed customer affiliate programmes. 30

Outsourcing IT and e-business

2.

3.

4.

5.

6.

7.

DoubleClick can offer targeted advertising. These and many other companies basically provide technologies and services that attract and deliver targeted audiences to your e-business. Informing customers – organizations like OnDisplay.com and Cardonet.com act as content mediators, serving up-to-date, relevant content to a website. Thus W.W. Grainger, in the maintenance, repair and operations business offers hard goods supplies to US businesses. It partners with OnDisplay, which utilizes the information from 2000 plus supplier databases to develop on-line interactive catalogues for Grainger’s three websites. Grainger’s on-line sales exceeded US$150 million in 2000. Customizing (self) service – companies like Firepond.com, Selectica.com and Calico.com build configuration software that is such a strong feature of the Dell site offering build-toorder computers, and the Cisco Systems and Cabletron Systems sites selling routers and networking gear. Transacting – there are many companies, notably Ariba, CommerceOne, Oracle, Moai Technologies, that offer marketmaking platforms. Ariba offers shared commerce services in B-to-B marketplaces. Its key customers included (as at 2001) Federal Express, Cisco Systems, Charles Schwab and Chevron. CommerceOne offers web-based B-to-B procurement and platforms for creating vertical trading communities. Moai Technologies provide B-to-B exchanges and auction platforms. Securing payment – many organizations and customers have concerns over the security of payments over the web. These concerns have encouraged the development of companies to look after the payment and financing functions of on-line transactions. Thus eCredit.com provides real-time credit underwriting engines, while Paylinx offers systems that support credit and debit card transactions. Customer support – many organizations new to e-business may well feel unable to provide the necessary level of information, problem resolution, advice and order tracking for their customers. As a result external service providers have developed offerings for, for example, call centre facilities, live on-line services and the checking of order status. E-fulfilment – we found many examples of companies providing such services included Celarix, Manugistics and i2. In addition many e-fulfilment companies had developed for the business-to-consumer market. 31

The Make or Break Issues in IT Management 8. Adaptive customer profiling – rather than developing the necessary software and internal capability, companies can now hire collaborative filtering and data mining services from providers such as Verbind.com, Datasage.com, and E-piphany.com. Verbind, for example, provides American Express, Reel.com and Furniture.com with its LifeTime product. At one level these would appear to be exciting and highly functional developments. However, outsourcing extensively throughout the customer resource life cycle does raise a number of issues. Handing over control of activities creates exposure to risk. What level of exposure is judicious, and how can the risks be mitigated? Does increased dependence on suppliers mean that deeper relationships are required? At what stage might cooperators become competitors? In answering these questions one conclusion is clear – whatever the line of business, extensive fee-for-service outsourcing and the treatment of every activity as a commodity to be outsourced are rarely appropriate. A particularly profound problem occurs with a firm’s ownership of the relationship with its end customers. If this relationship is compromised through outsourcing, then so is a potential source of competitive advantage. Consider one company (A) we studied. Throughout 2000 it employed an e-fulfilment firm (B) to deliver goods but insisted that these be delivered to A’s warehouse and not to the end customer. At no time did B know who the end customer was; it was only given enough information to deliver goods in the right quantity and at the right time to A. These goods were then relabelled by A and delivered to the end customer. In this scenario, conditioned by previous experiences, A’s behaviour was designed to protect its customer database and customer relationships.

2.8 The virtual organization – effective management approaches The virtual organization made possible by the development of internet-related technologies relies heavily on outsourcing. Cisco Systems and Dell provide clear examples of virtual integration. Consider Dell. Dell has explicitly described its strategy as that of virtual integration. During 2000 it made more than US$40 million a day 32

Outsourcing IT and e-business (over 50 per cent of total sales) via the Internet. Its continuing success is invariably put down to its customer focus. However, an underlying vital component has been sourcing strategy and management. According to CEO Michael Dell: ‘I don’t think we could have created a $12 billion business in 13 years if we had tried to be vertically integrated.’ With fewer physical assets and people it has fewer things to manage and fewer barriers to change. Through IT-enabled coordination and control of its value network of suppliers and partners, Dell has operated with a 20 000 rather than an 80 000 workforce. In the supply arena it has focused on making long-term deals and commitments with as few leading suppliers as possible. Datalinks measure and feed back supplier performance in real time. Close ties with suppliers (‘their engineers are part of our design and implementation teams’) mean that Dell buys in innovation from its suppliers. Information technologies allow speed and information sharing and much more intense forms of collaboration. It also means that suppliers can be notified precisely of Dell’s daily product requirements. This has also allowed Dell to focus on inventory velocity, and keeping inventory levels very low. Dell has also sought strong partnering relationships with key customers. Seen as complementors, customers are often involved in research and development, where Dell’s focus is on relevant, easy-to-use technology, improvements in the customer buying process, keeping costs down, and superior quality in manufacturing. Dell also offers service centres in large organizations to be close to the customer. Thus Boeing has 100 000 Dell PCs and 30 dedicated Dell staff on the premises. For present purposes, what is interesting are the criteria such a company has used to make sourcing decisions. The Dell criteria would seem to be six-fold: 1. Dell focuses its attention on all activities that create value for the customer. This includes R&D involving 1500 people and a budget of US$250 million, which focuses on customerfacing activity and the identification of ‘relevant’ technology. It tends to outsource as much as possible all other activities that need to get done. 2. Dell carefully defines its core capability as a solutions provider and technology navigator. It uses partners/suppliers as much as possible to deal with such matters as products, components, technology development, assembly. 33

The Make or Break Issues in IT Management 3. A key core task is coordination as against ‘doing’ tasks such as manufacturing and delivery. 4. A key core capability is control of the value network through financial and informational means to ensure requisite speed, cost and quality. What does Dell control? Basically the company appoints and monitors reliable, responsive, leading edge suppliers of technology and quality. 5. Dell takes responsibility for seeking and improving all arrangements that give it speed and focus in the marketplace and in its organizational arrangements. 6. Dell sees information management and orchestration as a core capability. This is an outcome of two strategic moves on its part. The first is to convert much of the physical assets (‘atoms’) it manages into digital form (‘bytes’). The second move is to outsource as much as possible of the remaining physical tasks and assets, while rendering management of the digital 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 bring together our thinking and learning into two summary matrices. Our research has made clear that, whether at the IT, project or strategic alliance level, fortunately, we can apply to e-business sourcing many of the principles learned in other contexts in the 1980s and 1990s. Cisco and Dell are not so far removed from what has been called the original virtual organization, clothing manufacturer/retailer Benetton. Moreover many of the practices observed in IT sourcing over the last decade can apply directly to the e-world. Let us bring these principles together. IT and e-business sourcing must start with the business imperative. In Figure 2.5 we identify two dimensions of business activities. The first is in terms of its contribution to competitive positioning. In IT, mainframes and payroll applications are frequently perceived as commodities, while British Airways’ yield management system gives the company a competitive edge in ticket pricing and is regarded as a differentiator. The second is in terms of the underpinning it provides to business operations. As a broad example one website might be critical – as is the case for Amazon (no website, no business) – or it could be merely useful – for example, the New York jeweller cited earlier. These two dimensions create four quadrants. 34

Outsourcing IT and e-business

Critical

"Qualifiers'

'Order winners'

(Best-source: in-house/partner)

(In-house/buy-in)

'Necessary evils'

'Distractions'

(Outsource)

(Migrate or eliminate)

Commodity

Differentiator

Contribution to business operations

Useful

Contribution to competitive positioning Figure 2.5 Strategic e-sourcing (A) by business activity

Let us use the Dell example to illustrate the thinking here. ‘Order winners’ are those business activities that critically and advantageously differentiate a firm from its competitors. The six Dell items listed in the previous section fall here. The strong message here is to carry out these core activities in house, buying in resources to work under internal control where expertise is lacking and a build-up of internal learning is required. ‘Qualifiers’ are business activities that must be carried out as a necessary minimum entry requirement to compete in a specific sector. For airlines, aircraft maintenance systems are vital but do not differentiate the airlines from each other. Often critical differentiators can become commodities and move to this quadrant. Thus, were Dell’s excellent customer service ever to become an industry standard, it would be redefined as a ‘Qualifier’. As at 2001, assembly, manufacturing and delivery were being defined by Dell as ‘Qualifiers’. These should be bestsourced and can be done by third parties, where they meet the right cost and competence criteria (see below). ‘Necessary evils’ are tasks that have to be done but are not core activity and gain no strategic purchase from their fulfilment. Dell has tended to cut down on administration, inventory and 35

The Make or Break Issues in IT Management payroll tasks, for example, and would seek to outsource as much of these sorts of activities as possible. ‘Distractions’ are failed or failing attempts to differentiate the organization from its competitors. The goal here must be to eliminate the activity or migrate it to another quadrant. Thus in 1989 Dell opened retail outlets, but soon discovered this development was not going to be successful, and fell back on its direct business model. It also during the early 1990s suffered from ‘functionality creep’ in its notebook designs, a practice ended when it was realized that this attempt to differentiate meant little to customers. It is not enough, however, to identify a potential use of service providers or business allies. What is available on the market also requires detailed analysis. If the market is not cheap, capable or mature enough, then the organization will need to seek a largely in-house solution. A second matrix is needed to fully capture the major elements for consideration. In Figure 2.6 we plot the cost efficiencies and the capabilities the market can offer against carrying out tasks internally. Where the market can carry out a task cheaper and better, then outsourcing is the obvious decision but only for ‘Qualifiers’ and ‘Necessary evils’. An example is Federal Express providing customer delivery for Dell. Where the market offers an inferior cost and capa-

COST

Market superior

Market cost efficiencies vs. internal

Cheap source for non-key activities and roles

Outsource

In house

Buy-in for key activities and roles

• Management practices • Economies of scale • Experience curve effects

Market inferior Market inferior

Market superior

• Expertise Market capabilities • Service CAPABILITY vs. internal • Speed • Complementarity Figure 2.6 Strategic e-sourcing (B) by market comparison

36

Outsourcing IT and e-business bility then in-house sourcing will be the better alternative (assuming that ‘Distractions’ are best not sourced at all). Where the market offers a better cost deal, then this should be taken, but only for non-key activities (‘Necessary evils’). Where the market offers superior capability but at a premium price above what the in-house cost might be, then there may still be good reasons for insourcing or close partnering with the third party, not least to leverage and learn from their expertise, and apply it to ‘Qualifying’ and ‘Order winning’ tasks. Thus Figures 2.5 and 2.6 help to summarize the main criteria that can be used for making e-sourcing, and, in fact, many other business sourcing decisions. Use of the matrices requires decisions on trade-offs in order to establish the least risky ways external parties can be leveraged to organizational advantage. But as this chapter illustrates, making the right sourcing decisions does not guarantee their successful implementation. As in the cases of Dell and Cisco, internal capabilities must be developed to manage the risks, relationships and performance issues inherent in the extensive use of external service providers and business allies.

2.10 Conclusions In many countries in the world private and public sectors have waded into a series of further potentially large IT outsourcing waves, stimulated by moves to e-business, application service provision, business process outsourcing and the like, as well as more familiar forms of, and reasons for, outsourcing. It is useful to stand back and look at what has been learned so far about IT outsourcing practices. It should be said that good and bad IT outsourcing experiences, like everything else in IT and its management, are not sector specific. For example, financial institutions in all countries do not manage IT outsourcing any worse or better than any other organizations or sectors. Organizations fail when they hand over IT/e-business technologies 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 set of tasks for which a detailed contract and performance measures can be written. Too many client companies see outsourcing as spending – and as little as possible – and ditching their problems, not managing. In fact outsourcing requires a great deal of 37

The Make or Break Issues in IT Management in-house management, but of a different kind, covering elicitation and delivery of business requirements, ensuring technical capability, managing external supply and IT governance. A cardinal insight from the research we have been reviewing up to early 2001 is that organizations still expect too much from vendors and not enough from themselves, or, put another way, vendors are still much better at selling IT services than their clients are at buying them. The key is to understand and operationalize four capabilities necessary to pursue IT/e-business outsourcing effectively: 1. The ability to make sourcing decisions and arrive at a longterm sourcing strategy, building in learning, and taking into account business, technical and economic factors. On this front, our research identifies two proven practices in outsourcing. First, selective outsourcing decisions and total inhouse/insourcing decisions achieve success more often than total outsourcing decisions. Second, senior executives and IT managers who make decisions together achieved success significantly more often than when either stakeholder group acted alone. 2. The ability to understand the IT/e-business services market place, the capabilities and weaknesses of relevant vendors, and what their business strategies are and imply in any likely outsourcing deal with an organization. Our research shows two proven practices here. First, informed buying is a core IT/e-business capability for all contemporary organizations. Second, organizations that invite both internal and external bids achieve success more often than organizations that merely compare a few external bids with current internal performance. 3. The ability to contract over time in ways that give suppliers an incentive and ensure that you get what you think you agreed to. Two proven practices here are that short-term (4 years or less) contracts achieve success much more often than long-term contracts (7 years or more); and that detailed feefor-service contracts achieve success more often than other types of contracts. 4. The ability to post-contract manage across the lifetime of the deal in ways that secure and build the organization’s IT/ebusiness destiny, and effectively achieve the required service performance and added value from the supplier. The evi38

Outsourcing IT and e-business dence is that this is one of the weakest areas in outsourcing practice and is rarely adequately thought through at the front of outsourcing deals. Typically, a minimum of nine core capabilities emerge as necessary in response to problems confronted 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 four vital components before outsourcing IT/e-business to any significant degree, and then build these capabilities where they are lacking. These capabilities form the only real long-term security against disappointments in using the external market for IT and e-business services.

Notes 1. This chapter draws upon multiple sources. The first is a case history research database of over 250 organizations and their IT/e-business sourcing practices assembled and studied across the 1990–2001 period. We also draw upon three European and US IT/e-business outsourcing surveys carried out in 1994, 1997 and 2000, and additional case work into over 100 e-business developments carried out as part of ongoing research projects. The key publications and researchers are detailed in the references below. 2. Lacity, M. and Willcocks, L. (2000) Inside IT Outsourcing: A State of the Art Report. Executive Research Briefing. Templeton College, Oxford. 3. Lacity, M. and Willcocks, L. (2001) Global Information Technology 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 strategic sourcing are Quinn, J. (1992) The Intelligent Enterprise: A New Paradigm. Academy of Management Executive, 6, 4, 44–63; Pralahad, C. and Hamel, G. (1990) The Core Competence of the Corporation. Harvard Business Review, 68, 3, 79–91; Hamel, G. and Pralahad, C. (1994) Competing for the Future. Harvard Business Press, Boston. 39

The Make or Break Issues in IT Management 6. For more detail see Feeny, D. and Willcocks, L. (1998) Core IS Capabilities For Exploiting IT. Sloan Management Review, 39, 3, 9–21.

40

3

Learning to realize the benefits of IT Brent Work University of Cardiff, UK

In this chapter-argue that organizations fail to realize the benefits of their IT investments because they believe that these benefits occur effortlessly. This is patently untrue. The benefits of IT are what Stephen Toulmin calls futuribles: futures that do not simply happen themselves, but can be made to happen, if we meanwhile adopt wise attitudes and policies. Realizing the benefits of new technologies is a form of learning, which requires intelligent persistence. This is the make or break issue, which I describe in this chapter.

3.1 Some evidence of the missing benefits There is much literature, both academic and journalistic, that documents IT’s unrequited promises. I shall touch on just two aspects of it. The first is the so-called productivity paradox – has IT investment had an impact on national productivity? The second is whether IT expenditure affects a company’s bottom line. Stephen Roach, an economist for Morgan Stanley, raised the productivity paradox in 1984 when he observed that accelerating IT investment had no effect on US productivity. His comments sparked many studies. Most confirmed his remark. Recently, a number of analysts, including Alan Greenspan, Chairman of the US Federal Reserve, have argued that IT has begun to influence 41

The Make or Break Issues in IT Management productivity in the last few years. Table 3.1 shows the evidence for this. Table 3.1 Average US labour productivity growth Period 1948–1965 1965–1973 1973–1979 1979–1986 1987–1994 1994–2000

Business sector

Manufacturing sector

3.25 per cent 2.14 per cent 0.61 per cent 1.40 per cent 1.36 per cent 2.98 per cent

2.92 per cent 2.48 per cent 1.37 per cent 3.42 per cent 3.07 per cent 4.74 per cent

Since 1994 productivity growth in the US business sector has averaged nearly 3 per cent a year. This is more than twice the figure for any of the four previous business cycles. During the years 1998–2000 productivity growth in the business sector has averaged 3.7 per cent annually. This is the highest three-year average since the period 1971–1973. While this is impressive, it is only slightly above the average of the post-World War Two era (1948–1965). Hence, it might be argued that this only reflects a return to the long-term growth rate after 35 years of poor performance. Since 1994 the productivity growth in the US manufacturing sector has averaged 4.7 per cent a year. This is almost 50 per cent higher than in any period since World War Two. This is due primarily to manufacturing productivity growing by 6.4 per cent annually in the last three years – the highest three-year average since the 1940s. In 2000 manufacturing productivity grew by 7.1 per cent alone, the greatest since the US government began measurement. This consists of a 10.5 per cent growth for durable goods, but a 3.2 per cent growth for non-durable goods. In short the only real productivity miracle is in durable goods. While the hardware industry has rapidly become more efficient, its customers’ productivity has grown more slowly. The companies that produce durable goods account for a little over 10 per cent of US Gross Domestic Product. Companies in the business sector contribute 77 per cent. Hence, the rapid increase in durable manufacturing productivity has had little effect on overall US productivity growth. Moreover, IT invest42

Learning to realize the benefits of IT ment should have a greater impact on organizations whose product is information, for example finance and professional services, which are within the business sector. While most capital investment in durable manufacturing has some IT component, IT’s impact on productivity is likely to be less in this sector than in the business sector. In short it is impossible to demonstrate after almost 50 years of investment that IT has significantly improved American productivity. In the UK there has not been a similar growth in productivity. In 1996 an average hour of work produced 28 per cent less output in the UK than the US. In 1999 an average hour of work produced 38 per cent less output in the UK. This 36 per cent decline in the UK’s relative productivity indicates that the impact of IT investment is not yet visible in Britain. Paul Strassman, a consultant and former executive of Xerox, offers a second persuasive finding. He examined several hundred North American and Western European companies, in a variety of industries, over a number of years, with the hope of finding a relationship between IT expenditure and a number of financial indicators. In the end he concluded, ‘there’s no simple correlation between the money spent on computers and a company’s financial results’.

3.2 IT investment as a religious salvation If IT does not deliver significant benefit, why do we buy it? I think it is easier to explain if we look at individual organizations. I offer four cases from my own recent experience. They represent a cross-section of organizations: public and private sectors; large, medium, and small in size; developed and developing countries; national and global in scope. Thus, they offer a basis for generalization.

3.2.1 Case one A small aerospace manufacturer had only a mini-computer for its accounting department and a workstation for engineering planning. Five years ago, two of its largest customers warned its directors that they must adopt Computer Integrated Manufacturing or lose their preferred supplier status. The directors bought a software package, installed it, could not get it to work, and allowed the lease to expire. This cost them about 43

The Make or Break Issues in IT Management £50 000. Then, they acquired another package and 20 compatible PCs. The total expenditure was 5 per cent of annual revenue. The directors proudly promoted the new system to their customers, but after three years it still was not fully operational. I asked the managing director what their benefits were and without hesitation he said ‘we’re still in business’.

3.2.2 Case two Since the mid-1980s technicians in the office of an Asian prime minister have developed over 30 EIS applications. None of these has been justified and there has been no evaluation of their benefits. Several have not been accessed in the last year and yet they are still being maintained. When I asked the systems analyst responsible for these systems how this could be explained, she replied, ‘we are behind the developed countries. Therefore, we need to create as many systems as possible. Later we can worry about 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 a standard PC on each employee’s desk, to load the same software on each machine, and to connect all of the machines by means of a corporate network. The estimated cost for the project is US$450 million. When I asked what was the purpose of the exercise, the response was ‘to improve communications between these former competitors so as to expedite the merger’.

3.2.4 Case four A technological university sought an international reputation. It decided to install a state-of-the-art network throughout its campus. The justification was that it would provide the infrastructure to support innovation in computer-based education. This would make teaching more efficient and allow staff more time for research. The network proved to be slow, unreliable, and difficult to use. While large sums were spent on creating and maintaining the network, the development of educational software received little funding. The students and staff rebelled. The senior professors who initiated the idea claimed that the project was successful because so many had come to marvel at the 44

Learning to realize the benefits of IT network. They refused to allow any evaluation of the investment because they argued that it is impossible to measure the effectiveness of educational innovation. In all four organizations the purpose of investing in IT was aspirational rather than beneficial. It was mostly spin. The aerospace manufacturer wanted to stay in business. The IT staff in the Asian prime minister’s office wished to show that they were as technically competent as their colleagues in developed countries. The pharmaceutical corporation hoped to complete their merger as quickly as possible. The university desired prestige. In none of these instances did senior management require justification, or even articulation, of benefits because they aspired to a general state, not a specific improvement. In all four organizations there was an assumption that the expenditure on hardware and software would satisfy these aspirations automatically. The directors of the aerospace manufacturer were satisfied. They were not deselected and so they were in no hurry to implement. After 15 years the prime minister’s staff could point to their many EIS applications and be proud of their technical sophistication. The pharmaceutical corporation believed that better communication would result in a faster union with old adversaries; the existence of a standardized infrastructure would eliminate communication barriers. The university assumed that being the first to implement new technology on a wide scale would make its name. When the hardware vendors brought people from around the world to see the advanced network, the top administrators knew that the project was working. Why bother with what the students and faculty thought? In each of these four cases the aspirations were fulfilled, but it was impossible to identify the benefits arising from these 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 always brings improvement. All change is progress. Every innovation works first time. The word revolution has no negative connotations. The idea of modernity requires optimism because every day, in every way, we are getting better and better. Technology is the embodiment of the new and the modern. Therefore, the more of it we have, the better off we will become. We should love technology because it is transforming our lives. Those who wish to show that they are truly modern must buy ever new 45

The Make or Break Issues in IT Management technology. For the individual, as well as companies, being a ‘first mover’ is a lifestyle statement as much as a competitive strategy. Not surprisingly, post-modern critics conclude that IT is the religion of the late twentieth century. Like any religious fundamentalists, technophiles do not question their belief for fear of turning to salt, or is it sand? Like the mediaeval church, IT companies are getting rich by encouraging believers that salvation lies in IT.

3.3 IT investment as exploration I think that comparing IT to a religion is misleading. IT is demonstratively different from religious belief. Religion, like magic, deals with the vicissitudes of life by seeking the intervention of the gods. Technology allows us to attempt to control our own destinies. If we understand how IT works, we can produce desirable results consistently. The problem is that we never know how new technologies work. We have to learn what their benefits are and how to achieve them. I think that realizing IT 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 across the terrain, jotting down observations or making a crude map. He may have come for glory or for treasure. Certainly, if he finds any riches, it will be a happy accident. At the end of his journey he may publish his reminiscences. The next visitor to the new world will find life a little easier. He may have read the accounts of the original explorer and decided that there is wealth – gold or oil or ancient artefacts – awaiting him there. He should take a copy of the original map in order to assist his search. While he may find traces of riches, he will probably not find the mother load. In the meantime he will learn more about the land, its people, and its geography. He will probably even improve on the original explorer’s map. After him more will come, spurred on by the promise of wealth. Little by little, the location and extent of the riches will be discovered. As a result, local industry will be born. This may even provoke the colonial government to fund a scientific survey in order to map the region and to determine the full extent of its resources. Eventually, all of the trappings of a developed economy will arise – roads, railways, banks, a government – in order to exploit the wealth systematically. 46

Learning to realize the benefits of IT Of course, the story does not necessarily have a happy ending. Exploration is fraught with risk and even danger. Not everyone will find riches in the new land. The most likely way to make a fortune will be to transport people to this new region or to sell them supplies. There may be nothing of value there to discover. In this case all hope will be false. Some may even contract deadly diseases or be eaten by cannibals. The process of moving from initial exploration to systematic exploitation is an illustration of enacting a futurible. The discovery of a new continent has never led automatically to untold wealth. Just spending money on an expedition is not enough. Exploitation happens slowly because it depends on trial and error. Funding a succession of expeditions that does not accumulate knowledge of the territory is wasteful. Learning must be the aim. Blind persistence may be heroic. It may make your reputation, but it is usually folly. Intelligent persistence is crucial to success. True intelligence is not knowing more, but learning better. As Toulmin observes, this means the adoption of wise attitudes and policies in order to make the desired future happen.

3.4 Benefits realization as organizational learning The successful realization of IT benefits closely mirrors the moving from exploration to systematic exploitation. Imagine that you want to adopt a new technology. You want to send a signal to customers, competitors, or markets. This may satisfy an aspiration, but in itself it is unlikely to create much benefit. Realizing benefits is much harder work. How can you do this wisely? At the outset you will be prospecting. The most important thing that a prospector needs is a map that shows the terrain. If you are the first to use the technology, then finding a map may be difficult. You may speak to the people who created the technology. Their sales force will always suggest the kind of benefits you should realize. Of course, they have an incentive to think wishfully. You might also consider similar, but more mature, technologies. For example, those wanting to understand the benefits of adopting business-to-business e-commerce might do worse than to examine the extensive literature on the benefits of EDI. Of course, if you are not the first to use the technology, you may learn much about potential benefits and where they lie 47

The Make or Break Issues in IT Management from looking to other industries, to consultancies, to scholars, or even to competitors. With this information you can make your own map or modify someone else’s. Using your map as your guide, you can set out on your search for the benefits that are marked on the map. If you have done a good job of research, you may find a little treasure. However, in the case of a completely novel technology, your map is likely to be poor. You should not be discouraged because, at least, your approach to prospecting is not haphazard. The important thing is that at the end of the project you need to evaluate your map. Why did you fail to find any (or so) few benefits? How well does your map represent the actual terrain? How can it be improved? Then the next thing to do is to begin planning a new journey immediately. You may not be a member of the next expedition, but it does not matter because they will have your updated map. They will benefit from your learning. As a result, the second journey will almost certainly be more successful than the first, even if it only produces an even more accurate map. As this cycle of quest and reflection progresses, your organization will become increasingly adept at realizing the benefits of this technology. The lessons learned on a later project may indicate that a small investment in a previous, less successful one will unlock latent benefits. Eventually, it will become possible to invest in this technology with near certainty that its benefits will be realized efficiently. It is only at this point that your organization understands how to use the technology. The latest map embodies this knowledge. It is a tangible product of organizational learning. In this manner the means by which the benefits of this new technology are realized will take shape. By intelligent persistence, by the application of these wise attitudes and policies, the future will gradually unfold.

3.5 What is a benefits map? The idea that underpins the exploration metaphor is the benefits map. 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 technology replaces older technology, for example substituting robots for 48

Learning to realize the benefits of IT people. We hope the benefits of automation will appear instantly, but they never do. Why? This belief assumes activities take place in a vacuum. It ignores the existence of an organization. Substitute the old technology used in the activity with a newer, better one and productivity must grow. But an organization is a network of related activities – a system. A change in the way one activity works may have unforeseen effects on other activities. The most elementary illustration is that improved productivity in the factory is likely to create additional inventory and lower profits unless there is a corresponding increase in sales. Hence, it will be necessary to make alterations to activities throughout an organization in order to realize the benefits of a change of technology in one. This is particularly true of IT because information plays a role in every activity while production technology is limited to shop floor tasks. In fact many information technologies, especially those depending on databases and networks, are systemic and affect the operation of the whole organization rather than a few activities. A benefits map traces all of the alterations that must be made throughout an organization if a technology’s benefits are to be realized. Figure 3.1 shows a generic benefits map. At the lefthand side the capabilities of the technology are represented. These are the features of the technology that may be exploited in order to create benefits. At the right-hand side of the figure are the benefits that the new technology should produce. The three categories in the middle – individual characteristics, organizational architecture, and organizational competencies – are the factors missing from many organizations’ understanding of benefits realization. The new technology may enhance the existing characteristics of individuals or even require them to adopt new ones. The organizational architecture may have to be restructured to assist employees in acquiring these new characteristics. The architecture is more than just the system of relationships that shape it. It includes the organizational knowledge and behaviour necessary to maintain these relationships. The new technology may directly allow the architecture to be restructured. It may also do this indirectly. This occurs when individuals are able to use their enhanced characteristics in order to do their work in new ways. The value created by any organization arises from its compe49

The Make or Break Issues in IT Management Organizational architecture

Technological capabilities

Organizational competencies

Individual skills

Organizational benefits

Figure 3.1 Generic benefits map of any information technology

tencies. The benefits of any new technology depend on improvements in an organization’s competencies, particularly ones that are unique. These competencies are the product of the workings of the organizational architecture. The best types of benefits do not simply increase the bottom line. They are those that improve an organization’s competencies and the characteristics of its individuals. Such benefits create a virtuous circle. In order for the benefits of technological improvements to be realized, they must be channelled through individuals’ characteristics and an organization’s architecture in order to improve competencies. It is very likely that this will cause friction, if everything 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 amplify the benefits. An accurate map shows exactly where these points are 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 how they work. Two of the organizations that I have mentioned have systems that allow executives to scan information bases, i.e. databases that incorporate statistics on foreign trade, financial budgets, materials prices, etc. Their purpose is to allow executives to keep up to date with things. These information bases are 50

Learning to realize the benefits of IT systems that help executives to assimilate news about what is happening inside and outside of their organizations. Essentially, they assist learning. Since the benefits of learning are difficult to quantify, this is an interesting illustration of the use of benefits maps. With the help of people in these organizations I developed a benefits map for information bases. It appears in Figure 3.2. We produced this map by surveying the research on executive scanning. We also identified qualitative indicators and, where possible, quantitative measures for evaluating each feature on this benefits map. For example, we identified the organizational benefits of scanning in terms of increased market share and profit growth in the public company. Within the government we found more precisely addressing the interests of particular constituents to be the benefit.

Technological capabilities

Individual characteristics

Easy-to-use interface

Accelerated cognitive processing

Analytic features Improved information

Organizational knowledge Technical Domain

Tolerance for ambiguity Innovativeness

Organizational behaviour Scanning

Social influence

Wider range of variables used

Analytic comprehensiveness Confidence to act Early identification of problems/opportunities

Benefits

Organizational competencies

Higher performance

Responsiveness Depth of understanding

Figure 3.2 Benefits map for scanning information systems

51

The Make or Break Issues in IT Management The upper half of the diagram indicates the technical capabilities, the individual characteristics, the organizational knowledge, and the organizational behaviour needed if executives are to scan effectively. The lower half shows what organizational behaviour and competencies must be developed if scanning is to be converted into higher performance, the ultimate benefit of all IT investment. Researchers have concluded that there are three capabilities that any information base should have if it is to encourage scanning. The first two – an interface that is easy to use and features that allow data to be analysed – make the technology flexible. The third capability is improved information. Specifically, this means that the information included in the system should be more diverse, more current, more detailed, more relevant and/or more integrated than that which an executive now has. Researchers have found that there are three skills that executives need to scan effectively. The first is the ability to assimilate the increased amount of information. The interface and the analytic features make this possible. However, most executives require some technical assistance in order to scan successfully. Careful scanning is also likely to raise questions about the nature of the information, such as definitions of terms and ways in which calculations are performed. It is important that an executive is able to consult someone who knows about the application. The second skill is tolerance for ambiguity. An executive who feels comfortable dealing with vague, equivocal, and qualitative data is more likely to scan. The third skill is innovativeness. Executives who like to tackle new problems are more motivated to scan and better able to prosper from it. Researchers have emphasized the role of culture. In organizations where scanners are highly regarded, scanning will be encouraged. This is a self-reinforcing activity since social influence can increase scanning and intensive scanning should increase social influence. Scanning should lead executives to use a wider range of variables to develop an appreciation of a situation. This has three important consequences. First, the organization should produce interpretations that are more analytically comprehensive. This occurs when several alternative interpretations are created and evaluated before deciding which one to adopt. Second, executives should have greater confidence to act since their decisions 52

Learning to realize the benefits of IT are based on better data. Third, executives identify problems and opportunities earlier and so may act faster. These three behaviours result in better responsiveness to customers or citizens and a deeper understanding of their needs. The result is higher performance.

3.7 A case study in benefits realization When we examined the utilization figures for each of the information 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 found in this system. As a result, we were able to explain why it was so successful. We could also suggest some inexpensive ways in which its benefits might be increased. The executives who used it were impressed. Next, we chose a system that had the lowest utilization. We applied the benefits map to it in order to explain its unpopularity. Two factors stood out. The first was that the interface required executives to write SQL commands. The second was that executives did not understand the information that they retrieved. We rectified these two problems. We replaced the SQL interface with one that was GUI and we included an expert in this application within the EIS support group. We argued for both of these changes by reference to the benefits map. A third problem was subtle and took us longer to discover. It was obvious that there was little encouragement to use this system. After making the improvements, we gave a personal tutorial on the system to a senior executive. She was enthusiastic, so we asked her to promote it. She wrote an article for the inhouse newsletter. We also learned that the first system that we had examined was being demonstrated, as an exemplary EIS, in an introductory course for new employees. We asked that it be replaced in the demonstration by the second system, which had been improved. Again, we justified our request with the benefits map. We found the executives in these organizations natural scanners. Most were good at cognitive processing, were innovative, and had a tolerance for ambiguity. They were also very confident and acted with determination. However, they did not show a high degree of analytic comprehensiveness. They were ‘satis53

The Make or Break Issues in IT Management ficers’. They adopted the first way of looking at things that worked. They rarely questioned it. They were somewhat intolerant of alternative views. Of course, this probably has as much to do with their lack of time as with their personalities. We have tried to address this by developing additional interpretations in order to show executives that considering more possibilities will increase their depth of understanding. Some executives responded better than others to this tactic. We are still exploring this feature in order to improve the flow of benefits even further, but this remains an area of the benefits map that needs further exploration. The overall result of these initiatives has been an increase in use of the previously unpopular system and an improvement in the supporting features of the organizational structure, behaviour, and competencies. The cost of realizing these benefits has been small since most of the investment had already been incurred. We have now begun a programme to apply this ever improving benefits map to other information bases in these organizations in order to see whether we can exploit their latent benefits inexpensively. Moreover, new information base projects now require a justification that shows how each of the features in the benefits map will be addressed. Projects must also conclude with an assessment of whether the benefits have been achieved and how the map can be further refined. One of these companies will soon begin 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 specific technology within two companies. However, it is clear how this approach to benefits realization can be generalized. Of course, this account of using a benefits map is misleading because of its brevity. Learning to make use of a benefits map is not so easy. If it were, everyone would do it. It requires wise attitudes and policies to make it happen. In my experience IT professionals are a major obstacle. Their most common criticism of my exploration metaphor is: ‘By the time we have created a detailed map, most competitors will have moved on to a new territory where the riches are even more splendid.’ My response is that even if this were true, these com54

Learning to realize the benefits of IT petitors are just as unlikely to realize the benefits of this new paradise as they are to capture the advantages of the current one. As we have seen, technologists want to learn about new technologies, not about benefits. I have found that the most effective way to deal with their scepticism is to begin by examining an existing system that is regarded by users as a failure. Because it does not depend on new technology, it is easier to create a benefits map. A well researched benefits map will show what the impediments are. Often, this will suggest inexpensive improvements, which can lead to the realization of latent benefits. This is a very convincing justification for the technique. On the other hand, managers usually find benefits maps a refreshing initiative. They like being able to see how an investment should affect their organization. It helps them to appreciate the difficulties in managing IT investment better. In fact they are often uninterested in measuring the benefits of an investment precisely. Most of those who use or support the system agree on whether the necessary capabilities, characteristics, behaviours, structures, and competencies are being developed without quantifiable measures. Benefits maps also present problems for those who have to manage benefits. At the beginning the maps are generic. They must be tailored to an organization. In some organizations creating a system that has the required technical capabilities may be a serious problem. In others encouraging scanning may be the difficulty. In a third it may be the characteristics of the executives that are the stumbling block. The qualitative indicators and quantitative measures change from organization to organization and from technology to technology. The devil is certainly in the detail. Unfortunately, IS practitioners are wont to take a generic 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. Benefits maps provide a focal point for organizational learning. In fact I am testing a benefits map for realizing the benefits of benefits maps. Nevertheless, benefits maps are not the Holy Grail. They only work to realize future benefits when they are employed wisely. This requires intelligent persistence. The only alternative is to rely on the intervention of the gods of IT. 55

4

Purchasing and information technology Buying IT and using IT to buy Frank Bannister Trinity College, Dublin, Ireland

4.1 Introduction A typical business today spends 3–4 per cent of its turnover on its information systems. In some service industries, this figure can exceed 20 per cent. One partner in a professional services firm described its cost base as payroll, professional insurance and computing. The public sector spends vast sums on its computer systems and whether in the public or private sectors, a substantial proportion of this spend is on bought-in products and services. Where IT is outsourced, the external component of organizational IT spend can approach 100 per cent. Purchasing of IT is big business. Not only is IT procurement big business, the use of IT to purchase is also a significant and growing business in its own right. From the earliest days of commercial computing, IT has been used to support the purchasing function. From basic, nuts-andbolts internal purchase order processing systems, IT-enabled purchasing has evolved through Electronic Data Interchange (EDI), on-line catalogues, Web-based order, purchasing extranets, intelligent agents and business-to-business (B2B) electronic trading. All of this now falls under the general name of eprocurement. Electronic purchasing has become an integral tool in the development of lean manufacturing, just-in-time inventory and supply chain management. Indeed it is difficult to imagine such concepts as supply chain management being 56

Purchasing and information technology workable at all without powerful electronic purchasing systems. This chapter considers both of these aspects of purchasing. The first part of the chapter considers policies and some procedural aspects of purchasing IT. The second part looks at some current developments in e-procurement and at possible future directions 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 to obtain: The right goods At the right time In the right quantity From the right source At the right price. As a statement of mission, this is well suited to routine purchasing, particularly of such things as raw materials or office supplies. It can also be applied to much purchasing of IT. However, it does not work quite so well when applied to nonroutine procurement. In order to develop sound IT purchasing policies and procedures, it is important to understand to what extent IT purchasing is different from other types of purchasing. There are five characteristics of IT which collectively make purchasing IT different: Much IT purchasing is once off – notwithstanding the trend in information technology towards an ever larger number of less expensive components, many IT purchasing decisions are unique in the sense that companies do not buy ten PCs a month or a new accounts package once a year. One consequence of this is that organizations’ normal purchasing procedures do not always work properly when applied to IT. Standard requisition forms don’t fit, approval procedures are inappropriate and so on. Much IT purchasing falls into an ambiguous category that is half way between capital and current expenditure – sometimes purchasing that is essentially capital in nature (e.g. a major development project) is treated as current expenditure and sometimes expen57

The Make or Break Issues in IT Management 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 corporate database) can be painful and expensive – notwithstanding all of the advances in open systems and de facto standardization (such as Microsoft’s domination of the desktop and Intel’s near monopoly of the processor), supplier lock-in remains an issue. There is frequently a strong disincentive/barrier to changing suppliers. IT purchasing decisions are rarely isolated – buying a new printer may not have any knock-on effects, but a decision to change the network protocol or install an intranet may have all sorts of implications, not all of which are easy to anticipate. Within any organization, IT can be considered as a living system that needs day to day maintenance, continual improvement and replacement and continuing enhancement and expansion. It is often difficult to determine what constitutes good value – IT value is complex to assess and rarely simply a matter of lowest price. Quality can also be difficult to assess, particularly when buying IT services. IT is like a never ending capital construction project. Few decisions can be taken in isolation. A wide range of technical skills may need to be involved in a decision, particularly in a major development project. As IT becomes more integrated, both into an organization’s operations and with other technologies such as telecommunications and robotics, the range of skills necessary to control and manage IT systems widens. Even the very largest organizations may not be able to justify retaining people with all of these skills on the payroll. As a result, IT acquisition tends to require not only management of an expanding group of internal technical specialists, but also management of outside advisers and suppliers. No other aspect of most organizations’ purchasing operations exhibits all of these features and, as a consequence, requires such a complex mix of purchasing procedures

4.2.2 Secondary objectives In addition to the broad objectives set out above, IT purchasing policy has a number of other specific objectives. First, it is important to ensure that all purchases conform to IS strategy and IT policy. There is a close link between IS strategy 58

Purchasing and information technology and IT purchasing. For public sector bodies, this may include government guidelines or EU regulations. Second, purchasing procedures should assist management to monitor and control expenditure. IT expenditure is notorious for running over budget. Third, the purchasing process itself needs to be efficient. Some organizations manage to spend thousands of pounds deciding how to spend hundreds. As well as being efficient, purchasing procedures should be easy to work with. Unduly cumbersome procedures can be self-defeating as staff will quickly find ingenious ways of bypassing them. Fourth, purchasing needs to achieve a balance between local/user and central/IT management control. This issue has become progressively more important and more complicated with the evolution of distributed computing technologies and the Internet. Fifth, purchasing procedures should help organizations track and control their IT inventory. Some organizations have no idea what their IT inventory is. The best point to trap information about inventory is at the point of purchase. This is much simpler than carrying out a periodic census to try to establish what hardware and software are in the building. Finally, purchasing policies and procedures should be as flexible as is compatible with meeting all of the preceding objectives. An unduly rigid purchasing system is expensive, tiresome to users and likely to be subverted sooner rather than later. Even where an organization is operating in a stable business environment, rapid changes in technology or the market can present management with unexpected decisions at short notice and organizations cannot afford to stand on ceremony waiting for some convoluted purchasing system to run its course.

4.3.3 Complications Purchasing of IT is complicated by a number of additional factors. The first and most important of these is the speed at which the technology itself changes. It is sometime said, only half jokingly, that the half life of knowledge in the IT industry is about two years, i.e. of all the things known about the technology at the moment, half will be out of date or of no value within two years’ time. Managers must not only keep abreast of technological developments, but also be able to judge the right time to replace equipment and systems. A modern passenger aircraft will give 59

The Make or Break Issues in IT Management between 20 and 30 years of normal service. Properly maintained, a modern car will give at least 10 to 15 years’ service. PCs have a practical life (as opposed to a physical life) of under three years in a ‘normal’ organization and less than two years in organizations where leading edge IT is an integral part of the product or service. Managers are continually faced with user pressure for upgrading systems; they therefore need access to up-to-date, accurate and independent information and advice. A second difficulty is costing. There are several problems in trying to compute exact costs for IT. Traditional costing methods are often inadequate and new techniques such as Value Chain Analysis and Activity Based Costing may be needed to obtain meaningful decision information. On the other side of this coin are the difficulties in assessing the benefits derived from IT expenditure. Because IT is integral to the day-to-day operation of most organizations, it can be extremely difficult to assess its precise impact. Some commentators hold the view that much IT investment gives a poor return. Others argue this only appears to be the case because of the failure of conventional accounting and economics to measure the real impact of IT on organizational performance. A third issue that takes on its own peculiarities when IT is involved is control of expenditure. Most capital expenditure projects are directly under the control of a manager or a small group of managers. IT, by its nature, is used in every aspect of the business. Because the individual components of IT are both numerous and relatively inexpensive, it is easy for individual users and managers to circumvent normal IT purchasing controls. A further aspect of the cost control problem is ‘scope creep’. This can be due to a lack of completeness and/or precision in the stated requirements. Users are sometimes unable (or unwilling!) to state their IT requirements precisely. They may be unsure of what they require or unaware of what the technology can do for them. The result is a gap between what the system provides and what the users expect. Such a gap can also be caused by changes in perception as knowledge and expectations, based on increasing familiarity with the new system, grow. As new requirements emerge, demands for modifications and enhancements creep in, frequently even before the system goes live, and costs run out of control. 60

Purchasing and information technology In the light of all of the above, it is not surprising that textbook purchasing procedures do not always work well when it comes to IT. Prior to considering what are appropriate purchasing policies for IT, a brief discussion of the relationship between IS strategy and purchasing is in order.

4.2.4 IS strategy and purchasing There is a close relationship between IS strategy and IT purchasing. IS strategy impacts on IT purchasing and acquisition in a number of ways. There may be strategic decisions on products or product ranges (e.g. that the corporate database will be Oracle or that all servers will use the Linux operating system). Typically organizations will, for example, standardize on one word processing package or have a minimum specification for any PC purchased. There may be more generic strategies such as ‘best of breed’ acquisition. The relationship between IS strategy and purchasing policy is shown in Figure 4.1. IT purchasing policy is always important; in the absence of an IS strategy, it becomes critical. In normal circumstances, IT purchasing policy is derived directly from the IS strategy and covers matters of operational detail with which the strategy is not concerned. Strategy may simply lay down broad criteria within which purchasing policy can be formulated. Where organizations do not have a formal IS strategy, a good purchasing policy provides very considerable benefits, saves time and avoids many problems that might otherwise occur.

IT policies

IT strategy

IT plan

Company purchasing policies

Company purchasing procedures

IT purchasing policies

IT purchasing procedures

Figure 4.1 Relationship between IS strategy and IT purchasing

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The Make or Break Issues in IT Management

Scale of expenditure Continuing cost implications

Efficiency & effectiveness

IS Strategy

IT purchasing policy

General purchasing policy

Suppliers

Nature of expenditure Business environment

Figure 4.2 Factors influencing 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 in Figure 4.2. Apart from IS strategy, purchasing policy will be influenced by the scale of the expenditure involved. It will also be determined by the need for control of not just short-term expenditure, but also of the implicit long-term costs of IT purchasing decisions. There is a wide range of potential implicit costs including disruption, loss of service elsewhere, training costs, delays to other projects and so on. Purchasing needs to be efficient. Procedure and controls should be commensurate with the importance of the purchase being made. IT purchasing policy will be influenced by the organization’s standard purchasing policies and by practices and trends in the business in which it operates (for 62

Purchasing and information technology example, B2B type industry arrangements). Policy will vary with the nature of the expenditure and the supplier with which the 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 products Approved suppliers Purchasing 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 of external IT expenditure is to have an approved product list. Approved products can be hardware, software, services and/or consumables. They may be specific or generic. A specific approved 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 the models or version numbers approved. A generic approved product policy comprises a general technical specification where no brand or model is mandated. For example, a generic policy might state that all laser printers must have a minimum resolution of 600 dpi, print at a speed of not less than 16 pages per minute and be PostScript compatible. Generic policy only works well with hardware although it can be applied to certain classes of standardized software. To run an approved product policy, an organization must have in place a procedure for vetting hardware, software, services and/or consumables. All such products must be evaluated and approved by IT management and be in line with the organization’s IS strategy. An additional layer is made up of different authorization. For example, some products may be approved for general purchase. These are products that can be purchased by anyone with the requisite authorization without prior reference to the IT department. Small items, such as a zip disk, may not even need prior clearance or authorization from a budget holder. Other non-controlled items such as stand alone laptops or local printers may 63

The Make or Break Issues in IT Management Specific

Generic

IT department authorization Departmental authorization No authorization needed Figure 4.3 Dimensions of purchasing policy

require departmental approval, but need not involve the IT department. At the next level are purchases that are designated as ‘controlled’. This is the most important category. Controlled items are those that meet the organization’s technical requirements, but because of possible knock-on cost or enterprise level implications, must be cleared in advance by IT management. There may, for example, be licence fee issues, network or other implications. The concept is illustrated in Figure 4.3. By definition, any products that fall outside of these two categories are unapproved and if they are to be purchased, a special business case for them must be made. Apart from being out of line with IS strategy, such products may carry unacceptable corporate costs or risks (e.g. compatibility problems, etc.). The approved products list should be circulated to all managers with IT purchase authorization. Clearly an approved product should be suitable for the purpose for which it is required. However, there are several other desirable characteristics of any approved product. It should: Conform with the company’s IS strategy and policy Be reliable Be well supported either internally and/or externally Come from a reputable and (in the case of strategic products) a financially sound supplier (Normally) not be high risk or unduly innovative (this is not to say an organization should not purchase such products, only that they would not normally be on an approved product list) Be value for money. Approved product lists need to be kept under constant review. New products and new versions of existing products appear all the time. There needs to be a mechanism in place for both mon64

Purchasing and information technology itoring the announcement/release of new products and tracking industry standards and any implications these may have for the current systems or architecture. For smaller organizations, and even many larger ones, external advisers may be needed.

4.2.8 Approved suppliers Effective purchasing and good supplier management go hand in hand. At a further remove, purchasing may have a link into supplier chain management. In all purchasing, organizations should aim for good and mutually beneficial long-term relationships with their suppliers. This is particularly true in IT where an organization can be critically dependent on one or more of its IT suppliers, even without any significant outsourcing in the conventional sense. Specific approved products or product lists may imply that the suppliers of these products are approved. Sometimes it is convenient to have a generally approved supplier for a particular class of equipment or service. Approved suppliers should have a number of characteristics. They should: Have appropriate technical expertise Be businesslike Be reliable Be able to support their products Be stable Be responsive Where appropriate, have good relationships with their own suppliers Have a responsible attitude Have an interest in the customer’s business Have a good reputation Ideally operate to an acknowledged quality standard such as ISO 9001. An approved ‘supplier only’ policy can work for well-defined products or product groups such as desktop hardware or certain services. The extreme variant of this policy is total outsourcing where one supplier provides, directly or indirectly, all IT products 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 procedures for this. All expenditure can be classified either as expense or capital expenditure. When it comes to IT, the difference between these is not always clear. In general, expense expenditure is routine and includes, for example, expenditures involved in keeping the current systems up and running. It may include operations, maintenance, consumables, insurance, security, backup, etc. Capital expenditure is normally related to investment in new systems and equipment. This may include replacement of current hardware or software, acquisition of new hardware, or communications, development of new applications and so on. A traditional problem in IT budgeting has been to regard IT expenditure as a business overhead rather than an investment. Although these perspectives are not mutually exclusive, many researchers and commentators consider that to regard IT cost simply as an overhead leads to poor decisions. A full understanding of the nature of IT expenditure is therefore important. Ideally all purchasing should be based on agreed budgets. In reality, purchasing procedures need to be able to deal with four different situations: Budgeted expense expenditure Budgeted capital expenditure Unbudgeted expense expenditure Unbudgeted capital expenditure. Where there is an agreed budget and the proposed expenditure is within the agreed budget tolerance, purchase procedures, be they for capital or expense items, should be as simple as is compatible with proper control. A standard procedure should involve the following steps: The item is requisitioned and submitted together with the business case for the purchase. The required item is costed, usually by the IT department or the purchasing department, occasionally by the user. For standard items there may be internal price lists with discounts and/or bulk purchase arrangements. If direct on-line purchasing is in operation, these prices may be on the supplier web66

Purchasing and information technology site (e.g. in the form of an electronic catalogue). In certain circumstances, it may be appropriate for the user to obtain a quotation, but this should always be double checked by IT or purchasing management. The purchase is approved by the departmental manager or budget holder. For phased expenditure, the requisition should show the cumulative position. Particularly useful here is the concept of commitment accounting (see Example 4.1). The purchase requisition should also show whether there is any deviation from budget and if there is, an explanation why this is so. Finally the requisition should be signed by the person making the request and the person authorized to clear the expenditure. 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 to date

Actual

Committed

On order

Amount remaining

CD Servers Main server Scanners Workstations Cabling, etc. Software Development Implement Data uptake

40,000 10,000 8,000 35,000 4,500 7,500 50,000 6,000 20,000

23,000 10,500 4,000 12,500 5,200 7,500 25,000 0 0

11,000 0 4,000 14,500 0 0 27,000 6,000 20,000

6,000 0 4,000 14,500 0 0 n/a 0 0

6,000 (500) 0 8,000 (700) 0 (2,000) 0 0

Project Total

181,000

87,700

82,500

24,500

10,800

In general, the IT department should purchase all goods on behalf of the user. This is desirable for a number of reasons 67

The Make or Break Issues in IT Management including most efficient and effective management of suppliers. Apart from the trivial, goods should be delivered to the IT department and not to the user. There are several good reasons for this. First, the IT department can check that the correct goods have been delivered. Often the IT department will be in a better position to do this than the user. Second, where appropriate, the goods can be checked, if necessary tested and set up. For example, for a PC this might include setting up company software, creating a network address and adding virus protection. All items received can be logged at point of receipt and entered into the IT inventory. This is the surest way of keeping track of equipment and software. For software, licences can be checked, quantity or corporate discounts confirmed and any necessary registration or site licence agreement compliance procedures carried out. Finally the IT and/or purchasing department can check the invoice, ensure that it is correct, that all appropriate discounts have been given and pass it to accounts for payment with a copy to the user department for information. This ensures that all acquisitions have been budgeted, that they comply with IT purchasing policy, that costs are in line with (or under) budget or, if not, that approval is given at the appropriate level to exceed the budget. It also ensures that all hardware and software is logged and that inventories are up to date and accurate and that all licence terms and other legal requirements are met. These procedures can be used for budgeted capital project expenditure with some minor modifications that show for each item of expenditure so that the total project expenditure must be monitored and all requisitions must be signed by the project manager. Purchasing procedures should not only prevent unauthorized expenditure occurring, they should also provide a mechanism for handling necessary, but unanticipated, expenditure. Unplanned expenditure arises for one of two reasons: a significant cost overrun on budgeted expenditure or a requirement for new expenditure. In such circumstances, the case for exceptional treatment must be clear and contain all the necessary facts for management to make a decision. Users should be required to explain the reason for the request, why these items/services required were not in the original budget and why they are now needed. Users should also be required to state the implications of not proceeding (if appropriate). It is essential that this be an exceptional procedure and that it does not become regarded as routine. 68

Purchasing and information technology Good purchasing policy and procedures can do much to ameliorate many of the problems that plague IT systems, even in small organizations. Problems of compatibility, loss of control, cost overruns, high maintenance costs and so on can all be significantly reduced if not eliminated by a well-thought out IT purchasing 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 divided into the traditional and the trendy. The purpose of this seemingly frivolous distinction is to highlight the fact that much of the recent hyperbole and excitement about e-procurement is about technologies that in some cases have been established for well over a decade. There are new and exciting developments in procurement – for example, the emergence of intelligent agents and electronic auctions. There are also major implications in the expansion of supply horizons for smaller enterprises and for supply chain management in hitherto non-vertically integrated industries. Nonetheless, much of what is currently promoted as revolutionary is far from new. Before considering what current developments in technology may offer and what the future may hold, it is worthwhile reviewing what has been achieved so far. Internal applications of IT in purchasing, varying from demand forecasting through operations such as purchase order generation to goods matching and invoice clearance, date back to the 1970s. Lysons (2000) lists 24 internal purchasing processes that can be automated. Few organizations of any size today would not use at least partially automated purchase order processing (POP). Developments during the 1980s, including bar coding, electronic point of sale equipment, manufacturing resource planning, tele-ordering, hand-held terminals, automated stock replenishment and so on have all been deployed by organizations to improve the efficiency and effectiveness of their purchasing operations. Automated purchase order processing systems saved staff, shortened cycle times, reduced inventory levels and shortened lead times. In the most sophisticated applications, internal computer systems (host or network) connected everything from the invoicing matching system to the weighbridge. 69

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4.4 EDI In the 1980s, a further dimension in computer aided purchasing emerged in the form of Electronic Data Interchange (EDI). At the core of EDI is a series of standard documents (orders, invoices, acknowledgements, receipts, etc.) that can be exchanged electronically. For this to work, documents must to adhere to strict formats for content, order and syntax. EDI enabled customers to link their purchasing and goods receiving systems with their suppliers’ price lists, inventory, sales and distribution systems. While the concepts of just-in-time ordering and materials requirement planning were developed independently of EDI, EDI gave further impetus to these and to the concept of supply chain management. If customer and supplier systems were not yet tightly coupled, at least communication between them was greatly speeded up, numerous routine operations were automated and much paper was taken out the system. Linkage of point of sales equipment to inventory and through the EDI system to suppliers’ inventory and ordering systems enabled companies to further reduce inventory levels, eliminate the costs involved in the old paper-based methods and negotiate better deals with suppliers. From a supplier perspective, it saved cost as well as providing a barrier to entry by competitors. EDI for Administration, Commerce and Trading (EDIFACT) was adopted as an international standard, though the ‘one size fits all’ concept proved tedious for specialized industries and a number of variants soon emerged such as EDIFICE for the electronics and EDI-CON for the construction industries. Related technologies and spin-offs of EDI included Electronic Funds Transfer (EFT) and electronic mail (an important competitive advantage in the days before the Internet). However, as a purchasing technology EDI had and has a number of drawbacks. Traditional EDI is a send-and-forward system. It does not operate in real time nor does it facilitate the type of collaborative computing that full supply chain management requires. Second, it is expensive and difficult to implement. It comes in the form of a complex procedures manual and software that usually has to be installed by specialists and requires continuing maintenance. Small suppliers were often less than enthusiastic about this and implemented EDI only because a major customer (such as a supermarket chain) demanded that they do so. Third, EDI runs on private, and consequently expensive, networks. As a consequence, EDI is only cost effective for regular, high volume transactions. It is simply not designed for 70

Purchasing and information technology small or once-off transactions between occasional trading partners. In such instances, it is far cheaper to send a fax. For smallscale purchasers, such as local shops or businesses with many small customers, it is just not economic. It was not surprising therefore that, in industry terms, EDI is vertically organized. EDI has thrived in certain sectors such as the automotive industry, health and the high volume retail trade. It has been largely adopted by organizations that have long standing, or at least potentially long-term, business relationships. In most cases there are established contractual relationships and often long-term agreements (LTAs). Establishing an EDI-based relationship with a new supplier or customer is expensive and time consuming, and while the potential benefits are large, so are the front end costs. Despite these drawbacks, EDI has delivered substantial business and financial benefits for its adopters. Furthermore, the advantages of this type of electronic procurement have been visible to all. The problem is that it remains a difficult game to enter. It was natural, therefore, that with the emergence of the commercial Internet in the 1990s that other organizations would seek to use it to try to realize the benefits of EDI in a way that would avoid both the limitations and high costs. The concept of Internet-EDI was floated, but it was soon realized that the strict protocols and secure, closed world of EDI was not a natural fit for the open prairies of the Internet. Internet-EDI was consequently soon overtaken by several new and more innovative approaches 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 the mid-1990s that it suddenly exploded into the commercial world. In the subsequent hysteria of the dot.com boom in the late 1990s a great deal of nonsense was paraded as new wisdom. Illdefined terms such as ‘new business model’ and the ‘new economy’ were hawked around by a variety of gurus who proclaimed the death of business as we know it and made such ludicrous statements as ‘if you are not in e-business, you are not in business’. While, most of the excitement and attention was on the business of selling (almost all of the dot.coms were about retailing of some sort), the implications of the Internet and Web 71

The Make or Break Issues in IT Management for purchasing were not overlooked. E-procurement became a buzz phrase and commentators talked about the business of purchasing 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 open some possibilities for purchasing that were hitherto either infeasible or uneconomic. Initially, much of what was discussed was merely EDI without the cost base and use of e-mail to displace fax and phone, which was hardly revolutionary. Nonetheless, the Internet opened a number of important new possibilities that fall broadly under the heading of e-procurement. Five ideas of particular importance are: Business to business electronic commerce Open electronic markets Coupled systems Intelligent agents and Extranets. Each of these is considered briefly below. Perhaps the most talked about of the new developments was business to business (B2B) electronic commerce. As elsewhere, much of the discussion has been in terms of sales rather than purchasing (it is curious, given that every sale implies a purchase, how little attention relatively speaking has been given to purchasing). B2B implies, amongst other things, that groups of companies in the same industry could form electronic markets for trading with their suppliers. Groups that were early into this included the aviation and automotive industries both of which announced major B2B initiatives. Whatever the technology, the concept was simple, a specialized equivalent of any other electronic market would be set up where purchasers could seek and suppliers could offer goods via electronic catalogues or auction type markets. When the B2C (business to customer) business failed to ignite as the new economy prophets had forecast, they changed their tack and pronounced that B2B was where the e-business revolution would really take place. But after some initial excitement, the workability and benefits of B2B have also started to be questioned. Like EDI, B2B may work in focused and tightly knit industries; whether it will become widespread is more doubtful. At the time of writing, the jury is still out on this develop72

Purchasing and information technology ment and many of the B2B software and consultancy firms that sprouted on the back of high expectations in the market are now in difficulties. A variant on this is the open electronic market. This has grown very dramatically in the specialized business of share trading and some companies, such as E-Bay, have pioneered the online auction with considerable success. Attempts to emulate this in other areas have been limited although the use of intelligent agents (see below) could well accelerate developments in other markets. It is likely that e-auctions and markets will thrive in certain sectors. Any sector where the products are either commodities or close to commodities is a candidate, as is any business where brokers currently provide the market mechanism. Examples of the latter are travel (particularly airline travel) and insurance. The combination of on-line markets and intelligent agents (see below) has the potential to change radically much of purchasing, particularly of high volume consumables. Coupled systems is the use of the Internet to link purchaser and supplier computers directly. This has been done successfully for some time on a one-to-one basis. However, for a supplier to allow any potential purchaser to place orders directly into its system, or to examine its stock levels is a different question. Some companies, such as Dell and Apple, have sophisticated, purchaser-driven, make-to-order systems. Smart have tried the same approach with automobiles, but with limited success. Customer-driven production is fine when you are selling individual PCs (and possibly cars). It is more difficult to see how it will work in large-scale purchasing. What might happen if you were selling components by the thousand? How does one manage the risk that a saboteur might place a large order and then cancel it as soon as it was manufactured? All of which raises the questions of trust and security. These are discussed briefly below. Given the vast range of offerings now available on the Web, the intelligent agent, a piece of software that will search the Web looking for what the purchaser wants, is a logical, indeed an inevitable, development. The use of such agents is likely to grow. In future, it is likely that agents will not only know what the purchaser wants, but may even have some ‘room for negotiation’ built in. It is not difficult to envisage a world where, for certain products and commodities, computers buy and sell from each other, bypassing humans entirely. The 73

The Make or Break Issues in IT Management extensive deployment of agents is likely to lead to more efficient markets for purchasing as they are not constrained by the limits that time and energy impose on human searches for suppliers of a given requirement. There will always be purchases that cannot be automated and where humans prefer or need to make the decisions. For some of these, the logical technology is the extranet. This enables the purchaser to look at what a supplier has to offer, find out details such as specification, price and delivery time and to place orders directly at his discretion. Companies can set up arrangements with suppliers whereby employees can order directly from the supplier’s website. Controls on such purchasing are executed by the supplier, which can confine an employee to certain product types or even within authorisation or budget limits set by the customer. This type of arrangement 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 organizations require are available today. The problem is that, as of now, the infrastructure is not yet in place to make e-procurement on a large scale take off and this chapter concludes with a brief look at one aspect of this issue.

4.4.2 Security, legal issues and trust Central to the workability of on-line purchasing are the concepts of security and trust. Where there are established commercial relationships, as in an EDI network, trust is not an issue and the private networks used for EDI have meant that security has never been a major concern of EDI users. The same is not true of the Internet. When purchasing from an unknown supplier (or sending as yet unpaid-for goods to a hitherto unknown customer), there is an element of risk. E-procurement raises a whole host of legal and security issues that are beyond the scope of this chapter, 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? For example, a third party may pose as a supplier to obtain information including confidential company details. Confidentiality – is the information exchanged between me and my supplier secure from authorized readers? 74

Purchasing and information technology Non-repudiation – having accepted an order, can I be certain that the supplier will deliver it? This is normally more of a concern to the seller than the buyer, but it is an issue when purchasing. Where there is no established relationship, trusted e-purchasing will increasingly depend on trusted third parties known as Certification Agencies. These both operate and police a system of encrypted digital signatures, which ensure that parties to a transaction are authentic and provides a reasonable guarantee of contractual integrity. The future of e-purchasing will depend on the ability of states to organize Public Key Infrastructure (PKI). This is not a trivial task given the complex mix of technological and legal issues involved. Without an effective PKI, widespread open market e-procurement will be stunted and may end up confined to closed or private e-communities of the type found in traditional EDI. Finally there are the problems of law. Buying from existing suppliers with long-standing relationships is one thing. Purchasing from hitherto unknown suppliers in countries that may have different legal systems and taxation rules, is an altogether different matter. Living in the UK and buying a few books from Amazon in the USA may not raise many corporate concerns; purchasing a sophisticated machine press or an aircraft engine from an unknown supplier in Taiwan or Russia requires a clearer business and legal footing than current internet systems provide.

4.5 Conclusion Purchasing is a vast industry in its own right. It is a natural candidate for automation and is now extensively automated. Developments in telecommunications and artificial intelligence will continue this process, but there are limits to what will work in practice, due to the underdeveloped state of the technical and legal infrastructure and to the limitations of the medium. Some much touted ideas have failed to materialize; others remain as yet untried. Even if it were technically possibly, it seems unlikely that purchasing will ever be fully automated. The process of human control remains critical here as elsewhere and the art of negotiating with suppliers is unlikely to be handed over to machines in the foreseeable future.

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Reference Lysons, K. (2000) Purchasing and Supply Chain Management. 5th edn, 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) TAP Services Guide: IS/IT Services Procurement. HMSO, London. Farrington, B. and Waters, D. (1996) A Practical Guide to Worldclass Buying. Chapman and Hall, London. Giuniipero, L. and Sawchuck, C. (2000) ePurchasingplus. JGC Enterprises, 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 Systems Procurement: A Guide to Procurement Within The Total Acquisitions Process. CCTA, Norwich. Nash, T. (ed.) (1999) Managing Desktop IT: How to Select Providers of 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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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

5.1 Introduction IT management does not have an impressive reputation when it comes to fulfilling promises. Of course, IT never builds identical information systems in an identical organizational context and, therefore, IT projects always involve risks and uncertainty. These risks and uncertainty, however, decrease during the project. Unfortunately, so do the possibilities to adapt the information system to the wishes of the organization. Often, many requirements only become apparent when the information system is already in use. The problem described above is here defined as the ‘IT management paradox’. At the beginning of a project when there are still many possibilities to change the functionality of an information system, members of the organization often insufficiently understand these possibilities and their implications. At the moment that the information system is operational and the implications become clear, substantial modifications are hardly possible. Many techniques, such as prototyping, have been developed to resolve this problem and these work to some extent. However, incremental or spiral development techniques are always focused on delivering the best possible information system given the approved project. The important link between the identification and approval of these projects and the actual 77

The Make or Break Issues in IT Management implementation and subsequent operations is, however, often missing. In other words, in many cases we are simply developing the wrong systems, or justifying proposals against incomplete analysis. Prototyping techniques have too narrow a perspective of the system life-cycle to be able to actually resolve the IT management paradox. The fact that this is often the case can be illustrated with how cost/benefit analysis is regularly used. In practice, costs often only include development costs. Sometimes costs are even limited to the costs of developing the hardware and software of the information system. Development costs typically include 20% – 40% of the life-cycle costs of an information system (most costs are incurred in the operational stage of the information system). Hardware and software development costs typically include 5% – 10% of the life-cycle costs of an information system. In cost/benefit analysis these costs are compared to the perceived benefits of the information system and normally include estimations of strategic benefits and organizational efficiencies. Benefits, by definition, can only be derived during the operational stage of the information system (because there are no benefits during development). Consequently, we are currently evaluating systems on the basis of less than half of their lifetime costs and, consequently, a lot of the information systems that are currently built should never have been approved. The notion of full life-cycle management is introduced in this chapter to support resolving these types of problems.

+PKVKCN +PKVKCN EQUV EQUV

$GPGHKVU $GPGHKVU

1RGTCVKQPCN 1RGTCVKQPCN EQUV EQUV

Figure 5.1 Incomplete cost/benefit analysis in practice

78

Full life cycle management and the IT management paradox

5.2 Full life-cycle management In full life-cycle management a comprehensive set of methods and techniques is offered to manage information systems along the system’s life-cycle. Furthermore, information is shared among life-cycle stages. A number of approaches to life-cycle management have been published (Swinkels, 1997; Willcocks, 1994; Thorp, 1998). This chapter draws upon work of Swinkels and Berghout, Klompe and Nijland (Centre of IT Economics Research, University of Groningen). The three major life-cycle activities are defined first. These activities are: planning stage development stage operation stage. In the planning stage the importance of IT is compared to that of other business investment opportunities, new IT projects are identified and priorities between individual IT projects are determined. In the development stage the prioritized proposals are subsequently designed, built, tested and implemented. In the operation stage the information systems are kept operational and maintained. All three stages have their own typical cost/benefit problems and in order to establish an efficient and effective IT management, one needs extensive information exchange. In this chapter the life-cycle activities are subsequently discussed, together with their interrelation. Furthermore, a stateof-the-art overview is given using nine case studies in the financial services industry. There is insufficient space for an indepth discussion of the various techniques that should preferably be used for the particular life-cycle activities. These techniques are only referred to. We will argue that excellence of operations in only one or two life-cycle activities is relatively pointless, and efficient and effective use of IT can only be achieved through full life-cycle management. Figure 5.2 illustrates the concept of full life-cycle management and the most prominent cost/benefit issues.

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5.3 Planning stage In the planning stage the priority of IT compared to other business investment opportunities is determined, new IT projects are identified and priorities between individual IT projects are determined. Data of the current status of operational systems are an important input for this activity. How well do current operational systems perform, what is their current technical and functional quality, and what is the estimated effect of improvements? An analysis of the current operational systems provides a bottomup analysis of IT planning. Besides a bottom-up approach, Earl defines two other approaches, the top-down and inside-out approaches (Earl, 1989). In a top-down planning process, priorities regarding IT are established on the basis of organizational goals. In an inside-out planning process, priorities are established on the basis of new IT developments. A top-down analysis starts with a strategic analysis of the environment of the organization. Porter’s framework of competitive forces can be helpful here (Porter, 1980).

Figure 5.2 Three main activities of full life-cycle manangement

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Full life cycle management and the IT management paradox Typical questions that need to be addressed are: What business are we in? What differentiates us from our competitors? Why do customers actually buy from us? What will be the major changes in our line of business in the coming few years? To what extent will products or markets change? Is our market rivalled by other products or new competitors? What will be our strategic focus for the coming years? Will this goal primarily be achieved through product innovation, new markets or efficiency of operations? To what extent can IT assist in this strategy? For example, can we 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-up analysis and prioritization of IT and non-IT (Bedell, 1985). Inside-out strategies are typically supported by external IT consulting groups. Deliverable of the planning activity is a ranking of IT project priorities. The planning stage supports the notion that IT resources should be directed towards the most beneficial areas. Consequently, this is also true for the planning activity itself, where most of the effort to identify project proposals is directed to those organizational areas where the expected gains are the highest. Bedell’s method supports this notion. The identified project proposals can be prioritized using methods such as Information Economics (Parker et al., 1988); Balanced IT Scorecard (Grembergen, 2000) and Investment Portfolio (Berghout, 1997).

5.4 Development stage In the development stage the prioritized proposals are subsequently designed, built, tested and implemented. Suggesting that development simply means working through the list of prioritized proposals would, of course, be an enormous oversimplification. This would require indefinite resources of developers that are perfectly skilled in any technology and any business area, and users who precisely define what they require. Unfortunately, the planning problems in information system development are complex and priorities will change as systems 81

The Make or Break Issues in IT Management develop and so will the business environment. In order to keep track of the cost and benefits of the information systems under development, at least the following activities should be managed: management of cost, through active resource management management of benefits, through active management of the functionality of the information systems under development management of the time schedule.

5.4.1 Management of cost The resources required to build the information system comprise the cost of the information system. The resources typically include hardware, software and all labour time associated with the project (both IT and non-IT). As the system develops, a better understanding of the cost will be established. There will be few occasions where the actual costs are similar to those envisioned, as there will always be technical problems, functional changes or planning problems. Gathering cost data throughout the development phase has, therefore, several objectives: assembling data for future projects controlling the development activities evaluating cost and benefits of the project under development. The last point is often of major concern in an IS project, as increases in the development cost of a factor three or more regularly occur. Often, the rational of a project should be reconsidered. This reconsideration is identical to the investment analysis of the planning activity of full life-cycle management. In the planning stage the overall costs and benefits of projects are evaluated and compared to those of other proposals. Consequently, this is not a project management activity. Project managers are rarely in a position to compare their projects to others, let alone compare all projects to the strategic objectives of the organization. When cost and benefits change to a certain extent, the project requires another review, which is similar to the justification that is part of the planning stage. There is, however, no golden rule to deter82

Full life cycle management and the IT management paradox mine this ‘certain extent’. Regular reporting of project managers to management are an essential element here.

5.4.2 Management of benefits The benefits of information systems are associated with the envisioned functionality. In other words, the information system performs particular tasks, these tasks have particular efficiency or strategic consequences and these consequences result in benefits that should outweigh the anticipated cost. This also implies that cost and benefits appear in a very dissimilar form in an organization and this complicates management of benefits and comparison with costs throughout development. Both these issues will be subsequently discussed. As the information system develops, there will normally be requests for other (additional) functionality. Normally, these requests will also imply additional benefits and, therefore, they should often be granted. However, granting additional functionality normally also implies delaying the delivery of the information system and this could imply major costs. As the information system is under development, the competitive situation of the organization changes: companies merge, or competitors may launch new products. These changes might challenge the original rational or priority of the system under development. Short delivery cycles are therefore a commonly accepted principle in the management of IS projects and should be given a high priority against adding functionality. Senior management should be involved when conditions change to such an extent that the original cost/benefit appraisal could be challenged. From a managerial perspective the costs that have been incurred until that point in time are irrelevant. The (new) anticipated benefits should be compared with the remaining development costs and operating costs at all times.

5.4.3 Management of time schedule The final element that requires management attention is the time schedule. As delivery time is a major issue when developing information systems, so is the allocation of people to projects. Planning both milestones and final goals is essential, not only for the realization phase of the project, but also for the 83

The Make or Break Issues in IT Management exploitation phase. During realization, milestones are used to monitor the outcomes of the project, while during exploitation they can be used to monitor investment results, for example to check whether qualitative goals have been reached. Experience data from previous projects is one of the few means to help in the planning stage.

5.4.4 Conclusions regarding the development activity Managing information system development from a cost/benefit perspective requires control of functionality, resources and planning. The actual functionality determines the benefits, the resources determine the costs, and planning influences both cost and benefits. Senior management cannot be bothered with all changes that will definitely occur during development. However, at a certain point these changes will also affect the priority of the project compared to those of others or even the rational of the project. Management of system development, therefore, also includes senior management attention. However, it is hard to draw an exact line between operational project management and strategic reconsideration of projects.

5.5 Exploitation stage The exploitation of information systems differs from development in many ways: the organization of this stage is production-like system changes are normally minor (since major changes are considered new investments) ‘disabling’ functionality is often of major concern, such as security and availability issues (compared to ‘enabling’ functionality during the development stage). From a cost/benefit perspective the exploitation activity is of major concern as all benefits are reaped during exploitation and the majority of the costs are then incurred (normally between 60%–80% of the overall life-cycle costs). However, although the cost figures might be impressive, the possibilities to restrict the costs or increase the benefits could very well be minimal. Most 84

Full life cycle management and the IT management paradox costs and benefits will be lump sum and changes would endanger the continuity of the various information systems. Research indicates that on average approximately 10% of the costs and benefits can be influenced in this stage (Klompé, et al., 1999). Cost allocation and charge out are the most obvious methods to manage costs in this activity. Service-level agreements are the most obvious method to manage benefits in this activity. In Figure 5.3 an evaluation method for the operational activity is illustrated, which is developed by KPMG and Delft University (Kesarlal, 1997). Information systems also have an end of life. Identifying this point in time is part of the exploitation stage. Evaluating all operational information systems and removing those that are no longer used or cost-efficient has proven to be a very economical activity.

I T bu d g e t i n g

Costs management

Benefits management

Business average score

Figure 5.3 Cost/benefit managent of operating activity

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The Make or Break Issues in IT Management

5.6 Full life-cycle management revisited In the previous sections of this chapter the concept of full lifecycle management was discussed. This concept consists of various interrelated activities. Throughout the development of the information system, from first conceptualization through exploitation to abolishment, the notion of the costs and benefits of a particular information system will improve. However, the number of possibilities to influence these costs and benefits will, unfortunately, decrease. This is referred to as the IT management paradox: by the time the contents and consequences of the information system are clear, few possibilities are left to influence them. This paradox should encourage and not discourage the management of information technology. A more detailed life-cycle is illustrated in Figure 5.4. The planning stage consists of prioritization of IT against non-IT and the prioritization between IT projects. The development stage consists of designing, building, testing and implementing IS projects. The exploitation stage consists operating, maintaining and abolishing operational information systems.

Figure 5.4 Overview of life-cycle management activities

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Full life cycle management and the IT management paradox The various activities can only be adequately performed when information from other activities is available. For example, operational costs typically make up 60%–80% of the life-cycle cost of an information system. Not including these cost in the investment appraisal of the planning stage implies that many uneconomical projects will be approved. Building up experience data is, therefore, an important element of full life-cycle management. Aiming for excellence in only parts of the life-cycle seems to be relatively pointless, as excellence can only be realized on the basis 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 management are currently applied in practice? This section describes the state of the art in IT management at nine financial services institutions. Overall, we concluded that although organizations want to improve their IT cost/benefit management, they allow many opportunities to pass by. It is remarkable, for example, that still few organizations take the opportunity to evaluate their IT investments after implementation. The attitude towards cost/benefit management remains primarily incident driven. The outline of this section is as follows. First, the research method 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 in detail in the appendix to this chapter. Second, the research results of the nine case studies are given. The paper ends with conclusions regarding the quick scan tool and general findings within the area of IT cost and benefit management.

5.7.1 Research method The presented overview is based on quick scans, which were held at nine major financial services organizations in the Netherlands. The quick scan consists of semi-structured interviews. Three interviews were held at each organization, with: strategic management, among other things responsible for 87

The Make or Break Issues in IT Management organization-wide IT deployment, as well as responsible for making general strategic decisions IT management, with the main responsibility to offer IT services which are in conformity with the market line management, among other things responsible for the realization of benefits from IT in the business processes All these management types have a direct link to the IT investment process and therefore are included in the research (Rockart, 1991; Applegate, 1996). By involving three individuals within one organization, each with a different role and different perspectives on IT, a broader and more informed view of the IT cost/benefit management is obtained.

5.7.2 Research findings Using the quick scan in the three interviews, it is determined whether an organization addresses all requirements of a particular life-cycle activity. The three quick scan results are eventually combined in one conclusion about the IT cost/benefit management of the organization. According to the number of requirements it has implemented, an overall diagram of the organization can be drawn which represents how well it manages costs and benefits of IT. A typical outcome of the quick scan is illustrated in Figure 5.5. In addition to Figure 5.5, a detailed explanation is presented to elaborate on the scores for the five activities. It explains which aspects present themselves for cost/benefit management improvement. Presenting the results in a diagram provides a good base for communication within the organization. To implement all aspects of the quick scan is not meant to be an absolute goal for every organization, but rather the quick scan can give suggestions how to improve parts of IT cost/benefit management. Since improvements themselves are investments, they should be analysed for appropriateness given the particular context of the organization. The overall findings of the nine financial organizations are elaborated upon in the remaining sections of this chapter. All major life-cycle stages will subsequently be discussed.

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+ Strategic management involved in justification of IT proposals – Costs of exploitation are not considered – Formal investment method is absent

– No comparison between investment results and set goals – No IT cost/benefit improvement due to experience

Organization

+ Periodical analysis of information systems + Assessment of market and competition + Clear guidelines for IT investment proposals

Identification

Evaluation

Justification

Realization

Exploitation

Performance

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+ Operational costs of systems are known + System failure reports are available – No Service Level Agreements between IT and business operations Figure 5.5 Example of diagram resulting from a quick scan assessment

Maximum

+ Detailed project planning + Costs, time and functionality are managed – Considerable exceeding of time and costs

The Make or Break Issues in IT Management

5.7.3 Identification activity in practice An overview of the conclusions regarding the identification activity is given in Figure 5.6. All organizations have a bottomup as well as a top-down identification process. This means that IT investment proposals come from both an operational level and a strategic level. At the operational level ideas are generated by examining the business processes and (shortcomings in) existing information systems. Changing business strategies also have their impact on the IT strategy, which initiates new IT investments. Lastly, most organizations consult external advisors to inform them about new technologies and their possible impact. – The identification is reactive instead of proactive.

+ All organizations have a bottom-up identification process.

– Stratetic management is not involved in the identification activity.

+ Most organizations have a top-down identification process.

– IT proposals come from one part of the organization.

+ Almost all organizations use external sources to find new IT proposals.

– Guidelines for IT proposals are missing. Figure 5.6 Conclusions regarding identification activity

However, most organizations do not distinguish a distinct identification 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 these organizations IT proposals emerge either out of problems and difficulties with IT, or from spontaneous ideas which are not well thought out. The proposals are justified directly afterwards. What takes place is not pro-active explicit searching for IT proposals, but purely reactive activities. As a result many opportunities are missed, either because they were not discovered or because resources had already been given to necessary investments to resolve problems. Discovered ideas are so-called mustdo investments. There is no choice: the organization is forced to invest in the proposals. In this line, strategic management is seldom involved in the identification of IT investment proposals. It waits for the IT ideas and proposals to emerge from the organ90

Full life cycle management and the IT management paradox ization. Consequently, IT proposals often come from only one side of the organization. This side is either the IT side, which promotes IT investments but often lacks the insight in real needs for business processes, or the business side, which often lacks understanding of IT limitations. Lastly, the research shows that none of the organizations make use of proper guidelines for IT investment proposals. As a result the proposals are of varying quality, and are difficult to compare.

5.7.4 Justification activity in practice An overview of the conclusions regarding the justification activity is given in Figure 5.7. The research shows that in contrast to some years ago (Keen, 1991), nowadays strategic management is involved in the justification activity. The increasing costs and risks of IT investments demand the participation of the strategic management during the justification. In this justification tangible and intangible costs and benefits are considered. An illustrative example of this is a major bank deciding to give priority to an investment to improve the layout of their bank receipts (an investment which would bring in no direct financial benefits), rather than opting for an investment which would yield considerable financial profit. However, due to a lack of general criteria for investment proposals, organizations find that it is difficult to compare the proposals. 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 on the basis of a formal decision process with clear criteria that

– Goals are not verifiable or measurable.

+ All organizations have an eye for tangible and intangible costs and benefits.

– Criteria are not used or different for each proposal.

+ In all organizations strategic management is involved in the justification activity.

– IT cost/benefit analyses are often incomplete. Figure 5.7 Conclusions regarding justification activity

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The Make or Break Issues in IT Management apply to all proposals. Besides that, cost/benefit analyses are often incomplete. Examples of this are missing estimations of exploitation costs. Furthermore, only a small number of organizations estimate the costs that occur due to implementation of the information systems in the business processes. A substantial problem in most justification processes is that investment goals are not set in such a way that it can be checked afterwards if these goals have been achieved. They are not verifiable or measurable. There is a tendency to state goals in a qualitative way (‘better than the current situation’) instead of a quantitative way (‘an improvement of 15%’). Consequently we see in the evaluation activity that it is very difficult to say whether an investment was successful or not. IT cost/benefit management improvement remains difficult if it is not clear if and why IT investments failed.

5.7.5 Development in practice Although all organizations make detailed time schedules and estimations of budgets, most IT projects exceed these time and cost estimations. Especially sizeable projects often run behind their initial schedule. The research shows three majors causes:

– Project plans and time schedules are too optimistic.

+ All organizations make time schedules and plan budgets.

– Financial estimates are incomplete.

+ Most organizations use formal development methods to structure the realization process.

– Documented experiences are not reused – Subsequent calculations are uncommon. – The quality of delivered systems leaves much to be desired. – Project goals are not fixed. – Operational risks are not identified. Figure 5.8 Conclusions regarding realization activity

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Full life cycle management and the IT management paradox project goals are not fixed, and change during project execution the estimates of time and costs are not realistic risks 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 ‘everlasting projects’ do not deliver an operational system. One way to tackle this problem is to deliver the system before major system adaptations are made. Although this approach gives systems that have to be adapted to new needs, at least there are some products which can be used in the business. Beside the too optimistic estimates of time and costs, another cause of delays in system delivery is the problem that operational risks have not been identified properly before an IT project is started, and thus unexpected problems arise during realization. Opportunities to improve realization by doing subsequent calculations and use of documented experiences are uncommon. Lastly, the quality of most systems is regarded to be of a low level at the time they come into exploitation; they seldom meet the high expectations held by the end users or line management.

5.7.6 Exploitation in practice The majority of organizations register exploitation costs for each information system. However, two out of nine organizations only know the overall exploitation costs. They do not know how much each information system contributes to the total sum. Almost all organizations had appointed somebody to each information system, this person being responsible for the effective use of the system. It is, however, remarkable that in general no connection between the system and the initial goals is made. A well performed exploitation should focus on achieving the set goals, 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 should perform. Furthermore, in general there is no charging of IT costs to the business processes. Consequently it is difficult to know which costs are made to support the business process. Because benefits and costs are not considered at the business process, it 93

The Make or Break Issues in IT Management is difficult to determine whether the system is still profitable. An overview of the findings regarding the exploitation activity is given in Figure 5.9.

5.7.7 Evaluation in practice Most organizations do not evaluate. For example, they seldom look back whether the IT investment has really met expected goals. The three main reasons for this are: due to vague project goals it is difficult to determine if goals have been reached The results of one investment, so it is said, cannot be isolated from other investment results Due to limited IT resources, IT capacity is rather used for new projects than for evaluating old investments. Consequently, organizations do not know if a particular IT investment can be called a success. However, such an evaluation is necessary to determine how IT cost/benefit management can be improved. An analysis of the investment could lead to system improvement proposals or better IT economic processes for IT decision 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 the IT investment process. For example, they use the Capability Maturity Model (CMM) to evaluate and improve the realisation activity. Or they use benchmarks or a Total Cost of Ownership (TCO) model to evaluate the exploitation activity. This way they improve their IT cost/benefit management. – Most organizations do not use Service + Most organizations know the exploitation costs per information system. Level Agreements. – IT costs are not charged to the business processes..

+ Most organizations have arranged the responsibility of the information systems.

– Exploitation is not focused on achieving the investment goals, but on keeping the system operational. Figure 5.9 Conclusions regarding exploitation activity

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Full life cycle management and the IT management paradox

5.7.8 Conclusions full life-cycle management In this research the concept of full life-cycle management was used to assess the management of IT costs and benefits. Based on the observation that throughout the life-cycle of information systems, the costs and benefits become both more clear but also harder to influence, a quick scan instrument was developed to present opportunities to get a better grip on IT costs and benefits during the whole life-cycle of information systems. The quick scan was deployed in nine financial organizations and indicates that in contrast to a number of years ago, nowadays senior management is actively involved in the IT cost/benefit management. This is probably caused by the increasing costs, risks and potential benefits of IT investments. Although organizations confirm the importance of a well-performed IT cost/benefit management, in general quite a few aspects of their IT cost/benefit management were open to improvement. The quick scan tool which is applied in this paper appears to be an efficient tool for analysis. In all cases, the case study conclusions were confirmed by senior management and the analysis effort was experienced as worthwhile. The most important conclusions regarding costs and benefits management are as follows. Identification of project proposals: instead of a pro-active identification of IT proposals, most organizations have a more reactive attitude towards IT investments. Only when IT prob-

– Evaluation is missing, due to the fact that goals are not measurable.

+ Some organizations make use of some kind of format method to evaluate the investment process.

– Influences of other investments cannot be isolated. – IT capacity used for new projects rather than for evaluation. Figure 5.10 Conclusions regarding exploitation activity

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The Make or Break Issues in IT Management lems arise, a clear identification process is visible. Otherwise IT investment proposals are not sought. As a consequence, most IT proposals are necessary to solve a problem and there is no real choice about investing or not. Justification of project proposals: investment goals are not verifiable or measurable. It is therefore difficult to assess if an IT investment has been successful. Realization of projects: IT projects last too long and cost too much due to unclear project goals, too optimistic estimations and the occurrence of unanticipated problems. Exploitation of operational information systems: in general the focus lies on maintaining the information systems operational, not on using the systems to achieve investment goals. Evaluation of cost/benefit management: because the results of many IT investments are not assessed, organizations do not know how to manage their IT costs/benefits better. Though these results are interesting in their own right, the real benefit of the quick scan tool is not to arrive at general findings, but to suggest specific points for improvement to particular organizations. The merit of the quick scan tool is the possibility to locate specific lacks in IT cost/benefit management, present them in a communicative manner, and give a basis for improvement. The case studies support the assumption that excellence of operations can only be achieved when all activities of full life-cycle management are addressed. Simply, because information of other activities is required to achieve some form of overview. The different parts in the life-cycle model require input from other 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 paradox by influencing IT costs and benefits not only at an early stage of the life-cycle when the effect of influence is the most substantial, but also during the full lifecycle. Because of the dependencies between the different elements in the lifecycle, this full life-cycle approach presents the opportunity to use experiences over time and thus to mature our management of IT costs and benefits.

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Full life cycle management and the IT management paradox

Appendix: Quick scan elements in detail With the information economics life-cycle (Swinkels, 1997) approach as a basis, a quick scan instrument has been developed with the purpose of gaining insight in the way organizations handle IT cost/benefit management. The quick scan instrument requires that the life-cycle is developed in more detail. Using multiple general sources of literature on IT evaluation and IT economics (e.g. Willcocks, 1994; Farbey et al., 1993, Remenyi et al., 1993; Hogbin; 1987 Parker and Benson, 1988) and more specific sources on the life-cycle model (e.g. Berghout et al., 1996; Irsel and Swinkels, 1992) and interviews with members of the Workgroup Information Economics, who initially developed the information economics life-cycle concept, a model is created which details the main activities of the life-cycle into a number of requirements for a well-performed activity.

Identification This activity is concerned with discovering all investment proposals where IT can benefit the organization. The ideas for investments can be found by a top-down, bottom-up and an inside-out approach (Earl, 1989). Examples of these approaches are: IT investment proposals derived from business goals (top down), proposals due to failing information systems (bottom up) and proposals that are presented by innovative use of IT (inside out). The importance of identification lies in the fact that during the next activity (justification) a choice should be made from the ideas and plans that have been discovered. When important ideas are overlooked due to bad identification, important opportunities might be missed. Thus, the identification activity is necessary to identify all attractive IT investment proposals. The main requirements for a well-performed identification are as follows: Senior management should be involved in this stage and determine the direction in which new IT investment proposals should be sought. It is the role of the senior management to set the general direction of the company. As these days IT is becoming more and more of strategic importance, the involvement 97

The Make or Break Issues in IT Management of strategic management in this activity is essential. All operational information systems should be periodically checked to see whether it is necessary to discard them or improve them. To minimize the threat that operational systems suddenly fail, a periodic check of systems is necessary. Such a check could give the impulse for discarding an information system or for additional IT investments to improve the current situation. It enables a pro-active reaction to possible threats. A well-performed identification considers all three possible sources of new IT proposals: top down, bottom up and inside out. Though the majority of proposals may come from one source, all three sources should be referred to. This entails analysing business goals, existing business processes, operational information systems and looking for IT possibilities. Besides the internal IT opportunities, the organization should pay attention to the external developments with respect to competition, customers, changes in society, government regulations and advice from external parties. External ideas, opportunities and threats should be identified. For example, for most financial companies a change in the government’s policy can have a major impact on the organization of information. It is essential that one person (or department) is responsible for proactive identification. If no one is responsible for identification, the identification process will be without structure (or nonexistent). Most likely many IT investment proposals will be overlooked: either they remain undiscovered or are carried out without entering the IT decision process. Guidelines should be used which have to met by all IT investment proposals. To attain a certain quality of proposals, clear guidelines should be used which can specify defined norms (such a financial norms) or norms concerning content (such a certain aspects that have to be addressed in each proposal). The guidelines should be known by all who are involved in the IT investment decision-making process. Persons (or departments) should have the time and resources to generate proposals. Clearly, only when people get the resources to draw up proper IT proposals, will the identification turn out the best IT investment proposals.

Justification The justification activity is used to justify IT investment propos98

Full life cycle management and the IT management paradox als and to weigh the different proposals against each other, so that limited organization resources can be distributed among the most attractive proposals. To make an accountable decision, a number of (predefined) criteria can be used to score each proposal. The criteria can be financial (e.g. return-on-investment figures) and non-financial (e.g. strategic match). The main requirements for a well-performed justification are as follows. Three aspects should always be regarded in each proposal: costs (including time), benefits and risks. One can have all kinds of different criteria to justify IT investments, as long as the criteria cover the costs, benefits and risks of the investment. Distinctive criteria should be used to justify the execution of IT investments. Due to limited resources only a small number of IT investment proposals can actually be realized. Therefore the proposals should somehow be compared to each other to determine which proposals should have priority. By distinguishing criteria all proposals can be matched. A distinction should be made between the investment’s impact on the business domain and the IT domain. Because there is a considerable difference between investments in information systems and in the technical infrastructure, there should be an awareness that investments can have an impact on different domains. Investments in information systems can result in direct benefits for business processes (the business domain), whereas investments in the technical infrastructure (IT domain) mostly do not. However the investments in the IT domain are crucial to do (future) IT investments. Consequently both types of investments are equally important, but may have very different kinds of benefits. Strategic management should be involved in justification. IT investments are characterized by high costs and high risks, but also high potential benefits. Furthermore, many IT investments have a company-wide impact. These are reasons why the strategic management should be involved in justification and make clear decisions concerning IT. There should be well-founded (overall) estimations of all tangible and intangible costs (including initial investment costs and exploitation costs) and benefits. All costs and benefits should be quantified as much as possible. This is especially difficult for the intangible costs and benefits. A quantified estimation is 99

The Make or Break Issues in IT Management often more usable in the justification process than qualitative statements (such as ‘much more’ or ‘much better’). These quantified estimations do not always have to be financial figures, but can also be estimations of numbers (like product numbers), time estimations (like time to develop), etc. Although in this stage the estimations may be overall estimations, they have to be well-founded. Of course all costs have to be regarded, including the initial costs and the annually returning exploitation costs. Justification should be performed according to a formal justification process. For an effective justification a formal process should be used. A formal process is characterized by documented procedures, which are followed in practice. The main benefit of a formal process is that it can be adapted using experiences from previous IT investments so it becomes more effective. Project goals should be verifiable and measurable. It is important that it is possible to determine if goals have been reached. There are three reasons for this: firstly, during realization it is always clear which goal should be reached and one can work towards that goal. Secondly, at the end of the IT project it is possible to say whether an investment was successful. Thirdly, if an investment was not successful, the reasons for failure are more clear. IT and line management should be involved in justification. IT management and line management both have different points of view on IT investments. IT management is mostly responsible for providing information about the possibilities and limitations of IT. Line management is mostly responsible for providing information about the needs for the business processes. Participation of both managements guarantees the support which is needed to bring the IT investment to a successful ending. It should be known how different proposals interact with each other. Most IT projects interact with each other, either as opposing factors (because they share resources) or as complementing ones (because one project has results, which can be used by the other). The interaction of proposals should therefore be taken into account.

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Full life cycle management and the IT management paradox

Realization During the realization of the investment, the aims and goals that were set during justification should be achieved against minimal costs. The investment proposal is implemented during an IT project. This not only implies a technical implementation of the system, but also the integration of the system in the business process. All related costs should be monitored. This includes indirect costs such as the costs that occur due to the reorganization of the business processes. The main requirements for a well performed realization activity are as follows. A time schedule and well-founded detailed estimations of all costs. The overall estimations during justification should now be detailed. As a result there will be a project plan with a detailed time schedule and budget. Measurable targets with respect to functionality of the system. The project goals from justification should be translated to functional goals. The goals describe what functionality and performance the information system will have. Measurable milestones during the project. Milestones are necessary to monitor the project and be able to adjust where required. There should be continuous monitoring of costs, time and functionality. To determine whether a project needs adjustment, one needs to measure the costs, time and functionality and compare these to the preceding plan. These three aspects can be used to steer a project. For example, in most cases one can cut costs by discarding functionality. Or, at the price of higher costs, a project can be delivered faster. Subsequent calculation. After the project has finished, a report should be made which explains the differences between actual costs and planned costs. This is not only useful to evaluate the project, but also gives insight in the way things can be done more effectively in the future. Operational risks should be assessed at the start of the project and monitored during the project. Most project problems can only be successfully solved if they have been identified at the start of the project. They should be monitored during the execution of the project. A structured development method should be used (e.g. SDM). 101

The Make or Break Issues in IT Management Developing an information system according to a structured method has two advantages: firstly, none of the important development stages will be overlooked. Secondly, the method can be easily adapted when results are not satisfactory. Problems and budget or time exceedings should be reported to management. The sooner problems are known, the sooner actions can be taken. There should be some mechanism during realization where management is informed about such problems. A structured scheduling method should be using while planning the project (e.g. function point analysis). Methods like the function point analysis, the COCOMO method or comparable methods give insight in the efforts an IT investment requires. By using the same method structurally, an organization can adapt it to make increasingly better estimations. Problems occurring during project execution should be written down in reports, so that knowledge can be used. It is not uncommon for projects to encounter the same problems as past projects. If knowledge about these problems is used, they can be avoided or corrected earlier on.

Exploitation The primary target of the exploitation activity is to optimise the support of existing systems to the business processes. This entails minimising operation costs, and maximising the use of the possibilities of the systems. A well-performed exploitation addresses the initial investment goals, while monitoring all exploitation costs. During exploitation the business reaps the benefits of the system. The main requirements for a well-performed exploitation activity are as follows. Operational systems should be kept operational, so that expected benefits can be realised. The investment goals should be reached by making sure that the operational systems remain operational and contribute to the set goals. The most important exploitation costs should be registered for each information system. During exploitation operational systems should be kept operational, and thus guarantee that expected benefits can be attained. The costs of exploitation form a considerable part of all investment costs. Insight in these costs can help to determine if an information system 102

Full life cycle management and the IT management paradox still is profitable by comparing resulting costs to benefits and expected costs. Also this insight helps to determine all investment costs of future IT investments. Important exploitation costs are costs of software, hardware, technical staff and costs that occur in the business process due to exploitation of the system. Differences between results of costs, benefits and performance and their expectations should be reported and documented. As was the case with realization, the same applies here: an organization can only learn and subsequently improve its cost/benefit management by reporting the problems that occurred. Only when problems are highlighted can proper actions be taken to improve the situation. The most important system performances of each information system should be registered. To monitor the performance of the information systems, several aspects of an information system should periodically be recorded. Depending on the kind of information system, these aspects can be: response time, number of technical problems, downtime of the system, number of problems reported to the help desk concerning the system, etc. Changing performances can indicate a problem, and can require changes to the systems and maybe even additional IT investments to increase the performance. In this last case, the exploitation provides an IT proposal as input for identification. IT costs should be charged to the business processes. To decide if an information system is (still) profitable, it is wise to study both costs and benefits at the same point: at the business process level. If benefits and costs are clear, it can be decided if the benefits of the system still outweigh its costs. To gain insight in the actual costs, all IT costs should be charged to the business process, because that is the point where the benefits are most visible. According to Earl (1989), charging the IT to the business process does not always have to mean that the business actually pays for IT. Service Level Agreements should be formulated between the IT department and user organization for each information system. They should be checked periodically. On the one hand the IT costs should be charged to the business processes, but on the other hand the information system should also perform in accordance with predefined agreements. Only when the system works as specified, it can be successfully exploited in the business process. Service Level Agreements are used to record agreements about the performance of the system. 103

The Make or Break Issues in IT Management Each information system should have an exploitation budget. Practice shows that operational systems often need some minor adjustments to make them fully functional. To be able to make these adjustments a (small) budget should be available to each information system. For each information system somebody should be responsible. When the system is implemented in the organization, somebody should be appointed who is be responsible for ensuring that the system keeps running and who can assure its effective use.

Evaluation By comparing the outcomes to the set goals, an IT investment can be evaluated. If goals are not met (any longer), systems should be discarded. Furthermore, by evaluation the whole investment cycle and its outcomes, improvements can be implemented in the IT investment process. In this way, proposals can become more realistic, justification can be based on better criteria, realization can yield better results and exploitation can be more effective. Through a thorough evaluation, an organization can learn about and improve its IT cost/benefit management. The main requirements for a well-performed evaluation activity are as follows. A quantitative analysis of the benefits should be carried out. All benefits which can be measured should be subjected to a quantitative analysis. Especially during justification the goals that where formulated in a measurable way should be analysed. A qualitative analysis of the project benefits should be carried out. Effects that cannot be measured directly can be retrieved using qualitative measures, including interviews with customers or users, analysis of complaints or external benchmarks or audits. The results of the system exploitation should be compared to its goals. Differences should be registered. The question to answer is: have we reached our goals by making this IT investment? If goals are not met, the system may possibly be adapted so that benefits can still be derived. Additional investments may also be decided upon, to make the existing system more profitable. A cost analysis should be performed. By comparing the registered costs during realization and exploitation to the cost estima104

Full life cycle management and the IT management paradox tions during justification conclusions can be drawn about the quality of the IT cost/benefit management. Improvements in either the decision process or the investment implementation can be the result. The reports about realization and exploitation should be reviewed: what are the differences between the targeted and resulting costs and benefits, and where do these differences come from? Such an analysis is used to improve IT cost/benefit management. Two possible conclusions can be: the estimations were not correct and should be adjusted in the future, or the implementation of the investment failed and some activities should be improved. Strategic management should be involved in the evaluation of IT cost/benefit management. Strategic management should always take the initiative to evaluate and improve IT cost/benefit, because IT and line management do not take this initiative. IT management is not directly interested in a cost-effective IT use, because this means a shift of IT responsibility to line management. Line management is also not interested in this shift, because it becomes responsible for the results of IT applications. A periodical analysis of the complete IT cost/benefit management should be carried out. All activities in the IE life-cycle should be periodically analysed to see if they are performed effectively and efficiently. A good approach is to use formal methods to assess each of the five activities. An example of such a method is the Capability Maturity Model (Paulk et al., 1993) to assess the realisation activity. Furthermore benchmarks can be used to determine if specific information systems are used efficiently. Written procedures should be used detailing how each of the five stages should take place. Only when formal procedures exist, that lay down how an activity should be carried out, it is possible to actually improve work procedures so that they become more effective. Informal procedures are hard to adapt.

References Ahituv, N. (1980) A systematic approach towards assessing the value of an information system, MIS Quarterly, December. Applegate, L. M. et al. (1996) Corporate Information Systems Management: the Issues Facing Senior Executives. Irwin, Homewood, Illinois. 105

The Make or Break Issues in IT Management Bedell, E.F. (1985) The Computer Solution: Strategies for Success in the Information Age. Dow-Jones Irvin. Berghout, E.W. (1997) Evaluation of information system proposals: design of a decision support method, PhD Thesis, Delft University of Technology. Berghout, E. W. et al. (1996) Lecture notes: Information Management/Information Economics. Delft University of Technology. Brynjolfsson, E. (1993). The productivity paradox of information technology. Communications of the ACM 36(12): 67–77. Clemons, E.K. (1991). Evaluation of strategic investments in information 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 IT Investment: A Study of Methods and Practice. ButterworthHeinemann, Oxford. Hogbin, G. and Thomas, D. (1987) Investing in Information Technology: Managing the Decision-making Process. McGrawHill, London Irsel, H. G. P. v. and Swinkels, G. J. P. (1992) ‘Investeren in informatietechnologie: Take IT or leave IT (Investing in Information Technology: Take IT or leave IT; in Dutch).’ Informatie 34: 624–636. Keen, P. G. W. (1991) Shaping the Future: Business Design Through Information Technology. Harvard Business School Press, Boston, Massachusetts. Kesarlal, J. (1997) Management and Control of Operational Information Systems, MSc Thesis, TU Delft. Klompe, R, Berghout, E. and Looijen, M. (1999) Cost/benefit evaluation of operational ICT in large financial organisations. Proceedings 6th European Conference on Information Technology Evaluation, MCIL (Reading). Parker, M. M. and Benson, R. J. (1988) Information Economics: Linking Business Performance to Information Technology. Prentice Hall, Englewood Cliffs, New Jersey. Paulk, M. C., et al. (1993) Capability Maturity Model for Software, 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. 106

Full life cycle management and the IT management paradox Rockart, J. F., et al. (1991) The Information Technology Function of the 1990s: a Unique Hybrid. Center for Information Systems Research, Sloan School of Management, Massachusetts Institute of Technology. Swinkels, F. G. J. P. (1997) Managing the Life-Cycle of Information and Communication Technology Investments for Added Value. European Conference on the Evaluation of Information Technology. Delft University Press, Delft. Thorp, J. (1998). The Information Paradox: Realizing the Business Benefits of Information Technology. McGraw-Hill Ryerson, Toronto. Willcocks, L. (1994) Information Management: the Evaluation of Information Systems Investment. Chapman & Hall, London. Willcocks, L. (1996) The evaluation and management of information systems investments: from feasibility to routine operations. Investing in information systems: evaluation and management. Chapman & Hall, London. Willcocks, L. and Lester, S. (1999) Beyond the IT Productivity Paradox. Chichester, England; Wiley, Chichester.

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6

A framework for evaluating legacy systems Carole Brooke Faculty of Business and Management, University of Lincoln, United Kingdom

6.1 Introduction Legacy systems are computer systems, situated within a particular organizational environment, which no longer meet the needs of that environment. Such systems can cause considerable problems in organizations, from high-profile cases such as the millennium bug to less widespread but equally serious cases where, for example, companies have been unable to adapt their computer systems sufficiently to support their customer base or changing product profiles. Not all ‘legacy’ is bad, however. Many legacy systems contain a massive amount of historical organizational data, business process information and/or functionality. Yet these systems are often inflexible or run on outdated hardware or software technology of which few people may have knowledge. In this sense, then, they can become a liability rather than an asset. Even so, the term ‘legacy systems’ has been overused and abused. A cynical view might suggest that the term is little more than an artefact of late capitalism, intended to make established usable software look outdated and sell more products. However, this view is also rather narrow. To summarize, a more holistic view of legacy systems would seem to suggest that the problem is the gap between the capabilities of the system and the needs of the business in which it is used (Brooke, 1994). 108

A framework for evaluating legacy systems It is not enough to regard such solutions as purely technical, concentrating only on the software, which is a ‘problem’ – for if the problem concerns the relationship between software and business, so must the solution. The study of legacy systems has tended to be biased towards a software engineering perspective and to concentrate on technical properties. This chapter suggests that the evaluation of potential change options for legacy systems can only be carried out as part of a holistic organizational analysis. That is, the evaluation of legacy systems must take place within a framework that combines business and technical considerations. Evaluating the potential change options for legacy systems can only be carried out as a joint process of decisions about business and IT strategy. In particular, business strategy must lead this process. This chapter presents a framework for a more holistic evaluation of legacy systems. It is based on the generation and prioritization of organizational change scenarios. The framework is described and its use is illustrated within a large commercial company. The Organizational Scenarios framework was developed by the author (Brooke, 2000) and inspired by the research of Clegg et al. (1996). The main trigger for the author’s research in this area comes from years of teaching executive MBA students about the human and structural implications of information technology in the workplace. In reviewing existing theories and concepts, it became apparent that some of the material could be combined to form a more satisfactory approach to understanding the issues. Thus it was the conceptual ideas of authors like Zuboff (1988) that came to be combined with the more empirically focused works of Scott Morton (1991) to form a practical evaluation technique that, nonetheless, gives serious treatment to the social and political values that are inherent in every organizational decision-making process.

6.2 Getting started This section gives a brief overview of the stages involved in using the framework and then goes on to illustrate each step by reference to the work with CallCentre. The technique presented here enables organizations to identify for themselves choices in the application of technology, espe109

The Make or Break Issues in IT Management cially (but not exclusively) information technology in the workplace. Choices are indentified through a process of scenario generation involving different stakeholder groups across and at different levels of the organization. The use of scenario building in the context of technology is not new. It is an established qualitative methodology for generating future scenarios and can be used 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 the information required at each stage. Ideally, a participant group should consist of about a dozen people and include: Senior directors (preferably including someone at board level) Managers from different organizational functions (including Human Resources) IT specialists (preferably including a software engineer) Front-line staff (including those at the external customer interface) End users (preferably including an external customer). The Organizational Scenarios framework begins with helping participants to describe their organization as it currently exists. An icebreaker exercise, such as asking participants to illustrate on paper their personal view of the legacy system, can be a useful way to begin. Once this is done, all the participants are asked to generate the first scenario, referred to as the status quo. Following this, participants are given three new scenarios to consider, which are, in themselves, stereotypes but which encourage participants to be creative in thinking about organizational change. On completion of the status quo exercise, participants are divided up into small groups and facilitated to develop their own scenarios. Ideally each group should produce three or four additional scenarios. When this has been achieved, the facilitators bring the groups back together to evaluate the status quo and the new scenarios. Participants are asked to prioritize the scenarios in order to avoid an explosion of possibilities before moving onto the next stage. It is important to note, though, that the status quo scenario must always be carried forward to the next stage of the model for comparison, as the objective is to assess the gap between what is currently in place and possibilities for the future, as well as to assess the feasibility of any suggested changes. 110

A framework for evaluating legacy systems The empirical research took place within a large UK-based company that is structured around a call centre operation. They are referred to hereafter as CallCentre. Major problems were being encountered with the flow of work through the business process chain. The company thought that this was primarily due to human error although CallCentre also made it clear that the technology involved was inadequate to support the complexity and size of the tasks being performed. The work with CallCentre began with an icebreaker exercise. The exercise consisted of individuals expressing their personal view of the current set-up and its associated problems in the form of a picture or diagram. Discussion then took place in a plenary session of the different perspectives. Interestingly, there was a general consensus concerning the nature of the problems. These focused around issues such as fragmented communications, inaccurate information (their word), inadequate technology, and a general lack of quality control. After this the group was asked to generate a description of the status quo using a matrix (see Table 6.1). This stage should be led by a facilitator (preferably someone who is not a direct stakeholder) and begins with a group analysis of the existing organizational scenario (which may or may not already involve technology) against nine criteria: boundary, vision, logic, structure, roles, view of information, costs, benefits and risks. This exercise was facilitated by the author and recorded on paper how they viewed the current set-up. A brief description now follows of the criteria in the matrix (more detail of the theoretical underpinning is given in Brooke, 2000) and is illustrated by reference to the CallCentre outputs. Boundary refers to the scope of the business area under evaluation. It could be a particular department, for example, or it could be the whole organization. The boundary for the analysis at CallCentre was a particular job management activity and the chain of processes associated with it. The information systems supporting this activity ran in a virtuous circle from the customer through to professionals in the business and back out again to the customer. The participants viewed the processes as a chain through which (ideally) information flowed speedily and without error. They spoke a great deal about the fluidity of information and problems were seen in terms of the interrup111

The Make or Break Issues in IT Management Table 6.1 Status quo scenario Boundary of the analysis How job management is effected and work is delivered to the field and back. Company vision Pure history. This activity is meant to deliver a service. Deals with problems. Removes them so that professionals in the field can get on with the job. Seen as the flexibility point for the whole business process chain. Measured on volume and speed and 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 job control roles. Deskilling of professionals took place – i.e. they used to manage their own work loads rather than rely on controls. View of information Information is seen as a resource but as frequently inaccurate. 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 quality checks). tion of this flow-through and this perspective is echoed in the scenarios they produced. Vision in this context does not refer to a mission statement or the like. It refers to a global summary of how the organizational unit being evaluated actually exists. Participants were asked to consider why it was that the job management activity had been designed in its particular way. What was the vision behind its design and function? Responses suggested that the design to a 112

A framework for evaluating legacy systems large extent had simply followed history in a ‘because we do it that way’ sense. It was recognized that the core of the business was about delivering a service and it was thought that designing the processes in this way enabled the service to be delivered with a minimum of problems. The vision had been to remove problems away from the customer interface. It had become clear to 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 this arrangement. The organization centralized the control of its job management functions hoping, thereby, to achieve greater efficiency. Also, the intention was to ‘remove the dross’ from the highly paid professional staff. The organizational structure flows from this. The role of the job management function was to support professionals in delivering a service to the customer. In order to do this more quickly, service delivery was done on a regional basis, hence the whole process chain was a mixture of centralized and regionalized controls. A problem highlighted at this point was that there was no dependency built into the system. Too much of the activity ran in parallel so that problems often did not become apparent until much later ‘downstream’ in the process chain. Work roles were fairly mixed. Some roles in the process were deskilled (e.g. one group of technicians were no longer able to manage their own individual job schedules) whereas for other groups there was a certain amount of multiskilling. Specialist skills were still required, mainly only for the higher paid professionals. Key to an understanding of the role of information systems vis-à-vis people at CallCentre was their view of information. View of information asks the participants to identify the company’s general approach to the concept of information. The research team pointed to the difference between data and information and the difference between an objective view and one that gives more importance to the role of the individual in its interpretation. The responses from organizational members were self-contradictory. Whilst individual members recognized that ‘information’ (i.e. not data) received on a terminal screen would not be interpreted in the same way by everybody, they still insisted that this was a result of ‘human error’ and that the solution was to automate people out of the process as far as pos113

The Make or Break Issues in IT Management sible. The assumption was that the technology was a neutral vehicle for transference of facts and that it could speed processes across spatial and functional boundaries. The information system’s role was to transmit what they called ‘facts’ unchanged from place to place and, therefore, with a high degree of accuracy. Information was seen as an objectified, externally manageable physical resource. This view of information is referred to shorthand in the framework as ‘a resource view’. Its theoretical aspects are discussed in more detail elsewhere and it has links with the resource-based view of strategic management (Brooke, 2000). The last three criteria addressed in the status quo matrix are costs, benefits and risks. These tend to be fairly familiar concepts and usually focus on economic considerations. However, participants were encouraged to think more broadly about effects associated with the existing set-up and to articulate both tangible (e.g. compensation pay-outs to customers) and intangible (e.g. damage to reputation) issues. The comments made in the matrix for these three criteria are fairly self-explanatory, except perhaps one: the cost of failure as a benefit. This refers to the effect that failure has on the increased demand for customer service. In other words, if the company delivers a service to a customer but does so incorrectly then it has another opportunity to visit them to put it right. Since getting to the customer was seen as a current strength of the business (even if not performing the job entirely correctly) the company could maintain some aspects of its good reputation. This ironic situation, however, is reflected badly under the costs section, where it was clear that rework was a major issue. As one participant put it: We are good at fixing problems but we introduce a lot of problems, too. Fifty per cent of the work is actually rework. Having assisted the participants to record their view of the status quo, the author led them to briefly consider three alternative stereotypical scenarios labelled automate, informate and transform (see Table 6.2). The purpose of these three stereotypes was to alert participants to the different ways in which technology could be applied to support, change or enhance business processes and, in particular, to pay attention to the different sets of values and assumptions that underpin the different strategies. The terms ‘automate’, ‘informate’ and ‘transform’ have become 114

A framework for evaluating legacy systems Table 6.2 The stereotypes: automate, informate, transform Automate profile

Informate profile

Transform profile

Boundary

Production department.

Production department and customer-facing departments.

Whole organization

Vision

Specialized manufacturing.

Individualized products.

Innovative products.

Logic

Substitute human effort. Maximize time/effort/£.

Augment human effort. Release new potential. Be more responsive.

Restructure Become more proactive.

Structure

Specialized functions. Centralized.

Cross-functional activity and use of networking. Focus on intraorganizational links: ‘tight–loose’.

Fully networked organization. Groups formed as necessary. Focus on interorganizational links: ‘loose–tight’.

Roles

Defined by technology. Streamlined. Tendency towards specialization.

Expanded jobs/ skills developed.

Flexible/multiskilled. Increase in contract staff.

View of Tangible/measurable resources, information e.g. time, money, head count, equipment. What counts is what can be measured.

Intellective/analytical skills emphasized. Individuals shape activities and influence new direction; bring alternative interpretations.

Hybrid staff and specialists are key. Intra- and interorganizational knowledge are highly valued. Emphasis is on coordination rather than direction (automate) or individualism (informate).

Costs

Hi-tech machinery. Capital intensive. Labour turnover.

Loss of control. Coordination. Decision risks.

Depends on restructure but could be: relocation, redesign of of systems, reskilling of staff and management.

Benefits

Cheaper labour. Predictable output. Greater control.

Quicker response times. Job satisfaction. Market sensitivity.

Responsive to changing context. Develop new alliances. Global positioning.

Risks

Dehumanizes workforce. Misses potential. ‘Leaves the brains at the door’. Failure to re-evaluate Driven by the technology. the core business areas.

Exploitation of workforce. No economy of scale. Sense of insecurity. Loss of planning and continuity.

relatively well established in the literature, but a useful guide is given in Cash et al. (1994): When information technology substitutes for human effort, it automates a task or process. When information technology augments human effort, it informates a task or process. When information technology restructures, it transforms a set of tasks or processes. (Preface, p. v) 115

The Make or Break Issues in IT Management An automate approach to IT is based on principles of the substitution of human labour and cost efficiency. The organization’s vision will, therefore, tend to be limited to a view of the business that maximizes technological control, streamlines work processes, and reduces variability. Physical resources will be stressed: labour, machinery, finances, and so on. Benefits will tend to be short term, focused on reductions in overhead, labour, and increased management control. Similarly, automation does not recognize a primary role for perceptions. The first conceptualization of the term informate is generally credited to Zuboff (1988). An informate approach to IT is based on the principles of augmenting human effort and helping individuals to add value through the application of intellective skills. The rise of cross-functional activities, the ability to see relationships between different parts of the business, and to have more of an overview of the work context will enable individual workers to identify and anticipate new business opportunities and novel ways of working. Job expansion, quicker response times, and improved market sensitivity are some of the characteristics that define the informate scenario. The vision of the business has moved beyond specialization and tightened control to an individualized approach that pushes more of the decision and control mechanisms out from the centre and closer to the customer interface. Transform takes the informate scenario to its extreme. Transformation became an established term following the work of the MIT 1990s research team (Scott Morton, 1991). The basic argument was that it was very tempting to apply IT in order to achieve efficiency through automation (and sometimes it was also the simpler route) but that long-term benefits could only come from applying it in a way that literally transformed the business. The structure of the organization has become much more diffuse and difficult to physically identify. Staffing and groupings are constantly changing to reflect the requirements of the business. Indeed, the very nature and purpose of the business itself requires re-evaluation. Management’s role has become one of coordination rather than direction and control. The business needs to be very proactive in its approach to the market 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 struc116

A framework for evaluating legacy systems tural change than the informate scenario. Whereas informating might involve the restructuring of jobs and roles, full transformation involves a re-evaluation of the very nature and purpose of the business itself. These stereotypical scenarios encourage participants to think in progressively more radical ways about the organization. It is also important that they identify both the positive and negative effects of transformation, informating and automation, and articulate their views on these. The concepts described therein encouraged participants to be creative in thinking about organizational change. The three profiles of automate, informate and transformate should be explained to the participants by the facilitators of the scenario-generating exercise. It should not be assumed that an organization’s approach to technology will exactly mirror one of the three profiles. Nevertheless, these (which are in essence) stereotypes have a useful function. They speed up the scenariogenerating process and, when plotted against the dimensions given on the vertical axis, provide a substantial foundation for generating and evaluating other alternatives. No upper limit is assumed but participants are usually encouraged to generate no less than three additional scenarios of their own, labelled as scenarios two, three and four, etc. These stereotypes were explained to the CallCentre participants and then participants were divided into two smaller groups to develop their own alternatives to the status quo set-up. Each group was asked to generate at least three scenarios. Group One produced three alternative scenarios and Group Two produced four scenarios. For reasons of confidentiality the details of these scenarios are not presented here. Each group was asked to rank their scenarios in order of priority. Returning to the plenary, the participants presented to each other the details of the seven new scenarios and their reasons for their relative prioritizations. It became apparent that the preferred scenario from each group had some overlaps and were, in fact, fairly easily merged. The whole group felt that to produce this one final consensus view of 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 moving on in the way that is required, for instance, by the Delphi technique (for a brief summary see Georgoff and Murdick, 1986). 117

The Make or Break Issues in IT Management The purpose of the exercise is to elicit different perspectives and encourage mutual understanding of them, not to make judgements concerning their validity or to remove variability. One effect of going through this process is the opportunity for managers and their staff to reassess the values that underpin their decisions. This is particularly important since for a long time the literature has argued that there is a lack of self-awareness and a need for assumptions that underpin management goals to be made more explicit (Bailey, 1993; Buchanan and Boddy, 1983). The scenario resulting from the end of this exercise at CallCentre is presented in Table 6.3. The whole group then looked at the prioritized scenario and asked questions about what was preventing the organization actually getting from the status quo to the new scenario. It is worth noting here the importance of the status quo scenario generated at the outset. It should always be carried forward for comparison because the objective of the method is to assess the gap between what is and what could be, as well as to assess the practicality of suggested changes. The plenary group generated a list of problems associated with closing the gap between the status quo and the scenario in Table 6.3. The issues were then grouped in order to tackle their solutions more easily. The groups that participants suggested were: technical problems, process issues, and organizational issues. For reasons of commercial confidentiality details are not provided here but some general observations will be made to indicate the insights that the exercise provided. To summarize, six technical problems were identified, 11 process issues and five organizational issues. It became apparent that whereas 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 would be eradicated once the process issues had been tackled. One of the most important insights from the exercise so far was that what appeared on the surface to CallCentre to be an information systems problem turned out to be much more to do with a need for change in work organization and organizational attitude. Although at one level this appeared to challenge their expectations it also had positive outcomes as we will see. By conducting the analysis in this way the participants came to 118

A framework for evaluating legacy systems Table 6.3 The prioritized scenario Boundary of the analysis

Company vision

Explanatory logic

Organizational structure

Roles

View of information Costs

Benefits

Risks

As before: i.e. how job management is effected and work is delivered to the field and back. However, boundaries of this activity are now clearer because it has been centred on one machine type but longer because it now extends to the customer because the service is now electronically enabled at point of delivery. A one-touch process. Many links in the process chain have been removed. Customers can now deal more directly through internet access. The front end has effectively been removed. Good customer perception. Speedier delivery end to end and responsibility for quality lies with one unit, becoming more transparent and less fragmented. No staff involved except those professionals actually delivering the end product. All organizational resources involved are managed under one banner and are, therefore, more easy to control. The professionals are now fully multi-skilled. This results in a more diversified ‘field force’. The only other associated roles in the process chain require maintenance and planning skills. Same as before: it is a resource and must be factually accurate from end to end. Relocation and redeployment. Training. Combining two existing technical systems. Data quality/cleansing. Customer satisfaction. Speed of delivery. No job management. No telephone calls to answer. Transparency of customer order right through the process. Significant savings in overheads (mainly staffing budgets). Very complicated to plan. Costly and time consuming to implement. Staff may end up being ‘jack of all trades, master of none’. Individual units may become too big and too dependent – could become too vulnerable to system crashes.

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The Make or Break Issues in IT Management see for themselves the social and organizational nature of the problems. It also had the benefit of making the changes seem more doable. There had been a concern at the outset that very expensive technological solutions would be necessary. It was now clear that this was not the case. However, many of the changes needed depended on senior management intervention. Examples included adjustment of the scorecard methods of weighting performance criteria, and adjusting priorities for individual target setting. The participants had been under pressure in their various work roles to come up with improvements in business performance. Being able to present senior management with a detailed and holistic plan of actions that needed to be taken and which made senior management’s role explicit helped to relieve some of that pressure. It was felt by the staff that a good business case could now be made for implementing the changes.

6.3 Second iteration of the scenarios The scenarios framework calls for a second iteration. The goal of this second iteration is to evaluate the implementation details of the preferred scenarios for their potential future business impact. Doing this helps an organization to assess its future ability to change. This attempt at ‘future proofing’ makes a significant contribution to the evaluation of organizational change, particularly at strategic levels. In the work with CallCentre, this occurred eight weeks after the first workshop was conducted. The length of the gap was partly due to availability of all the participants, and partly to give the CallCentre managers time to consider the different scenarios and the technical problems and solutions in greater depth. The gap in time should be kept to a minimum. At the beginning of the meeting we revisited the prioritized scenario (Table 6.3). It was felt by the managers that in order to strengthen the future-proofing exercise we should also return to the other seven scenarios generated by the small groups to make sure that we did not miss something. When we did this, we found that three scenarios presented themselves as helpful in further developing the prioritized scenario. The result of this further development is presented in Table 6.4. In the second iteration the objective was to future-proof the prioritized scenario by examining the market in which CallCentre operates and 120

A framework for evaluating legacy systems Table 6.4 Organizational scenarios tool second iteration – ‘future proofing’ Boundary of the analysis Company vision

Explanatory logic

Organizational structure

Roles

View of information

Costs

Benefits

Risks

All provision of service within the local section of the customer supply chain. One workforce delivering to one customer service team. Wholesale unit to equally support any retailers. Move from task focused to job focused (ownership). Minimum systems and costs. Efficient service delivery. Effective use of people. Transparency of process. Central control of process. Regional implementation. Local innovations tried, and if successful rolled out nationally. 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 staff who are empowered to manage their work. Information is still seen as a resource – information is a record of an actual physical resource (e.g. a piece of equipment). Multiskilling and training especially of the field force. Some changes to IT systems and a lot of process redesign. 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 customer satisfaction and costs. Start-to-finish time of customer orders is minimized. Fits with changes taking place in the external organizational environment. 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: because everyone is following national processes work can be picked up by other regions). 121

The Make or Break Issues in IT Management checking whether it would allow the company to meet the needs of that market. Looking at the combination of different change options, technical feasibility and the wider organizational environment helped CallCentre to produce a final scenario that supports their need for ongoing flexibility.

6.4 Conclusions Over the years the author has found that organizations are biased towards physical, tangible and technically oriented issues and that this is reflected in an inherent bias in established methods of information systems evaluation. It was, therefore, unsurprising that the mapping of the status quo at the beginning of the exercise revealed a tendency towards a resource view of information within CallCentre. The framework presented in this chapter was developed with the objective of redressing this imbalance by exposing the values underpinning different choices and by centring on human factors in the development of technology. The fact that the participants identified for themselves the overriding social and organizational nature of their problems helped to make the case more convincing for them. However, it will still be largely dependent upon senior management to enable implementation of the changes. Also, full recognition of the human and social nature of their problems implies the need for a change in culture. This is a complex and sensitive area but the author is of the opinion that without such recognition, many beneficial effects of organizational change will be lost. These issues were discussed with CallCentre during the final stages of the evaluation exercise. This chapter has presented a framework that encourages organizations to consider different organizational scenarios and their underlying values and assumptions so that decisions can be made in a more explicit and informed way. One advantage of the framework is that it is intended to be a tool-in-use. The precise steps of the framework can be (and have been in practice) tailored to the needs of the organization. For example, the costs, benefits and risks criteria can be modified to reflect the organization’s own project profiling methods, and criteria can be weighted accordingly. Most importantly, the outputs of such an exercise form a valuable archive of an organization’s decisionmaking activities. Opportunities for more in-depth and critical post-implementation review can be enabled. 122

A framework for evaluating legacy systems It is perfectly possible to identify a range of stakeholder groups that might be involved in an information technology development (Earl, 1989). Yet even where stakeholder groups are involved by management, it is often only during the development phase and not earlier in the evaluation process. Analysis and feasibility studies are considered the realm of the specialist or senior manager and not for stakeholder debate. This increases the tendency for decisions to be based purely on the interpretations of managers, who may have particular political agendas, and whose perspective is filtered through the organization’s dominant logic (Hall, 1995). Other, perhaps less powerful, stakeholder groups may not be adequately represented (Knights and Murray, 1994; Ezzamel and Hart, 1987: 348ff). In contrast, the generation of organizational scenarios puts these different groups at the centre of the evaluation exercise. The greatest management challenge presented by this method of evaluation is the simultaneous letting go (being explicit about values) and taking part (alongside a variety of political stakeholders). Above all, a critical approach is needed. Conducting what amounts to a self-evaluation is not an easy task and it may be tempting to avoid issues that make stakeholders feel uncomfortable. If, as has been argued, established methods of evaluation are biased towards tangible and technical issues and away from perceptual and human-focused issues, then it seems likely that the mapping of the status quo will reveal a tendency towards a resource view of information. The new framework presented in this chapter contributes to redressing this imbalance by exposing the values underpinning different choices and by 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 exercises referred to in this chapter. Also, mention should be made of Professor Keith Bennett, Research Centre for Software Evolution at the University of Durham, who, together with two other academic colleagues, formed a research team between 1997 and 2000, funded under the SEBPC Programme by the Engineering and Physical Sciences Research Council. Without the support of the SEBPC funding some of the research work presented in this chapter would not have been possible. 123

The Make or Break Issues in IT Management Finally, thanks are due to the staff and management at CallCentre who invited me into their organization and contributed much of their time, skills and knowledge to the research.

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 Organizational Choice and Process Redesign Issues. Journal of Information Technology, 15, pp. 17–28. Buchanan, D. A. and Boddy, D. (1983) Organizations in the Computer Age. Gower, Aldershot. Cash, J. I., Eccles, R. G., Nohria, N. and Nolan, R. L. (1994) Building the Information-Age Organization: Structure, Control and Information Technologies. Richard D. Irwin, Boston. Clegg, C., Coleman, P., Hornby, P., Maclaren, R., Robson, J., Carey, N. and Symon, G. (1996) Tools to Incorporate Some Psychological and Organizational Issues during the Development 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 Management Accounting: An Organizational Emphasis. Cassell, London. Georgoff, D. M. and Murdick, R. G. (1986) Manager’s Guide to Forecasting. Harvard Business Review, January–February, pp.110–120. Hall, R. (1995) Judgement and Hyper-Reality. Journal of General Management, 19, 4, pp. 41–51. Knights, D. and Murray, F. (1994) Managers Divided: Organization Politics 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 of Work and Power. Heinemann, Oxford.

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7

IT on board or under the thumb? Robina Chatham and Keith Patching Cranfield School of Management, United Kingdom

7.1 Introduction During the past few years a trend has been reversed. In the 1980s and early 1990s, as IT became more embedded within organizations, more and more companies decided to invite their most senior IT person onto the main board. After all, this made sense. Just as human resources and finance needed their representation on the board, so IT had to make its presence felt at the highest levels. More and more IT directors joined the ‘inner sanctum’. Recently, however, we have witnessed an increasing number of IT directors and CIOs being, once again, subordinated to other senior board members, and being removed from their exalted status. We also recognize that the number of IT people who move into more senior roles, such as CEO or chairman, is significantly lower than one would anticipate statistically. Compared to their counterparts in finance and marketing, for example, relatively few IT people break into these most senior, general management roles. As we meet and talk to many senior IT people, we are hearing what we heard years ago: that IT is misunderstood, badly treated, and undervalued. The role of the IT director or CIO is precarious; and IT people are complaining of being under the thumb of their senior colleagues once again. 125

The Make or Break Issues in IT Management In this chapter we shall explore some of the reasons why this may be. Is it true that IT remains misunderstood by IT-phobic senior managers? Or is there something in the way in which IT people present and develop themselves that contributes to their relative 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 disciplines to help answer some of our more difficult questions. We are surrounded by ‘gurus’ who jostle with each other to foretell ever stranger stories of the technological futures that await us, as we harness the microchip with greater and greater proficiency. But so many of the predictions that have been made over the past 30 or more years about the kind of society that technical progress can offer have failed to materialize. Do we really want, for example, a ‘paperless office’? If so, why have we singularly failed to achieve it, given how many years it has apparently been within our grasp. Just because something is possible it may not be desirable. It is possible to run all our businesses electronically these days. Despite the complaints of IT providers that in the phrase ‘paperless office’ what they really meant was ‘less paper’ and not ‘no paper’, the vision that they often presented was paper free. Yet it hasn’t happened, and is highly unlikely ever to happen. Indeed, technology has given us the ability to generate more and more paper, more quickly and more readily. The Internet, virtual worlds, global positioning, instant communications with anyone anywhere are all available right now. As we sit next to people at dinner, we can choose to talk to them, or by our mobile phones to people we would prefer to talk to. Colocation is now no longer a determinant of who we deal with, communicate with, or even (I suspect in the near future) procreate with. For a while these opportunities will present us with a number of ‘moral imperatives’. As an example of a ‘moral imperative’ consider travel. It is perfectly feasible for many people of our generation to travel for their holidays anywhere in the world. No longer are people constrained by distance or expense; people do 126

IT on board or under the thumb? not have to be millionaires to go on safari to Africa, to visit the Taj Mahal, to go walkabout in the Australian outback, or to live the nomadic life in Mongolia. The fact that one can means that, at least for the ‘chattering classes’, you must. To say that you would rather not bother is to commit a new sin of omission. Virtual reality and all the other manifestations of IT will soon create a similar ‘moral imperative’. Not to surf the Net will be a ‘terrible waste of opportunity’. But this wave of technophilia cannot suppress the underlying human spirit, the patterns of culture laid down over thousands of generations (Hallowell, 1999). Technology can give us almost limitless freedom to have anything we want. So what do humans really want? What will the anthropology of the twentyfirst century look like?

7.3 Reforming the tribes – back to virtual nature The clues are already there. The Internet is allowing clumps of like-minded people to form new tribes. At present, these tribes suffer from terrible shortcomings. Members often cannot even see each other. But take all the IT-related capabilities of the twenty-first century; and take the long history of human evolution, living in smallscale societies, characterized by shared values and beliefs (often confused with ‘primitive religion’); take the spirit of freedom; and take the persistent need for a sense of identity in a world bent on making everything the same; and you soon realize that the anthropology of the twenty-first century is one of a re-emergence of difference. Gaining their identity from shared interests (such as the ‘worship’ of Jennifer Aniston, or a lifelong commitment to Star Trek), small ‘tribes’, physically distributed across the globe, but brought into tribehood by the virtual reality of twenty-first century IT, are already starting to form. In the early days, they will be indistinguishable from each other. But as they provide for more and more of the members’ sense of belonging, they will begin to drift apart from each other in language, values and comprehension (Nicholson, 1998). IT has the power to overcome physical limitations and barriers. It is unlikely, however, radically to change human beings. For a 127

The Make or Break Issues in IT Management while, a generation or so, individuals will have the unique ability 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 for a 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) societies are 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, for sure; but the ends will be the same as they always were: to belong, to identify with, to have meaning for others, and not for technology. Over the years, technology ‘gurus’ have been very good at predicting technological advancements, but the record shows they are not so good at predicting how people will react to these advancements. Adaptable though we humans are, there are some aspects of who we are that seem to resist the lure of technology-induced change. Human societies have been evolving for millions of years; the microchip has been with us for less than a generation. Maybe we ought to look beyond technology for some 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 various forms. One of the tasks of anthropology during the past century or so has been to record the multiplicity of ways in which the human spirit has manifested itself in culture after culture, from Africa to New Guinea, from South America to Greece. Its role has changed with the advent of the ‘global village’. No longer are 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 recording difference. It has also noted ‘similarities’. Many anthropologists have observed that, despite differences of language and expression, there are a number of patterns of human culture that recur in every recorded society: the use of language; some form of pair-bonding; the telling of stories and myths to pass on the important truths, and so on. It may be, therefore, that anthropology has a role to play in 128

IT on board or under the thumb? helping us to identify how we may respond to the opportunities of IT. Will IT transform us into yet more strange and new forms of society? Or will it simply have to fit into the universal patterns of culture that human evolution has established indelibly upon us?

7.5 IT people, the shamans of the twenty-first century? One way of exploring these questions is to turn the anthropological lens onto those people directly responsible for delivering IT to the rest of us: the IT professionals. In many cultures (but less overtly so now that ‘magic’ has been ‘replaced’ by science), the mystical ‘truths’ have been the preserve of groups or individuals within society who do not form a separate ‘tribe’ but have a special role or roles. These are generically referred to as ‘shamans’. Characterized as having access to powers most ordinary folk cannot get hold of, shamans have often had their own cult status within their respective societies. They learn strange, often incomprehensible, dialects, and are treated with a mix of awe for their powers, and contempt for their often ‘anti-social’ behaviours. Many are not allowed to marry or enjoy the normal pleasures of acceptance within society. They maintain their selfworth by becoming ever more distant and incoherent, locking themselves away until called on to cure some ailment, or deal with some natural disaster. When they do emerge, their behaviour is often unpredictable, so people not directly involved with the immediate situation often steer well clear. As western ‘civilization’ ‘takes over’ many indigenous cultures, shamans tend either to reintegrate themselves into the mainstream, or to set themselves even further apart, setting up exclusive cults, which are open only to the minority who reject the ordinariness of the evolving culture. The circumstances that allowed IT people to develop shamanistic roles within our organizations are fading away with the onset of ‘chips with everything’. IT is no longer associated with the ‘computer’; it lives in our cars, our video recorders, our cameras, and our washing machines. Increasingly we are adopting technologies in which ‘fuzzy logic’ operates. 129

The Make or Break Issues in IT Management ‘Fuzzy logic’ has its roots in eastern philosophy, rather than in the essentially black and white logic which has dominated western thinking since the time of the ancient Greek philosophers (Kosko, 1994). Consequently, while we in the west have struggled unsuccessfully for years to create ‘artificial intelligence’ machines based upon the binary notation that lies at the heart of our computers, eastern technologists have been able to invest cost-effective intelligences that break through the barriers of binary thinking. The mainframe computer, like almost all western computers, was built on binary logic. Because of its size and complexity, it became the archetypal religious artefact of the shamanistic IT person; the mystical manifestation of the IT shaman’s power. The supporting myths (the mainframe is down) and rituals (the Friday payroll run) have begun to lose their sway. Ordinary folk have now learnt the arts of the IT shaman; we are (or can be, if we want) all shamans now.

7.6 IT people – a different kind of tribe? So if IT people are unlikely to be ‘shamans’ within our own society, are they, instead, a tribe apart from the rest of us? One of the ways of distinguishing different tribes from each other is by language. By this yardstick, IT people almost definitely form a different tribe. Their language is hard to penetrate, and they seem to have very little inclination to learn our own language. This makes communication between us very difficult. And the anthropological record shows that poor communication is often associated with tribal warfare. According to this observation, there should be frequent hostilities between business people and IT people. The evidence is unarguable – the skirmishes that take place at every opportunity can sometimes spill over into full-scale war in the offices of our organizations. Like most ‘aliens’ IT people have a number of characteristics that make them different from the rest of us; like many aliens, many of these differences are based upon stereotypes rather than direct observation. What we know about the French, the Australian Aborigines, and the native North Americans is rarely based upon painstaking personal research. It is based upon the limited amount of data anyone needs before feeling sufficiently 130

IT on board or under the thumb? confident that he or she can pass judgements upon them. Stereotyping is morally unwelcome in today’s politically correct western culture; but it is the same mental phenomenon that allowed our forebears to recognize danger in an instant and live long enough to breed. Taking time to check the validity of first impressions could be fatal in the wild. And the mental equipment that kept us in the evolutionary race for millions of years is not going to roll over and die just because it is not considered politically correct to jump to hasty conclusions these days. The human mind thrives on generalizations. The study of almost any subject (be it mathematics or sociology, history or biology) depends upon generalizations. So when we study the possibility of there being a ‘tribe’ of IT people, we focus upon those generalizations. Calling them stereotypes is challenging but accurate.

7.7 The IT stereotype The IT stereotype, then, is a generalized description of ‘your average IT person’. Like any generalization, it may actually describe no one individual at all. But its strength lies in its generalizability; it allows non-IT people to be prepared to ‘know’ in advance what to expect. Unfortunately, as we know only too well, this tends to create a filter through which the actual IT person is viewed. Self-fulfilling prophecies are created in this way. It is a shame; but it is human nature. In preparing for this chapter, and for much of the work we do professionally with IT people, we undertook some research. We wanted to answer the age-old question, ‘Why hasn’t IT delivered on its promises?’ But instead of seeking the answers in the technology or the structures of organizations, or in economics, or any other of those areas that had been thoroughly excavated before, we asked about people. We interviewed hundreds of senior managers. Some were IT managers, but most were not. Most were the business managers who use IT rather than supply it. We asked these managers about the people who deliver IT services to them. We asked them to describe these people – to characterize them. As more and more descriptions were recorded, it became more and more apparent that many if not most business managers have a set of similar 131

The Make or Break Issues in IT Management views about IT people in general. They may vary these views as they describe each individual IT person, but these variations are just that – variations on a theme. That theme is the IT stereotype. In some ways it is like the stereotype of the estate agent, the accountant, or the second-hand car dealer. It is a shorthand caricature. It may not apply in fact to any individual, but it prepares us for ‘the worst’. Moreover, it colours how business managers expect IT people to behave. Expectations are often fulfilled (they become self-fulfilling prophecies) as business people interpret the language and behaviour of IT people through the filters of the stereotype; constantly, largely unconsciously, looking for behaviours that confirm their view, and dismissing behaviours that do not fit in with the paradigm. Not surprisingly, each encounter is both an example of the stereotype and a reinforcement of it. So the following description is not our view – it is the collective (partly unconscious) view that many business managers hold about IT people in general. If it offends, don’t blame us, blame the collective unconscious of the business community. Among the characteristics of the stereotypical IT person are comfort with logic, facts and data, but a significant lack of comfort with ambiguity and unpredictability. Their world is black and white, and one in which shades of grey are avoided. According to the stereotype, IT people are unimaginative, and do not think laterally or creatively (Chatham and Patching, 1997). They are poor at dealing with moral and ethical dilemmas, and avoid making decisions where there are no ‘provable’ right or wrong answers, preferring to follow clear and unambiguous 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 business context Influencing positively and constructively Dealing with conflict Saying ‘no’ Communicating in business language Networking among their peers and external business contacts Leadership. What is more, they do not always create the right image; their 132

IT on board or under the thumb? dress and posture do not engender business confidence. This reputation is often reinforced by IT professionals’ behaviour such as: Flippancy and off-handedness Poorly timed campaigns Politically naïve remarks Fighting the ‘wrong’ battles Not knowing when to back down Using inappropriate judgements: intellectual rather than moral or ethical Failing to canvass opinion, and to build relationships and partnerships Not knowing the difference between ownership of ideas and possessiveness Lack of sensitivity to and empathy for others’ feelings or needs. Many IT managers know they have an image problem, but are unable or unwilling to confront the issue. Some literally go into hiding to avoid hearing painful comments about themselves, and some escape into other professions (such as academia and contracting). Many live out the self-fulfilling prophecy, ‘I can’t win, so there’s no point in trying.’ As a consequence, IT managers are often politically naïve. They perceive 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 responsible for entire sections of an organization’s activities, have to deal with organizational politics. Organizations, being made up of people, are essentially political institutions. But we have found that IT managers are often among the least well equipped to cope successfully in the political arena. IT managers and their senior peers in other functions do not have mutual respect for one another, nor can they talk to each other in a common language. The quality of their dialogue is relatively poor. This is no one’s fault in particular. But we do believe it is up to IT managers to take greater responsibility for resolving this 133

The Make or Break Issues in IT Management problem. In many cases, this means that IT managers, to be able to work effectively in the political arenas of the boardrooms of today’s businesses, will need to ‘unlearn’ many of the lessons they have learnt in becoming lifelong technical experts. Virtually all the training (both explicit and tacit) that IT people receive throughout their IT lives works on the principle that there is a ‘right’ answer to everything. Many people go into IT (more or less consciously) because it is somewhere where they can deal with certainties. The profession attracts those for whom getting things right and being precise is important. But organizational life outside the computer room is not like this. Decisions have to be made on criteria other than the ‘purely rational’. This causes many IT people a great deal of unease. Asked to venture away from their anchors of certainty, they cannot determine absolutely where right and wrong exist. More dangerously, they cannot be sure whether other people’s motives are ‘pure’. In the absence of certainty, many withdraw from the battles, comforting themselves in the belief that organizational politics is no different from self-servingness – another phrase to describe the self-interested squabbles of people for whom organizations are merely convenient places to grub around for personal gain. So many IT people are highly suspicious of the whole idea of organizational politics. They equate it with dirty dealing, underhandedness and getting one over on one’s fellows. They see politics as a competitive game that, because they have dedicated their time to doing good for the organization through professional devotion to IT service and project delivery, they have not accepted its inevitability nor had the chance to develop skills in this area. This puts them at an unfair disadvantage. The ‘political game’ is not like chess (a game that many IT people are good at, incidentally). Chess is rational, logical, and absolutely competitive. Computers have now learnt to be better at chess than even Gary Kasparov. But because some IT managers interpret the ‘political game’ as though it were like chess, they bring to organizational politics some dangerous assumptions. Amongst the most dangerous assumption is that organizational politics is competitive in the same way as chess is competitive: There are only two sides 134

IT on board or under the thumb? There are a number of well-rehearsed and proven strategies You should never reveal your strategy to your opponent It is the purpose of the game to beat the opposition (or they will beat you) Whatever you do to enhance your own position naturally weakens that of your opponent Cool, logical, clever, unemotional people are best at the game. For some IT managers, many of whom cannot bear to lose, the preferred option is not to play, for fear of losing a game whose strategies they do not understand. But none of these features of games like chess apply to organizational politics – except in dysfunctional organizations. Many very successful ‘players’ of organizational politics are successful because they know that, unlike chess: There are many ‘sides’ – or shades of opinion There is nothing well rehearsed or proven at the leading edge of organizational change You should always discuss and share your views with those who may see things differently The purpose of the game is for everyone to win Whatever you do to enhance your position can also enhance the positions of others Cool, logical, clever, unemotional people are often worst at the game; the political game requires intuition and feeling as well as logic It is about building relationships so that people will want to deal with you again.

7.9 Task, process and people Our continuing researches into the nature and consequences of the IT stereotype have shown that there has been some progress over time in the relationships between IT people and others in the business community (Chatham and Willcoxson, 2001). Our data show that business people have noticed: Improved responsiveness to business needs Improved service delivery Improved customer relationship management Improved communication 135

The Make or Break Issues in IT Management Increased credibility of IT managers. At the micro level of individual service and communication the IT/business relationship is much healthier than it was. Yet considerable work remains to be done at the macro level in promoting understanding of IT’s capacity and potential across the organization. In our view, this work can be enhanced by IT managers confronting the stereotype, rather than pretending it does not exist, or is unfair. But to do so, they may also need to recognize that they continue to see their roles in different ways from their colleagues. In one element of our research we have used a number of psychological profiling instruments, which have identified a marked contrast in leadership style and perceptions of needs for task clarity, process-orientation and control. The data suggest a radically different approach to the managerial role. In the case of IT managers this is one of task focus rather than people focus. The evidence points to the conclusions that IT managers would find greater difficulties in building human relationships than their generalist counterparts, and would feel more comfortable following orders and implementing strategy than devising strategy themselves. In February 2000 a large seminar for senior IT people was held under the title ‘Today’s CIO is Tomorrow’s CEO’. Clearly, the convenors and those who attended had some idea that senior IT people are poised to become the most senior business leaders of the future. During the seminar, the IT directors present were asked to list what they saw as the three most valuable skills for the IT director today. Nearly half answered ‘technical expertise’; less than a third listed ‘understanding the business drivers’. Meanwhile, ‘boardroom networking’, ‘leadership’, ‘people development’, and ‘mentoring’ scored extremely low. When asked to predict what the most valuable skills would be in two years’ time, they provided a similar set of answers. With these kinds of answers, it is not surprising that the IT stereotype persists. Assuming those who would bother to attend such a seminar would have aspirations to more senior positions, they have, themselves, reinforced the data we have gathered regarding the stereotype. If so many senior IT people think that 136

IT on board or under the thumb? their primary skill should be technical, they are unlikely to challenge accepted wisdom or their superiors in their thinking or decision making regarding business matters (Chatham and Willcoxson, 2001). In other words, both the psychological analysis of senior IT managers, and the way they think about their own roles, suggests a type of person who is most comfortable in a supportive or subservient service role rather than a strategic one.

7.10 Conclusions Despite the espoused ‘strategic importance’ of IT to so many businesses, it appears that many business people continue to view IT as a support function rather than part of the centre of the business. This has led to senior IT people being excluded from the most senior decision-making bodies. Our suggestion is that this has a number of causes. The first is the mismatch between many of the ‘opportunities’ IT provides to transform our society and what people actually want from technology. Technology gurus continue to promote visions of the future in which many of our deeper needs appear to be overlooked. This leads to a suspicion that technologists really don’t understand the human condition at all. This suspicion is reinforced within the IT stereotype. It may not be fair to each and every IT manager, but it is the filter through which they are likely to be viewed. By failing to confront the stereotype, they allow it to persist. Finally, many IT managers reinforce the stereotype by taking a naïve stance towards the relationships and networks that characterize how the most senior people in organizations operate. Hanging on to a much more ‘systems’ view of the world, and shunning organizational politics, IT managers fail to achieve the influence they need to enable IT to take its place on the most senior agendas of their businesses. Better and better technology will not resolve this issue. It is up to each and every senior IT manager to become more ‘streetwise’. This means focusing more on the consequences of technological change than the possibilities. It means realizing that, at the very top of organizations, there are few, if any, ‘right’ answers. It

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The Make or Break Issues in IT Management means embracing ambiguity, uncertainty and human complexity. And it means acquiring political acumen to deal constructively with the complexities of life, rather than of technology.

References Chatham, R. and Patching, K. (1997) IT Managers – Fighting the Stereotype. Cranfield School of Management, Management Focus, 9. Chatham, R. and Willcoxson, L. (2001a) Testing the Accuracy of the IT Stereotype. Unpublished. Chatham, R. and Willcoxson, L. (2001b) Progress in the IT/Business Relationship: A Longitudinal View. Submitted to Journal of Information Technology. Hallowell, E. M. (1999) The Human Moment at Work. Harvard Business 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 IT Managers: How to Get Streetwise. Butterworth Heinemann, Oxford.

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Why business models matter (and how they can make a difference in internet commerce) Stephen Drew Henley Management College, United Kingdom

8.1 Introduction Numerous newly launched e-business ventures have in the space of a few years experienced hyper-growth cycles and then subsequently, in many cases, either collapsed or had to face radical restructuring to survive. The investment bank Morgan Stanley (Phillips, 2001) has estimated that about 70 per cent of all technology venture capital raised in the USA in the last 25 years has been invested in dot-coms in 1999 and 2000 alone. This huge influx of financing, accompanied by a migration of energetic and talented professionals and managers into high technology industries in the 1990s, led to an almost unprecedented burst of innovation and entrepreneurship. However, in late 2000 and the early months of 2001 it became apparent that such rapid growth was unsustainable. A downturn in technology spending and the consequent poor earnings of high technology companies resulted in a huge stock market correction, most markedly in the Nasdaq. History compels both practitioners and scholars of management to analyse the roots of these failures and disappointments. Although the term has rarely been defined, much attention has been focused on the notion of a business model as a success factor. In this regard, an example of anguish and corporate soulsearching is presented by Paul Allaire, CEO of Xerox Corp, who told analysts that his company’s stock price collapse was 139

The Make or Break Issues in IT Management because ‘we have an unsustainable business model’ (Colvin, 2001). The present business environment is highly chaotic and ambiguous. It is difficult to construct detailed, reliable forecasts, or even well-developed future scenarios, of future consumer and market behaviour. The business viability of crucial future technologies like 3G wireless phones or advanced broadband services is not clear. In such conditions strategists often focus on lessons learned from successes, failures and similar patterns of industry evolution in earlier eras. A back-to-fundamentals approach to analysis is also evident in the recent work of Michael Porter (2001), which challenges many of the tenets of the new economy and criticizes ‘artificial’ business ventures. An argument is made here that a developed and integrated business model is an important success factor in internet commerce. The concept of a business model is distinguished from that of a business strategy, or value chain, and a framework for analysing business models in fast-paced industry settings is presented.

8.2 Insights from e-retailing Tesco.com is the internet food shopping service arm of the supermarket chain Tesco Plc. It took its first on-line orders in December 1996. By early 2001 it had outdistanced all UK competitors and grown to become the world’s largest on-line supermarket, filling some 60 000 orders a week. The operation made a loss of £14.7 million in 1999 but was reported to have become profitable in 2000 after a cumulative investment of £52 million. In spring 2001, the UK customer base of over 500 000 was generating revenues of £5 million a week A visit to the Tesco.com website shows not only groceries and wine on offer, but also books, DVDs, CDs, videos, electronics and flowers for sale. A typical grocery customer is a busy working mother with a family. The average order is over £75, with a further £5 charged for delivery. On-line prices are the same as those in Tesco stores. Distribution is by means of a storebased ‘pick and pack’ model, in which baskets of groceries are picked directly from the shelves of 100 Tesco stores and delivered, using a fleet of 700 vans, within a 2-hour time slot, until 10 pm every weekday. The Tesco.com website is well designed, functional, and supported by 130 servers to ensure reliable 140

Why business models matter access. Advertising and linkages to partner sites generate further revenues. Webvan is a US counterpart to Tesco.com, established in late 1996 by Louis Borders, founder of the Borders bookstore chain. Like Tesco.com, the Webvan site offers groceries and a diverse range 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, along with the appointment of high profile CEO George Shaheen, previously President of Andersen Consulting. By the end of that year the company was serving 21 000 customers in San Francisco, its principal market. Delivery charges were waived for orders over US$50 and average order size was US$71 in late 1999. Drops to households were scheduled within 30-minute windows. Prices were low and in most cases less than store prices. Unlike Tesco.com the operations were built from the ground up. Large (300 000+ square foot) and highly automated distribution hubs, costing up to US$35 million each, were to be constructed to store and pick groceries. A US$1 billion deal was negotiated with Bechtel to build distribution centres in 26 US cities after San Francisco. Webvan also expanded through the purchase of Homegrocer.com in June 2000 (6 per cent owned by Amazon.com). Unfortunately Webvan lost US$144.6 million in 1999, and in April 2001, when CEO George Sheehan resigned, it had not reached profitability. Webvan has now ceased trading. Do these two well-known internet retailers have distinctive business models, and do differences in their business model matter? Most clearly they do, since few observers would confuse their respective approaches to e-commerce retailing. There are obvious differences in pricing, financing, and supply chain models. Tesco.com appears positioned to grow beyond the bounds of the UK as its parent company generates above industry-average profitability. By contrast, Webvan is struggling to maintain a listing on the Nasdaq exchange. Figure 8.1 summarizes Tesco.com’s business model and e-strategy, as well as the corporate strategy of Tesco Plc. It is apparent that the business model is an important means of implementing Tesco strategy; however, it is a part, and not the whole, of that strategy. The model is a representation of how the business manages its supply chain and creates value for cus141

The Make or Break Issues in IT Management 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’ in B2C • Early or first-mover • Alliance with Yahoo! • Entry into B2B through partnership in the World-Wide Retail Exchange • ISP – Tesco.net • Internet investments (£18 million in iVillage.co.uk) • Mobile phone network • International expansion of Tesco.com in the far east

Tesco.com: business model • On-line sales of groceries and diverse consumer goods • £5 delivery charge per order • Same price as Tesco stores • Store-based ‘pick and pack’ model • Own fleet of 700 vans • 2-hour delivery slot • Revenues from advertising/linkages

Figure 8.1 The Tesco business model

tomers and other stakeholders in ways that distinguish it from competitors.

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 activities of value creation in traditional industries. However, in practice such a model does not always convey or communicate the dynamic and distinctive way in which technology and business infrastructure can be melded to create a value proposition for internet businesses. As an example, we can compare the value chain representation of a traditional landline telephone business with that of a mobile phone network, as shown in Figure 8.2. A study of these value chains does not disclose the fact that 142

Why business models matter Firm infrastructure Finance, ERP, business information systems, administrative systems Human resource management Recruitment, training, e-learning, reward systems, HR intranets, expenses Technology development Product and process design, new technologies, R&D, knowledge management Procurement EDI, extranets, B2B market places and auctions, contract management Inbound logistics •Management planning and coordination of suppliers •Inventory and demand management •EDI, extranets

Operations •Network of base stations •Network management

Outbound logistics •Management of channels and business partners •Information and inventory management systems

Marketing and sales •Stores, on-line and telephone sales channels •CRM and advertising •Market research and competitive intelligence

After-sales service •Telephone/on-line customer support and service •Billing systems •Maintenance

Figure 8.2 Value chain for mobile telecommunications

these are quite different businesses in their key characteristics, nor does it elucidate critical factors leading to the recent explosion in growth of the mobile phone industry around the world. Such critical factors include the provision of a very personal means of communication, convenience, scalability of the infrastructure, rapid innovation and value-added digital services such as text messaging. Admittedly value chains can be developed to a finer-grained level of detail than shown in Figure 8.2; however, a value chain provides at best a limited picture, and does not focus per se on the customer value proposition, nor the complex integration of skills and technologies required to generate a competitive advantage in dynamic industries. This telecommunications example demonstrates a further limitation of the value chain model. It tends best to represent businesses with linear process flows, where key activities are internal and controlled by the firm. However, many modern businesses, especially in service industries such as banking and telecommunications, are more appropriately modelled as networks, with complex linkages between processes. Therefore Cronin (2000) has proposed a new model of organization and value creation in internet businesses, through what she terms a ‘digital value 143

The Make or Break Issues in IT Management system’, based on dynamic, external webs of relationships. In such a value creation system, key activities are shared between the firm and its partners in a type of business ecosystem. In defending his company’s dominance of the operating system market, Microsoft founder Bill Gates argues that, in place of direct rivalry between software firms, the focus of competition in his industry has now moved to rivalry between different business models. In this he may have been thinking about competition between substitute technologies, such as PCs and the net computer, and the associated ecosystem of firms that typically evolve around alternative technological models. A dramatic example of competition between different technologies and business models is that of Motorola’s failure with Iridium, a system of global wireless telecommunications using low-flying satellites, versus the success of digital networks based on the GSM standard. Iridium was a US$5 billion joint venture established by Motorola to build a mobile telecommunications network using 66 lowflying satellites. It was launched in September 1998. The value proposition hinged on access to the network from almost anywhere in the world, in areas where other coverage was unavailable – such as the Borneo jungle. The system was meant to overcome the problem of incompatible mobile telephone standards in different countries. Unfortunately, the telephone handset was badly designed, as large as a brick and weighing almost half a kilo. Furthermore, on launch it was priced in the region of US$3000, although later reduced to US$1500. Airtime charges could be as high as US$9 a minute. Quality of communication was notably worse than other mobile phone networks, with frequent dropped calls. Ironically, reception might be good in the jungle, but notably poor inside a New York skyscraper or moving car, since a clear line-of-sight to a satellite was required. The system could only handle some 25 000 users at a time. About 60 000 customers were needed to break even. By contrast, modern digital GSM phones, as produced by Nokia, Ericsson, Siemens and other manufacturers, are lightweight fashion items that can be purchased at numerous retail outlets for a modest price. Airtime charges are low and often bundled into inexpensive pre-pay packages. GSM is not a universal standard but is very widely available in many countries, notably the European Union, and growing in North America. 144

Why business models matter Iridium filed for Chapter 11 bankruptcy nine months after launch in July 1999, whereas GSM networks provided by numerous wireless telecom companies continue to grow apace. Mainstream mobile phone users shunned Iridium’s offering, and there were simply not enough globally travelling, price indifferent senior executives and oil company exploration and mining professionals to make the network profitable. The technology infrastructure was extremely ambitious, complex, and expensive. The Iridium failure had causes other than an unworkable technology and marketing model. Finkelstein and Sanford (2000) suggest key contributing factors were the failed strategy and lapses of control and governance at the very top of the organization, including the board of directors. These examples demonstrate that the concept of a business model can be a useful means of discussing the essence of business success or failure. A search of any electronic database will reveal many recent references to business models in discussing strategy in internet and high technology firms. The term ‘business model’ has been widely adopted by the consulting and IT communities in practitioner and professional publications, and increasingly by academics as well. The concept of a business model might well be dismissed as faddish, poorly defined, and of limited utility (Porter, 2001). However, an equally plausible argument might be made that the concept fills a real gap in the armory of strategic models, in between that of a business strategy and value chain. As the examples of Tesco.com and the telecommunications industry show, it can be particularly useful for analysis of strategies in fast-moving environments – hence its widespread adoption. Although sceptics have disparaged the concept, it may prove more helpful in the long run to refine and clarify its meaning and appropriate applications, and to develop useful conceptual underpinnings.

8.4 Business model analysis Only a few management scholars have attempted to define the term ‘business model’, or to present a rigorous model for analysis. Timmers (1998) provides a definition of a business model as: An architecture for the product, service and information 145

The Make or Break Issues in IT Management flows, including a description of the various business actors and their roles; and A description of the potential benefits for the various business actors; and A description of the sources of revenues. He proceeds to address some of the limitations of the value chain model, as noted earlier, by suggesting a procedure for deconstructing and reconstructing the value chain. Timmers also identifies 11 business models in use or in experimentation. These are: e-shops, e-procurement, e-auctions, e-malls, third party market places, virtual communities, value chain service providers, value chain integrators, collaboration platforms, and information brokers. Mahadevan (2000) defines a business model as: A unique blend of three streams that are critical to the business. These include the value stream for the business partners and the buyers, the revenue stream and the logistical stream. Mahadevan proceeds to analyse three general models of e-commerce: portals, market places, and product/service providers, in terms of various building blocks under the three streams as shown in Figure 8.3. Timmers, Mahadevan and other writers have presented models for e-business that are typically classification schemes for types of website, interactivity, and software application. However, the notion of a business model is somewhat broader than, and need not necessarily be focused on, the use of a particular web technology or approach. Indeed the technology, while advanced in nature, may not be the only factor contributing to success of the overall venture, as in on-line financial services. Hamel (2000) writes from a more strategic perspective and prefers to use the term ‘business concept’ as a synonym for business model. He presents many examples of business concept innovation based on breaking the rules of conventional strategy and applying a framework consisting of: Core strategy Strategic resources Customer interface Value network. 146

Why business models matter Market structures Business model building blocks Value streams • Virtual communities • Transaction costs reduction • Information asymmetries • Market-making process Revenue streams • Increased margins • Revenue from on-line communities • Advertising • Variable pricing • Information asymmetry • Free offerings Logistical streams • Disintermediation • Infomediation • Meta-mediation

Portals

Market makers

Product/service providers

Y

Y Y Y Y

Y Y

Y

Y Y Y

Y Y

Y

Y Y

Y Y Y Y Y

Figure 8.3 Business models in internet commerce (modified from Mahadevan, 2000)

Recent market events have underscored the importance of addressing profitability in e-business ventures. Indeed, in the present climate, a business plan presented to an institutional or venture capital investor without a reasoned financial case would be unlikely to meet with success, despite an apparently compelling customer value proposition or steep growth projections. Therefore, the framework presented here builds on that of Timmers, Mahadevan, Hamel and others, but is focused around a core of long-term growth and profits, as shown in Figure 8.4. A viable business model is defined here as a means of creating profit and growth for the firm by offering a proposition of value to customers and business partners, supported by effective systems for delivery, sales and revenue generation.

8.5 A business model framework Measures of profit and growth are assumed to be of central interest to both management and stakeholders of the firm, and necessary for survival. The engine to create profit and growth is driven by systems for revenue generation and product/service 147

The Make or Break Issues in IT Management

Value proposition

Profit and growth engine Revenue generation system

Delivery system

Figure 8.4 Business model framework

delivery, together with the value proposition offered to customers and business partners. The description of the profit and growth engine in a business model should not only present financial projections and breakeven analyses, but also a strategic case to address questions such as: When and how can a positive feedback and growth cycle of increased sales, revenues and profits be created? What are the sources of advantage? How will the venture be able to protect its advantage and maintain growth and profits? (For example, through barriers to entry, proprietary technology or switching costs) What are the sensitivities of the financial projections to risk and uncertainty? This model itself can be deconstructed into constituent systems and submodels, as follows.

8.6 Value proposition Like ‘business model’, the term ‘value proposition’ is rarely defined. In practice, it refers to a bundle of product and service features, delivered at a given price point and supported by certain business processes. Amazon.com customers buy a choice of reading material at a price that, including delivery charges, is 148

Why business models matter often no different from that offered by local bookstores. However, Amazon.com’s website experience includes search facilities, access to book reviews, on-line communities, the company’s brand identity, and its technology platform. The purpose of deconstructing the value proposition, as shown in Figure 8.5, is to identify those significant components of the value proposition that truly distinguish the firm from its competitors and that help create a sustainable advantage. Value propositions often include more than one of the models described by Mahadevan and Timmers, such as portals, on-line communities, and e-stores.

Price model

Product/service model

• Pricing strategy • Bundling

• Product selection • Support services Value proposition

Technology model • Software/hardware • Architecture

Identity model • Brand • Reputation

Figure 8.5 Value proposition

8.7 Revenue generation system Many dot-com ventures have struggled to generate revenue. Advertising and cross referrals have proven potentially viable sources of income for Yahoo! and a few other portals, but in numerous other businesses websites still need to prove themselves capable of revenue generation through product or service sales. In some cases the Web represents a loss leader for firms 149

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 specialist publications attempt to make their site a revenue centre by means of selling subscriptions. There are several models of pricing and market-making on the internet (Dolan and Moon, 1999), including: Set pricing with periodic or dynamic updating Buyer/seller negotiation with or without a specified starting point Auctions, reverse buying and exchanges. Examples of these can be found in the numerous private and public B2B exchanges that have been launched, including FreeMarkets On-line, Transora and the World Wide Retail Exchange. Internet businesses often use a model based on giving something away free, in hope of gaining real revenues later on, when growth has generated a critical mass of customers. This is the approach of many software developers, including Netscape and Adobe. However, a demand for the revenue-generating product must be well identified in the first place, before large investments are made in such a model. ‘Free’ or advertising-based models can work, as shown by the history of commercial television in the UK, and the success of many free local newspapers offering pages of classified advertisements. A potentially important future pricing and sales model is micropayments, or ‘pay per view’, whereby web users may pay for content, searches, or other interactions on a usage basis. As shown in Figure 8.6, the revenue generation system is dynamic, and includes a choice of technology model and business architecture, in addition to pricing and sales/market models. The business architecture describes the venture’s relationships with other partners, or with a parent company if it is part of some larger grouping. The revenue generation models of firms such as FreeMarkets On-line include income from several sources, for example consulting, market-making, and advertising.

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Why business models matter Price model

Sales/market model • Sales process • Marketing strategy

Revenue generation system

Technology model • Software/hardware • Architecture

• Pricing strategy • Bundling

Business architecture • Partnerships • Alliances

Figure 8.6 Revenue generation system

8.8 Delivery system Value America was one of the early dot-com companies to sell brand name consumer goods at low cost over the internet. On IPO in 1999 it was valued at US$2.4 billion; however, the stock dropped from US$75.00 in 1999, to US$2.00 in mid-2000, when the firm was taken over and CEO Craig Winn ousted. Major investors in Value America suffered huge losses. For example, Paul Allen, cofounder of Microsoft with Bill Gates, reportedly lost US$50 million, and Fred Smith, CEO of Fedex, lost US$8 million. Value America generated huge demand, through a pricing model of low-cost provider, and a sales/market model based on high-profile advertising in newspapers like USA Today and the Wall Street Journal. However, the company was unable to satisfy all orders through its supply channels, and had to resort to buying toys off the shelves of competitive retailers such as Toys RR Us to sell on at a loss to its own customers (Byrne, 2000). Distribution and delivery can be a challenge for both B2C and B2B ventures when faced with success and the need to rapidly scale up the business. However, as shown in Figure 8.7, the supply chain model must be complemented by appropriate cost management, technology infrastructure (such as EDI and extranets) and busi151

The Make or Break Issues in IT Management Cost model

Supply chain model • Supplier policy • Open or proprietary Delivery system

Technology model • Software/hardware • Architecture

• Cost drivers • Economies of scale and scope

Business architecture • Partnerships • Alliances

Figure 8.7 Delivery system

ness architecture. The economics of delivery need to be well understood before making decisions such as outsourcing or inhouse manufacture. Business risks must also be considered in making any investments in high-tech distribution capacity, as demonstrated by the Webvan example described earlier.

8.9 Profit and growth engine A good value proposition, flourishing revenue stream and effective delivery system are necessary, but not sufficient, components of the profit and growth engine. A financial model is needed, to support growth without compromising management or exposing the venture to unnecessary risks. Reliance on trade or private financing from a limited number of investors can be an asset if times are good, but a liability when a downturn occurs. European fashion retailer Boo.com collapsed, in part, because the original investors refused a second round of financing when needed, and other sources of capital were not available. A strong governance model is required. This means solid leadership from CEO, general managers and board of directors. Lack of oversight and conflicts of interest can arise when direc152

Why business models matter • Source of capital • Burn rate

Value proposition

• Directors/investors • Separate/integrated

Finance model

Governance model Profit and growth engine Revenue generation system

Delivery system

Figure 8.8 Profit and Growth Engine

tors are too few and become too personally entangled in the firm’s affairs or too closely identify with a firm’s strategy, as in the Iridium case.

8.10 The business model framework in practice The business model framework proposed here is a foundation for a business plan for an internet venture, or any business competing in fast-moving and complex markets. The purpose of this framework is to identify and highlight the key features of a new business on which competitive advantage, profits and growth are built. Therefore, it should be used judiciously and not treated as a set of checklists. In the interests of brevity and clarity, the analyst should only elaborate on the components of the model shown to lead to sustained profits and advantage. These could arise through, for example, barriers to entry by competitors, switching costs, first-mover effects, brand equity, inimitable resources, or complex integration of activities, technologies and skills. Other aspects of the model that may be common to competitors, or that are hygiene factors, or that can be easily imitated, should only be summarized.

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8.11 An example in on-line financial services: Nordea Nordea is one of the most successful internet banking operations in both Scandinavia and the world. About two-thirds of Nordea’s clients in Finland bank on the internet. Although a small bank by global standards, it is a leader in on-line financial services, with more on-line banking transactions per month than Bank of America. Nordea can offer a full range of on-line services, 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 its branches in Finland Profits jumped by 20 per cent in 2000, largely due to internet initiatives Bottom-line improvements of US$250 million are forecasted in the next three years Only US$18 million has been spent on internet initiatives, much less than pure on-line competitors It has proven much cheaper for an established and respected bank to recruit on-line customers than in many new pure online ventures Customers pay four times as much for a stock trade than with competitor E*Trade, yet E*Trade has been unable to match Nordea’s number of trading accounts. Nordea has shown that on-line financial services can be a profit centre, and that a model of ‘bricks-and-clicks’ banking can compete vigorously with low cost pure internet operations. A summary of the distinctive components of Nordea’s business model is shown in Figure 8.9.

8.12 Summary and conclusions The changing business environment has forced many firms to reevaluate plans for exploitation of the Internet, and to delay or cancel projects launched only a matter of months ago. Amid such turbulence there is inevitably a search for quick fixes, and scepticism about the potential for e-business. Although the number of dot-com failures continues to mount, especially of highly speculative and opportunistic ventures, lessons can be 154

Why business models matter Value proposition

Revenue generation system

Delivery system

Profit and growth engine

• Consumer, small business and corporate on-line banking. • A trusted institution. • ‘Killer applications’ such as billpaying. • Universal service offerings. • Simple, but effective, web technology.

• Fees lower than at branches, but higher than those of pure on-line competitors. • An established sales and marketing organization. • Customer loyalty. • Good technological infrastructure.

• Low cost on-line operations. • Good technological infrastructure. • Off-the-shelf software. • On-line e-market places.

• Strong revenue stream and efficient operations. • First-mover advantages. • A well-planned and conservative approach to internet strategy. • Nordea is a result of bank mergers in four Scandinavian countries and has established infrastructure and corporate governance.

Figure 8.9 Summary of Nordea’s business model

learned from the recent huge burst of high-tech innovation and web entrepreneurship. Firms such as Tesco.com and Nordea show that real benefits of cost saving, enhanced revenue streams and profits can be obtained. 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 strategic armory between that of value chain (or value network) and that of a business strategy. Unlike a value chain, a business model relates to all components of a business operation, including value proposition, business processes, innovative application and integrative use of technology. It also explains the dynamics of revenue and profit generation. Unlike a strategy, it does not address broader issues of purpose and direction, such as company mission or the need for diversification. A business model should be made an explicit part of any strategic or business plan. However, a clearly defined business model 155

The Make or Break Issues in IT Management cannot replace common sense or sound financial analysis. Other success factors can come into play, notably the strength of a brand name or a firm’s reputation. Even so, a business model is an 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’s Chaotic 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 Digital Business. Harvard Business School Press. Dolan, R. and Moon, Y. (1999) Pricing and Market Making on the Internet. Harvard Business School (case number 9-500-065). Echikson, W. (2001) The Dynamo of E-banking; While Others Chase the Dream, Nordea is Making it Work. Business Week, 16 April. Finkelstein, S. and Sanford, S. (2000) Learning from Corporate Mistakes: The Rise and Fall of Iridium. Organizational Dynamics, Fall. Hamel, G. (2000) Leading the Revolution. Harvard Business School Press. Mahadevan, B. (2000) Business Models for Internet-based Ecommerce: 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 Business Review, 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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Whither IT? A look at IT in 2005 James McKeen and Heather Smith School of Business, Queen’s University, Kingston, Ontario, Canada

At the start of a new decade, the experts are divided about what will happen to IT in organizations. On one hand, pundits cite trends such as the growth of e-business and the rise of application service providers as well as the increasing technical sophistication of users as the reasons why IT, as a separate entity, will likely disappear into the rest of the organization in the future. On the other, research groups are predicting dire shortages of IT staff. It has also been found that the scope and depth of the CIO role is expanding, the status of IT is rising in most organizations, and that the CIO’s formal power is increasing. (Fazio Maruca, 2000)

9.1 Introduction To try to make sense of the challenges that are facing IT, particularly over the next five years, and how they will shape the organization that everyone loves to hate, the authors convened a focus group of senior IT managers from a variety of industries, including finance, retail, telecommunications, manufacturing and insurance. Participants were asked to assess how technology and organizational trends will affect IT in a number of areas including: IT’s mission, function, management, self-image, external controls, internal controls, staffing, systems development, hardware and software management, and use in the work157

The Make or Break Issues in IT Management place. This chapter presents the findings of this focus group. After a brief overview of the environment in which IT will find itself in the not so distant future and a look at how IT has changed over time, we then discuss IT’s evolving role and responsibilities in each of these areas. Yet another revolution has begun in the field of information systems. When it is over, IS departments as they are currently constituted will be dismantled. Independent software specialists will dominate the development of systems, programming and other software. Users will completely control 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 of business process owners – both inside and outside the corporation. (Cameron, 2000) At the beginning of the fifth (or sixth) decade of the ‘information age’ – depending on how you count, it is both amusing and frustrating to see the consistency of the pundits on IT. Predicting the demise of IT seems to be a theme. At the start of the current decade, they’re still at it. Articles with titles like ‘IT Department Faces Extinction’ (Marron, 2000) and ‘Are CIOs Obsolete?’ (Fazio Maruca, 2000) are challenging the concept of a separate IT department within organizations. The experts cite trends such as the growth of e-business and the rise of application service providers as well as the increasing technical sophistication of users as the reasons why IT, as a separate entity, will likely disappear into the rest of the organization in the future. Conversely, other research groups are predicting dire shortages of IT staff. The Gartner Group (1999) writes: Through 2004, market demand for relevant and specialized IT skills and know how will continue to outstrip supply. By 2006, nearly half the workers in developed global economies will be employed by industries that either produce IT or use IT intensively. 158

Whither IT? A look at IT in 2005 Similarly, it has been found that the scope and depth of the CIO role 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, particularly over the next five years, and how they will shape the organization that everyone loves to hate, the authors convened a focus group of senior IT managers from a variety of industries, including finance, retail, telecommunications, manufacturing and insurance. This has become a periodic exercise for the authors who convened similar groups in 1990 and 1995. We selected a five-year term as being the best time frame in which to predict meaningful change. This has proven to be remarkably accurate in the past (see McKeen and Smith, 1995, 1996). We believe that to look further ahead than five years is not only extremely difficult, but is ineffective given the pace and rate of change in the business and IT environment. Participants in the group were given the two previous papers and asked to use their framework to assess how technology and organizational trends will affect IT in a number of areas including: IT’s mission, function, management, self-image, external controls, internal controls, staffing, systems development, hardware and software management, and use in the workplace. This chapter presents the findings of this focus group. After a brief overview of the environment in which IT will find itself in the not so distant future and a look at how IT has changed over time, we then discuss IT’s evolving role and responsibilities in each of these areas.

9.2 The changing IT function More so than any other organizational function, IT has had to face pressures for continual change and challenge. For example, ten years ago we wrote: ‘It is evident that a more sophisticated mechanism for delivering IS to the organization is now required. Like the process of retooling an outdated factory to turn out products faster and more efficiently, the IS function must undergo a change that is no less comprehensive if it is to fulfil its organizational mandate … the risk of not doing so is increasing inadequacy and eventual obsolesence’ (McKeen and Smith, 1996). Ten years later, we read: ‘IT needs to transform itself, the way it operates, the way it does business. Those who 159

The Make or Break Issues in IT Management are not successful will disappear’ (Marron, 2000). This kind of pressure stems from two sources: the changing business environment and the changing technology landscape. Ten years ago, globalization, merger mania, deregulation, and electronic commerce, not only didn’t exist, no one had even predicted them (Fazio Maruca, 2000). Similarly the relentless improvements in all forms of technology, many of which were predicted, have led to a huge variety of applications, which have continually surprised and challenged IT and business managers alike. Just keeping up with these vast and varied changes has left everyone breathless. And it is unlikely that the pace of change is going to abate. In fact if there is one thing that everyone agrees on it’s that change is going to increase. While every organizational function has been affected by these business and technology changes, none has faced more of them than IT. This is because as the function charged with delivering technical solutions to business problems, it sits squarely at the intersection of these two massive forces. One way the IT organization has coped is by dramatically expanding the scope and number of its responsibilities. Table 9.1 illustrates how these have changed over the last two decades. Table 9.1 IT’s growing list of responsibilities 1980s responsibilities

1990s responsibilities

Systems development Systems development Operations management Operations management Vendor relationships Vendor relationships Data management End user computing Education and training Managing emerging technologies Corporate architecture Strategic systems Systems planning

2000s responsibilities Systems development Operations management External relationship management Knowledge management Infrastructure management Change management Environmental scanning Corporate architecture Strategic leadership 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 of the changes affecting IT over the last 20 years. It also explains 160

Whither IT? A look at IT in 2005 why IT is becoming increasingly more difficult and complex to manage. In fact, some organizations represented in the focus group are beginning to recognize that the demands of managing such an entity are so great that they require more than one person and have created a Chief Technology Officer as well as a Chief Information Officer. Others are creating an ‘office of the CIO’ staffed with several senior people, each with very specific responsibilities (Fazio Maruca, 2000). Whatever the future holds for the IT department itself, it is clear that information technology and its central place in the organization will get more important in the foreseeable future. To cope, IT departments will have to adapt. As Table 9.1 shows, IT’s influence now encompasses not only much of the traditional organization, but is also expanding to include the new forms of organization towards which the world is evolving. Looking ahead to 2005, our focus group managers saw a critical and important role for IT in both these areas, helping companies to adapt to the new business and technological realities they are facing.

9.3 The IT organization in 2005 Focus group members face a wide variety of challenges in their day-to-day jobs and each placed a different emphasis on what would be the most important one for their particular IT organization in the future. For example, one manager believes that IT staffing will be a driving issue behind the future of IT, while others feel it will be e-commerce or the major new technologies that are just hitting the market (i.e. wireless and unlimited bandwidth). However, together the members paint a compelling picture of the shape and face of the IT organization in 2005. Table 9.2 summarizes their vision and contrasts it with that of the previous two decades. The remainder of this chapter will discuss 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 corporate change was introduced in the early 1990s, along with the notion of re-engineering. It was the first time that organizations had realized that technology could be used to dramatically change how company processes worked. Instead of ‘paving the cow paths’, IT could be used to eliminate or short-circuit many time161

The Make or Break Issues in IT Management Table 9.2 IT in 2005 will be different from the previous two decades 1980s view IT mission

1990s view

Technology Corporate change management IT function System automation Corporate re-engineering IT management Reactive Proactive IT self-image Service provider Facilitator External controls Balkan states Federated republic Internal controls Metrics Impact Staffing Specialists Skilled generalists Systems development Structured Evolutionary Hardware/software Planned Confused management In the workplace Office automation Automated office

2000s view Corporate transformation Mobilize strategy Anticipatory Catalyst Federated network Value Business technologists Assembled Minefield Boundary-less office

honoured practices. With this realization came a growing recognition that it wasn’t enough to simply change a process with technology, one also had to change the human practices that supported it. Thus was born the concept of IT as a corporate change agent or change manager. However, although corporate change has become increasingly significant during the last decade, what has remained constant is the concept of the organization itself. Today, most organizations are still the same recognizable entities they have always been. This is about to change. Whereas in the 1990s change focused around processes, in the next five years we will see the beginning of the radical transformation of organizations themselves. The advent of the Internet in the mid-1990s has opened up new possibilities for doing business across organizational boundaries. Tapscott et al. (2000) suggest that as businesses come to recognize and exploit these opportunities, they will soon realize that technology can be used to create and enhance interenterprise effectiveness and efficiency. Over the next five years, companies will initiate major experiments with interorganization ventures to explore new ways of structuring enterprises to deliver value. Tapscott et al. predict that several new interenterprise business structures will emerge in the coming decade, such as those that integrate across a value chain (e.g. Dell Computers) or that aggregate goods for other companies (e.g. Amazon.com). IT will provide the means to facilitate such corpo162

Whither IT? A look at IT in 2005 rate transformations and IT staff will be instrumental both in identifying the possibilities available and establishing the mechanisms whereby these new ways of business will operate. Internally, too, businesses will begin to look significantly different, due to improving applications of technology, integration and knowledge and to management’s increasing need for structures and processes that can respond rapidly to external pressures and growing customer demands. There will thus be a significant broadening of IT’s change management responsibilities as companies realize that technology can not only be used to make its processes more effective and efficient but can also fundamentally transform the way business operates. In short, IT’s mission will grow to be more than facilitating change. Over the next five years, we will see organizations expecting IT to be front and centre in the drive to transform almost 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 departments became increasingly passé. Instead, IT organizations were asked to work with business managers at higher and higher levels in the corporation to develop corporate-wide applications to improve organizational work processes. This involved changing many of the fundamental ways in which work was done – eliminating steps altogether, simplifying processes, integrating them with related processes or by restructuring them. This corporate re-engineering function gave IT a new mandate to seek broader corporate-wide synergies and to link existing functional areas in new ways. In the process, businesses cut layers of management and began to see themselves in terms of processes rather than functions. As the decade progressed, it became clear to senior managers that the IT organization and its staff had a much broader corporate perspective than other functional areas and were thus able to suggest worthwhile new ways of deploying technology across departmental ‘stove-pipes’ to benefit the organization as a whole. Thus, CIOs and IT staff came to be seen as having an increasingly strategic role to play in the organization. By 2000, more than three-quarters of CIOs were either on the board or the executive committee of their respective organizations (Fazio Maruca, 2000). 163

The Make or Break Issues in IT Management Over the next five years, the IT function will increasingly come to be valued for its unique perspective on both the corporation and technology and its ability to use this perspective to facilitate strategy development and mobilize strategy for the business. IT will have two key contributions to make to strategy formation. First, as the Internet and electronic commerce becomes a greater and greater portion of a business, IT will be expected to play a key role in developing and implementing the organization’s ebusiness strategies. Second, as technology continues to evolve and diversify rapidly, IT will be expected to become more strategic about its technology policy and to present this strategy to senior management in ways that it can be effectively integrated into business strategy. These new strategic functions will require IT staff and management to develop new competencies, such as business acumen and leadership skills. They will also mean that, for the first time, IT decisions and actions will be in an area where they will have a direct impact on the corporate bottom line. Whereas in the past the influence of systems has been mediated by other company staff, increasingly over the next five years, through the Internet and other customer-facing technologies, IT systems will interact directly with customers. Thus, the IT function will, of necessity, become more outward-looking and more concerned with business value than previously. It will also become more visible both within the organization and externally. For example, focus group members noted that they have already begun to see their stock prices vary as market analysts assess their company’s ecommerce strategies. This pressure can only increase in the near term as both customers and the market vote with their dollars on the quality of IT’s work.

9.3.3 IT management Focus group members believe that there is no question that the job of the IT manager has got increasingly complex. As Table 9.1 demonstrates, over the years more and more responsibilities have been heaped on IT’s plate. But the tone of management is also changing. In the 1980s, responding to user criticisms that it was inflexible and bureaucratic, IT tried to react to users’ needs by creating support functions and adopting client-centred methodologies. However, in the 1990s this style of management was no longer enough. Many IT managers were dismayed to 164

Whither IT? A look at IT in 2005 discover that their users expected them to be proactive in their vision for how IT could help the company respond to business change by improving processes and developing new products and services. During this decade, IT managers explored a variety of ways to develop this skill. For example, they looked for ways to effectively combine a client-centred, business orientation with the knowledge of how information technology can change and improve company processes. In the future, however, even more will be expected of IT managers. In the rapidly changing business and technical environment in which they will be operating, IT managers will be expected to anticipate coming trends and to propose business strategies to take advantage of them. As business cycles shorten to become almost spontaneous and technology outstrips the ability to assimilate it, IT managers will be expected to look even further forward and develop strategies that will enable the company to fulfil needs as they develop. Thus, the key skill that IT managers will have to develop is the ability to ‘get ahead and stay ahead of the curve’ in both business and technology strategy. To do this, IT managers will have to dramatically increase their environmental scanning skills so they can learn about new technologies and new applications of those technologies. They will also have to develop their research and development capabilities to explore and gain experience with these technologies and what they can do. Because of the difficulties involved in predicting the future in such an unpredictable area, many IT managers will begin to use ‘real options’ thinking to develop and design hedging strategies for their organizations. This will require a more flexible approach to technology policy and architecture than has been used previously. IT managers will also need a more in-depth knowledge of business than in previous decades. As they realize that they need to better understand the business trends facing the company, IT managers will develop new links with the parts of the business designed to monitor customer feedback, business trends and develop new products. Initially, IT will do this by assisting the business to develop better tools to analyse and identify business information such as customer reactions, patterns, incipient trends and consumer needs. As they acquire a clearer understanding of what business is looking for, a much tighter IT–business partnership will develop than has existed in the past. 165

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9.3.4 IT self-image How IT views itself internally is key to how it performs. In the 1980s, IT saw itself as a service provider to the business community and designed its processes, structure and metrics accordingly. In the 1990s, however, IT saw its major role to be that of a facilitator of business. Its main job became providing the technology and tools that the business needed to do its work. Thus, IT infrastructure became much more important in the last decade. IT organizations developed PC ‘workbenches’ or suites of software for users to access as needed, and large, integrated databases were developed (i.e. data warehouses) for users to explore and do their own analysis, rather than having to rely on preformatted information from an IT system. Over the last decade as well, IT organizations came to recognize that facilitation of business did not necessarily mean that IT itself had to provide all IT services. Thus, IT organizations began to help users to find consultants and to outsource non-core functions (e.g. operations). By the end of the decade, many IT organizations saw themselves as coordinators of technology delivery to the business, rather than the sole providers of it. In the future, IT will have to change its self-image yet again to accommodate the more active role it will be taking in business. To underscore its responsibilities for business transformation, IT will come to see itself as more of a catalyst in identifying and delivering new forms of value to business. In adopting this selfimage, IT will have to be careful if it is not to be perceived as arrogant. IT in and of itself will never be solely responsible for business transformation and new business strategy, no matter how important technology is to the business. Instead, IT must view itself as a chemical agent that, when added to other substances, will cause something completely new and different to occur. As a catalyst, IT can start things happening in organizations that would never have occurred without it; it can stimulate new ideas and start people thinking about new possibilities. This is an exciting role but it is also one that requires considerably more business acumen and leadership skill than being a mere facilitator. Therefore, it is essential that IT groom and develop its people to be prepared for the role. An effective catalyst must pay more attention to the mixture of relationships, politics, finance, business reality and technology potential than it has in the past and use its judgment as to whether a new idea will create something new and valuable or merely result in a chemical disaster. 166

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9.3.5 External controls As the IT function matured in organizations during the 1980s, companies experimented widely with different forms of governance structures. By the end of that decade, IT functions typically had a wide range of relationships with different departments and very few controls and standards had been established. Over the 1990s, most IT functions adopted some form of federal model of governance, which operated much like a country of united states. In this model, individual user groups were free to make their own IT decisions until they wanted to use the corporate infrastructure. Then, they had to follow corporate standards. By the end of the decade, the need for corporate IT standards and controls over such things as security, communications, and data for new applications had been accepted by most business groups, although IT organizations were still playing catch-up with legacy systems developed in earlier years. Over the next five years, the need for corporate standards will grow as companies pursue ever greater levels of integration. The adoption of enterprise-wide software packages, such as ERP and CRM, will reinforce this need, as will the need for hardware and software to be ‘plug and play’. However, the new challenge IT will face will be how to establish such standards and controls across the network of businesses and customers with which the company will increasingly interact. This will reinforce the need for intra-organizational standards and controls so data and transactions can be easily exchanged. Already some industries, such as the oil and gas industry, have adopted a common data model, which greatly facilitates mergers and acquisitions. Architecture standards are growing increasingly ‘open’ too. This process will ultimately lead to a federated network of standards and controls to which all groups must ascribe. There will, however, be no single set of external controls. Instead, they will be established in a variety of places according to the type of control involved. Industry and technology groups will lead some standards efforts as will major players in a particular field (e.g. Microsoft, the US government). In addition, concerns for security and privacy will hasten legislation and both government and self-regulation in these areas. Organizations of all stripes will begin to cooperate especially in the area of security. Companies can expect some form of federal government coordinating body will be established in this area 167

The Make or Break Issues in IT Management by 2005. In short, standards and controls will increasingly come from a variety of places outside the organization for any type of computing that involves using the network. While internal standards and controls will still have a place, they will be relatively diminished by the greater need to establish an open network.

9.3.6 Internal controls In the 1980s, fed up with expensive systems disasters and unresponsive IT organizations, it was the accepted wisdom amongst managers that IT had to be brought under control (McKeen and Smith, 1996). Thus, began a fascination with IT performance metrics, which has lasted (in some form) up until the present day. In the 1990s, however, it became increasingly obvious that focusing on metrics alone resulted in some very poor systems with great metrics. Therefore, executives and researchers alike began to look at what impact information technology was actually having on the firm. They realized that simply delivering systems was not enough. The systems actually had to be beneficial to the organization. Thus, over the last decade, both IT and business departments have been increasingly held accountable for what a system contributes to the bottom line of the business. Unfortunately, this has all too often been interpreted as cost savings, which are considerably easier to measure, rather than increased revenues or new opportunities, which are often more nebulous and more difficult to attribute to the use of IT alone. In the next decade, it is likely these simplistic measures will be refined and made more sophisticated. IT will be assessed not only according to its impact on the bottom line or even according to whether or not applications were delivered on time and on budget, although these will still be important. The major internal yardstick in IT’s future will be the value that it delivers to the enterprise. This will take many forms, such as the ability to offer new products and services, to become more competitive, to participate in new markets, to operate more effectively, and to develop new capabilities. While value will frequently be defined as new value, companies will also begin to realize that the ability to leverage existing people, technologies and information more effectively also delivers value. In the past once a system was developed, IT management saw very little significance in the ongoing effort to maintain and upgrade it. Maintenance was seen largely as an overhead function – a necessary evil. Over the next 168

Whither IT? A look at IT in 2005 five years, IT management will begin to recognize that companies can frequently exploit current applications of technology more extensively. IT organizations will therefore look for ways to use existing infrastructure and applications more fully to deliver some ‘quick hits’ of value to the business. Increasingly, delivering value will come to be seen as a team effort – something that cannot be done without the unique skills and abilities of both the IT and the business members of the team. Interestingly, however, identifying value in advance will continue to remain an elusive skill. While there will be great successes in installing a particular piece of hardware or functionality in a particular company, there will be no guarantees that adopting it will yield the same value in another company. This will refocus management’s attention more fully on the non-technical aspects of value. Capabilities, cultures, and management themselves will increasingly come under the microscope to determine how they contribute to the value that can be derived from IT.

9.3.7 IT staffing It has always been a challenge for IT to acquire the right mix of skills in its IT staff. During the 1980s, a number of different specialists were developed as technology became more and more complex. Unfortunately, handoffs between them became problematic. In the 1990s therefore there was a move to develop more skilled generalists who would be able to bring a set of systems skills and disciplines to specific situations and adapt, by learning, the specialized tools and techniques that are required. While this helped certain business-facing parts of IT (e.g. project management and systems analysis) the need for highly skilled specialists in certain ‘hot’ areas remained. In 1995, we suggested that ‘careful attention must be paid to the people resource if IT is to excel’. Today, the rash of material around the IT ‘staffing crisis’ (Gartner Group, 1999), combined with the focus group’s personal experiences, suggests that these warnings have not been heeded. Staffing IT is and will continue to be a growing problem over the next five years. With the explosion of IT work taking place at present, most organizations will face serious skills shortages over the next five years. As in the past, management will have to resort to hiring specialists from consulting firms to fill the need for high 169

The Make or Break Issues in IT Management demand technical skills. Over the next five years it will be essential for IT organizations to develop individuals’ professional skills and recognize different career paths for different types of IT staff. The experts are predicting a growth in demand for such ‘soft’ skills as relationship management, strategic and analytical thinking and portfolio management (Gartner Group, 1999). They also suggest that the competencies needed by IT staff are expanding rapidly and include both technical and business skills. While focus group members agreed that these are and will be required, they also noted an ongoing need for specialists in key technology fields. Thus, over the next five years, it appears that while the majority of IT staff in any particular organization will evolve to become business technologists, there will also remain a strong need for technical specialists which companies will increasingly fill with skilled contractors.

9.3.8 Systems development In the last two decades, systems development has moved from a highly structured process to one that is more flexible and fluid according to the circumstances. During the 1990s, businesses placed increasing amounts of pressure on IT organizations to develop more adaptable systems in shorter delivery cycles. IT organizations responded by developing systems in smaller pieces, making greater use of prototypes, and providing users with more dynamic control over discretionary items, such as report 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 development life cycle (SDLC) has been gradually abandoned in favour of an approach that marries strong project management disciplines with a much more eclectic and modular development approach that may include: packaged software, custom software, legacy software, and end-user tools. Development teams also look very unlike those of the past. Increasingly they are composed of equal numbers of users and technical staff (including contractors). Pieces of systems are often developed separately by teams of consultants or specialists in a particular area (e.g. telecommunications, web development) and then plugged in. Proprietary data files, owned by a system, are mostly things of the past. In the new decade, these trends in systems development will continue to escalate as the pressures increase for faster develop170

Whither IT? A look at IT in 2005 ment and more functionality. To address these, over the next five years systems development will increasingly become a matter of assembling system pieces rather than coding new software. More and more systems developers will try to cobble existing software and tools together with new technology to create new value for the organization. In addition, knowledge management will become more and more important and a significant amount of development effort will revolve around acquiring or building the means to manipulate corporate and customer information. To this end, ongoing efforts will be made to standardize corporate data and processes so that the entire company has one look and feel to its systems. As bandwidth becomes less of a restriction, companies will begin to add more multimedia features to their systems. This, however, will not be a major feature of systems over the next five years. And, naturally, the Internet and its intranet and extranet siblings will play a huge part in all future development. Over the next five years, substantial efforts will be made to retrofit most existing corporate systems to make them accessible over the Internet and to make the company available to its customers around the clock. With the IT staffing crisis looming large, IT organizations will also have to modify their development teams – making increasing use of external contractors for technological components and users to work on business requirements and interface issues. IT staff, with their strategic perspective and business technologist skills, will be required for their ‘big picture’ view of the overall initiative. More and more, they will be used to maintain the linkages between the various parts of the development team through relationship management, coordination skills, and intelligent integration. A company’s development staff will come to be utilized more to pull a variety of disparate people and platforms together to achieve a desired result and to identify and resolve problems and issues that threaten the delivery of the system than for the actual development of software. Thus, they will come to be seen much as general contractors in the construction industry. These people may do some of the actual building work, but they may not. However, they always assume responsibility for deadlines, relationship management, project management, and risk management.

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9.3.9 Hardware/software management Over the last decade, hardware and software management has become increasingly confusing for IT managers. The proliferation of hardware available and the increasing number of vendors have kept managers running hard just to keep up. Today, most IT organizations interact with a network of vendors for a variety of purposes. This has meant that the task of managing all of the relationships involved, and sometimes managing the relationships between two vendors, has become a larger and larger challenge for IT. Over the next five years, these trends will grow to a different level of intensity because of the impact that IT architectural decisions will have on the business. In the past, infrastructure was largely seen as a technical decision and best left up to the experts. As organizations come to view infrastructure as strategic to the enterprise, hardware and software management decisions will become more and more visible in the organization. Thus, it will become a minefield for IT management, which could blow up in its face if it has made the wrong technology decision. For this reason, IT managers will begin to pay more serious attention to the development of technology strategy. This strategy will not simply make architectural decisions for the organization, however. It will also be devised to hedge against the wrong choices being made. Rather than investing in a single technology direction, organizations will begin to explore and develop options – to various degrees – in multiple technologies. Risk management will become much more fully refined in this area as a result and companies will begin to look at their technology 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 an automated office. They ensured that all users were connected electronically in some way and had access to the basic software they needed to function. Many IT organizations developed a standard suite of office software and integrated corporate systems into office PCs when and where they were needed. Policies and standards were established to ensure that systems were kept secure and that viruses and non-approved software 172

Whither IT? A look at IT in 2005 were not introduced. These practices worked reasonably well until the later part of the decade when the Internet opened organizations up to the world. Almost overnight, not only could employees communicate electronically with others outside the firm, customers and other companies could access the company – both its people and its systems. All of a sudden, the concept of a self-contained automated office appeared both quaint and dangerously out of date. Over the next five years, the Internet will be the catalyst for changing the workplace. While many features of the future workplace have already been introduced, e.g. e-mail, on-line access, multimedia, integrated software, partnerships with external organizations, they have not yet come together to change most offices in dramatic ways. This is about to change. In the near future, offices will open up more and more to the outside world until the workplace becomes truly boundary-less and work is conducted in cyberspace rather than the workplace. Remote workers, mobile workers, home workers, networked workers, virtual workers will all become a reality over the next five years in many companies. Similarly, as companies themselves become boundary-less, the space in which they do business will also change from ‘bricks and mortar’ to ‘clicks and mortar’. IT will be kept busy enabling not only company functions, but also office support anywhere, any place, any time since existing security and infrastructure will not be adequate to cope with the new demands. The workplace will perhaps see some of the most observable changes in organizations over the next five years. By 2005, through IT, the entire look and feel of a company to both its customers and its workers will be fundamentally changed and the virtual office will have arrived.

9.4 Conclusion This chapter has explored the ongoing evolution of the IT function in the organization. In particular, it has tried to identify the ways in which key elements of the IT function will be different in the future than in the past. It has shown that IT is becoming increasingly central to corporate strategy in many ways. Not only will IT be making a major contribution to a firm’s business and technical strategic visions for the future, it will also have a primary role in implementing and mobilizing these strategies. IT will therefore increasingly need to anticipate the company’s 173

The Make or Break Issues in IT Management future direction and to provide the information and infrastructure to ensure that the business will be in the right place at the right time. With the walls of the organization beginning to crumble and firms exploring new ways of working and delivering services to their customers, IT will be expected to act as the catalyst for this transformation. IT itself will also be changing to accommodate these needs with new ways of developing systems and partnering with other companies to deliver value to the organization. The pressures involved will place a significant strain on IT staff and it is expected that recruiting the right types of business technologists for a company will be a considerable challenge. The next five years will not be easy ones but they will be exciting as IT managers experiment with and explore ways to facilitate 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 and Sons, Chichester. Sevcik, P. (2000) Network Forecasts For 2005. Business Communications Review, January. Tapscott, D., Ticoll, D. and Lowy, A. (2000) Digital Capital: Harnessing the Power of Business Webs. Harvard Business School Press, Boston.

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Strategic decisions in the information age Transforming technology promises into business benefits1 Rapoo Bank and Theo Renkema Eindhoven University, The Netherlands

10.1 Introduction Although the potential of IT is beyond dispute, it proves to be very difficult to evaluate its true business value. IT spending has increased considerably and now represents one of the largest capital items of many firms, across many industries. In the present competitive business arena, modern IT enables efficient and effective business operations, leveraging business improvements and securing a competitive edge. Capturing the value of IT is often considered as the most critical and yet the most complex part of managerial decision making. Many managers do not try to justify their expenditure or measure whether their money was well spent. This situation has become unacceptable in the light of the rising costs and uncertain benefits of this increasingly important type of business investment. The risk of making the wrong decisions, selecting the wrong projects or – in broader terms – of misalignment of IT and the business – is simply 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 governing investment decisions concerning IT. The focus of this chapter is on the strategic and organizational dimensions of such decisions, and offers a synthesized perspective on how to manage these decisions. Many of the insights, viewpoints and concepts 175

The Make or Break Issues in IT Management presented are the results of several years of academic research and management in the realm of IT evaluation and benefits management (see Renkema, 2000). First, Section 10.2 discusses a number of important developments in the area of organizational and managerial decision making, with particular attention to the concept of bounded rationality. Subsequently, Section 10.3 looks at four styles of decision making, based on a distinction between the ‘product’ and ‘process’ dimension of decision making and inspired by the way firms take strategic investment decisions. These two sections set the scene for Section 10.4, in which a model is presented – paraphrasing conventional business wisdom in marketing coined the P4 model – which offers four control options to manage investment evaluation and to support organizational decision making. This chapter’s conclusions are given in the fifth and final section.

10.2 Investment issues and management challenges Throughout the second half of the twentieth century, information technology (IT) has been permeating virtually every part of modern society. It has even been suggested that this marks a digital revolution that will have far reaching and profound consequences, perhaps even more than the well-known industrial revolution (see e.g. Negroponte, 1995; Thurow, 1999). In the last few years, the notion of the ‘New Economy’ has been used to illustrate the perceived contribution of information and communication technology (ICT) to lasting economic growth and increased levels of business productivity (Kelly, 1998; Shapiro and Varian, 1999). In the present ‘information age’ it seems we are only at the start of a radical digitalization of business activities, which will have a profound impact on practically every organization. Until recently, IT was mainly used to rationalize routine business processes in the corporate ‘back office’. IT was considered an administrative expense or liability and the main thrust was to improve efficiency through cost savings and cost displacements. Today, long-term and capitalintensive business investments are made in the corporate ‘front office’ in order to improve effectiveness, to gain and sustain competitive advantage and to transform entire business processes. Nowadays, it is not so much the question whether to invest, but more the question of how and where to invest in order to get maximum business value and to increase return on investment. 176

Strategic decisions in the information age The increased importance of IT has meant that in many firms IT investments claim a major and increasing share of the available financial resources. It is estimated that since the 1990s large organizations spend up to 50 per cent of their total capital expenditures on IT, while they constitute between 1 per cent and 10 per cent of sales turnover (Banker et al., 1993; Weill and Broadbent, 1998). Information-intensive organizations – e.g. in financial services or many governmental organizations – have the highest spending figures, compared with other organizations. Although subject to a slight downward trend in the 1980s, IT budgets rising with double-digit percentages a year should not be considered as rare, while still up to half of the total IT costs are not part of formal budgets. In many cases, IT spending is on a comparative level with spending on, for instance, research and development (R&D) and marketing (Ballantine et al., 1995). US government statistics indicate that as of 1994 computers and related IT resources make about half of all business spending on equipment, even excluding the massive spending on programming and software (Sager and Gleckman, 1994). In 1999 US corporations spent US$10 billon on building websites alone. Driven by an increasing ‘electronic commerce’ application, at the turn of the century, the IT industry might well account for some 10 per cent of world economic activity, a doubling of the 1990 figure (Willcocks and Lester, 1999). The financial importance of IT makes it clear that investment issues with respect to IT can no longer be ignored. Businesses that really want to get ‘value for money’ from IT-based infrastructure need to pay active attention to their management process of assessing and creating business value. This requires tighter management control and scrutiny towards IT investments across their entire life cycle. The value for money to be obtained from investments in IT, however, is far from guaranteed. IT investments have repeatedly been the subject of disappointed expectations and their evaluations raise many questions. The increased financial importance of IT contrasts considerably with the difficulties encountered when trying to assess the potential business benefits and measure the realized contribution to business performance. Many IT-based improvement projects are known for their overshoots in time and budget, and for insufficient quality or unclear business contribution. Although not all unsuccessful IT projects are likely to be publicly known, there is a well-documented 177

The Make or Break Issues in IT Management history of unsuccessful or even clearly failed investments and of their inability to generate sufficient business value. The cancellation of the Taurus project of the London Stock Exchange in 1993, e.g. cost £80 million and over £400 million of abandoned system development costs of the securities industry. In 1994 the British insurance firm Prudential stopped their Plato project to migrate to a client-server IT architecture, costing £40 million. In 1997 the US Internal Revenue Service admitted their attempt to build a single integrated system for processing 200 million tax forms was a failure, and had already cost several billions of US dollars. Organizations estimate that around 20 per cent of their IT spending is wasted and that 30 per cent to 40 per cent does not contribute to business performance (Willcocks and Lester, 1999). Around 70 per cent of all firm IT investment seems to give no adequate return on investment (Hochstrasser and Griffiths, 1990). Only around 50 per cent of completed projects are considered to be a true success (Lytinen and Hirschheim, 1987). Even the Gartner Group, one of the leading commercial IT research firms, sees only a 1 per cent net average return on IT in the years 1985–1995.

10.3 Foundations for organizational decision making Decision making plays an important role in organizational theory, both in a descriptive and prescriptive way. The decision making approach to organizational analysis can even be considered to be a specific school in organizational theory, and combines several disciplines such as psychology, economics, operations research and statistics. From a more practical point of view, adequate control of decision making has become one of the key factors for successfully managing and controlling firms in strategic, tactical and operational terms. In today’s turbulent and often diffuse business environment an important differentiating factor in a firm’s ability to innovate and compete has become managerial decision making.

10.3.1 Quality of decision making In line with the increased importance of decision making in organizations, much decision research efforts have been devoted to designing instruments that can increase the quality of organizational and managerial decisions. ‘Decision quality’ refers to 178

Strategic decisions in the information age aspects such as (see e.g. Vroom and Jago, 1988; Butler et al., 1993): The ‘correctness’ of a decision, or in other words the extent into which decision making stakeholders have confidence that the outcomes of a decision process reflect the aspired goals and that all relevant aspects have sufficiently been addressed The level of organizational commitment and the degree of acceptation of a decision Learning experiences, which are gained by taking a decision and by having a learning-oriented decision process The efficiency of the decision making process: taking a decision with minimal efforts, both in financial and organizational terms. In their study of the behavioral aspects of organizational decision making, Janis and Mann (1977) extracted the following criteria to judge whether decisions are of a high quality: There are clearly defined and well-known goals Decision makers have clear knowledge of a number of alternative courses of action The projected advantages and disadvantages of a particular choice are carefully evaluated Decision makers are open to new information, even if they have preliminary ideas regarding a possible solution Even if new information conflicts with preferred choices, there is sufficient room for correct interpretation There is a re-examination of all known alternatives, before making the final decision When implementing the final decision, there is a defined implementation plan, which allows for contingency measures to mitigate risks. The ultimate goal of improving the quality of decision making should always be increasing the chance of success of the investment considered. As such, a distinction can be made between: ‘Good’ decisions – decisions that have a high degree of quality (e.g. a comprehensive problem diagnosis, complete coverage of all decision alternatives, high organizational acceptance, fast decision making) ‘Successful’ decisions – decisions that are successful in terms 179

The Make or Break Issues in IT Management of their outcomes (e.g. cash results, customer satisfaction or competitive advantage). Devoting time and resources to improving the quality of organizational decision making can be considered an important requisite for making successful decisions, and therefore for maximizing the business value gained from IT. Apart from well-articulated investment goals and valuation criteria this also means process-oriented issues such as management commitment, mutual trust and a common ‘language’. Special attention for the quality of decision making in order to arrive at good (and ultimately successful) decisions becomes more important if, relatively speaking: Investments have many (intangible) organizational and strategic impacts Of these impacts, many business impacts are human and social impacts Investments require much funding and resources There are high expectations and ambitious targets regarding investment results There is much uncertainty concerning the possibility of realizing the results Investment stakeholders have many different interests and power bases Investments have an innovating nature, both in terms of technology and business. The more projects meet these investments characteristics, the more evaluations and decisions will have to rely on managerial judgement, stakeholder assessment, at the expense of pure financial and analytical techniques. This should not be considered as detrimental for high quality decision making, but as an opportunity to motivate the use of more qualitative yet relevant methods for decision making.

10.3.2 The classical model of rational decision making The classical economic model of the pure rational decision maker (the ‘Homo economicus’) plays an important role in theories of organizational and managerial decision making. This model can be characterized by three central premises: 180

Strategic decisions in the information age A decision maker knows exactly what he (or she) wants; i.e. he has clear and unambiguous goals in mind. In economic theories this usually means a maximization of utility or profits A decision maker is omniscient, which means that he oversees all possible decision alternatives A decision maker has a unlimited capability to process information. This rational model is very well recognizable in support of what have been called ‘programmable decisions’ (Harrison, 1987) or ‘well-structured problems’ (Bass, 1983). Often algorithmic, mathematical models from the field of operations research are used. A characteristic is that the contribution of different decision alternatives is usually projected using historical data. Ackoff (1979) calls this the ‘predict and prepare’ paradigm, while Rosenhead (1989) speaks of ‘colonizing the future’. These kind of decision-making techniques are abundant within control decisions of operations management for routine, predictable decisions (e.g. for inventory management, materials management, sales analysis). This mathematical, statistical approach, however, falls short when supporting non-routine, more strategic management issues. These are characterized by large complexity, subjectivity, qualitative effects, uncertainty and possible conflicts between interested parties and stakeholders. Therefore, these kind of decisions are difficult to structure and to program in advance. Management decisions regarding IT are typically decisions of the latter category. Advanced mathematical methods and techniques are thus of limited value to support capital-intensive infrastructure investment decisions.

10.3.3 Bounded rationality as a decision-making paradigm The central premises of the classical model of rational decision making have proved to be very unrealistic for organizational decision making, both in descriptive and prescriptive terms. In fact, rational decision making can be considered nothing less than a utopian construct. Many empirical studies have made clear that decision makers generally do not and, more importantly, cannot act according to the rational decision making model.2 Apart from evaluations that can more or less be considered ‘rational’, decision makers are influenced by for instance emotions, self-interest and prejudices. Much of the deviations 181

The Make or Break Issues in IT Management from the classical rational model can be explained by its ‘holistic’ view of organizational decision making, which means that decisions are supposed to be taken by a single entrepreneur and owner of the firm whose main goal is to maximize profits.3 Employees are assumed to be unlimitedly loyal to this profit orientation, and to the organization as a whole. Practical decisions, however, are generally bound up with the interests and goals of several stakeholder groups, e.g. management, business units or departments, trade unions, financiers. Also firm goals are not always unambiguous, but vague (e.g. ‘strategic advantage’) and even contradictory (e.g. cost containment and marketing effectiveness). Organizations not only strive for financial returns and maximal profits but also for continuity, power/stature and the realization of a good working environment and climate. Moreover, many firm goals are ‘constructed’ in the course of a decision-making process, and are therefore not necessarily defined or known in advance (Weick, 1979; Checkland and Scholes, 1990). In addition to this, human decision making is constrained by cognitive limits: omniscience is nothing less than an illusion, information processing capabilities are limited. Nobel laureate Herbert Simon has introduced the more descriptive and realistic view of the ‘administrative man’ in contrast to the ‘Homo economicus’. The decisions of this ‘administrative man’ are guided by what Simon (1977) refers to as ‘bounded rationality’, which means that: Not all decision alternatives and their consequences are known in advance. Every decision maker constructs in a search process for alternatives a subjective and limited view (or using the German noun Weltanschauung, see Checkland and Scholes, 1990) of the relevant decision issues, alternatives and possible solutions. This view is highly dependent upon the specific background, knowledge and experiences of the decision 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 alternatives in a process of problem resolution, but limits himself to a number of alternatives that are considered to be satisfactory. Subsequently a solution is chosen that best matches the aspiration levels. This is called ‘satisficing’ instead of ‘optimizing’ decision behaviour. Consequently, decision support should focus on structuring the steps that lead to a satisfactory 182

Strategic decisions in the information age solution. Simon makes a distinction between three consecutive steps: – Intelligence – situations in the direct operating environment of a decision maker will prompt the need for taking decisions; a decision maker can look for these situations himself or can be confronted with them, whether he likes it or not. In all cases the main characteristic is a perceived difference between 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 resolution. Following the seminal work of Simon, several applications and extensions of the decision paradigm of bounded rationality can be found in decision-making theory. These generally address the question of how bounded rationality works in an organizational setting, with multiple decision makers, group interests and goal conflicts. Cyert and March (1963) speak in this respect of ‘the behavioral theory of the firm’, while Lindblom (1959) introduces the ‘science of muddling through’. An important conclusion of these studies is that organizational decision making is highly dependent upon all kinds of routines and formal procedures in order to foster stability and to prevent conflicts. Consequently, organizational change can only take place incrementally, step by step. In the ‘garbage can’ model of Cohen et al. (1972) the rationality of organizational decision making has almost disappeared. Decisions are not necessarily considered to be resolutions for perceived organizational problems. Decisions are more or less unstructured 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 useful decision support tools. With the publication of the strategic decision model of Mintzberg et al. (1976) – with the title ‘The Structure of Unstructured Decision Processes’ – this line of thought goes in a more hopeful direction. From this moment on, decision-making theory pays more attention to finding appropriate methods and techniques to support organizational decision making. 183

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10.4 The product and process dimension of investment decisions Accepting the concept of bounded rationality in organizational decision making has important consequences for the type of decision support that needs to be given to organizations and managers. Not only are the content and goals of decision-making relevant (see the ‘choice’ phase in Simon’s model as discussed in the previous section), but the focus of managerial support moves to the overall structure of the decision-making process. This has for instance been referred to as ‘meta decision-making’ (De Leeuw, 1986), ‘the organization of decision-making’ (Verzellenberg, 1988), ‘decision control’ (Van Aken and Matzinger, 1983), and ‘the rationality of control’ (Hickson et al., 1986). Theories of strategic decision making make a distinction between a prescriptive, goal-oriented view and a descriptive, process-oriented view (see e.g. Mintzberg, 1994). Idenburg (1992) follows this distinction and speaks in his review of the strategy literature of the ‘what’ and the ‘how’ of strategy development. He pictures these dimensions in a 2 by 2 matrix, which results in four views on strategy formation: Emergent strategy (goal dimension weak, process dimension weak) Rational planning (goal dimension strong, process dimension weak) Learning process (goal dimension weak, process dimension strong) Incremental logic (goal dimension strong, process dimension strong).

10.4.1 Four styles of decision making Inspired by the four types of strategy formation as defined by Idenburg, this section discusses a typology with four styles of investment decisions. Figure 10.1 visualizes an adoption of Idenburg’s matrix to investment decisions in the context of IT. This matrix will be of the basic building blocks for the design of a model for strategic control of IT investment decisions. The starting point of this model is the division between the product and process dimension of investment decisions. Every investment decision – essentially a choice to devote resources and funds to a particular course of action – is the ‘product’ of a 184

Strong

Learning experience

Balanced control

Weak

Process dimension

Strategic decisions in the information age

Act of faith

Rational planning

Weak

Strong

Product dimension Figure 10.1 The product and process dimension of strategic control of investment decisions (adapted from Idenburg, 1992)

decision-making process (see Figure 10.2). In this decisionmaking process several steps are taken, within a certain task division of the participants in this process and within a political context, resulting from different goals, priorities and use of power. Depending on the extent and direction of decision control, several styles of decision making can be used. Act of faith Without any structuring on the product or process dimension, investment decisions will amount to ‘act of faith’ decisions. This leads to what Shank and Govindarajan (1992) have called a ‘technology roulette’. The decision to invest looks like gambling; Limited funds

Investment proposal(s)

Product: decisions

Decision-making process OUTPUT

INPUT

Decision steps Participants Political context Figure 10.2 An investment decision as a ‘product’ of a decision-making process

185

The Make or Break Issues in IT Management there are no clear goals or expectations and one can only hope for a successful outcome. After an investment has been made, it is also quite easy to qualify it as a success or as a failure, depending on what someone wants to prove. This situation has become unacceptable in the present IT investment climate, in which not ‘acts of faith’ but more rigorous analyses are required. Rational planning Too much structuring on the product dimension will lead to ‘rational comprehensive planning’ (Rosenhead, 1989); i.e. trying to quantify as many aspects as possible, thereby ignoring the much more complex and uncertain organizational reality decision makers face. This reflects the classical view of the ‘rational’ decision maker. The many finance-based evaluation methods are product oriented, concentrating on the consequences of IT investments that can be monetary valued. Also multi-criteria methods, which are applied in a mechanistic way, often show the characteristics of rational planning. Logical analyses of investment criteria predominate; these generally take the form of cost/benefit analyses, in which there is no room for intuitions or emotions. Learning experience An 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, choosing between alternatives to reach these objectives. This implies that an investment decision is merely regarded as a learning experience. The prime purpose of supporting decision making is to make involved stakeholders arrive at a decision (e.g. through building shared ‘mental models’, see Senge, 1990).4 Providing them with relevant decision criteria to evaluate and choose between investment alternatives falls beyond the learning focus. Balanced control The decision-making perspective taken here advocates a more balanced approach towards the evaluation and management of infrastructure investment decisions, what Figure 10.2 refers to as ‘balanced control’. It is aimed at structuring investment appraisal through a dynamic alignment of both the product and process dimension. At the heart of any evaluation lies the establishment of a set of investment arguments to assess the business impacts of investments. This establishment does not, however, 186

Strategic decisions in the information age take place in isolation of its organizational context. It is the outcome of a communicative process between involved stakeholders.

10.5 The ‘P4’ decision-making model As argued in the previous section, the aim of strategic control of investment decisions is to improve and facilitate organizational decision making on its proposed investments. Therefore an explicit view is needed of IT investment decision making as an organizational and largely communicative process. It is not a ‘method of pinning numbers on things to prove or disprove a case’ (Farbey et al., 1993). Decisions cannot simply be taken by defining a firm’s strategic goals and by calculating the optimal investment strategy (see the previously discussed variant of rational planning), although the general opinion in many firms is that this characterizes good decision making. Investment decisions concerning infrastructure have more to do with eliminating wrong solutions and assessing the risks of project proposals than with a ‘numbers game’ that uses advanced mathematical scoring techniques. A group of decision makers, or a management team, generally is more successful in this than a single decision maker or top manager. Making the intuitions and experiences of these decision stakeholders explict is more important than calculating as much as possible; business impacts should only be translated into financial figures when possible and appropriate. A decisionmaking process concerning IT therefore involves multiple stakeholders, who are through mutual consultation trying to assess the future value to be gained from a proposed investment. Establishing a common mindset for change will stimulate a shared investment vision and start a process to commit all involved stakeholders to the final decision and all of its consequences. The product of such a process provides the crucial standards against which the investments business value can be measured and managed across its life cycle. To further develop this view this section introduces a model for strategic balanced control of investment decisions. Four aspects are distinguished that can be used to improve investment appraisal and to manage the underlying decision-making process. Paraphrasing the well-known four Ps of conventional business wisdom in marketing (but with a different meaning), the resulting model is referred to as the ‘P4’ model. The P4 187

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Substantial rationality

Managing the product

Procedural rationality

Managing the process

Structural rationality

Managing the participation

Political rationality

Managing the politics

Figure 10.3 Types of rationality leading to strategic control options

model is grounded in four types of bounded rationality, each leading to a different control option (see Figure 10.3). The distinction between substantial rationality, procedural rationality and structural rationality is made by Kickert (1979) and De Leeuw (1986), and political rationality can be considered as an additional type of rationality (Renkema, 1998). The four strategic control options cover the main management issues of decisions concerning IT (see Figure 10.4). The innermost circle of Figure 10.4 refers to what in the previous section has been called the product dimension of decision making, and concerns the content of investment decisions (management of the product). The other three circles refer to the discussed process dimension and are concerned with the structure of the decision process in terms of decision phases and steps (management of the process), involving the right (groups of) people in decision making (management of the participation), and handling the political elements of decision making (management of the politics). 188

Strategic decisions in the information age

Politics Political profits and losses

Stakeholder power

Negotiations Political means

Coalitions

Participation Senior management

Financial executives

IT specialists Affected employees Ownership

Process

Project champion

Manageable steps Organizational learning Value Post-implementation management reviews

Product Earnings

Expenditures

Positive contributions

Risks

Negative contributions

Figure 10.4 The P4 model of strategic investment control

10.5.1 Managing the product At the heart of the P4 model lies the ‘product’ of the investment appraisal, i.e. the ‘business case’ or set of value metrics on the basis of which the decision whether to invest or not is made. Every investment decision is made against the background and judgement 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, adequate categorization of all possible and relevant impacts will require local adaptations, reflecting the specific goals and characteristics of the organization in which a decision is made (see Kusters and Renkema, 1996). As such they should be related to the overall investment strategy of a firm (e.g. cost leadership, innovation focus, competitive positioning). In later stages of an investment, e.g. during realization and implementation, the defined value metrics in a business case serve as performance indicators to evaluate the realized business contribution of a project. It is best to make the likely business impacts, and thus the business case, as explicit and debatable as possible, since every evaluation is generally subject to personal, informal and 189

The Make or Break Issues in IT Management Table 10.1 General structure of the business case of an investment Organizational characteristics

Rational model

Political model

Goals and preferences

Consistent across participants

Power and control

Centralized

Type of decision process

Orderly, logical, rational

Outcome of decision making

Maximization of choice options

Rules and norms

Optimization of corporate actions

Information use

Extensive, systematic and accurate

Beliefs about ‘cause–effect’ relations Corporate ideology

Known, at least to a probability estimate Efficiency and effectiveness

Inconsistent, pluralistic within the organization Decentralized, shifting coalitions and interest groups Disorderly, push and pull of interests Result of bargaining and interplay among interests Free play of market forces, conflict is legitimate and expected Ambiguous, information used and withheld strategically Disagreement about causes and effects Struggle, conflict, winners and losers

implicit judgements of involved stakeholders. By explicating different views on an investment the final decision will, as a rule, have more organizational support and commitment. If not, there is a risk that all involved stakeholders will create their own images concerning the possible impacts and the desirability of these impacts, without talking about them. Good communications amongst involved stakeholders can extract and identify the cause-and-effect relations between IT, business performance and financial returns, with a focus on organization-specific goals and 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 different organizations.

10.5.2 Managing the process The second control option of the P4 model refers to the process of investment appraisal. This process considers the different phases the evaluation goes through, both prior to, and during, project execution and investment management. It is recommended to decompose 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: 190

Strategic decisions in the information age Formulation of project goals Evaluation of alternatives Choice of investment alternative Implementation of the chosen solution Follow-up and control of a decision. Since IT investments provide the long-term foundation for many business processes and products, decisions should be subject to a thorough preparation. This subdivision of steps is not meant as a sequential and rigid procedure, but more as a pattern of thought, with possible feedback loops (Witte, 1972; Mintzberg et al., 1976). Another important recommendation lies in performing post-implementation reviews of the investment decision in order to monitor and control the investment across its life cycle. These reviews provide valuable information on whether the investment actually delivers value for money and to what extent there is still room for improvement. The initially defined investment evaluation criteria in a business case then serve as performance indicators to assess the actual contribution of an investment to business performance. Unfortunately, most organizations do not take the time to reflect on decisions that were taken in the past. Many reasons are given for this, but often heard are that something that is a historical ‘fact’ cannot easily be changed, and that project ambitions, scope and conditions have changed too much to be able to make an ‘honest’ assessment. If reviews of investment projects do take place, these are more used as management audits in order to find ‘guilty’ employees and to settle up for a project that is likely to become a failure. This bears the risk of becoming a ‘witch hunt’, instead of a vehicle for capturing improvement and learning opportunities. Regular reviews of the investment also minimize the phenomenon of ‘investment entrapment’ (Van Dinther, 1993); a situation in which evergreater resource commitments are made because of too much emotional involvement, without sound evaluations of increased investment. Post-implementation reviews can further be used to establish an investment climate in which – often implicit – knowledge on investment outcomes is well managed and in which organizational learning is encouraged. Many investment decisions are made by ‘jumping from one project to the other’. Explicit knowledge of prior investments and their realized value can contribute greatly to improved decision making on new investment proposals. In terms of the organizational learning theory of Argyris and Schön (1978), investment control after 191

The Make or Break Issues in IT Management project implementation means ‘single-loop learning’ and using prior investment experiences in new decision situations means ‘double-loop learning’. Single-loop learning focuses on managing an investment project in such a way that the defined investment goals are met. Double-loop learning on the other hand focuses on questioning and critically assessing the way in which an investment project is being managed; investment goals are assessed in terms of their viability and this may mean defining new goals. Managing the process of investment decision making is ultimately a process of investment planning and control, which, in order to prevent a too mechanical view, can be conceptualized using the well-known cycle of quality management (see Deming, 1986): Plan – plan the desired investment outcomes and identify any uncertainties surrounding them Do – perform project activities in line with the defined outcomes Check – monitor whether actual project behaviour and outcomes match the defined outcomes Act – perfom adequate actions in order move project outcomes in the desired direction or ensure that the project keeps moving in the current right direction. Planning and controlling investment projects like this will lead to ‘value management’ of investments. Value management means managing all financial and non-financial impacts of an investment (see Table 10.1), ultimately with the goal of finding an adequate balance between cost and risk management (minimizing efforts, expenditures and mitigating risks) versus benefits management (maximizing benefit opportunities and delivery). The steps of ‘plan’ and ‘check’ are in fact the phases in which investment control is executed through managerial decision making, while the steps ‘do’ and ‘act’ are part of operational project reality, guided by the decisions taken during investment control. Adjustments of project reality achieved like this are examples of ‘single-loop learning’. If the planning phase is subject to a reassessment of initial goals and preferred outcomes this can be seen as ‘second loop learning’. Figure 10.5 visualizes this process of value management, using the above-mentioned terms and process structure. 192

Strategic decisions in the information age Ex-ante: assessment of business impacts

1: PLAN

Improve or assure investment realization and operation

4: ACT

Manage costs, benefits and risks 2: DO

Realize and operate investment

3: CHECK

Ex-post: measurement of business impacts Figure 10.5 Value management of investment projects

The initial stage of investment decision making, in which project proposals are evaluated and eventually a go/no-go decision is made, is a crucial phase since in this proposal stage the chance of taking the wrong decisions can be minimized. ‘Wrong’ decisions are decisions in which a likely desirable project is rejected or a likely undesirable project is accepted. Maximizing the quality of decision making gives a higher chance of making the right decisions (see Section 10.2). In many cases, however, the business value of a project cannot be estimated with much certainty in advance, as external factors (e.g. technology developments, actions of competitors or market trends) may change the basis upon which the decision is based, or because follow-up decisions on controllable project aspects (e.g. organizational scope, ambition level or business process impacts) are made. Managing the process of investment decisions, thus, goes much further than a one-off formalization of the steps in the proposal and feasibility stage of decision making. Adequate management of investment processes requires value management across the full life cycle of a project, which can be thought of as consisting of several life cycle stages, e.g. from conceptualization, design, realization, to implementation and managed operations. 193

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10.5.3 Managing the participation The third aspect that gets special attention in the P4 model concerns the participation of the different project appraisal and decision-making stakeholders. It is advisable to involve all appropriate (groups of) people in decision making with respect to the investment. These include senior management, IT specialists, financial executives and the employees whose work is affected by the investment. Organization of the collaboration between involved stakeholder parties and representatives is an important means to increase adherence to and support for a decision. Special attention is needed to ensure senior business management ownership and sponsorship. Strategic IT decisions should be prepared and approved of at the highest level. It has further been shown that the likelihood of success of investment projects 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 by some involved stakeholder to make the investment a success. This stakeholder does not necessarily have a formal role that implies such an effort. The more powerful this champion’s position is in the organization the better.

10.5.4 Managing the politics The previously discussed control options of the framework merely sketched a homogeneous, rational picture of an organization. This view implies for instance that the different stakeholders in the investment appraisal share the same intentions, goals and priorities. A more realistic view is that of an organization in which different stakeholder groups have their own wishes and preferences. In conflict situations the outer political ring of the P4 model may totally overrule the other three rings. Such a view allows for the recognition of conflicting interests and the use of political means to safeguards one’s interests (Pfeffer, 1981; Mintzberg, 1983). The extent to which a firm and key decision stakeholders highly depend on the often-implicit view they have of organizational decision making. Two contrasting views are the ‘rational model’ and the ‘political model’ (Daft, 1986), see Table 10.2. In practice, both models will somehow represent actual decision making, depending on the political nature of investment issues and the organization in which the decision is made. 194

Strategic decisions in the information age Table 10.2 The rational versus the political model (after Daft, 1986) Organizational characteristics Rational model Goals and preferences Power and control

Type of decision process Outcome of decision making Rules and norms

Information use

Beliefs about ‘cause-effect’ relations Corporate ideology

Political model

Consistent across participants

Inconsistent, pluralistic within the organization Centralized Decentralized, shifting coalitions and interest groups Orderly, logical, rational Disorderly, push and pull of interests Maximization of choice options Result of bargaining and interplay among interests Optimization of corporate actions Free play of market forces, conflict is legitimate and expected Extensive, systematic and accurate Ambiguous, information used and withheld strategically Known, at least to a probDisagreement about ability estimate causes and effects Efficiency and effectiveness Struggle, conflict, winners and losers

As many of today’s IT investments are for common use and therefore are subject to multi-stakeholder interaction, their evaluation is generally subject to politics. Especially the division of earnings and expenditures over the different involved stakeholder groups has an important impact on the political context of investment decisions. Managing these politics – the fourth control option of the P4 model – means that, after the initial recognition of the political context of investment decisions, the intentions, wishes and preferences of stakeholders are explicitly taken into account. Experience shows that agreement on the route to follow and a common perspective among evaluation parties give a greater chance of a successful project (see e.g. Markus, 1983). This should preferably stem from the same motives and a relationship based on equality. In order to reach such agreement, it may necessary to use such decision-making strategies as negotiation and coalition building. An investment in IT can only increase in terms of its outcomes and value if it is done from a shared perspective rather than from individual, diverse or even conflicting perspectives. Decision support with respect to the politics of the evaluation lies in what has been 195

The Make or Break Issues in IT Management called ‘stakeholder analysis’. Boonstra (1991) suggests the following steps in such an analysis: Listing of stakeholders, their estimated power and impacts of the proposed investment Assessment of possible ‘winners’ and ‘losers’ and their possible (political) ‘profits’ and ‘losses’ Establishment of feasible strategies (e.g. financial compensation) to influence the political account of profits and losses. The appropriate use of specific decision strategies depends on the specific political context of investment decisions. This can also be conceptualized in terms of the degree of agreement amongst involved stakeholders regarding (see Butler et al., 1993; Deitz, 1997): The goals of investments: the extent to which there are no different views concerning the purposes of investing in IT The relation between investment goals and decisions: the extent to which there are no different views concerning the contribution of investment decisions to the defined purposes of investing in IT. Different degrees of agreement will lead to different, more appropriate, decision strategies, such as (see Figure 10.6): Relative use of analytical and measurement techniques if there is agreement on both goals and the relation between goals and decisions More reliance of managerial insight and stakeholder judgement if there is agreement on goals but not much agreement on the relation between goals and decisions Deliberate use of negotiations and consensus finding between stakeholders if there is agreement on the relation between goals and decisions but not much agreement on goals Room for organizational creativity and inspiration if there is not much agreement on both goals and the relation between goals and decisions.

196

Strategic decisions in the information age

High

Negotiation and stakeholder consensus

Analytical and measurement techniques

Low

Organizational creativity and inspiration

Managerial insight and stakeholder judgement

Agreement on relation between goals and decisions

High Low Agreement on goals Figure 10.6 Decision strategies based on level of stakeholder agreement

10.6 Conclusions In the present information age, IT investments are simply too important and too expensive to be ignored, ill-managed or left over to technology specialists. If organizations really want to transform the technology promises of modern IT into business benefits, decision control and investment assessment should be on the top management agenda. Given the business issues at the spending levels at stake, no organization or senior business managers can in fact permit itself anything less than that. Strategic IT decisions are more than simply calculating financial returns and assessing hard, measurable business impacts. If this were the case, managers could easily take refuge with one of the many standard capital budgeting textbooks. Above all, it is an organizational process, in which multiple stakeholders interact to agree upon the value of an investment, from its initial feasibility stage to its managed operations. This chapter argued that investment decisions concerning IT are generally not taken according to the classical, economic model of rational decision making. It is therefore more realistic to base decision-making support upon the practical consequences of the paradigm of bounded rationality. In correspondence with the distinction between the ‘what’ and ‘how’ of strategy formation, a distinction can be made between the product and the process dimension of investment decisions. If both dimensions do not get the attention they respectively deserve, an investment decision will result in an act of faith, the consequences of which are unpredictable and 197

The Make or Break Issues in IT Management unmanageable. One-dimensional control of decisions on the product or product dimension will respectively lead to pure rational planning or to considering an investment decision merely as a learning experience. Both variants fall short of taking strategic investment decisions on IT. In the P4 model, as introduced in this chapter, both dimensions are simultaneously addressed, referred to as ‘balanced control’ of investment decisions. This balanced control captures both the need to arrive at a more sound, rigorous investment appraisal, which should focus on assessing business impacts, as well as the organizational decision context in which this appraisal is taking place. This decision context consists of a communication-intensive group process of stakeholder interaction and negotiation, with different steps, many involved parties and political implications. The P4 model integrates four strategic control options, which, if managed adequately, will lead to a balanced control of investment decisions. This required decision support along the following four lines: Managing the product – defining the (evolving) business case through value metrics Managing the process – following the several decision steps to make a final judgement and to manage the evaluation life cycle Managing the participation – involving the right (groups) of people in investment decision making Managing the politics – finding common interests and managing conflicts of interest.

Notes 1. All rights reserved. © T. J. W. Renkema. Parts of this chapter build on and draw from The IT Value Quest: How to Capture the Business Value of IT-based Infrastructure, ISBN 0 471988170, published by John Wiley & Sons Ltd, 2000. © John Wiley & Sons Ltd. 2. The classic model of rational decision is theoretically founded within neo-classical economics. Within the academic community of economists many academicians admit this neo-classical theory is not appropriate for describing or supporting organizational decision making. Ryan et al. (1992) for instance argue: ‘Neoclassical theory was developed by economists to predict general patterns of economic behaviour. It was never intended 198

Strategic decisions in the information age to be an explanation of how individuals do or should behave.’ 3. The holistic model of an organization is also rooted within neo-classical economics, in which a firm is conceptualized as a production function between supply markets of production factors and sales markets of products and services. 4. This variant in many respects has similarities with the interpretive school of IT evaluation research (see Symons, 1991; Hirschheim and Smithson, 1988; Walsham, 1993).

References Ackoff, R. L. (1979) The Future of Operational Research is past. Journal of the Operational Research Society, 30, pp. 93–104. Argyris, C. and Schön, D. A. (1978) Organizational Learning: a Theory of Action Perspective. Addison Wesley, Amsterdam. Ballantine, J. A., Galliers, R. D. and Powell, P. L. (1995) Daring to be Different: Capital Appraisal and Technology Investments. In: Proceedings of the Third European Conference on Information Systems, Athens. Banker, R. D., Kauffman, R. J. and Mahmood, M. D. (1993) Strategic Information Technology Management: Perspectives on Organizational Growth and Competitive Advantage. Idea Group Publishing, Harrisburg. Bass, B. M. (1983) Organizational Decision-making. Dow-Jones Irwin, Homewood. Beath, C. M. (1991) Supporting the Information Technology champion. MIS Quarterly, September, pp. 355–372. Boonstra, A. (1991) Political Aspects of Information Systems development (in Dutch). Informatie, 12, pp. 857–864. Butler, R., Davies, L., Pike, R. and Sharp, J. (1993) Strategic Investment Decisions: Theory, Practice and Process. Routledge, London. Checkland, P. B. and Scholes, J. (1990) Soft Systems Methodology in Action. John Wiley & Sons, Chichester. Cohen, M. D., March, J. G. and Olsen, J. P. (1972) A Garbage Can Model of Organizational Choice. Administrative Science Quarterly, 17, 1, pp. 1–25. Cyert, R. M. and March, J. G. (1963) A Behavioral Theory of the Firm. Prentice-Hall, Englewood Cliffs. Daft, R. L (1986) Organizational Theory and Design. West Publishing Co., St. Paul. Deitz, R. H. M. (1997) IT Investments Between Intuition and 199

The Make or Break Issues in IT Management Calculation (in Dutch). PhD Thesis, Eindhoven University of Technology, The Netherlands. Deming, E. (1986) Out of the Crisis. Cambridge University Press, Cambridge. De Leeuw, A. C. J. (1986) Organization Management: A Systems Perspective on Analysis, Design and Change (in Dutch). Van Gorcum, Assen. Farbey, B., Land, F. and Targett, D. (1993) How to Assess your IT Investment: A Study of Methods and Practice. ButterworthHeinemann, Oxford. Harrison, E. F. (1987) The Managerial Decision Making Process. Houghton Mifflin, Boston. Hickson, P. J., Butler, R. J., Cray, D., Mallory, J. R. and Wilson, D. C. (1986) Top Decisions: Strategic Decisions in Organizations. Basil Blackwell, Oxford. Hirschheim, R. and Smithson, S. (1988) A Critical Analysis of Information Systems Evaluation. In: Björn-Andersen, N. and Davis, G. B. (eds). Information Systems Assessment: Issues and Challenges. North Holland, Amsterdam. Hochstrasser, B. and Griffiths, C. (1990) Regaining Control of IT Investments, a Handbook for Senior Management. Kobler Unit, Imperial College, London. Idenburg, P. J. (1992) Bossa Nova in Strategy Development. Economic Statistical Briefings, 22 April, pp. 98–403. Janis, I. L. and Mann, L. (1977) Decision-Making: A Psychological Analysis of Conflict, Choice and Commitment. The Free Press, New York. Kelly, K. (1998) New Rules for the New Economy. Pinquin, New York. Kickert, W. J. M. (1979) Organization of Decision Making: a Systems-Theoretical Approach. PhD Thesis, Eindhoven University of Technology, The Netherlands. Kusters, R. J. and Renkema, T. J. W. (1996) Managing IT Investment Decisions in their Organizational Context. In: Brown, A. and Remenyi, D. (eds). Proceedings of the Third European Conference on IT Investment Evaluation. University of Bath, UK. Lindblom, C. E. (1959) The Science of ‘Muddling Through’. Public Administration Review, 19, Spring, pp. 79–88. Lytinen, K and Hirschheim, R. (1987) Information Systems Failures. Oxford Surveys of Information Technology, 4, pp. 257–309. Markus, M. L. (1983) Power, Politics and MIS Implementation. Communications of the ACM, 26, 6, pp. 430–444. 200

Strategic decisions in the information age Mintzberg, H. (1983) Power In and Around Organizations. Prentice-Hall, Englewood Cliffs. Mintzberg, H. (1994) The Rise and Fall of Strategic Planning. Prentice-Hall, Englewood Cliffs. Mintzberg, H., Raisinghani, D. and Theoret, A. (1976) The Structure of ‘Unstructured’ Decision Processes. Administrative Science Quarterly, 21, June, pp. 246–275. Negroponte, N. (1995) Being Digital. Alfred A. Knopf, New York. Pfeffer, J. (1981) Power in Organizations. Pitman, Boston. Renkema, T. J. W. (1998) The Four P’s Revisited, Business Value Assessment of the Infrastructure Impact of IT investments. Journal of Information Technology, 13, pp. 181–190 Renkema, T. J. W. (2000) The IT Value Quest: How to Capture the Business Value of IT-based Infrastructure. John Wiley & Sons, Chichester. Renkema, T. J. W. and Berghout, E.W. (1997) Methodologies for Information Systems Investment Evaluation at the Proposal Stage: A Comparative Review. Information and Software Technology, 39, pp. 1–13. Rosenhead, J. (ed.) (1989) Rational Analysis for a Problematic World: Problem Structuring Methods for Complexity, Uncertainty and Conflict. John Wiley and Sons, Chichester. Ryan, B., Scapens, R. W. and Theobald, M. (1992) Research Method and Methodology in Finance and Accounting. Academic Press, London. Sager, I and Gleckman, H. (1994) The Information Revolution. Business Week, 13 June, pp. 35–39. Senge, P. (1990) The Fifth Discipline: The Art and Practice of the Learning Organization. Doubleday Currency, New York. Shank, J. and Govindarajan, V. (1992) Strategic Cost Analysis of Technological Investments. Sloan Management Review, 34, 1, pp. 39–51. Shapiro, C. and Varian, H. R. (1999) Information Rules: A Strategic Guide to the Network Economy. Harvard Business School Press, Boston. Simon, H. A. (1977) The New Science of Management Decision. Prentice-Hall, Englewood Cliffs. Symons, V. J. (1991) A Review of Information System Evaluation: Content, Context, and Process. European Journal of Information Systems, 1, 1, pp. 205–212. Thurow, L. C. (1999) Building Wealth. Harper Collins, New York. Van Aken, J. E. and Matzinger, B. (1983) A Neo-Rational Model 201

The Make or Break Issues in IT Management of Decision Making: Decision Preparation Between Intuition and logic (in Dutch). M&O Tijdschrift voor Organizatiekunde en Sociaal Beleid, 6, pp. 478–493 Van Dinther, M. (1992) Caught in a Web, Psychological Backgrounds of Investment Decisions (in Dutch). AXA, Equity and Law. Verzellenberg, L. N. J. (1988) Investments in Hospitals: Model and Practice (in Dutch). PhD Thesis, Eindhoven University of Technology, The Netherlands. Vroom, V. H. and Jago, A. G. (1988) The New Leadership: Managing Participation in Organizations. Prentice-Hall, Englewood Cliffs. Walsham, G. (1993) Interpreting Information Systems in Organizations. John Wiley & Sons, Chichester. Weick, K. (1979) The Social Psychology of Organizing. AddisonWesley, Reading. Weill, P. and Broadbent, M. (1998) Leveraging the New Infrastructure: How Market Leaders Capitalize on Information Technology. Harvard Business School Press, Boston. Willcocks, L. and Lester, S. (1999) Beyond the IT Productivity Paradox: Assessment Issues. John Wiley & Sons, Chichester. Witte, E. (1972) Field Research on Complex Decision Processes: the Phase Theorem. International Studies on Management and Organization, 2, pp. 156–182.

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11

E-business model options The first challenge is how to sustain the business Dan Remenyi Trinity College Dublin, Ireland

We are merely reminding ourselves that human decision affecting the future, whether personal or political or economic, 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 the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive or whim or sentiment or chance. (Keynes, 1964 [1936]) This chapter considers a variety of different ways a business and especially an e-business raises funds, expends these monies to produce goods or services and then generates an income that allows the organization to be able to pay its way and thus to stay in business. This is referred to as a model business or economic explanation of how the organization sustains itself. This chapter describes seven alternative relatively traditional approaches to e-business models. These models are then reviewed in terms of sustainability and risk. The chapter then considers the question of whether there are any other more radical ways of creating a specific e-business model.

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11.1 Introduction Whether it is web-enhanced1 or just a plain old-fashioned bricks and mortar organization, it is not easy to build and sustain a successful business that earns a suitable return on the funds invested in it. Looking at well-established household name businesses like IBM, Holiday Inn, Kodak, ICI, Nestlé, Virgin Atlantic or Tesco it is possible to get the false impression that it is a cinch to be a great commercial success. With the enormous power of hindsight it is easy to obtain the impression that it was obvious that these businesses would flourish and that the business model decisions such organizations made were pretty straightforward, if not actually simple. In fact deciding on an appropriate business model is a major challenge for all business organizations. If the business model is not sound then the prospect of a successful outcome is not good. This is especially true in the case of both web-enhanced and web-enabled2 businesses, which have had particular difficulty with this issue. Although the business model is a central issue for success there is surprisingly little understanding of what actually constitutes a business model and what processes are required to develop this important business dimension. As Timmers (1999) points out there is no universally agreed definition of the term ‘business model’. Authors often use this term without even bothering to define it. In the case of web-enhanced or web-enabled businesses it sometimes appears that no attention at all has been given to the business model and this has been a contributing factor to the high rate of failure of these types of businesses. Furthermore it is also worth pointing out that a business model is not a one-time-only event, but rather an issue that needs to be addressed from time to time in order to ensure that the business’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. Most often, it seems to refer to a loose conception of how a company does business and generates revenue. 204

E-business model options There is no doubt that the term business model is now well grounded in business and management literature and that there are a large number of often conflicting ways in which it is used especially 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 and their roles; and a description of the potential benefits for the various business actors; and a description of the sources of revenue. This view of Timmers makes the business model a very comprehensive and wide ranging statement of the main factors underpinning the business. Mahadevan (2000) defines a business model as: A unique blend of three streams that are critical to the business. These include the value stream for the business partners and the buyers, the revenue stream and the logistical stream. However, the term business model is often used in a more limiting sense and as such is seen as being synonymous with the concept of the business case or the value proposition or an economic justification. In this context the business model is the way in which a business organization envisages what value, and specifically economic value, it has to offer its customers and how it will make a suitable return from providing the product or service it offers.3 Thus, in this sense there are two parts to the business model – one is customer focused and the other is internal business process focused. A business model may be developed for the organization as a whole or for a section or part of it. In fact a business model may be produced for a particular line of business, or even for a specific product or service. Specifically a business model needs to demonstrate a compelling and preferably unique reason why people want to buy a product or engage in the activity the business organization is offering (Remenyi, 1999). The business model also needs to address how an appropriate fee or charge will be levied that will cover the organization’s costs and make a return for its 205

The Make or Break Issues in IT Management investors. Furthermore a comprehensive business model will also indicate how the venture will be initially funded and how it will continue to be financially viable. As may be seen for these characteristics of a business model, it is quite similar to a business strategy and therefore it is of considerable importance that it is closely aligned to the corporate strategy. If it is not then there will be inherent contradictions in what the organization is trying to do and these will cause problems in the market place. The business model focuses attention on the economics of the business process but this is not to say that it is a simple cost benefit or financial statement. As Lacity and Hirschheim (1995) point out: Much of the knowledge required to make efficient economic decisions cannot be expressed as statistical aggregates but is highly idiosyncratic in nature. A comprehensive business model needs to address a series of issues, only one of which is a statement of cost and benefits. And within the cost benefit arena there are several different options and statistical measures available to the analyst to understand how the business may perform. However, in this chapter only the high level issues and concepts of how a return is earned on the investment are addressed.4

11.3 Components of a business model As mentioned earlier this chapter considers the business model from a macro or high-level perspective in which there are three distinct components of a business model. These three components need to be considered separately before being brought together to represent the whole. These are the investment and how it is funded, the ongoing costs and finally the revenue and how it will be generated.

11.3.1 The investment There are four generic types of investment, which nearly every organization will employ from time to time. These four generic types of investment (Figure 11.1) are prestige investments, core investments, corn-seed investments and must-do investments (Remenyi et al., 2000). Each one of these investment types has a 206

Risk/visibility

E-business model options

High

Prestige High risk High profit

Corn-seed Very high risk High profit

Low

Core Medium risk Medium profit

Must-do Low risk Low profit

High Low Profitability Figure 11.1 Four generic types of investment

particular role to play in assisting the organization achieve its goals and objectives and needs to be incorporated into the corporate strategy.

11.3.2 Core investments Core investments are those that are by far the most frequently encountered in any organization. These are the backbone of the business and it is for these goods and services, which are facilitated or created using these investments, that the organization attracts its customers or clients. In the e-business world these will be websites that support the main thrust or the core of the business. These investments will seek to attract more business or they will be used to reduce organizational costs. Such investments may also open up a new line of business for the organization. Core investments need to be the continual concern of the senior management. If for any reason the core investments are not delivering the required return, the business may be in serious trouble. Where successful, these websites will play a major contribution to changing the main or core business processes of the organization. The risk profile of this type of investment is not considered to be very high as the organization should know precisely what it is doing and know how to manage the risks. Dell and Cisco use e-business to focus directly on this investment quadrant. They have both web-enhanced their core business processes and in so doing have directly improved their efficiency and effectiveness and brought in new business. 207

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11.3.3 Prestige investments It is through prestige investment that the organization attempts to make its presence felt in the market place. These are big budget website investments that are undertaken to show the expertise of the organization and/or its commitment to a particular project. These types of investments are not usually required to make an immediate return, but are believed to contribute to the longer-term success of the business. Prestige investments are not usually the daily concern of the senior management, but typically are only considered as part of the business decisionmaking process from time to time. The websites of organizations such as newspapers and magazines, major automobile manufacturers and some large financial institutions and retails who are not selling directly on the Web but are using it as a public relations vehicle fall into this category. The risk profile of this type of investment is normally considered to be very high as this type of investment may be outside of the routine of the business. When these investments are successful they can substantially help to increase the profit of the organization.

11.3.4 Corn-seed investments Corn-seed activities are research and development investments. It is through Corn-seed investments that the organization attempts to ensure its future. Here money is spent for the future development of the business. These are experimental investments where a website is being developed as part of the organization’s research and development programme. Corn-seed investments are not expected to make a return on investment in the short term. However, investment in this area may turn out eventually to be core to the business in the future. On the other hand some investments in this quadrant will simply be scrapped. All forms of research and development investment are generally considered to be risky. But of course the returns from this sort of investment can be very high indeed. There is some considerable activity in this investment quadrant in the e-business world at present. ABN-Amro have been con208

E-business model options sidering a portal with KPN Telecom but have decided not to proceed. Lloyds and Vontobel, a Swiss Bank, abandoned web plans.

11.3.5 Must-do investments There will be occasions when an organization undertakes a website investment that gives no return at all, or perhaps gives an intangible return that is difficult to measure. Websites designed for training might be an example of these. Websites that are used to ensure that the firm complies with some legal requirement will often be regarded as a must-do investment. When a website has become outdated then the replacement of that website is frequently a must-do investment. Many of the brochure-ware websites were initially seen as mustdo investments because organizations feared being left behind if they 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 the investment Investments are normally made for the medium to long term. This means that the organization will not obtain a payback in the immediate future. Investments often require substantial amounts of funding, which is not always available out of the normal cash flow of the business. Thus investments are usually funded either from equity or debt or a combination of both. All these four generic investments would normally require funding of this form. The cost of the funding of investments is often a critical issue and needs to be specifically considered in the business model. In general, equity is usually considered to be more costly than debt. On the other hand equity is normally regarded as being of lower risk than debt as equity does not bring with it a fixed obligation for an interest payment. As part of the business model the organization will have to decide from which of these sources to raise the funds.5 Once the investment is up and running the costs incurred thereafter are considered to be ongoing costs, which are usually funded out of ongoing revenues. One of the difficulties in the 209

The Make or Break Issues in IT Management web and internet world is that in many instances e-business have been slow in generating ongoing revenues and thus ongoing costs have had to be funded in the same way as investment, i.e. from equity and debt. Thus slowness to produce ongoing revenue has been at the heart of the problems on many e-businesses.

11.4 The term of the business model Although it is not always necessary for all business organizations to make profits from the first year of their operation, it is not possible to sustain a business activity for any material amount of time without there being some important contribution, usually profit, being made to the overall business position. This normally means that the business model needs to show how a profit will be made within the first few years of operation. Of course, there are exceptions to this general rule. Mining companies, organizations that build huge structures such as the channel tunnel and companies that rely heavily on high-tech research and development, may have longer periods before realizing profits. But the vast majority of business enterprises, and especially those that are based on trading, need to show a return relatively promptly.

11.5 High-level and detailed business models There is a large range of approaches to developing business models. Some business models are produced that only deliver a high-level view of the situation while others delve into a considerable amount of detail. Sometimes the high-level view is sufficient, especially for the purposes of initial concept filtering or decision making, but usually, in the end, the business model needs to be expressed in some detail, at which point the business model might be further developed until it actually becomes a programme action plan and then eventually a project or budget. Thus the high-level model is the starting point of the full planning process.

11.6 Generic business models There are a number of high-level business models that may be regarded as generic. These represent the different ways a busi210

E-business model options ness can look to being funded and how they will produce the required return in order to be seen as successful. The following are seven of the more frequently encountered business models: 1. 2. 3. 4. 5. 6. 7.

Traditional trading model or the classic profit Classic cost reduction New trading model or the new economy Investor funded deficit model or the begging bowl Stock market funded deficit model or the casino Sleight of hand model or the Mr Mistoffelees The high stakes model or the maverick

11.6.1 Traditional trading business model or the classic profit The traditional trading, or for that matter manufacturing business model, sometimes referred to as the classic profit model is the normal way in which most businesses operate. This is not a new approach to thinking about how business functions. Its roots go back into antiquity. Here the organization raises funds from both equity and loans or debt and uses this money to fund the purchase or production of goods or services. The goods and/or services are sold at a higher price than was paid to acquire or produce them. This revenue can thus pay all the costs involved as well as result in a surplus or a profit, which is used to fund further development of the business. The process underpinning this classic business model is shown in Figure 11.2.

Acquire capital – equity and debt

Dividends paid to equity holders

Set up business

Make purchases

Produce goods

Earn surplus

Sell goods at a profit

Figure 11.2 Traditional trading model or the classic profit model

211

The Make or Break Issues in IT Management The classic profit model has been by far the most common way in which businesses have been funded during modern times. After the original capital has been acquired and the physical business 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 of the capital, which is paid by way of dividends to equity shareholders and by way of interest to the suppliers of the other funds. An important issue with this classic profit model is how long does it take for profitable sales to generate enough income to pay all the overheads required to operate the business. Few organizations have products or services with a sufficiently high price tag and profit margin that the organization is in profit immediately. Therefore there is usually some initial period of loss making. This period may be a matter of months or even years, but it is important that a time to profit is viable. For most businesses this would be a question of months or maybe in the case of large-scale operations, a couple of years at the most. In the main, organizations would not expect to have to wait many years to reach a level of profitability. An important aspect of this model is how the organization accommodates growth in the business. Business growth always requires additional funding. This may be for working capital such as inventories or debtors or operating expenses or it may be for extra fixed assets such as manufacturing facilities. Such funding is not always available from currently earned profits6 and thus depending on the profit margins and the required rate of growth the business may wish to return to the suppliers of equity and debt for further monies. However, obtaining additional capital for expansion in this way is not a routine event. A special rights issue of shares is normally arranged if additional equity funding is required or new loans may be arranged by means of debentures or mortgages etc. The question of overtrading is often raised in conjunction with the business growth issue when working with the classic profit model of business. Overtrading occurs when a business expands too fast and has not put in place the funds necessary to cover the increased requirement for either working capital or fixed capital, as mentioned above. Overtrading is an important cause of business failure and therefore all organizations, and especially those 212

E-business model options who are recent start-ups, need to be on the look-out for this problem.7 In the web-enhanced or web-enabled business world the classic profit model of business underpins quite a number of websites, especially those that are trying to trade in the business to consumer arena. Figure 11.2a shows the classic profit model as it may be applied to e-business. The organization attempts to provide a product or a service or distributes something or creates a portal. It does this at a fee, which generates a profit. Most of the web-enabled shop businesses are based on this model. The travel reservations websites also use this type of thinking, as do the players in the retailing and wholesaling sectors. Timmers (1999) refers to these as e-shops and also points out that e-malls and e-auctions operate in essentially the same sort of way. An example of a classic business to consumer e-shop would be eLuxury.com and a classic business to business e-shop would be Merck-ltd.co.uk. A classic e-mall would be Britannica.co.uk and a classic e-auction would be e-Bay.com. The web-enhanced business of Dell Computers also operates on this basis. Provided the price at which these websites sell their goods or services exceeds their costs, then this business model is perfectly sustainable as it is effectively a continuous self-funding model that only needs extra money or funds for unusual growth requirements.

Acquire capital – equity and debt

Dividends paid to equity holders

Set up business

Make purchases

Produce goods or services, set up portals or distribution

Earn surplus

Sell at a profit

Figure 11.2a The classic profit model applied to e-business

213

The Make or Break Issues in IT Management In a sense all other business models need ultimately to refer back to this one as it is the conceptual cornerstone of applied economic logic.

11.6.2 The classic cost reduction model It has been suggested by Rosen and Howard (2000) and Berryman et al. (1998) that cost reduction is a major driver of ebusiness, especially business to business e-business. The classic cost reduction business model operates in a similar way to the classic profit model and may even be considered by some to be a subset of it, except that in the case of the latter there will generally be no attempt to look for additional revenue sources or streams. In this case the model is based on the reduction or the avoidance of a range of current costs or potential costs. This may be thought of as business process re-engineering or business process improvement. The process underpinning the classic cost reduction business model is shown in Figure 11.3. Like the classic profit business model at the start-up the organization acquires sufficient funds to set the business up and running and to initiate the trading or manufacturing processes. Then the additional profit generated by the cost reduction activities pays for the investment and keeps the company going. In the web-enhanced or web-enabled business world this model underpins many of the business to business websites that attempt to reduce their users’ transaction costs or improve the efficiency or the effectiveness with which they service their

Acquire capital – equity and debt

Set up business

Dividends paid to equity holders

Figure 11.3 Classic cost reduction model

214

Make purchases

Change processes

Earn surplus

Reduce costs

E-business model options clients in their industry supply chain. Websites such as CommerceOne.com, J2C.com, Buildersonline.com, and Ingredients.com use this type of thinking (Norris and West, 2001). Therefore, websites that create collaborative platforms or third-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 perfectly sustainable. This type of model may or may not require external funding in the form of equity or debt. It is also effectively a continuous self-funding model that only needs extra money or funds 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 the new economy model takes only a slightly different approach to the classic profit model to the continuing funding of the business. However, there is one very important difference. In the case of the new economy model the goods or services that are produced by the business are not sold at a profit, but are either given away or sold at a loss. The revenue gap created by this deficit sale, at a loss, has to be closed.9 Unless this gap is closed the business is not sustainable. Applying this type of model the organization attempts to earn a secondary fee10 from some activity such as advertising. It is through the secondary income that the organization earns sufficient revenue to have a surplus and thus make a profit and stay in business. This type of organization does not attempt to run at a loss, but tries to balance its income and its costs through multiple streams of income. The process underpinning the new economy business model and the recycling of the business activities is shown in Figure 11.4. Financial advisers in the e-business world were strongly recommending websites to seek multiple income streams. These included trading, selling advertising banners, selling data acquired from their clients and prospects etc. However, it is now being suggested that one of the causes of the failure of e-business is that some organizations dissipate their energies on too many different income streams and have not focused adequately on what should have been their core business. 215

The Make or Break Issues in IT Management

Acquire capital – equity and debt

Dividends paid to equity holders one day

Make purchases

Produce goods or services, set up portals or distribution

Earn other secondary fee (like advertising) and thus make a surplus

Give goods away or sell at a loss

Set up business

Figure 11.4 New trading model or the new economy

This business model is in essence not as different to the classic business model as is sometimes suggested. It calls for profit to be made pretty well immediately, but from a secondary or perhaps several different sources or streams of income (Dayal et al., 2000). The type of thinking described by this model also underpins the idea of the loss leader. In this case a product or service is sold at a loss for a limited amount of time in order to establish a new product in a competitive market, or to attract a new segment of an already established market away from a competitor. In this situation the gap between the revenue produced by the loss leader and its cost to the organization needs to be carefully funded. In traditional business this can seldom be done through a secondary stream of income such as described above. In the case of loss leaders the organization’s advertising and promotion budget, or perhaps in some cases its public relations budget will be called upon to fund this deficit. It is important to notice that loss leaders are seldom sustained for any length of time. It is simply not in the interest of the business to deliver products or provide services at a price that is less than the cost,11 other than for a brief time period with a very specific corporate objective. In the web-enhanced or web-enabled business world this model has underpinned many portal websites. Originally Yahoo! and Alta Vista were examples of this type of business model, but today they have grown into organizations that are directly funded by their primary business or revenue stream, which is selling advertising, although they do make money out of other activities as well. 216

E-business model options When the secondary income stream is strong this business model is sustainable. However, it is certainly a fragile or vulnerable model. If the secondary income stream is reduced then the business may suffer severely and even collapse. This model served many websites quite well in the early days of e-commerce and e-business when there was a great belief that web-based advertising would probably outperform television-based advertising.12 However, faith in web-based advertising has been substantially diminished and e-businesses that relied on this source of secondary income have been affected accordingly. Relying on web-based advertising is now regarded as a very risky or even dangerous strategy for the generation of adequate funds to stay in business. Rather, web-based advertising is seen as a potential additional cream on the top, for more secure income streams. According to David Wessel writing in the Wall Street Journal on 11 January 2001, advertising will not really work for internet companies and this is proven, he suggests, by Yahoo!, which has been hit by reduced advertising incomes and is already looking for alternative sources of funds.13 Wessel suggests that Yahoo! and other websites have been looking in the wrong direction for financial security. He points out that ‘a key feature of the Internet is its support for customized content, and business models must take that fact into consideration’. However, Wessel does not spell out exactly how this can be done and how the profit may be made from this sort of service. Despite the difficulties experienced by Yahoo! and others the new economy business model is very important to the current ebusiness world as it is used to fund a number of ‘free’ services. To some extent this type of business model may be seen as a commercial or economic experiment. Of course it is an experiment that always has to eventually keep its eye on the bottom line. As Peter Senge pointed out in The Fifth Discipline (1990): Business has a freedom to experiment missing in the public sector and often in not for profit organizations. It also has a clear bottom line, so that experiments can be evaluated, at least in principle, by objective criteria.

11.6.4 Investor funded deficit model or the begging bowl The investor funded deficit model that is sometimes referred to as the begging bowl is an approach that is used when it is 217

The Make or Break Issues in IT Management believed it will not be possible to earn a profit in the short term and the sponsors of the business do not have, or are not prepared, to put all the funds required into the business from day one. This is an especially high risk business model for both the investors and the e-business entrepreneur. The idea here is that the business is set up with a limited amount of funding and that the management of the business will from time to time, perhaps even over an extended period of time go back to the original investors, or maybe even to new investors to obtain additional funds to continue the project. These rounds of fundraising become a central issue in how the enterprise is run. The term ‘the begging bowl’ is used because the entrepreneur has to go back to the investors and ask – please may I have some more funds! In between fundraising initiatives the organization tries to manage the business in such a way that the cash utilization, which is now commonly referred to as the ‘cash burn’, is controlled as effectively as possible. Numerous organizations have found it necessary to cut back on expenses such as advertising and staff, not to mention growth plans in order to slow down their cash burn. The process underpinning this business model is shown in Figure 11.5. The money raised in this model is often by private placements. A private placement occurs when a wealthy individual or an organization with surplus funds supplies money to a fledgling

Acquire capital – equity and debt

Set up business

Make purchases

Produce goods or services, set up portals or distribution

Go back to investors and obtain more capital

Give goods away or sell at a loss

Figure 11.5 Investor funded deficit model or the begging bowl

218

E-business model options 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 are sometimes referred to as venture capitalists, a term that more than anything else signifies the high risks involved in these enterprises. It is sometimes said that venture capitalists will invest in several new business ventures in the expectation that one or more of these fledgling businesses will fail, but that the one that succeeds will be so successful that it will more than compensate for the losses incurred in the others. Thus venture capitalists are sometimes described as playing the numbers by taking calculated gambles on a range of investments. On the face of it this is a fairly extravagant way of finding successful business investments, but if the upside potential is truly enormous and if the original cash requirement is controlled then it can be an effective way to operate. This business model is quite different to the other three business models previously described here. It calls for medium- to longterm funding before any profit is expected. The problems here are to do with the difficulties in forecasting when the organization is likely to stand on its own two feet and start to turn in profitable business. It has always been the case that some organizations have needed funding for quite some time before becoming profitable. However, some web-enabled businesses seem to have thought that there was no need to be concerned about profit for quite an extended period of time. Although this may have been sustainable to some degree in the very early days of the e-business phenomenon, it is certainly not true any longer. A danger for the business using the begging bowl type of model is that the original investors can lose interest in the business or they can just run out of available investment funds for the project. Another risk with this approach to funding a business is that the market can turn against the product or service being promoted. Furthermore, there can be a flood of competition, all of which can make it very difficult to find more money to fund the business.14 All of these issues can affect the investment climate, which in turn affects the ability of the company to obtain the funds needed. Scores if not hundreds of websites have closed during the past few months because investors have refused to produce 219

The Make or Break Issues in IT Management 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.com created what its cofounder, Mr Edward Johnstone, a chartered accountant, called an independent travel website. They saw themselves as being the answer to Lastminute.com. Despite having initial funding from investors of £800 000 and establishing what Johnstone referred to as an award-winning website this dot.com was forced to close down after a few months. ZedZed.com was simply caught in the downturn of sentiment against dot.coms. Its prospects were not any worse when it attempted to go back to the investors for additional cash. In the eulogy for ZedZed.com, Mr Johnstone correctly points out that their worst mistake was ‘to believe that Internet businesses should be valued on the number of subscribers, rather than the transactions that they make’. It is generally believed that Freeserve.com, which had been very successfully floated a few months earlier, had been valued on its number of subscribers, but within a few months the market sentiment moved against this approach to understanding business value.15 It is clear that the begging bowl type of model is not sustainable in anything but the short term. The entrepreneurs using this approach need to urgently move to a breakeven point and to ensure that their cash flow will soon cover their outgoings. If this is not achieved then this business model will not produce viable results. Investors who participate in this type of business situation are not usually looking to a return in the form of dividend income, but rather are looking to obtain shares in the business. They expect that the shares will come on the market at high prices and that the price of these shares will then rocket. Some of these investors have been disappointed.

11.6.5 Stock market funded deficit model or the casino The stock market funded deficit model, which is sometimes referred to as the casino model, works on the basis that the business has been funded at least in part, by becoming a public listed company on a stock exchange. The issuing of shares on the stock 220

E-business model options market results in the organization acquiring a large pool of cash. In the same way as the investor funded deficit model the management of the organization tries to manage the cash burn as effectively as possible. In this model the business is not expected to reach a state of profitability in the short term, or perhaps even in the medium term. However, in this situation it is asserted that the losses do not matter while the business is growing and the organization is becoming more and more established. This is because while the share price of the business is high the issue of additional equity capital can fund operating deficits. The company can go back to the stock market again and again to fund the deficit. There are, however, two important limitations to this approach to funding a business even when the share price stays high in a bull stock market. The first problem is that equity share capital is a notoriously expensive way of funding a business. This is largely due to the growth expectations of the current shareholders in particular and the stock market in general. This means that dividends, when they are available, are expected to be continuously growing. The second issue is the one of control. The continuous issue of ordinary equity share capital leads to the original owners holding a smaller and smaller percentage of the shares. This could mean that in the end they may not have as much control over the business as they may wish. This returning to the stock market is how Amazon.com has sustained itself during the five years in which it has continued to make very substantial losses. Thus as long as there is stock market enthusiasm for the business and as long as the share price continues to rise, funds are available to sustain the business despite its operational losses. Stock market enthusiasm for some companies applying this business model has in some instances been enormous. Amazon.com’s share price rocketed to US$110 per share without the company ever making a profit. This made its founder Jeff Bezos a paper billionaire. Of course market sentiment can also change, and within a year of Amazon.com’s highest share price it had fallen to about US$10, relieving Jeff Bezos of his billionaire status. Similar share valuation crashes occurred to many of the well-known e-businesses quoted on the Nasdaq during the year 2000. This volatility in the share price has had very serious consequences for the companies that were relying on obtaining 221

The Make or Break Issues in IT Management additional funding from the stock market and indeed has resulted in some of these firms being declared bankrupt. Other organizations such as Amazon.com have had to curtail their expansion plans and even reduce their staff complement in order to survive on their own cash flow. It is this intrinsic uncertainty of stock market prices that frequently depends on investor sentiment, rather than any clearly rational economic or corporate behaviour or performance that leads to this model being referred to as the casino model. In simple terms the management of an organization has actually very little control over its share price, which can decrease even when profits are made and can increase when a loss occurs. The process underpinning this business model is shown in Figure 11.6. The stock market funded deficit model works perfectly well as long as the stock market value or share price is high, because a high share price means that the company shares are easily sellable and that to raise any given sum of money fewer shares will have to be issued. However, if the share price is low and declining this stock market funded deficit model effectively collapses and the business is either forced into liquidation or into a merger. This model is not really sustainable. Of course in periods when the stock market is bullish it appears that these funds are virtually unlimited. But inevitably stock markets take downturns and there are numerous web-enabled businesses based on this casino model that are currently facing the negative side of this approach.

Acquire capital – equity and debt

Set up business

Make purchases

Stock market enthusiasm for the business share price continues to rise and funds the business Figure 11.6 Shareholder funded deficit model or the casino

222

Produce goods or services, set up portals or distribution

Give goods away or sell at a loss

E-business model options Lastminute.com used a variation of this model in the early part of 2000 when the stock market was still very keen on dot.com businesses. 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 well established in the market and the high value of its share price only lasted a few weeks. At its high the share price reached about £5.50. Thereafter the share price declined and has been as low as 70 pence. However, the large cash reserve of some £250 million, which was obtained at the time the company was listed on the stock market, represents the resource with which the directors intend to establish the company as a profit-making market leader in its industry sector. Lastminute.com’s IPO timing was perfect as the stock market started to have reservations about the viability of dot.coms within a few weeks of their going public.

11.6.6 Sleight-of-hand or the Mr Mistoffelees model The sleight of hand model, which is sometimes referred to as the Mr Mistoffelees model, produces profit out of what appears to be thin air. In this case the company offers a free giveaway, supposedly without any real strings attached. The first example of this type of business model on the Web was the establishment of Freeserve.com, which opened up internet use in the UK to a much greater audience than it had been before. Instead of paying somewhere between £6 and £12 per month as a basic charge to obtain access to the Internet, subscribers to Freeserve.com had no charge at all to pay. By moving over to Freeserve.com users of the Internet were able to save themselves £70 to £120 per annum. This was at the time pure magic and thus the reference to Mr Mistoffelees, the magical cat from T. S. Elliot’s famous poem. Although Freeserve.com funded this service in a number of different ways the primary source of money that underpinned the initiative was a bounty or rebate that Freeserve.com was paid by the national telecom company for the additional telephone charges they were able to levy as a result of the increased usage made of the telephone service by subscribers to Freeserve.com.17 In addition to the bounty or rebate Freeserve.com also obtained 223

The Make or Break Issues in IT Management

Acquire capital – equity and debt

Set up business

Make purchases

Obtain income from a non-obvious secondary source such as a telecom and thus make a surplus

Produce goods or services, set up portals or distribution

Give goods away or sell at a loss

Figure 11.7 Sleight of hand model or the Mr Mistoffelees

some income from advertising and eventually more still by converting its site into a shopping mall. The process underpinning this business model is shown in Figure 11.7. This model is reasonably high risk as it relies on keeping the telecom company on side. In the turbulent Internet Service Provider (ISP) and telecom market there is reason to believe that such arrangements are not likely to be sustainable in the long term. It is also high risk because it is not difficult to copy and this occurred rapidly with free internet services being offered by Tesco, Waitrose and many others. It is therefore not likely that this model will be sustainable in the long term. It is more probable that in the medium to long term users of the Web and the Internet will have to pay directly for the services that they consume. However, there is no doubt that this was a very creative approach and has been a spur to others to find new ways of funding 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 the maverick model, is one in which there is either no intention to make a profit at all or at least no intention of making a profit in the short to medium term. In this case the investors and the management of the new business are simply trying to create a market presence that is noticed by or may even be damaging to a large competitor. The rationale here is that if the newcomer to 224

E-business model options

Acquire capital – equity and debt

Set up business

Make purchases

Ensure that the business appears to be sufficiently threatening to a large competitor that it is bought out and the founders get rich

Produce goods or services, set up portals or distribution

Give goods away or sell at a loss

Figure 11.8 The high stakes model or the maverick

the market is sufficiently visible and attractive to the customer base, it will take enough business away from the current market incumbents to cause them sufficient irritation that they will want to dispose of this newcomer. The traditional way of achieving this is to buy out the newcomer.18 The process underpinning this business model is shown in Figure 11.8. This business model carries a very high-risk profile. It is necessary for the newcomer to have very deep pockets to be able to function for long enough to be a substantial irritation to the market place incumbents. Then the management of the new organization needs to be highly skilled at negotiation to be able to obtain the price they require for their business. Clearly this is not a sustainable business model, although an individual could undertake this type of enterprise a number of times if he/she had the ideas, the energy and the funds available.

11.7 The sustainability issue From the point of view of sustainability the above seven business models may be placed within three groups. These are internally self-sustaining, sustained by collaboration and sustained by additional funding. Figure 11.9 shows where each of the different business models falls within this taxonomy. The classic profit and the cost reduction models are normally the most sustainable as they largely rely on the organization’s own expertise and resources to achieve their objectives. Management 225

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Internal

Collaboration

Additional 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

has a high degree of control over the key variables in this type of business model. The new economy and the Mr Mistoffelees models are highly dependent on collaborative business relationships, which are not necessarily permanent and thus there is a question mark over the long-term sustainability of these business models. This is of course not to say that in the short term they cannot be very effective. The begging bowl, the casino and the maverick are simply not sustainable except over the short term. In all three of these models there is usually a need for quick wins, 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 business models is more successful or appropriate than others. Any one of these may be used to achieve business success. The choice of business model is to do with the management and equity owners’ style, the industry sector, and the availability of funding, legislation, and the competitive environment. It is not possible to say that one type of business model will be more profitable than others. It has been pointed out, however, that some of the models are less sustainable as ongoing businesses than others. In fact it is probable that only the classic profit model will be sustainable in the really long term. However, it is quite possible that management have a greater interest in the short to medium term than the long term.19 It is clear that the classic cost reduction is limited in the sense 226

E-business model options that it is only possible to squeeze a finite amount of cost out of any system or improve the efficiency of an organization to a certain extent. The other business models that are market facing will generally have greater upside potentials. On the other hand for the classic cost reduction model to be a success the organization does not have to find a client base, which is probably the greatest challenge that the other situation faces. It is possible to say that each of these business models brings with it a specific risk profile and that some of these models are considerably more risky than others. Figure 11.10 shows the varying degrees of risk associated with the different business models. The classic profit and classic cost reduction models face the least degree of risk. These situations may be regarded as having to simply manage normal business risks. The classic profit model needs to focus on normal competitive market risks while the classic cost reduction model has to ensure that all the change management issues associated with business process improvements are controlled. The new economy, the begging bowl and the casino models are all higher risks than the first two because they require the business to focus on setting up deals with one or more outside agencies, which will not be under their direct control. This is more challenging and more risky. The Mr Mistoffelees and the maverick business models represent even higher levels of risk primarily because the organizaBusiness risk

High risk

Very high risk

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

227

The Make or Break Issues in IT Management tions that pursue these approaches may have even less control over their own fortunes. Of course high risk is not in any sense intrinsically bad. There is a direct relationship between risk and profit and the business models, which have the higher risk profiles, should have a higher profit potential. Of course high risk projects need to be managed in a different way to low risk projects but that is a subject beyond the scope of this chapter.

11.9 The next generation of business model The above describes seven different approaches to business models that are found underpinning a variety of e-businesses. These approaches to business are not only relevant in the web or internet-enhanced or -enabled e-business world, but are actually found in many different business environments. For this reason they are sometimes thought to be too old fashioned and thus not entirely suitable for new business on the Internet and the Web. It has been said that traditional economic analysis cannot be used to create a definitive business model for the Web or the Internet. In this view of the world it is the new economy that will describe how money can be made from the Web and the Internet. According to David Wessel, writing in the Wall Street Journal on 11 January 2001, ‘the winning business model for the Internet has not yet been identified, and many dot-coms have failed while searching for the right strategy’. Wessel points out that it will take time for an appropriate web or internet oriented business model to emerge. Thus clearly Wessel believes that there will emerge some new business logic that is applicable to e-business, which will open the door to much greater success in this arena. Charles Leadbeater, who believes that much of what is now done on the Web does not deserve to be regarded as being innovative, took this point further. He suggests that Amazon is only a bookshop that uses the Web to sell and that it will require collaborative peer-to-peer applications20 before the real power of the Web and the Internet is accessed. It will be in this sort of application that new business models will be developed. It is not altogether obvious why there should be a new way of creating business models or a new economic logic that will be brought into existence by the Internet or the Web or by e-business 228

E-business model options and it is certainly not at all clear what such a business model would look like. It is worth noting that in the Harvard Business Review for March, Professor Michael Porter points out that ‘the phrases “new economy” and “old economy” are rapidly losing their relevance, if they ever had any. Retiring these phrases can only be healthy because it will reduce the confusion and muddy thinking that have been so destructive of economic value during the Internet’s adolescent years.’ Thus in reality there may not be a next generation of business model and thus perhaps concepts described in this chapter are the only ones available.

11.10 Discussion E-business has offered a number of very interesting challenges not the least of which has been to understand the various economy justifications that may be used to direct these business enterprises towards profitability. In this chapter seven classic business models have been discussed in which a variety of direct and indirect approaches to the realization of profit have been described. These business models seem to be too conservative for those who are of the view that there is somewhere a new economic logic that can be applied to e-business. Costello (2000) provides a clear example of this type of thinking when he points out that: Three laws of economics are driving rapid growth in business-to-business e-commerce. These are Metcalf’s law of network utility,[21] Coarse’s (1937) law of transaction costs[22] and the law of Socio-Technological Distribution.[23] However, it is not at all certain that these are actual laws of economy nor is it clear how they may be used to understand business investment and to help organizations achieve an appropriate level of profitability. It was probably the concept of the learning curve costing that started the idea that new economic logic, which was not based on immediate profit, could be used rationally in business. The basic idea of learning curve costing was that the cost of manufacturing and distribution in the early years of a product are higher than those a few years later. So if the product is sold at a price based on the average cost over a five-year period the firm can undercut the competition now. Although the firm would be 229

The Make or Break Issues in IT Management losing money in the early years, it will be adequately profitable in the later years to make up these losses and the overall situation will make the required return in the medium to long term. This was one of the novel ideas that impacted the traditional economic logic of the later years of the 1970s. But like many other management ideas the learning curve costing concept did not stay long in fashion. It is a similar sort of change to traditional economic logic that is now being proposed by some of the practitioners of e-business, which can be summarized as only worrying about the profitability of the business some time in the future. A number of e-businesses have effectively resuscitated learning curve costing thinking. This is evidenced by the creation of ebusinesses that deliberately operate at a loss. The best known example of this is Buy.com whose critics describe it as ‘selling dollar bills for 99 cents’ (Dolan and Moon, 1999). It has been argued that e-businesses intrinsically cause prices to decline and that this phenomenon is at the core of the profitability problem. The argument used here is that the tendency to need to sell at low prices is due to the Web and the Internet abolishing the ignorance premium.24 Websites such as MySimon.com, Bestbookbuys.com, Kelso.com and Compare.net offer immediate price comparison across a wide range of goods. However, it does seem that despite these effective cost comparison websites, there are still a substantial number of individuals who prefer to purchase from the better known higher priced websites. There is no doubt that the issue of trust plays an important role here. Therefore it does appear that whatever pressures the Web and the Internet exert for prices to decrease, it is not universal and its influence in the marketing mix has largely been overemphasized (Roberts, 2000). But whatever this new economic logic might be there is no doubt that profit is at the centre of business, whether it be e-business or traditional business. Normal business sense applies to this sector and these web companies have to pay their way with profit and internally generated cash flow just like everyone else. In simple terms e-businesses and dot.coms come under our capitalistic system and capitalism, as it is currently practised, is based on the notion of private ownership of the factors of production on which all business relies. Because these factors of production are in private ownership they have to be directly paid for. To change these economic realities it would be necessary to change the 230

E-business model options notion of the private ownership, which would need a new political system. The fact that some e-businesses and dot.coms seem to have got away without earning a profit and without an internally generated cash flow for some years does not mean that they will be able to do so for much longer.

11.11 Summary and conclusion The subject of business models for e-business investment is an area that has been neglected. This is one of the reasons why there has been so much disappointment and failure in the e-business world. Some e-business entrepreneurs seem to have simply ignored this subject deliberately, perhaps believing that it was not important or maybe too difficult to get right. The words of John Maynard Keynes (1964 [1936]) come to mind when he said: Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. This chapter addressed the issue of the different business models or sets of economic logic that can currently be used to understand how an e-business may be directed to earn a suitable return on investment. This discussion has been conducted at a macro or high level and has not focused on the planning detail that is required to convert a high-level business model into a practical plan. Therefore this high-level view needs to be followed by a second discussion of the detailed components, which actually represents the day-to-day activities of the e-business as it moves towards profitability. From this next level of detail an e-business plan and budget may be developed that will provide specific direction to the management of the enterprise. Having defined what is meant by a business model the chapter looks at the fact that a business model requires an understanding of the investment required, the ongoing cost and the revenue. A taxonomy of investment is provided and e-business examples or types discussed in this context. Seven different business models are described and examples are provided. These models are then reviewed in terms of sustainability and risk. The chapter also discusses the suggestion that there may be a new economic logic, which has not yet been established and 231

The Make or Break Issues in IT Management which may become available for internet- and web-enabled and web-enhanced businesses. This new economic logic might be able to break out of the confines of investment, revenue, cost and profits and the discipline that these concepts impose on all business. However, this type of thinking does seem rather hypothetical 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. Current Research, IMI, UK. Coarse, R. (1937) The Nature of the Firm. Economica, IV, pp. 386–405, reproduced in Putterman, L. (1989) The Economic Nature of the Firm: A Reader, Chapter 5. Cambridge University Press. Costello, G. (2000) The Business-to-Business Boom. In: Willcocks et al., Moving to e-Business. Random House, London. Dayal, S. Landesberg, H. and Zeisser, M. (2000) Building Digital Brands, 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 on the 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 published in 1923 by McMillan in London). Prometheus Books. Keynes, J. (1964) The General Theory of Employment, Interest and Money. Harcourt Brace Jovanovich, San Diego (first published 1936), p. 149. Lacity, M. and Hirschheim, R. (1995) Information Systems Outsourcing, Myths, Metaphors and Realities. Wiley and Sons, Chichester. Mahadevan, B. (2000) Business Models for Internet-Based eCommerce. 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. McGraw Hill, New York. Porter, M. (2001) Strategy and the Internet. Harvard Business Review, March, pp. 63–78. 232

E-business model options 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 Costs and 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’s Gold. 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 which is using the Internet and the Web in an attempt to improve its current operation’s efficiency or effectiveness or to gain access to a new market. Web-enhancement is also referred to as ‘digital transformation’. 2. The term ‘web-enabled’ is used to describe a business which has been created ab initio to take advantage of the improvements in business process through the use of the Internet and the Web. These websites are sometimes referred to as ‘Born’ on the web businesses. 3. In the March 2001 edition of the Harvard Business Review, Michael Porter describes economic value as follows: ‘Economic value for a company is nothing more than the gap between price and cost, and is reliably measured only by sustained profitability.’ 4. It is interesting to note how strongly Michael Porter (2001) feels about the misleading way in which the term business model has been made a central issue in the e-business environment. Porter says: ‘Yet simply having a business model is an exceedingly low bar to set for building a company. Generating revenue is often a far cry from creating economic value, and no business model can be evaluated independently of industry structure. The business model approach to management becomes an invitation for faulty thinking and self-delusion.’ 5. The dot.com phenomenon has been spurred on by the availability of venture capital which on the face of it appears to have been very inexpensive. According to Desmet et al. (2000), ‘In the present era of cheap and accessible capital, Internet entrepre233

The Make or Break Issues in IT Management neurs have successed in quickly transforming their business ideas into billion dollar valuations that seem to defy the common wisdom about profits, multiples, and the short term focus of capital markets. Valuing these high-growth, high-uncertainty, high-loss firms has been a challenge, to say the least: some practitioners have even described it as a hopeless tack.’ 6. Growth that is funded by internally generated profit and cash is sometimes referred to as organic growth and if this route is taken to funding an increase of scale then the business will not be burdened by an additional share issue, which dilutes the equity base or by more debt, which in turn increases the financial risk of the business. 7. The issues related to global reach and global presence seem to have at least temporarily overshadowed the issue of overtrading. It has been assumed in some business cases that whatever level of activity that the web-enhanced or web-enabled business achieves will somehow be funded. In fact it looks like the issue of overtrading has somehow been totally forgotten. 8. The definition of unusual growth requirements is of course a challenge, which could be addressed by stating that it could refer to the occasional need to acquire extra fixed assets as opposed to additional working capital. 9. It is certain that the gap between the revenue and the costs has to be closed but as Mahadevan (2000) suggests the web entrepreneur may think that the gap will close in the future when the e-business is established. 10. The term ‘secondary fee’ as used here does not in any way imply that this income stream is less important than the primary fees. To illustrate this it is interesting to note that in the case of Yahoo.com there is at present no primary fee as such. All the income comes from the secondary activities, which in the case of Yahoo.com is mostly advertising related. 11. The sales of goods or services at less than their cost are tantamount to a liquidation of the capital base of the company. Any sustained 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 the third millennium more individuals would be surfing the web than watching television. 13. The problem of diminishing advertising income is said to be the main factor in Yahoo!’s drop in share price from a high of US$240 to US$17 (at the time of writing) – a decline of 93 per cent. 234

E-business model options 14. This will have a double negative effect on the business in that negative sentiment or extra competition will reduce income as well as making it harder to find additional funds. 15. It has been suggested that there is a law of economics called Metcalf’s law of network utility and that this law states that there is value in large networks independent of the revenue that they generate. It was thought that it was Metcalf’s law that caused Freeserve.com to be so highly valued at its IPO (initial purchase offer). 16. The term initial purchase offer, or IPO, is now commonly used instead of stock market listing. 17. This is a similar strategy to the one used by the highly successful television quiz show Who wants to be a Millionaire? This television quiz show funds itself by the use of high rate telephone charges to special telephone numbers. However, in this case it is made very clear to all potential callers that they will be asked to pay a high rate for the telephone call. 18. There are a number of variations to this business model that were highly visible in the dot.com world during 1999 and 2000 where start-ups were quickly sold to an established organization, which was looking for an e-business operation but which did not want to have to create one for themselves from scratch. 19. It is important when thinking about the implications of the short, medium and long term to remember the advice of John Maynard Keynes (2000 [1923]) who said that ‘Long run is a misleading guide to current affairs. In the long run we are all dead.’ 20. What is meant by peer-to-peer applications in this context is not exactly certain. The term is sometimes used to describe eauctions. It is also used to describe the Napster type applications where music is shared across the Web. 21. Metcalf’s law of network utility suggests that the greater the number of modes in a network the greater its utility and thus the greater its value. It has been said that this law underpinned the value, which was associated with Freeserve.com when it was launched on the stock market. 22. Coarse’s law addresses the question of the efficiency of internal production as opposed to the acquisition of goods or services externally. Thus this concept considers the classic buy or make decision-making arena. 23. The law of Socio-Technological Distribution discusses the different rates of development of technology and change in society and refers to gaps that can occur between these two issues. 235

The Make or Break Issues in IT Management 24. The ignorance premium is the increased price that the organization may charge due to the client or customer not knowing that lower priced equivalent items or services exist.

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The CIO’s career is over … long live the CIO!! Han van der Zee Nolan Norton Institute, De Meern, The Netherlands

It is common knowledge that Information and Communications Technology (ICT) has had a tremendous impact on society at large in a way that defines our era. As far as businesses are concerned, IT began its triumphal march into society with cost and labour saving applications. The gains were mainly due to the mechanization of clerical procedures; later came the addition of computerized management information systems; and even later many business process redesign initiatives were being made possible through the application of ICT. Today ICT has become all-pervasive, and is interwoven with virtually all products, services, distribution and communication channels and processes in society. ICT changes the rules of the game in traditional industries and blurs existing boundaries between sectors of industry. ICT is therefore not merely a technology that supports and enhances the delivery of products and services. It has become a major defining factor of the strategic environments of corporations. Traditional methods for developing corporate, business and ICT strategies cannot deal with ICT in a way that is appropriate to its defining role in the new economy. Nor can a chief information officer alone being held responsible for trying to align distinct and separate corporate, business and ICT strategies. This chapter argues that ICT needs to be considered a context factor, rather than merely a resource. Consequently, integrated 237

The Make or Break Issues in IT Management corporate, business and ICT strategies are necessary, aimed at fully integrating the capabilities of ICT with corporate and business strategies and management’s expectations, and vice versa. This has profound implications for the role of the Chief Information Officer (CIO) in corporate strategy and management.

12.1 How ICT changes the economy and industries It was only in the 1980s that some visionary companies demonstrated that ICT could be far more than just a cost saving technology, as it had been before for 30 years or so. Since then, the name of the game has changed immensely. ICT: Is developing at an incredible rate Currently plays a dominant role in just about every defining characteristic of the new economy Creates new markets and sweeps others away Is breaking down the borders between companies and between countries Is the source of a new generation of products, services and distribution channels and indeed a new generation of industries. With that, ICT: Has become an important external factor in strategy development Is an important external factor in two important dimensions of strategy: market attractiveness and competitive positioning Changes market attractiveness because it alters structures in the economy, both those between industries and those within industries Influences competitive positioning because it changes consumer behaviour (for example, by allowing consumer access to better information), selling approaches (such as electronic auctions), 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 that appear to make it just a resource among others, albeit a very powerful one. Because of the manifold uses to which it can be put, ICT is changing economies of scale and scope in a variety of industries. Its influence is ubiquitous, and it continues to boost efficiency, supporting individuals, teams and the organization as a whole. Simultaneously, ICT either enables firms to adopt new forms of operating logic or it forces them to. Most importantly, ICT, in conjunction with a liberalization of the market and improved market efficiency, undercuts the assumption of the vertically and functionally integrated firm, enabling new designs and configurations of businesses and business networks (see Figure 12.1). We turn now to the questions of why, and if so, how ICT should be integrated in corporate strategy and management.

Enabling technology

Interenterprise computing

Workgroup computing

Personal multimedia

The change

The internetworked business

'The Net'

Enterprise infostructure

The promise

The extended enterprise

The integrated enterprise

The high-performance team The effective individual

Wealth, creation, social development Recasting external relationships

Organizational transformation

Business process and job redesign Task, learning efficiency

Figure 12.1 Implications of ICT on individuals, teams, the organization, business networks and society. © New Paradigm Learning Corporation, 1996

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12.3 Why integrate ICT in corporate strategy and management? In the previous section we have argued that ICT is driving new business designs, business networks, and value propositions. This fact alone means that it would be a mistake to see the role of ICT in corporate and business strategy and management as merely that of ‘a resource among others’. Therefore, in this section we first deal with five important observations regarding the role of ICT in corporate strategy and its defining role in the new economy. First, ICT must be taken into account as a defining technology of the environment when developing a strategy for any business. As we have seen, ICT is changing the structures of the economy with respect to industries and segmentation of markets, and it is thus redefining what a business is. For example, internet companies selling books and CDs have already changed the attractiveness of traditional markets and created new markets and businesses. The ‘power system’ in the market, where firms master scarce resources, master access to consumers, and capture value in the market, changes dramatically as a result. This implies that CEOs have to ask themselves what business they 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 and functions as well. For example, newspapers can be read on the Internet, and books and MP.3 music can be downloaded. TV viewers can create their own personalized TV guide with web TV, and goods and services can be distributed on the Internet. The implication is that product managers must understand the opportunities ICT offers either to enhance existing products or to create new products and services, especially as these relate to shifting consumer preferences and spending. Third, modern ICT offers new ways of marketing, in both traditional and virtual electronic markets. New distribution patterns are emerging as marketing moves from broadcast to ‘narrowcast’ and one-to-one approaches. ICT is redefining the role of wholesale and retail selling: sales processes are changing because of the possibilities offered by electronic bidding and electronic auctions, and market research is becoming an up-tothe-minute interactive process. Indeed, the changes are now so 240

The CIO’s career is over … long live the CIO!! far-reaching that whole areas of marketing, such as brand building and consumer response systems, have to be rethought. ICT has serious implications for many existing methods and concepts of marketing and channel management and the implicit assumptions underlying them. In short, marketing and distribution have changed. Marketing managers must understand the implications and opportunities of ICT in their field of responsibility. Fourth, having replaced traditional technologies in many areas, ICT is increasingly a product technology that underlies virtually all products and services in the economy, aside from being a product itself in the computer and software industry. This suggests that product designers, engineers and operations managers must understand the implications and opportunities of ICT. Fifth, ICT will continue to be used to support organizations with respect to systems for accounting, management control, reporting and so on. However, much more data can now be collected by automated production, sales and service processes than ever before. Digital electronics, embedded software programs that can be downloaded via telephone lines, the Internet, extranet and intranet systems, and other consequences of ICT are fundamentally changing logistics processes, purchasing and procurement procedures, international cash management, and many other operational procedures. These developments enable company operating models to be adapted to exploit economies of scale and scope. Cost savings can be achieved by linking back-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 responsibility, and what opportunities it offers. With this, we assume that the question of whether ICT should be positioned at the core of corporate and business strategy has been sufficiently addressed. Still one important question remains: how can that be realized?

12.4 How to integrate ICT in corporate strategy and management Traditional approaches to strategy development, such as those described by Anthony (1965) and Ansoff (1965) among others, 241

The Make or Break Issues in IT Management have dominated the tradition of business policy and strategic management for decades. Traditional thinking defines strategic management as a systematic, top down, linear process of planning, organizing, leading, and controlling the efforts of organization members, and of using all other organizational resources, such as finances, equipment and information, to achieve stated organizational goals. Today, however, more refined approaches exist that focus on specific dimensions of strategy formulation, such as: Customer/market positioning, as for instance outlined by Porter (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 the new information economy. Porter’s five forces model, for example, takes account of the effects of ICT on switching costs. And his concept of the value chain, which is not so much a theory as a description, outlines a series of connections between activities that can deal with emerging value networks, for instance by breaking up the value chain and distributing its components over a multiple network of contributors. Microsoft and Intel have used D’Aveni’s ‘building entry barriers’ strategy, among others, and the content generation industry can be described in terms of his ‘deep pockets’ strategy. However, each of these approaches has shortcomings with regard to the information economy and the role of ICT. For example, Porter’s theories for strategic management assume static and stable industry structures. D’Aveni’s concept of hypercompetition is based mainly on traditional economic relationships as defined by the manufacturing industry. In general, resource-based strategies, including Prahalad and Hamel’s, fall short of addressing changes in market attractiveness. In the past, ICT strategy followed business strategy. Until recently – and unfortunately in many organizations still today – IT (the ‘C’ wasn’t even addressed at all) used to be merely one item on the agendas of management teams, while an IT manager or CIO (chief information officer) would be appointed to implement or manage it. He or she inventoried the functional requirements of the various IT users in the company, established what 242

The CIO’s career is over … long live the CIO!! data-processing capacities were required, and organized the development, implementation and operations of IT systems. Such traditional IT planning methods shared the assumption that the purpose of IT planning was merely to translate a company’s business strategy and business objectives into new structures and plans that took account of IT. During the 1990s, then, the most important goal of ICT planning was the alignment of ICT capabilities and activities with business objectives and business requirements, including decisions regarding the scope, scale and pace of ICT projects. However, alignment approaches become increasingly irrelevant, or at least redundant in the environment of the new information economy. Aligning ICT with business objectives requires a stable business and a thorough, robust business plan. The relevance of such business plans is questionable today. Detailed business plans on the traditional model are likely to be obsolete by the time they reach the ICT planner, and who is this person anyway? Time is of critical importance in the competitive environment of the new economy. Today’s competitive and dynamic business environment does not allow for lengthy alignment exercises. Real-time integration of ICT into the business planning process is one proposed solution to this problem. It will be clear that all this has implications for the strategic agenda of management teams. An integrated business-oriented and ICT-related strategy must be formulated if one is to fully grasp the opportunities of the information economy. Such a strategic agenda should encompass different issues and portfolios: portfolios of products and services, businesses, capabilities and complementors (relationships). This is shown in Figure 12.2. The main source today of new business opportunities can no

Portfolio of products

Portfolio of businesses

Portfolio of capabilities

Vertical integration

Portfolio of relationships

Virtual integration

Figure 12.2 Portfolios that determine the strategic agenda

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The Make or Break Issues in IT Management longer be rigorous market analysis and thick reports produced by armies of strategic planners. New business opportunities come from people who think about what competitors do, how customers and consumers behave, what their preferences are, how lifestyles evolve, what (ICT) suppliers can offer, and what regulators and politicians are planning to do, among many relevant issues. New business opportunities can also be produced by creatively thinking through examples from other sectors of industry, other cultures and other geographical areas. Above all it is crucial to understand contextual developments (such as globalization, deregulation and digitization) and to link them with an imaginative and creative evaluation process that facilitates broad participation if opportunities are to be successfully generated. Strategy development is a continuous, dynamic and perhaps rather intuitive process that involves many different participants. In our view, the information economy requires management teams to focus on five important aspects of strategy formulation.

12.4.1 Innovate To innovate, companies need to maintain a portfolio of experiments, new initiatives, and original ideas in different stages of their life cycle. Here, it is important to apply portfolio management techniques: to push innovations, to evaluate at different stages 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 be implemented in business and whether it has a reasonable chance of succeeding. Sometimes it will be necessary to pull the plug on innovations that do not seem to be going anywhere or have already become outdated. And, of course, it will always be important to maintain focus in the first place on the market, customers and consumers, rather than on technology or other resources. Naturally, working closely with partners and complementors who can be trusted and who have specific and appropriate competencies can also be beneficial.

12.4.2 Create new markets New uses for technology will lead to new business and create new markets. The Internet and the electronic commerce it makes 244

The CIO’s career is over … long live the CIO!! possible are creating markets no one ever anticipated. Data transmission has created a new market in the same way the telephone infrastructure did in the past. It is worth emphasizing that it is advisable to cooperate with partners, especially those who ‘own’ additional parts of relevant value chains or have access to different geographical, ethnic or cultural markets.

12.4.3 Work with partners and complementors As we have already seen, establishing networks and partnerships can help to quickly generate new business opportunities or to identify ones that are as yet untapped. Establishing different kinds of partnerships can prevent an organization from becoming dependent on one partner, or on too few. If the product, service, distribution channel or customer portfolio offered by the partner is specific and has a strategic value for the organization, it is a good idea to build a long-term relationship based on mutual trust and commitment, and to develop new business opportunities together. In other cases, more distant relationships are desirable, because it is easier to manage such suppliers on a performance/cost basis and switch when appropriate.

12.4.4 Develop ICT enabled business architectures Any efficient combination of a business model and an ICT architecture comprises virtual and physical elements, as well as selfowned and outsourced components. Products, services and distribution channels increasingly involve ICT components. The creation of fully integrated products, business models and ICT architectures will stimulate the generation of new business opportunities, and even more so when ICT architectures, ICT standards and ICT components are based on global standards and developments. There will be advantage to be gained, for instance, from the ideas of small, start-up entrepreneurs in the software industry who accommodate ‘new economy initiatives’ by developing plug-and-play products with e-commerce features.

12.4.5 Have business people manage ICT Management, monitoring and control of ICT initiatives must be in the hands of people who are sensitive to market develop245

The Make or Break Issues in IT Management ments. As we have seen, getting the most out of ICT depends on people who understand how it can create new business opportunities and enable or integrate existing ones. It is also important that ICT investments be monitored by business people – not ICT technicians – with a mature financial investment management approach. To regard ICT merely as an overhead expenditure, as many companies still do, is obviously seriously inappropriate.

12.5 Implications for traditional ICT strategy and the role of the chief information officer Traditional strategy sees ICT as one resource among others in the context of the business strategy. Paradoxically, firms, whether corporations or businesses, no longer need an IT or ICT strategy. This is a logical consequence of the all-pervasiveness of ICT in the new economy. A firm’s strategy must now assume ICT as a pervasive and influential environmental factor that redefines products and services, markets, distribution, sales processes, operations, operational models and internal governance. This is not to say that a firm should not have an integral view on ICT, including issues such as mastering the technology, access to critical ICT resources, and suitable partners. Resource strategies must see the rapidly developing ICT infrastructure as a plugand-play environment, as it were, for business operations. ICT is increasingly based on standardized software, and it is especially important that a firm knows its purchasing position as regards the relevant licences for software, which can incur tremendous costs. Firms should no longer have one budget for ICT, whether as capital investments or operating costs. The pervasiveness of ICT suggests that it should be an integral part of the budgets of the various operations, especially the costs of developing products, services and other applications. Economies of scale and scope can still apply. The point is to see these from the viewpoint of the business, not from that of the technology. The CIO will no longer be the only executive expected to be in control of ICT-related operations. It might once have been justifiable to allocate responsibility for ICT to a single CIO or IT 246

The CIO’s career is over … long live the CIO!! manager, as the introduction of the position of CIO a number of years ago reflected the increasing importance of IT in business operations. The motivation was often simply the huge investments in IT equipment and software involved. Nowadays, ICT is so pervasive in all aspects of business that it can be considered simply irresponsible to allocate responsibility to a single manager. Everyone on a management team must understand the role of ICT in the modern economy and its impact on all aspects of business. New generations of managers and management teams indeed have a better understanding of the role and business impact of ICT. They will take responsibility for the control of new generations of IT projects, including defining the functionality to be delivered and contracting activities to third parties. The question remains what will happen to the position of the CIO, as the roles associated with it are changing. We believe the CIO will still have a major role to play in building and maintaining a technical and logical infrastructure, that is, a suitable plug and play environment for all the activities of the business. The project portfolio of the position will be ‘reduced’ to major projects in the overall infrastructure; the development of other ICT applications will be the responsibility of line managers. In some kinds of business, the positions of CIO and the Chief Operating Officer (COO) overlap or be entirely the same, especially where ICT and digital technology permeate all operations. In general, a separation can be expected between ICT governance and ICT management (Figure 12.3). The management team as a whole, we believe, should deal with ICT governance, while ICT management should be the domain of the IT manager, previously called the chief information officer. It is sometimes argued that the IT manager should be more involved in the process of strategy development of the company. Because of the all-pervasiveness of ICT in the economy, including markets, marketing, sales and other business processes, as well as the new landscapes of competition that are emerging, the argument seems to make sense. But ICT does not replace entrepreneurship; it is part of entrepreneurship. Corporate vice presidents of strategy and new business development will have to master the full scope, opportunities and impact offered by ICT technology. ICT represents a powerful new force, but entrepreneurship must put it to use in a world of politics, social change and cultural development. 247

The Make or Break Issues in IT Management Business

Integrate ICT with business purpose and develop the 'right' standards and policies

ICT governance

ICT governance

Understand Ensure the business impact 'right' contracts of emerging for the 'right' ICT pruposes Manage ICT sourcing strategy

ICT management

Protect the business's contractual position

Make and keep ICT work

Service

Create and maintain coherent blueprints for systems, databases and infrastructure

ICT management

Technology

Figure 12.3 ICT governance versus ICT management

12.6 Conclusion ICT is a defining force in the strategic environments of corporations, as well as a sophisticated delivery technology for products and services in the information economy. ICT has been an important contributor to the rise of the modern business networks. However, traditional methods for developing corporate, enterprise, business network and ICT strategies do not deal with the dynamics and rules of what we call the new information economy. New principles, new directions for strategy development and corporate management are needed. Management teams must focus on three major tasks: generating new business opportunities, building a strategic agenda and making decisions, and preparing to radically change the skills and competencies in the organization. What is important here? First, the process involving the generation of new business opportunities and the move toward new 248

The CIO’s career is over … long live the CIO!! business models require a vision regarding the role of ICT in the organization. Second, new business opportunities and new business models can only be created and developed by the proactive, rapid, yet orderly selection and implementation of common ICT standards. Third, learning to participate in a complex network of businesses and find suitable partners will be key to survival. Overall, new and different skills and competencies will be needed, while the role of the CIO will change dramatically. Any forward-looking organization with a desire to stay alive in the highly competitive new economy must fully integrate ICT in its business processes. In order to do so, it must make use of strategy development and management processes that are at least current and reliable, if not leading edge and innovative. In this 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 alignment: leveraging information technology for transforming organizations. IBM Systems Journal, 32, 1. Prahalad, C. K. and Hamel, G. (1990) The core competence of the corporation. 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 the balanced business scorecard. Journal of Management Information Systems, 16, 2, Fall. Venkatraman, N. (1999) Nolan, Norton & Co. Conference, Wittenburg Castle in Wassenaar, the Netherlands, 21 June.

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Herding cats Managing IT in the twenty-first century Terry White Bentley West Consultants, Johannesburg, South Africa

13.1 Introduction In 1639 John Woodall, a surgeon’s mate in the English Navy, observed that sailors who took regular quantities of limes did not contract scurvy (the disease caused by lack of vitamin C). In those days this was a momentous discovery when you consider that almost 50 per cent of sailors on long voyages died, mostly from scurvy. And so it was that many sailors had to be pressganged into the navy, because your chances of long-term survival were limited. In spite of this knowledge that limes prevented scurvy, the English Navy did not adopt the use of the fruits as a standard practice on their ships. In 1753 James Lind rediscovered the work of Woodall and published his findings widely. Still the English Navy disregarded what was fast becoming common knowledge. It was only the disastrous outbreak of scurvy that crippled the Arctic expedition of the HMS Discovery in 1877 that spurred the Navy into adopting the policy of carrying and using limes on all naval voyages. (The English came to be called ‘Limeys’.) But the English Merchant Navy adopted this standard only some forty years later. What does this have to do with managing IT in the twenty-first century? Well, in the face of mounting evidence that the way we manage IT no longer matches the way business works or indeed 250

Herding cats wants their IT delivered, we steadfastly cling to the old ways and myths of IT management. These IT management myths take names such as methodologies, the systems development life cycle, projects, service level agreements, standards, the list goes on. Their usefulness is passed and each IT management technique, process or organizational form needs rethinking. Underlying all of this is the way we manage. This requires the greatest overhaul of all. We are still managing IT as if it were 1975. But both the technology we are managing and the business that the technology should serve have changed irrevocably. And the frustration is, that even though the need for change is overwhelming, many IT managers steadfastly turn away from potential answers in their faith in ‘traditional’ methods. But we mustn’t be too critical of just IT managers, many business managers are in the same boat. It is as if they are rowing into a rising wind, 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 practices that would have saved countless lives? Was it traditionalism? Or the ‘not invented here’ syndrome? Or good old resistance to change? All of the above may have had a place in the equation, but the suspicion is that they really were too busy with the day-to-day minutiae of running a navy to pay attention to 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 will radically change the meaning of information for both enterprises and individuals. It is not a revolution in technology, machinery, techniques, software or speed. It is a revolution in concepts. It is not happening in Information Technology (IT), or in Management Information Systems (MIS), and it is not being led by Chief Information Officers (CIOs) … And what triggered this revolution and is driving it is the failure of the ‘Information Industry’ – the IT people, the MIS people, the CIOs – to provide INFORMATION. (Drucker, 1999) It seems that one of the greatest commentators on business this century believes IT people share their future with the dodo. And that’s not all he has to say: he has this prognosis for IT people: 251

The Make or Break Issues in IT Management They will not disappear. But they may be about to become ‘Supporting Cast’ rather than the ‘Superstars’ they have been over the last forty years.

13.2

The times they are a-changin’. But is IT management? There is a general crisis for the internal IT function. Research suggests that there is a wide dissatisfaction with the quality of in-house IT. The business of business is changing. The speed, focus, scope, strategies and even the definition of what makes a business are changing. Businesses must respond to competitive pressures in months, weeks or even days (Stalk and Hout, 1990). Producing the goods or services fast are the least that business has to do to be in the game. These days quality, price, and ability to deliver to where the customer is are basic prerequisites of staying in business. But business also has to contend with rapid implementation of new ideas (Treacy and Wiersema, 1993; Pritchett, 1994). Customer focus has changed, from a simple recognition that in some undefined way customers are important, to now recognizing exactly where customers need to be satisfied and doing so, with a minimum of fuss – businesses need to make customers feel special. They also have to change from a prime focus on their internal operations to having both an inward and an outward focus. Looking at their customers is one form of outward focus, but keeping an intelligent eye on competitors, legislators, suppliers, shareholders and the environment is becoming central to survival. Many concerns are also crossing boundaries, joining with their suppliers, competitors and customers to provide a specific solution. Companies are discovering that they need to move away from control of people and processes at a policy and procedure level, towards guidance of activities within a strategic context. Looser and less intrusive forms of control are succeeding in the complex world of business competition. And the catalogue of change required by business is matched by changes in the technology that makes it all possible. Organizational technology has moved through Zuboff’s (1988) ‘automating, informating and transformating’ cycle and now possibly has arrived at the ‘creating’ stage of IT’s effect on busi-

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Herding cats ness. The technology is arguably allowing business to create new forms, models and frameworks in which a concern may operate. Arguably because the jury is still out as to whether the new 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 personalized services directed at customers anywhere on earth. Well that’s the theory. Again, the critics sit in waiting to see whether this new technological freedom will add anything substantial to Adam Smith’s supply and demand doctrine of 1774. But it goes without question that technology is extending the capabilities and reach of business, with concepts such as supply chain management, business intelligence, knowledge management, 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 clarified. Technology, information technology, and ICT or information and communications technology are defined as the physical infrastructures and systems used by businesses to effect their business plans. The management of IT or ICT is what this chapter is concerned with. ‘Management’ has been variously defined as: ‘getting things done through others’, or the ‘planning, organizing, executing and monitoring’ of business endeavours, or the controlling of a functional area or process. We will see later that we need to redefine ‘management’ if we are to convert from rowing to sailing in IT waters. So the management of IT concerns itself with the process of bringing the technology to bear on behalf of the business. And how do most IT managers bring technology to bear? Through methodologies, the systems development life cycle, projects, service level agreements, standards – but you’ve seen this list before. 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 at all. It seems that business also has a problem with the time taken and the cost of developing information systems solutions. The systems development life cycle (SDLC) is not business friendly: 253

The Make or Break Issues in IT Management it requires accurate specification of business requirements, signoff on specification documents, and (some time later, perhaps six months, one year, two years or worse), user acceptance testing. Research suggests that businesses frequently do not know exactly what they want, change their minds, and are more concerned with results and outcomes than with the production of a system (Earl and Feeny, 1994).. Does putting in an ERP really improve a business’s competitiveness? Ask a few business people and their answer will be that in a whopping 80 per cent of cases business is disgruntled, dissatisfied or downright disgusted with the solution (Beam, 1994). For whatever reason, the SDLC systems development method cannot claim to be successful. Business executives are unable to assess whether they are getting value for money from their IT dollars (Remenyi et al., 1995; Le Roux, 1997). They know that they need IT (if so many gurus keep on and on about it, they must need it surely?), but they have a sneaky suspicion that things were better before the advent of these so-called miracle machines. They’re wrong of course, IT is probably the competitive tool of the era, but not the way their in-house IT people are delivering. There is a need to deliver 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 expectations presents a complex picture. There is a need to balance opposing requirements: business expectations of stability directly contradict the need to change quickly and often. There is a need to control a myriad of differing driving forces: your operations staff are driven by efficiency and cost containment, while your business analysts are motivated by the need to provide the most effective IT solution to the business at acceptable cost. Not only must you provide leadership to the business, but you must also follow their lead. You need to deliver a robust IT solution while at the same time allowing constant change to the specifications of that solution. You need to run stable and efficient IT infrastructures that last for years, and yet be flexible enough to provide these infrastructures at the drop of a hat. You need to keep pace with technological change, and yet not change so quickly that your basic competence in the technology is lost. Amongst all this you need to offer highly intelligent and mobile 254

Herding cats IT people sufficient fulfilment, growth and material reward, so that 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 use the business ‘wind’ to propel your progress. And you will need to overcome your own internal beliefs that limes have nothing to do with the way you run your ship. These are tall orders, but the rest of this chapter is intended to provide a taste of a sailing IT in the business wind.

13.4 Dealing with complexity In 1687 Sir Isaac Newton proposed the law of universal gravitation, and set in place principles that would guide science and the world for the next three hundred years. He saw the universe as ‘things’ that interacted with each other in a uniform and predictable way. This mindset is prominent in modern management thinking today: many managers still believe that: ‘if you have a service level agreement then service will 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 competitive’ (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 other things have to happen if information technology is to be effective. And we are discovering that IT management methods are too limited to address all these factors in the ‘if this … then that’ or linear thinking way. We need to be able to handle the complexities of IT differently. And there is no doubt that the provision of IT services within organizations is complex. And management in a complex environment is the key to management in the twenty-first century. Not only IT management but all forms of management (Wheatley, 1993; Sanders, 1998; Zohar, 1997). While scientists have been studying complex environments for over a hundred years, the thinking that complexity science can be applied to our management of our organizations has only started to take shape in the last five years or so. And application of complexity science to the management of IT organizations is yet to be applied. Thus the ideas presented in this chapter are new. While there is a growing body of evidence and examples of 255

The Make or Break Issues in IT Management 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 linear thinking can take you just so far. But when you start dealing with an environment where individuals are relatively free to act within broad parameters, then you need to use the science of complex adaptive systems to explain and operate in these conditions. Linear thinking cannot answer questions on how ecosystems operate, or how weather patterns form, or how people interact or most importantly how the new business environment will operate. There is a difference between complicated and complex. Complicated systems have many parts but each system works exactly the same way over time. Your watch is complicated, as is your motor car, as is the space shuttle, and indeed your laptop computer. But they operate exactly the same way every time you use them. Complex systems on the other hand react differently all the time. They appear to generate more than the sum of their parts, and when viewed at a large scale they appear to be intelligent, learning systems that constantly change to meet new circumstances. Which of course interests us in looking at how to manage IT in a new way. Very simply, complex systems have a large number of components or agents that interact with each other and their environment according to a few rules. The sum of these interactions creates a pattern or form that constantly adapts to conditions in which the system operates. That’s why they are called ‘complex’, because they exhibit many independent interactions, ‘adaptive’ because they respond to their environment, ‘systems’ because they are linked in some way. Imagine if you could create an IT organization that constantly adapted to the environment in a coherent yet independent way without the need for constant management intervention? Business is a complex adaptive system, not a linear complicated one, and the management of IT within that business is the same. Axelrod and Cohen (1999) showed how the decentralization of individual inputs (the agents), with a central maintenance of standards (the rules), brought together thousands of volunteer programmers to produce an operating system called Linux that competes with the best that Microsoft has to offer. 256

Herding cats What then are the principles that govern complex adaptive systems? Axelrod and Cohen (1999) define the three driving principles of these systems as variation, interaction and selection. Variation provides the raw material for adaptation. It allows for different types of agents, who because of their difference respond to particular problems in diverse and often ingenious ways. But there must be some limit to the variety of agents in the system, or the system would become too confused or boundless. Interactions are the events that occur within the system. They shape and are shaped by other interactions. A simple example is the use of e-mail, particularly those nasty ‘send this e-mail to three thousand of your closest friends, or get a wart on the end of your nose’ type e-mails. Less frivolous is the use of e-mail by bosses to communicate with staff. Their choice of interaction, rather than calling a meeting or one-to-one sessions, defines how most people within the system will operate. Interactions are governed usually by simple rules as well as by physical factors like proximity and barriers (one-to-one sessions would be extremely difficult in a global company), and also by the timing of the interaction. If decisions take three months because of a tortuous IT steering committee, then you can expect that certain interactions in a project will take place at a slower rate. Finally, Axelrod and Cohen discuss the role of ‘selection’ in complex adaptive systems. Selection dictates which variations and interactions will be deemed to be successful and thus will replicate, and which will 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 criteria than those espoused in official documents. In highly political organizations, successful political manoeuvring will be one such criterion, while organizations in which no one takes decisions will have the negative selection criterion of autocratic decision making, or a company in which everyone keeps their ideas and information to themselves is likely to shoot its messengers. Employees interact with each other and the environment, and adapt to changing conditions. Outside of this, the economy is also a complex adaptive system, as is society. In order to find some way through this maze of complexity and chaos, forward thinking business people are applying complexity science rules to their businesses with gratifying results. It’s hard work, much 257

The Make or Break Issues in IT Management 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 are always agreeable, but in some cases they are not. However, all business people who have embarked on this route agree that the rewards 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 complex processes to produce complex adaptive systems. On the contrary, scientists have found that a few simple rules that govern the behaviour of individual components of the system tend to generate complex systems. Complex adaptive systems have components or agents that interact with each other and their environment according to a few simple rules. All of this occurs within an overriding definition of the system. To manage a complex system requires that you pay attention to three or four levers of control, and most importantly that you then resist the temptation to interfere with people trying to get their jobs done within the system. To create and manage a complex adaptive system is difficult and takes time. The essential elements of such systems are as follows.

13.5.1 A driving sense of purpose A driving sense of purpose that binds all system components and defines the system. What is in the system and what is out, and why that system exists. In the mundane world one might term these your vision (where you want to go) and mission (why the system exists). But having a complexity science viewpoint on this will allow you to view this ‘vision’ and ‘mission’ from a position that examines the variation, interactions and selection that will occur in the system.

13.5.2 A few good rules A few ‘rules’ need to be defined. Here leadership is important. In complexity science there is a concept of fractals. A fractal is the smallest part of a system, which when multiplied by itself develops into complex systems. Or looked at the other way, fractals are components of the whole system that looks the same as the 258

Herding cats whole system. For example, the human circulatory system is a fractal. If you look at the blood vessels in your hand, they resemble the overall shape that the complete system takes on. A tree has a fractal nature, because each branching twig is seen on different scales throughout the tree. So the question is: what rule or rules, if multiplied throughout the organization, will result in complex adaptive behaviour that serves the purpose of the organization?

13.5.3 The environment Constant attention to relationships and the environment in which the system operates, with particular attention to the selection criteria, is critical to success of complex adaptive systems. This means that you need to look at what people need in order to get their job done – equipment and systems as well as the performance management mechanisms that reward ‘successful’ behaviour and penalize ‘unsuccessful’ behaviours. Now this need not be a draconian punitive environment, but where many organizational systems fall down is that they reward people equally (plus or minus a few percent) irrespective of whether these people show aligned behaviour or not. The management of the environment in complex adaptive systems means that you must spend the time and effort in managing the selection criteria and process.

13.5.4 Emergent behaviour If people have guidance in the form of a clear and driving purpose, and a few simple rules to channel their actions, they will tend to organize themselves to get the job done. The consequent behaviours and actions may be unpredictable but provided the selection process is sound, the result will be greater than the sum of the parts. It is doubtful whether Linus Torvalds, the originator of the Linux operating system, predicted the richness and robustness of the system when he set out on the open source software development path.

13.5.5 The new role of leaders The new role of leaders in complex systems is to see through all the complexity and chaos both inside and outside the organization and translate what they see into a compelling business 259

The Make or Break Issues in IT Management direction. Then they draw the attention of employees to what they see. New leaders will choose the fractal rules that create new and adaptive behaviour in the organizations, apply these few rules rigidly, and let behaviours emerge. Finally the role of the leader in complex adaptive systems is to create an environment in which people can follow the fractal rules within a driving sense of purpose. And to ensure that success 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. Each domain in IT can benefit from thinking about them from a complex adaptive systems perspective. The questions of driving purpose, fractal rules and environment and selection give critical clues as to how each IT management method can be changed to accommodate a complex world. Here is an application of the complex adaptive approach to methodologies, and some other areas of IT. Obviously the driving purpose, fractal rules, environment and selection criteria will differ from organization to organization, and must be subject to further analysis.

13.6.1 Methodologies (i) Driving purpose Why do we use methodologies in developing IT solutions? A standard approach to solutions development is probably one key reason, as is the advantage of having a checklist of activities that has been tried and found to work in other implementations. You need to question the real reasons for having your particular methodologies as against the usual reasons given by the sellers of the methodology. (As Forrest Gump said: ‘If you’re going to do something, try to have a reason for doing it.) This will help you identify the driving purpose for your methodological thinking. Perhaps the checklist is the prime reason your IT department uses methodologies. So the driving purpose that may bind the system components (the various agents and the interactions they will have) within your methodology system could be something like: ‘Miss nothing’ or ‘Only the good stuff’ or ‘Method in our madness’. Now these are only slogans that describe the driving purpose behind the methodology. Remember the purpose has to inform all the components and agents at every 260

Herding cats stage of their interaction in the system. The driving purpose needs to have more than a slogan. It needs to define the system, and guide people and actions in that system. Remember that business people find IT methodologies inflexible and cumbersome. (ii) Fractal rules What are the few rules that if multiplied again and again would create interactions that built up something greater than the sum of the parts? A methodological fractal rule might be something like: consult the checklist every step of the way. Too many methodologies are little more than ‘shelfware’, bought or developed by somebody who is passionate about standardizing the way IT solutions are developed. But then no one refers to the methodology again. Another fractal rule for methodologies might be: ‘relationships with the business need methodical management’. This rule acknowledges that IT people often are not good at relationships, and therefore the methodology should include visits to business staff and workplaces as part of the development activities. Often the opposite is the case – once the business requirements are obtained (often at meetings at the project office), then the development team turns its back on the world of mere business mortals to produce its work of art. There should be a rule in methodologies that force the ongoing interaction between the solutions developers and the wider business. (iii) Environment Remember that business people find IT methodologies inflexible and cumbersome, so the above fractal rule must ensure that constant methodology consultation is easy. Perhaps you need to give thought to making the methodology not only as simple as possible, but fully customizable to the job in hand, and easily accessible to everyone involved in developing the solution. (iv) Selection What is the definition of success in the domain of IT methodologies? What reward process will replicate and strengthen the use of your methodologies? Specifically your success criteria should confirm and reinforce your driving purpose and fractal rules. Due to time constraints, people moving onto other activities and many other reasons, many IT solutions processes do not carry out the post-implementation review according to their methodology. However, this review may be just the selection 261

The Make or Break Issues in IT Management process necessary to confirm and reinforce (or disaffirm and abrogate) the use of the methodology. Therefore your management of the selection process must include a post-implementation review, and must also ensure that the follow-on actions take place. 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, fractal rules and environment take on the nature of a management process. An example in an operations environment could be as follows. The driving purpose of operations could be encapsulated in the words: ‘availability and stability’. Availability requires that businesses get the service where and when they want it, and stability specifies that whatever is available must be dependable and durable. Fractal rules covering the operations environment could involve something like: Prevention rather than cure. Be careful here, because although it’s easy and indeed desirable to say you want to prevent problems from happening, the cost of doing so is high – you’re talking about redundancy, sophisticated hardware management technologies and a mindset that is far from the usual IT technician’s. An alternative might be to take a leaf from Peter Senge’s (1990) book on systems thinking, which requires you to solve problems on two levels: first, solve the problem, then solve the problem that caused the problem. This rule of ‘Two level problem solving’ supports a strong selection process, which makes the overall system stronger over time. Solving just the immediate problem does nothing about strengthening the general environment. Measure and report. IT people tend to be too busy to measure ongoing performance, and even more so when it comes to reporting their results. But at the base of most IT success is not how wonderful your systems are, or how stable, although this is important. Real IT success depends on the relationship between IT and the business (White, 1995). And relationships depend on trust. And trust depends on delivering what you say you will deliver. So you could be delivering great IT serv262

Herding cats ices, but if you don’t know it and the business doesn’t know it, your relationship will suffer. Marketing is something IT people neglect to their ongoing detriment. Other operations fractal rules exist. Remember that the purpose of a fractal rule is that when it is multiplied by every interaction that occurs in the complex system, it creates something greater than the whole. Don’t be tempted to think about these rules as policies and procedures – that will kill your complex adaptive system. Fractal rules govern every interaction within the driving purpose. They must be easy to understand and there must be very few of them. The operations environment, guided by a driving purpose and operating according to a few simple rules, dictates a certain environment. Don’t have a fractal rule requiring prevention rather than cure if you don’t have the considerable and expensive tools required to constantly monitor every device attached to your network, to capture out-of-limit events and report on them so that pre-emptive action can be taken. And if you opt for a fractal rule that requires two levels of problem solving, make sure that you train your problem solvers on how to resolve problems in this way. And make sure that your selection processes identify and reward pre-emptive action or two level problem solving. You can apply complex adaptive systems thinking in the architecture function (where the driving purpose might be ‘Flexible for the future’) or the development function (where the driving purpose might be: ‘Deliver in business timeframes’). This form of thinking is an attitude as much as a system. It requires you to go back and ask the really basic questions like ‘Why do we do this? and ‘What are the rules for doing that properly?’

13.7 Managing in the complex environment Remember that in managing a complex adaptive environment you have to make a critical change to your thinking. Command-andcontrol management is no longer a clever way to do things, indeed the style conflicts with the system at every turn. The old ‘line-ofsight’ management style in which you need to see everything that everyone is doing in order to assess how they are performing needs to be revisited. A new ‘out-of-site’ method is essential, in which you manage by results, outputs and outcomes rather than by adjudging frantic activity as the criterion for success. 263

The Make or Break Issues in IT Management Think of ‘management’ as an activity rather than a job. Then you can devolve the planning, organization, execution and monitoring (POEM) into the system. As long as it is being done as an activity somewhere in the system, you can rest assured. Your new role is much wider than that. You need to move into a leadership role. This role involves the management of meaning, attention, self and trust (MAST). This MAST form of leadership was postulated by Warren Bennis (1993). He recommends that you manage meaning by examining the environment inside your department, company and outside. Then as a leader you create meaning for all the people in your organization and translate that meaning into a driving purpose. This is not trivial. A question like ‘What does customer service really mean to our organization?’ can upset numerous applecarts. Then you manage attention: if your department has decided that two level problem solving is the way to go, then you need to pick up on everything that pulls problem solvers away from the approach and eliminate it from their environment. It’s important to say ‘Pay attention to this, and stop paying attention to that.’ Estimates of the amount of unnecessary work not aligned to the vision 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 is consistent with the driving purpose and fractal rules. And management of trust is the most difficult element of all. If service is an important part of your driving purpose then it is up to you to ensure that those people who deliver good service are rewarded and those who don’t are not. This upsets many Human Resource departments, because their mindset is often about fairness – hence the complicated grading and payroll systems that keep everyone within tight bands. Management of trust really comes down to saying you will do something, then doing it.

13.8 The long and winding road Whatever the application, the management of complex adaptive systems is more a state of mind than a system. It believes that people are important agents in the system of managing IT. And if people are important, then their ideas are important, their innovations are important and their morale is important. 264

Herding cats Complex adaptive systems management puts people back into the equation, where policies, procedures and regulations have taken them out. You can see that complex adaptive systems thinking can be applied to many if not all areas of management in the IT environment. 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 such systems. 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 and Quality. IS Analyser, 32, 2. Bennis, W. (1993) Learning Some Basic Truisms About Leadership. 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 the Nineties. 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. Pitman Publishing. Le Roux, D. C. (1997) A Model to Guide Management Questions on the Value of Information Technology. Unpublished Doctoral research proposal, University of Pretoria. Lewin, R. and Regine, B. (1999) The Soul at Work – Unleashing the Power of Complexity Science for Business Success. Orion Business Publishers. Pritchett, P. (1994) New Work Habits for a Radically Changing World p. 10. Pritchett & Assoc., Dallas, Texas. Remenyi, D. S. J., Money, A. and Twite, A. (1995) Effective Measurement 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. 265

The Make or Break Issues in IT Management 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. BerretKoehler, San Francisco. White, T. (1995) Towards a Model for the Integration of New Technologies into Organizations. Unpublished Master’s Thesis, 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 of Work and Power. Basic Books, New York.

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Back to the future A look at information deliveries René Pellissier Graduate School of Business Leadership, Pretoria, University of South Africa

14.1 Introduction The modern business world is flooded with the e-word: e-business, e-government, e-trading, e-learning, e-data, e-partners, ebanking. Underlying this buzz, lies a radical shift in the assumptions of the business model. No longer is IT the support or enabler, it has evolved into being the very centre, the heart, of the business and initiatives that drive them. Modern literature in the business and IT domains have much to say about long-term benefits of incorporating IT into business strategies. The future evolves around the e-hype. All of this is undoubtedly true. However, it is my contention that there is too much focus on the technology and not enough on the information, on the specific requirements of the individual and of the business organization, before the acquisition of some technology system. This could in part be one of the reasons for the dot.com tragedy. One prime example of this is retail banking’s heavy investment in ATMs since the early 1980s. With the belief that this was an essential aspect of customer service and critical to maintaining market share, ATMs fast lost their competitive advantage and, instead of reducing costs, banks were faced with the expense of maintaining and updating their ATM systems. With the new trend towards internet banking, the banking industry is on the verge of disappearing in its current physical form and provides 267

The Make or Break Issues in IT Management but one example of the changing business model introduced by ubiquitous IT. Thus, it is important to carefully identify what the specifics of the demand for information are before appropriate systems are implemented (sometimes at huge cost in terms of physical resources and ROI). In fact, it is not enough merely to calculate NPVs and ROIs for the evaluation of the new system’s benefits. It is of far more benefit to determine needs and current state of technology in serving those before the decision for the IT investment is made.

14.2 The I in IT We are familiar with the IT hype. It is clear that our futures are thus defined. It remains our responsibility to make these work. Within the dynamics of an information driven society, there is certainly no lack of data – raw, untarnished. Loads of it. However, behind the driving force of IT, lies a more compelling one – information (knowledge, business intelligence). It goes by all these names. Really, the IT is driving very little apart from cost if it is not singularly focused on amassing appropriate information. Davis and Davidson believe that, by 2020, some 80 per cent of business profits and market values will come from the part of the enterprise that is built around the business of information. Thus, organizations that capture and apply the information at each point of contact with the customer will be far better off than those who do not. Moreover, the last years have seen an overinvestment in technology and the implementation of systems and the underestimation of the information needs and requirements. It is becoming more relevant for businesses to realize that they should amass all relevant data, analyse that data and subsequently use the resultant forces to personalize products and services, thus exceeding customer expectations and thereby gaining competitive advantage face a huge window of opportunity (Lattig, 1999). Figure 14.1 summarizes the transformation of business data into information and business intelligence, in terms of information economics, i.e. the demand and supply sides of information. Raw data is transformed (using technology) into information 268

Back to the future which is data that is meaningful. Thus, one might propose as the information value chain: data

information

business intelligence/knowledge

Moreover, information economics works along the same principles as general supply and demand economics. There is a need for information (i.e. the demand or IS or systems side) and the delivery of that need (the supply or IT or technology side). This is illustrated by Figure 14.1. The figure illustrates the importance of transforming large sets of (raw) data into meaningful information (knowledge or business intelligence) for optimal decision making. The demand side of information covers the information systems (IS) in which the specific needs (operational or strategic) are identified and summarized, whereas the supply side of information covers the IT side where the needs are met using appropriate technology. Business literature generally does not distinguish between the two (i.e. IS and IT) with the result that decision makers tend to view them as very much the same. This confounds the IT make Data

Establishing the detail of business requirements and application needs

Creating systems that satisfy the needs of an application Supply of information

Demand for information Creating an environment in which the appropriate systems can be identified to satisfy the demand

Creating the environment in which supply is to take place

INFORMATION/ BUSINESS Figure 14.1 Information economics highlighting the value chain of information

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The Make or Break Issues in IT Management or break decisions, since too much focus is placed on the technology and too little on the information. This chapter provides some practical tools to develop and exploit the window presented by the ambiguous IT. It provides decision makers with some measure of evaluating their existing IT implementations (in terms of needs) and enables them to plan their future IT. Vendors are listed in terms of the information delivery landscape proposed. Finally, it links the demand for information (or IS) to the specific supply (IT side) of information based on a study undertaken in South African business.

14.3 Proposed classification of information technologies 14.3.1 Introduction According to Riel (1998) the costs and benefits of IT within an organization are far from obvious. Apart from tangible and intangible costs, Riel is of the opinion that there are also irreducible costs (in between the above costs). He defines irreducible costs as some form of opportunity costs that require different forms of modelling. He also mentions three broad categories of costs associated by IT projects. These include hardware and software costs, labour hours, support fees and other hard facts related to computer ownership: Technological costs System costs and Support costs. Riel argues that, in classifying the cost of the IT investment into the categories and forms above, a more comprehensive picture of the effects (short term and long term) can be gained to evaluate the IT investment decision. The justification for IT implementation and deployment decisions will be greatly enhanced by proper classification of possible IT systems. This will be done according to the information delivery software classification presented below.

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14.3.2 Classification of information delivery systems The history of IT has essentially been that of finding more efficient ways and means of getting data into systems to perform simple tasks. Greater efficiency results in less waste, fewer resources and reduced costs. Also, by standardizing and integrating systems, more waste is eliminated. One possible disadvantage of this approach is that organizations all perform at the same level. Thus, standard approaches to IT may deliver shortterm competitive advantages, but, in the long term, may only ensure competitive parity. Moreover, standard approaches to IT may corrode differentiating strengths. In view of this, ways should be uncovered to discover, develop and accentuate strengths. The focus of future organizations will not be on collecting data, but rather on acquiring information (and business intelligence) to support and enhance innovation. Competitive advantage comes from matching internal strengths to profitable opportunities to create and sustain advantages that competitors cannot easily copy. For this, they need information about their own businesses, their customers and the external environment. The data that organizations collect over many years could act as the source of that information. This is the notion of ‘information delivery’. Information delivery may be defined as the end-to-end process of converting raw data, which large organizations have in abundance, into meaningful information, which is required to support and enhance successful decision making (after The SAS Institute, 1999). Such software may be categorized according to four main categories: Personal productivity tools and utilities Transactional databases Standard operational applications and Strategic information delivery or business intelligence. The first three categories above are primarily concerned with data capturing, time saving and the achievement of day-to-day efficiencies. Personal productivity tools have automated the process of creating documents and organizing personal information. Transactional databases provide an efficient means of storing substantial amounts of data that are continually changing. Standard applications enable an organization (or organiza271

The Make or Break Issues in IT Management Quadrant 3: Systems applications (OLTP – especially ERP)

Quadrant 4: Business intelligence (data warehousing and mining)

Examples: SAP AG, peopleSOFT, BAAN, JD Edwards, SSA

Examples: SAS, Hyperion, Cognos, Business Objects

Quadrant 2: Database applications

Quadrant 1: Office automation

Examples: Oracle, Excel, SYBASE, INFORMIX, MS Access, Lotus Notes, DBASE, SOFTWARE AG

Examples: E-mail, desktop publishing, word processing, facsimile transmissions, video conferencing

Figure 14.2 Proposed classification of information delivery systems (Pellissier, 2001)

tions) to integrate operational processes within and between them, based on common software. The first three software categories are essential to the organization’s survival and provide an operational solution. However, the last category concerns more than survival. It is essential only to those organizations that have set themselves more ambitious goals (such as market leadership, exceptional levels of customer satisfaction, aboveaverage ROI and sustainable competitive advantage), hence a more strategic focus. One proposition in terms of the class of information required is presented in Figure 14.2, representing the information landscape (and ensuing IT) as four quadrants of the software industry (examples are given in brackets). The first and most basic level is that of office automation. The other three quadrants are discussed in the order in which I believe they become pertinent to organizations and their growing need for strategic information (or business intelligence). Thus, organizations will move through these quadrants in the following order as a subsequent need for (strategic) information arises and corresponding to the evolution of information needs: office automation DB applications processing business intelligence

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on-line transaction

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The evolution of information needs: office automation DB applications on-line transaction processing business intelligence Figure 14.3

It should be noted, however, that there is evidence that the products in the different quadrants of the matrix are continuously improving and competing with those in other quadrants. This will become clear in Figure 14.3.

14.3.3 Quadrant 1: Office automation (OA) Spencer (1994) describes office automation as ‘the application of computers and communications technology to improve the productivity of clerical and managerial office workers’. ‘[It] … involves the integration of all information functions in the office, including word processing, electronic mail, graphics, desktop publishing, and data processing. The backbone of office automation is a local area network, which serves as a pathway between users and computers.’ The emphasis of office automation used to be on personal productivity as reflected by the above definition; however, it is now realized that substantial synergies can be derived from effective group work. Thus the above definition is expanded also to include all software that enhances the efficiency of groups. Furthermore OA is one of the categories of software that has to do with data capturing, time saving and the achievement of dayto-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 applications efficiently by centralising the data and minimising redundant data’. They add: ‘Rather than storing data in separate files for each application, data are stored physically to appear to users as 273

The Make or Break Issues in IT Management being stored in only one location.’ Consequently, a single DB services multiple applications. Thus, these authors maintain that DBMS can be viewed as the software that: Permits an organization to centralize data Manages them efficiently and Provides access to the stored data via application programs. Turban and Aronson (1998, p. 80) define a database as ‘a collection of interrelated data organized to meet the needs and structure of the organization and can be used by more than one person for more than one application’. They add that the database management system (DBMS) is the software program that creates the database, allows for easy single access to the database, and facilitates the adding, updating, deleting, manipulating, storing and retrieving of data. This means that DBMS permits organizations to centralize data and thereby manage data efficiently. The DBMS acts as an interface between application programs and the physical data files. A multidimensional DB model represents relationships between data in a multidimensional structure. This principle is best viewed as cubes of data and cubes within cubes of data, with every side of the cube consisting of another level of information, in contrast to spreadsheet applications, which consist of data of a flat nature. Thus a matrix of actual sales can be stacked on top of a matrix of projected sales to form a cube with six faces. Cubes may be nested within cubes to build complex views of data. The main advantages of DBMS are summarized in Table 14.1.

14.3.5 Quadrant 3: Systems applications (with special focus on ERP) This quadrant consists of Online Transaction Processing (OLTP) of all aspects of business information provided within one integrated solution, and more specifically, the Enterprise Resource Planning (ERP) systems. ERP is defined by Deloitte Consulting (1998) as many information systems that work together with the aim of coordinating efforts throughout the organization in order to share information, automate processes and produce and access information in a real-time environment. 274

Back to the future Table 14.1 Main advantages of DBMS Reduction of the complexity of the IS environment Reduction of data redundancy and security

Elimination of data confusion

Reduction of program-data dependence

Through central management of data, access, utilization and security Through the elimination of isolated files in which the same data elements are repeated (corresponding to the re-engineering principle of capturing data once, at the source) Through the provision of central control of data creation and definitions Through the separation of the logical view of the data from its physical elements

Reduction of program development and maintenance costs Through rapid and ad hoc queries from Higher flexibility of IS large pools of information Increased access and availability of information After Haag et al. (1998) ERP entails the development and implementation of a total (online) software solution. All aspects of business information are packaged within one integrated solution. The result is faster decision making, since all information within the organization’s IT/IS structures is assimilated and summarized within one system. This enhances organizational efficiencies, since they contain information about the organization’s customer base, inventories (and inventory build-ups, etc.). This quadrant’s focus is therefore on the enhancement of organizational efficiencies. This quadrant can also be classified as OLTP (or online transaction processing) consisting of a wider range of systems than the popular ERPs. This will not be covered in detail here. Table 14.2 shows issues pertaining to the implementation of ERP systems.

14.3.6 Quadrant 4: Business intelligence This quadrant includes software that supports Business Intelligence (BI) in an organization. The definition for 275

The Make or Break Issues in IT Management Table 14.2 Organizational issues in the implementation of ERP systems ERP implementation is very costly and consumes a large part of the IT budget There is a substantial need for IT resources during IT resources the ERP implementation and in terms of maintenance The decision should be made as to whether specific Functionality modules only or the complete system will meet the organization’s requirements – general information or specific requirements have to be addressed Management information is generally based on Data availability multiple data sources (internal or external) – all of which have to be available Strategic information should be available Information flows throughout the organization (on intranet) – the ERP system is required to provide such an information sharing and storage facility No transactional facility Transaction data should be stored separately since calculations are not the main function in a reporting environment SAP has a so-called family of add-ons that link onto ERP systems are not their software and provide links from other open to other systems platforms The core functionality of ERP is not that of No provision for data storage or information information warehousing and ERPs have been found lacking in this area – although SAP AG is reporting moving into the competitive field of information warehousing Costs

business intelligence is taken from Richard et al. (1999, p. 108): Competitive Intelligence or Business Intelligence can be defined as both a process and a product. In the former sense, Competitive Intelligence involves the legal and ethical means that a company uses to utilise information. On the product side, it provides insights into the activities of the competition. This information can also include the present and projected behaviour of suppliers, customers, technologies, markets, products and services, and the general business environment. 276

Back to the future Data warehousing addresses the problem of fragmented data in separate operational systems, thus not allowing decision makers to integrate complete knowledge bases. Laudon and Laudon (1997, p. 218) define a data warehouse as ‘a database, with tools that stores current and historical data throughout the organization’. The data may originate in many core operational systems and are copied into the information warehouse when needed – striving towards a pull (or JIT) information delivery system. The data are standardized and consolidated to be used across the organization for strategic analysis and decision making. Thus, an information warehouse includes query and analytical tools as well as graphical reporting facilities. These systems may perform high-level analysis of trends, but are also able to drill down into more detail if so needed. They seek business intelligence. Thus data warehouse data may differ from operational data according to the platforms in Table 14.3. Data warehousing includes important organizational strategies, such as Executive IS (EIS), Management IS (MIS), Decision Support Systems (DSS), marketing and financial strategies. The technological framework for information delivery is the data warehouse. A data warehouse is more than a store of data; it consists of an entire process of: Extracting data from operational systems Table 14.3 Difference between operational and data warehouse data Operational data

Data warehouse

Isolated data

Organization-wide integrated data collected from legacy systems Contains recent data as well as Contains current operational data historical data A single agreed-upon definition exists Original fields may be inconsistent for every field stored in the system across the organization Data are organized around major Data are organized from an operational or functional perspective business information subjects Data are stabilized for decision Data are volatile to support making operations within the organization Data are stored on multiple platforms Data are stored on a single platform 277

The Make or Break Issues in IT Management Reconciling and organizing it in ways that make business sense and Exploiting it with knowledge discovery and analytical software. Data mining is undoubtedly one of the fastest growing fields in the information delivery arena. Once a small interest area within computer science and statistics, it has expanded into a field of its own, providing strategic benefit from data and information for long-term decision making. In broad terms the data mining process (from the data warehouse) tries to discover hidden patterns and trends, especially since: Databases become large and multidimensional, making access and analysis virtually impossible Standard statistical methods may be impractical because of missing values The large databases make it impossible for systems administrators to know what information is pertained in the data or what is relevant to ask. Information delivery covers a range of technologies concerned with the end-to-end process of extracting information from raw data to support meaningful decisions. On the other hand, the practicalities of information delivery make it very difficult to implement solutions unless they are based on an ‘end-to-end’ approach to technology. In such an end-to-end approach, the same family of software solutions performs all the essential functions of information delivery. This quadrant may also be called business intelligence, or OLAP (On-line Architecture Platform) as this is what it provides to the business. The main advantage of an end-to-end solution is the elimination of integration issues. Selecting different modules of an information delivery solution from various suppliers (called ‘best-ofbreed’) may: Delay implementation Cause vast expense Cause time-consuming maintenance problems and Build inflexibility into the system (counter to the notion of increased responsiveness and market edge). An end-to-end solution, on the other hand, is designed for rapid ROI and sustainable competitive advantage. 278

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14.3.7 Extended classification of information delivery systems As is often the case in the information arena, most models are dynamic and subject to change. There exists empirical evidence to suggest that the classification of information deliveries (Figure 14.2) presented above is under change. The following follows on some recent research done on the model in the light of vendor initiatives and new IT needs and applications. The research design focused on South African medium to large enterprises, targeting a stratified sample in order to determine strategic use of IT and the corroboration of the information delivery matrix in Figure 14.2. Figure 14.4 presents the shift in terms of evolving technologies within quadrant 3 and the ensuing movement towards quadrant 4. This is mainly due to the 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 their products towards the strategic quadrant, making way for a ‘hybrid’ quadrant, called ERP extensions. This new quadrant is the direct result of vendors changing the applications of their software products because of new market trends. ERP extensions CRM Vaas (1999) describes CRM as a robust salesforce automation application. She explains that, where salesforce applications SYSTEMS APPLICATIONS (OLTP – ESPECIALLY ERP) Examples: SAP AG, Peoplesoft, Baan, JD Edwards, SSA

BUSINESS INTELLIGENCE (INFORMATION ERP extensions WAREHOUSING AND MINING) Examples: SAS, Hyperion, Cognos Business Objects, Seagate, Oracle MS OLAP

DATABASE APPLICATIONS Examples: Oracle, Excel, Sybase, Informix, Microsoft Access, Lotus Notes, DBase, Software AG

OFFICE AUTOMATION Examples: Groupware, EDMS, workflow, spreadsheets, e-mail, desktop publishing, word processing, facsimile transmissions, video conferencing, voice recognition

Figure 14.4 Extended classification of information delivery systems

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The Make or Break Issues in IT Management manage contracts and sales opportunities, CRM does all that and more. It includes front-office applications that deal with customers, customer and product information, marketing encyclopedias, and product configuration engines. CRM also has the ability to integrate back-end systems. Thus, CRM facilitates customer satisfaction and retention in that it provides better service through analysis of data. The business is better able to anticipate customer needs, resulting in quicker reaction times and better focus on customer values. Some CRM applications (Siebel, 2000) are geared for professional service organizations that provide for resource assignment, contract management, risk management and subcontract management. These systems provide consultants and service professionals with the necessary information to work more effectively. Most systems also provide for mobile computing, placing data right at the point of the sales activity. The e-CRM component allows for customer interaction through the Internet. Hill (1999) claims that CRM promises an understanding of which customer is valuable in the present as well as in the future, thus enabling business to offer ultimate customer satisfaction, resulting in customer loyalty. Moreover, the customer also benefits from CRM in that they receive meaningful, relevant messages and promotional offers. CRM benefits are both of an operational and a strategic nature, resulting in their classification above. As clickstream information is incorporated into the CRM systems, they will continue to provide more relevant strategic components, possibly moving them into quadrant 4 in the future. SCM Naturally, it is important to maintain a customer focus without 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 the pipeline in order to become a finished product. The aim of SCM is mainly the elimination of unnecessary operating costs. This can be attained through collaboration with partners along the value chain. Thus, SCM systems interact with the ERP systems linking suppliers with the necessary information in terms of justin-time quantities. Supply chain software may also facilitate the 280

Back to the future internal processes like planning and making and moving of materials. Information obtained through the SCM can in turn be fed to CRM applications. E-commerce Turban and Aronson (1998, p. 857) define e-commerce as ‘the buying and selling of products and services using computers 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 end user or distributor. By-products are manifold but the main advantage is certainly the power of the information obtained. This makes e-commerce a major tool in developing CRM and SCM. In conclusion, both information delivery matrices are useful to: Analyse the organization or its competitors in terms of capacity of information delivery systems – this analysis encompasses two monitoring and analysis actions in terms of the information technology classification matrix. The one area for periodic review is that of the software industry and more specifically new product developments in the original four quadrants. The second area is the benchmarking of the information delivery capabilities of rival organizations relative to one’s own. The advantage of applying the matrix in this way is that organizations will be able to develop the resource base of their organization by designing strategies to exploit IT strengths and also to invest in the preservation of its information delivery systems. Analyse information needs by monitoring customer behaviour – from Oracle comes the following: ‘If you don’t know your customer and what they want, you won’t stay in business.’ This comment emphasizes the need to monitor and analyse customer behaviour.

14.4 Vendors and product applications in the extended matrix Each quadrant in Figure 14.4 will now be discussed in terms of content and major vendors and product applications. Subsequently, the extended matrix will be proposed. 281

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14.4.1 Quadrant 1: Office automation Office automation products are classified according to certain functions that they automate in the office, and some are specifically focused on improving personal productivity. These products are general accounting packages, word processing, spreadsheets, desktop publishing, electronic mail, electronic facsimile transmissions, video conferencing and speech recognition. Products also exist where all the above functions are integrated into office integration software. The last subject of discussion is software that evolved from the increased focus on group productivity – known as workflow systems, document management systems and groupware. Table 14.4 provides a summary of all the product types classified under office automation. Table 14.4 Summary of OA product types and major vendor products Product type and definition

Major vendor products

General accounting packages Software that facilitates transaction processing of the general ledger, cash book, accounts receivable and accounts payable (Turban and Aronson, 1998).

Accpac, Brilliant Accounting, Impact (These products are suitable for small to medium businesses only.)

Word processing A computer program that provides for manipulation of text. Can be used for writing documents, inserting or changing words, paragraphs, or pages, and printing documents (Spencer, 1994). Spreadsheets A program that uses a matrix consisting of rows and columns to perform calculations on numerical data (Spencer, 1994). Desktop publishing Specifically designed software packages that mix text and graphics into one document with the ability to send the result to a laser printer (Seachrist, 1992). Today spreadsheets, databases, word processors, presentation graphic software and DTP packages and more can fit into this definition. This classification focuses on the professional desktop publishing products.

282

Microsoft Word (part of MS Office), Corel Word Perfect (part of Corel) and Ami Pro (part of Lotus Smart Suite).

Microsoft Excel (part of MS Office), and Lotus 1-2-3 (part of Lotus Smart Suite).

Quark with QuarkXpress, Adobe with InDesign, Photoshop, Illustrator, Acrobat and PageMaker. Plus also provides stiff competition. Other major players are Corel Ventura, PageMaker (Aldus Canada Ltd) and FrameMaker (Frame Technology Corp.).

Back to the future Electronic mail The process of sending, receiving, storing, and forwarding messages in digital form over telecommunications facilities (Spencer, 1994). Video conferencing A conference among people remote from one another who are linked by telecommunications devices. Considered an alternative to travel and face-to-face meetings, a teleconference is conducted with two way video, audio, and as required, data and facsimile transmission (Spencer, 1994). Voice Recognition Software that facilitates the process of voice recognition by computers (Spencer, 1994). Office integration software An applications software package containing programs to perform more than one function. A package typically includes related word processing, spreadsheet, database, and graphics programs. Since the information from the electronic spreadsheet with the database manager and the word processor (and vice versa), this software is integrated (Spencer, 1994). Workflow systems A powerful business process automation tool that places systems controls in the end user departments. It is highly flexible and can be designed to automate almost any information processing system. Turban and Aronson (1998, p. 314). Electronic document management systems A system for capturing, indexing, storing, tracking revisions, and providing controlled access of electronic documents. The most common types of documents within an EDMS are word processing files, but other types of electronic files can also be stored within a system. Goodfellow (1999, p. 25) Groupware Software products that support groups of people engaged in a common task or goal. The software provides a mechanism to share opinions and resources (Turban and Aronson, 1998, p. 312).

Microsoft Exchange Server and LotusDomino are the major ones. Others are Eudora mail, Groupwise and Pegasus. There are numerous players in this market and VocalTec Inc., Intel Corp., IBM, Lucent Technologies Inc., and PictureTel Corp. are some of the companies with video conferencing products.

Dragon Systems (NaturallySpeaking), IBM (ViaVoice). Microsoft dominates the integrated office software market for personal computers with their Office Suite followed by Lotus’s Smart Suite and Corel Office Professional Suite.

Range from high end systems to low end systems and there are numerous players. High end: Action Technologies’ Action Works Metro and Ultimus’s Workflow. Low end: Jetform Corporation’s InTempo and Keyfile Corporation’s Keyflow. PC Docs/Fulcrum and Xerox with DocuShare. Goodfellow (1999) reports there are ±70 vendors offering EDMS.

The three leading groupware server software packages are Lotus’s Domino/Notes, Microsoft’s Exchange and Novell’s Groupwise.

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14.4.2 Quadrant 2: Database applications Databases are used for differing purposes and for that reason database products are classified as desktop databases, hybrid systems and robust enterprise level database applications. Information regarding these databases is summarized in Table 14.2. The main database technology in use today is in terms of relational databases, but there is a trend to implement object oriented database management systems and object/relational database systems. The major vendors in the enterprise DBMS arena have opted for the object/relational database systems, but they are not in full use yet. The pure object-oriented DBMS have specific vendors and are indicated in Table 14.5. Another trend of note is that all database vendors are geared for mobile computing and web databases. Table 14.5 Summary of database product types and major vendor products classified according to use Product type and definition Desktop databases Desktop databases are relational databases that are priced for the lower end of the database market. These database systems offer flexibility and end user programmability and are found in all organizations because the Information Technology (IT) departments cannot possibly create and maintain all the small databases in the organization. Hybrid databases Hybrid database systems are programs that can mainly be used for other purposes but also have strong database functionality. Enterprise DBMS Robust databases that are designed to accommodate hundreds and thousands of simultaneous users logging on from around the world and that have the mechanisms to ensure that users do not step on one another’s toes.

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Major vendor products

The major players in this market are Lotus with Approach, Microsoft with Access and Corel with Paradox.

Spreadsheets and Lotus Notes.

Oracle with Oracle 8I and Oracle 7 IBM with DB2, Sybase with Adaptive Server Enterprise, Informix with Informix Dynamic Server, MicroSoft with Microsoft SQL Server.

Back to the future Table 14.6 Object-oriented DBMS and object relational DBMS and major vendors Object/relational DBMS This is a hybrid database technology with a combination of object-oriented features with all of the abilities of standard RDBMSS to store, retrieve and analyse tables of the usual data primitives (text, integers, dates, etc.) using standard Structured Query Language. The OO quality of ORDBMSS 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 filter all the red out; and you can use objects from within the standard relational framework, like running a query on all audio objects to determine which ones are speech and which ones are just music (The, 1994, p. 49). Main advantage: Provides some of the benefits of objects without forcing users to turn away from well-proven familiar relational technology Major vendors Oracle, Informix and IBM. Object-oriented DBMS Best described by contrasting relational databases that are record oriented in that data are viewed as a collection of record types (or relations) whereas object-oriented databases consist of objects that represent real-world objects and entities. The goal of object-oriented databases is to maintain a direct correspondence between real-world and database objects (Larson, 1995). Main advantage: OODBMS outperform relational databases at handling complex relationships among data. Major vendor products GemStone from Servio Corporation, Ontos from Ontos Inc., O2 from O2 Technology, ObjectStore from Object Design Bases, OBJECTIVITY/DB from Objectivity Inc. and Versant from Versant Object Technology.

14.4.3 Quadrant 3: Systems applications (with focus on ERP) This quadrant consists mainly of ERP systems, new developments such as the ERP extension software and EDI/e-commerce. The new trends in ERP systems and extensions are in integration with the Internet as the platform and improvements in the value chain. These developments such as e-commerce, CRM and supply chain management will be discussed below. The application of ERP and main vendors is summarized in Table 14.7 and the main ERP extension areas and their main vendor products are summarized in Table 14.8.

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The Make or Break Issues in IT Management Table 14.7 ERP system applications and major vendors Product type ERP ERP vendor products provide many diverse modules, which cover almost all processes in a business. The financial modules are the most widely used. ERP vendors also focus on the manufacturing field with modules that are aimed at streamlining internal processes such as inventory, material and resource planning, bill of materials and just-in-time ordering. ERP systems also include the supply chain management modules that facilitate procurement and distribution of components, raw materials and other resources. Other processes in the enterprise are also covered such as project management, treasury management and more.

Major vendor products

Bylinsky (1999) reports that the largest ERP vendors in order of sales turnover in 1999 were SAP (US$5 billion), Oracle (US$2.4 billion), PeopleSoft (US$1.3 billion), JD Edwards (US$979 million) and Baan (US$743 million).

Table 14.8 ERP extensions and major vendor products Product type Customer relationship management (CRM) CRM systems are designed to bring business closer to the customer with better service through the analysis of data that make it possible for business to anticipate customer needs, which results in quicker reaction time and a focus on what the customer values. These systems consist of some or all of the following components: • Salesforce automation application which manages contacts, accounts and sales opportunities • Front-office applications that deal with customers, collects customer and product information • Marketing encyclopedia consisting of rich information about products and pricing, competitors, decision issues, objection handling tools, brochures, presentations and videos • Product configuration engine and • Integration into back-end systems such as financials, inventory and ERP systems.

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Major vendors products

The main vendor in this field is Siebel Systems. The big six ERP vendors (SAP, JD Edwards, IBMS, PeopleSoft, Oracle and Baan) all have CRM products. Other vendors that provide CRM products are Pivotal Software, Rubic Software, Clarify and Saratora Systems.

Back to the future Supply chain management CSIPER Consulting (1999) explains that what supply chain management systems actually do is to interact with the existing ERP system by providing linked suppliers with the necessary information to supply a company with inventory when needed and in the correct quantities. The supply chain software also facilitates internal processes like planning, making and moving of the raw material.

Component and supplier management software is provided by Aspect Development, Manufacturing execution systems software is provided by Camstar, Oracle and Pivotpoint and dynamic performance monitor software is provided by Foxboro.

E-commerce The commercialization of the Internet changed the way we do business and in order to facilitate 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 traditional value chain directly with an end user or distributor.

14.4.4 Quadrant 4: Business intelligence This quadrant consists of data warehouses, OLAP tools, data mining and strategic decision support systems. These systems and the main vendor products are summarized in Table 14.9. Table 14.9 BI product types Data warehousing Data warehouses are ‘databases consisting of cleansed, reconciled, and enhanced data integrated into local business subject areas for the purpose of improving the corporate decision making process. Typically, they are enterprise-wide in scope so that executives can readily understand company-wide sales or the complete business relationship with a given customer’ (Graphic Arts Monthly, 1999, p. 71). OLAP OLAP systems are high powered software front ends and data manipulation systems that sit on top of data such as a data warehouse (Watterson, 1998). Lamb (1997) suggests that OLAP allows users to study data in a multidimensional manner, implying that they can drill down to details or view summary slices of data as required. The software facilitates the slicing and dicing of data for ad hoc queries associated with decision support systems. Data mining Data 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, previously unknown and potentially useful information in data’. Strategic decision support systems Software systems that specialize in specific areas of strategic planning and decision making that normally uses OLAP and/or data mining tools to analyse data. This includes Executive Information Systems (EIS) and data analysis of ERP extension systems.

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The Make or Break Issues in IT Management Table 14.10 is a summary of the BI vendors with BI technologies used in their product offering. Table 14.10 BI vendors and BI technologies used in product offering Vendor Cognos Hyperion Seagate Oracle SAS NCR IBM Business Objects Microsoft Informix EIS systems Pilot Software Comshare

Data warehousing

OLAP

Data mining

3 6 6 3 3 3 3 6 3 3

3 3 3 3 3 6 3 3 3 3

3 6 6 3 3 3 3 3 3 6

3 6

3 3

6 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 matrix Figure 14.5 presents average current and future expected usage of all the products within each quadrant, showing that about 50 per cent of businesses use products in all four quadrants and that the highest percentage of future implementation is planned in the systems applications quadrant, followed by the BI quadrant. Figure 14.5, however, includes products at different stages in their life cycle and this obscures important information. The analysis therefore proceeded with a classification of the products within each quadrant as either a growth product, a mature product or a hybrid product. The criterion for a mature product is a lower than average future implementation percentage relative to the rest of the products in a specific quadrant. Time of introduction of the product to the market was also taken into account based on information that was gathered during the 288

Back to the future Analysis of Quadrants: Growth Products

11%

OA

66% 6%

Quadrants

DB

54%

35%

Systems App

49%

20%

BI

53% 0%

10%

20%

30%

40%

50%

70%

60%

Average % usage Future Current Figure 14.5 Average current and future usage as per information delivery classification matrix

theoretical research. Table 14.11 summarizes a proposed classification of the products. Table 14.11 Proposed classification of products Quadrants

Products

Q1 – Mature products

Word processing, spreadsheets, e-mail, general accounting, DTP, facsimile Voice recognition, groupware, workflow, EDMS, video conferencing Desktop DBMS, enterprise DBMS Object relational DBMS, object-oriented DBMS Notes ERP ERP extension, e-commerce Data warehousing, OLAP, data mining

Q1 – Growth products Q2 – Mature products Q2 – Growth products Q2– Hybrid products Q3– Mature products Q3 – Growth products Q4 – Growth products

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Software

Future implementation of software ERP Ext E-Comm Work Flow EDMS Video DW Voice OLAP/DM Fax ERP OR/DBMS OO DBMS Notes EDBMS Groupware DTP DDBMS Accounting Word Proc Spreadsheets E-mail

48% 43% 28% 26% 25% 24% 20% 17% 14% 13% 12% 10% 5% 4% 4% 4% 2% 0% 0% 0% 0% 0%

4%

10%

20%

30%

40%

50%

60%

% Planned Figure 14.6 Current and future usage of mature products of information delivery classification matrix

Figure 14.6 narrows the analysis to the current usage of mature products of the four quadrants, showing that the four quadrants are similar to the information delivery classification matrix in Figure 14.2. This diagram also illustrates that South African businesses have a very high average usage in mature office automation and DBMS. The mature products of the systems application quadrant are used to a lesser degree which makes sense as the sample included medium businesses and this accords with indications from the theoretical research that ERP systems are only now penetrating the mid-size business market. BI products according to the above classification are all growth products and one must look at Figure 14.7 to see that BI has the lowest current use and therefore fits as the last quadrant of the information delivery classification matrix. It is also clear from Figure 14.6 that the highest current usage is in BI products. Another interesting point is that the future 290

Back to the future 21%

Q1

45% 11%

Quadrants

Q2

30% 46% 44%

Q3

20%

Q4

53% 0%

10%

20%

30%

40%

50%

60%

Average % usage Future Current Figure 14.7 Current and Future Usage of Growth products of Information Delivery Classification Matrix

implementation plans are higher for systems applications products than for BI. This is explained by the fact that e-commerce and CRM products are part of the systems applications quadrant. e-commerce and CRM are among the most important developments in the software industry worldwide, which shows that some businesses are planning to keep up with world trends in the software industry. Another fairly high future implementation percentage is the growth products of OA and the authors believe this to be in line with world trends of enhancing group effectiveness 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 and there are no significant implementations planned for the 291

The Make or Break Issues in IT Management future. This can be explained by business using or planning to use substitute products in the case of fax and accounting and in the case of DTP outsourcing seems to solve the specialized skills dilemma. Groupware have a high installed base but the software is not used to its full extent and one can expect to see growth in implementation of the individual group support software types or expansion initiatives regarding the extent of usage, which can include awareness training, or custom developed or commercial add-ons for existing groupware packages. Voice recognition is a bit of a dark horse and it is suggested that voice recognition will be incorporated as part of the operating system of the computer and will not be seen as a software 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 most widely used. Object relational databases and object-oriented databases are not used widely, with OODBMS definitely the least known and used by specific industries only. Of interest is that the future implementation for ORDBMS and OODBMS is almost the same, which seems to emphasize that businesses are also influenced by the worldwide struggle between the standards of ORDBMS and OODBMS. Systems applications The following interesting results from this quadrant are: Most businesses that use ERP systems use the financial module. (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 tested but all those industries that have not yet implemented ecommerce have future implementation plans. Many businesses plan to implement both business to business (B2B) and business to customer (B2C) solutions but there seems to be a slight preference overall for B2B implementation, though in some industries the businesses seem to concentrate on B2B only or B2C only. 292

Back to the future Major ERP modules used/planned

44% 86%

53%

62%

55% Financial

Inventory

HR

MRP

Scheduling

Figure 14.8 Major ERP modules used/planned

ERP extension software does not have a high current usage rate but more implementations are planned for the future. All three groups of ERP extension software show a trend of future implementation plans that exceed current usage. The CRM systems have the highest average usage and percentage of future 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 competitors. Business intelligence The following results regarding BI came to the fore: The average current usage of both data warehousing and OLAP/data mining is just above 50 per cent. Average current usage for data warehousing versus OLAP/data mining is almost the same and BI future imple293

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ERP products

SAP

44%

BPCS

15%

Oracle

15% 11%

JDE

9%

Peoplesoft Other

5%

Impact Encore

4%

Steamline

4% 2%

Baan 0%

10%

20%

30%

40%

60%

% Usage

BI component

Figure 14.9 ERP products used

24%

Data warehousing

54% 17%

Data mining OLAP

52% 0%

10%

20%

30% % Usage

Figure 14.10 Business Iintelligence current and planned usage

294

40%

50%

60% Future Current

Back to the future mentations for the two groups show a slightly higher percentage for data warehousing (see Figure 14.10). Kramer (1999), in a review of the three leading groupware server software packages, confirms that many corporations use groupware for little more than e-mail. The research results regarding the extent to which South African businesses are using groupware show that groupware is used 78 per cent for e-mail followed by 57 per cent for information sharing – from there on the percentages for other functions drop to 30 per cent and below. Many people believe that the facsimile technology is obsolete but authors such as Banker (1999) and Purchasing (1999) believe that electronic faxes still have a future as large companies still spend up to 40 per cent of their phone bills on faxing and urgent messages are still conveyed by facsimile. Fourteen per cent of the companies tested plan to implement facsimile technology, which shows that although it is a mature product some people still believe the technology to be useful in business. The influence of the battle between the hybrid database technology, object relational DBMS and pure object-oriented DBMS can also be seen. Stedman (1998) stated that OODBMS still makes up a sliver of the overall database business. Freedman (1999) states that the most broadly deployed ERP systems worldwide are those that track financial data. Key (1999) and Boey (1999) report that SAP has the biggest installed ERP base in the world and from the research results we can see that SAP has by far the biggest ERP installed base in relation to the other ERP vendor products. Richard et al. (1999) reported that the results of an attitude survey performed on CEOs and CIOs in firms in the USA showed a tendency to underinvest in business intelligence. The point was raised earlier in this chapter that the authors are concerned that the future implementation percentages might be too low. Taschek (1999) stated that Cognos is in the top tier of the BI market and that Seagate is another leader in this market. Seagate’s product Crystal Reports is used most and the company seems to be in line with world trends.

295

The Make or Break Issues in IT Management Current and planned strategic analysis with BI 65%

Customer

Strategic area

KM

58% 52%

Industry/market R&C

34%

SPM

31% 18%

Competitors

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Average % usage Figure 14.11 Current and planned strategic analysis

14.6 Conclusion It is vital to understand that, with the ever growing supply of new technologies, it is vital to identify first and foremost the appropriate information requirements – productivity, DBMS, OLTP or business intelligence – before endeavouring to acquire and implement the systems. This is the nature of information economics – to deal with the two aspects of information, its demand (or IS) and its supply (the technology), where the supply is becoming far more complicated than the demand justifies. Can we decide what we need, now and in the future, in order to make the IT investment work for us? Connectivity in a global world means a focus on information more than on the technology. Information is embedded in so many spheres of our private and business lives. The challenge is to forge linkages between the different information deliveries in order to obtain the appropriate information – in terms of content, format and time. This can only be achieved through the realization that one should apply the appropriate technology after the decision on the information has been made. Only then 296

Back to the future can there be true advantage through information and knowledge. The metric suggested in this chapter determines the information needs in terms of a matrix of information deliveries: OA, DBMS, OLTP, ERP extensions (CRM, SCM and e-commerce) and business intelligence. This provides some classification rule on information, the evolution of such needs and the technologies that can provide these. In understanding these principles of information economics, businesses can compete in the future spelled out by futurists. Unless we heed this, the future can never become our current reality. THE AIM OF SCIENCE IS ALWAYS TO GAIN KNOWLEDGE OF REALITY; WHILE THE GOAL OF TECHNOLOGY IS TO CHANGE REALITY.

References Banker, S. (1999) Don’t Bury the Fax Yet. Your Company, 1 October, 9, 7, pp. 90–93. Boey, S. (1999) SAP Roll Out mySAP.com for Companies in Region (800). Business Times (Malaysia), 2 November, BSMA8033137. Bylinsky, G. (1999) Challengers are Moving in on ERP: To Remedy the Shortcomings of Enterprise Resource Planning Systems, a New Industry is Selling Easy to Install ERP Modules and Loads of Extension Software. Fortune, 6 December, 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, New York. Freedman, R. (1999) ERP Beyond Y2K. PC Magazine, 22 June, pp. 219. Goodfellow, S. F. (1999) Document Management and the Internet: A Perfect Match. OfficeSystems99, April, 16, 4, pp. 26–30. Graphic Arts Monthly (1999) Seeking Business Intelligence in a data warehouse. Graphic Arts Monthly, July, 71, 7, pp. 71. Haag, S., Cummings, M. and Dawkins, J. (1998) Management Information Systems for the Information Age. Irwin McGrawHill, Boston, Massachusetts. 297

The Make or Break Issues in IT Management IBM (1998) The DB2 Family – an Analysis of Business Benefits Available. White Paper Number 98.01, February (http:// www.ibm.com). Key, P. (1999) SAP’s Internet play. Philadelphia Business Journal, 27 August, 18, 29, pp. 3–4. Kramer, M. (1999) GroupWare: Unleashing the Power – Cover Story: Looking at Three Leading Packages – and How to Make them Sing. PC Week, 3 May, 16, 18, p. 1. Lamb, C. (1997) Introducing BusinessMiner. Business Objects Technical White Paper 1–21 (http://www.businessobjects. com/global/pdf/products/bm). Larson, J. A. (1995) Database Directions. From Relational to Distributed, 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 Management Information Systems. Prentice-Hall, New Jersey. MacDonald, M. (2000) Just Four Simple Words. Modern Materials Handling, 31 January, 55, 1, p. 134. News Straits Times (1999) The Latest ERP Extensions. News Straits Times, 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 IT Circle of Excellence. JUTA, Cape Town. Purchasing (1999) Growing Role for Faxes in Digital Connected Era. Purchasing, 17 June, 126, 16, p. 82. Richard, G. et al. (1999) CEO and CIO Perspectives on Competitive 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. Computing Canada, 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 Computer Terms. 5th edn, Macmillan, USA. Stedman, C. (1998) Objects still Face a Tough Sell. Computerworld, 9 February, 32, 6, p. 33. 298

Back to the future Taschek, J. (1999) BI Vendors Need to Prove their Wares are Worth 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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15

Manipulating reality Deception on the Web William Hutchinson Edith Cowan University, Perth, Western Australia and Matthew Warren Deakin University, Victoria, Australia

Manipulating data for benefit has been the practice of individuals and organizations for millennia. Contemporary electronic communications media is not exempt from this practice. This chapter examines the principles of deception and some of the ways it is practised on the World Wide Web. The flexibility of digital data makes deception an easy task.

15.1 Introduction Manipulating data to produce desired outcomes has been routinely practised since the dawn of history. Individuals and organizations choose data that suits the image they want to be portrayed; soldiers camouflage weapons to avoid detection, or disperse false information to conceal intentions. Photographic images have been faked to alter history for many years (Brugioni, 1999). However, the advent of digital data has made manipulation of images, text, sounds, and even smells much easier. Innovations in the creation of perceptual peripherals (Turk and Robinson, 2000) has made the impact of manipulated data reach a profound level. The following sections will examine the principles of deception and their use on the World Wide Web. 300

Manipulating reality

15.2 Principles of deception In this chapter, deception is defined as the deliberate alteration of data or a situation’s context to promote a desired outcome. Therefore, it does not include self-delusion, or a person’s natural tendency to use mental models to interpret things in an individual way. The definition places emphasis on a second party being involved, where that person or organization is consciously trying to create deception. The word ‘deception’ tends to infer a negative motive. For instance the following words were derived from the thesaurus of 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 these words indicate an action and/or a negative motive. However, it is the motive that ultimately decides the ethics of a situation where a deception is used. To understand the fundamental of deception, it is necessary to define data, information, and knowledge. In this model (based on that used in Boisot, 1998), data is defined as the attribute of a ‘thing’ such as its colour, shape, or its value. However, knowledge is an attribute of an ‘agent’ (usually this means a human, although it can be argued that intelligent machines can have knowledge). Knowledge is a product of experiences, education, age, gender, culture, and many of the other factors that make up individuals. Thus, humans derive information by using their knowledge to select appropriate data to provide them with information. This is achieved in a particular context. To execute a deception one or more of these elements (data, knowledge, or context) must be manipulated. Hence to deceive, it is necessary to alter data by addition, deletion, or modification and/or alter the context in which the data are interpreted, and/or change the knowledge base. Figure 15.1 outlines the basic elements of this model plus associated strategies to deceive. Thus data can be manipulated to only allow the target access to the subset of data that will provide the best perceived outcome for the attacker. The data are then interpreted using mental models, which can be affected directly by such activities as propaganda, or education. This is usually a long-term process. 301

The Make or Break Issues in IT Management Data

Context

Knowledge

Alter environmental, and/or haptic signals, etc.

Deliver a subset of the whole, to enhance message required Information Alter mental models, e.g. education, propaganda, group pressure

Deception?

Figure 15.1 The relationships between data, context, knowledge, information, and the methods by which deception can be practised

However, the context within which the mental models make the human decide an outcome can also be influenced by enhancing/decreasing environmental signals. Of course, the ultimate aim is to alter behaviour. Thus, just changing thought patterns may not be enough; changing behaviour is more difficult. Bowyer (1982) classifies deception into two main types: Level 1: Hiding the real Level 2: Showing the false Figure 15.2 details the types of deception. Whilst this chapter is too short to go into each method of creating an illusion by ‘feeding’ data to an unsuspecting person, the variety of techniques can be left to the imagination. Also, there is the potential to manipulate the context by which data are interpreted. Figure 15.2 also illustrates the process of deception. There must be an objective, a target and a story to tell. The type of data, environmental, machine, or, direct digital, will determine the easiest and 302

Manipulating reality Means Camouflage/concealment/cover Feint/diversion

Planning process Objective

Target

Display/decoy/dummy Story

Mimicry/spoofing Dazzling/sensory saturation Disinformation/ruse

Source: Gerwehr and Glenn (2000)

Conditioning

Figure 15.2 Types of deception (Gerwehr and Glenn, 2000)

most effective method at any given time. This process is ongoing. Situations are dynamic, and so the methods used must be as well. Of course, there are two sides to a deception: the deceiver and the deceived. Organizations should have vibrant processes to ensure the integrity of the data received, processed, stored, and used. There should also be an awareness of the ability of others to manipulate perceptions. As such, the humans using the data should interpret them in the context chosen by that organization; not another.

15.3 Deception on the Web The digital nature of websites and their almost universal accessibility make them prone to attack. Some examples of the types of deception listed above will be illustrated. However, it should be noted that a really successful deception is one that is unrecognized. Therefore, the examples below are not truly successful deceptions but do serve to illustrate the point. Many of them are obvious and might cause embarrassment but not deception. Subtle attacks are far more destructive. The changing of a person’s photographic image, or the insertion of small pieces of text are techniques that may go undetected until the damage has been caused. For instance one can only speculate about the damage that could be caused by inserting the word ‘not’ in an employment advertisement stating ‘Applications from women especially welcome’. 303

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Figure 15.3 A supposedly Kurdish web page

The concept of camouflage can be practised on the Web. Here the user is fooled into believing that something is what it is not. Figure 15.3 illustrates a website that purports to belong to Kurdish rebels. In fact, Turkish government sympathizers run it. Many deceptions on the Web camouflage their real intent. A common way to spread a computer virus is to have an attachment 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 website to a NATO look-alike. Propaganda and disinformation have always been a part of making a point. Figure 15.5 gives an example of a rather obvious attempt. The contemporary term is ‘perception management’ and, as websites become organizations’ face to the world, more care will be needed to ensure that the data and their presentation on these sites give the desired image. Also, it is important that part of the corporate database shown does not allow its image to be tarnished or its secrets revealed. Dazzling is very much the same as an octopus releasing ‘ink’ to 304

Manipulating reality

Figure 15.4 NATO look-alike web page but obviously pro-Serbian

distract a predator. It is meant to provide data overload to the victim. The target’s resources are thus used up in coping with the attack rather than its normal operating activities. Much obvious and malicious hacking is of this type. Its intent is to embarrass and interrupt operations. ‘Spamming’ is one way to give this effect. Dazzling is also used as a feint to detract targets

Figure 15.5 Some rather unsophisticated anti-NATO propaganda

305

The Make or Break Issues in IT Management from the real attack. Table 15.1 lists some of the more common types of deception in computer networks. Table 15.1. Examples of deception on computer networks Deception

Description

Honeypots/Honeynets

Apparently authentic websites but really sites to trap hackers/crackers. Used to analyse attack strategies used by hackers. Sites used to espouse certain political, religious beliefs. They are often apparent, but many present ‘facts’ that can lead to deception occurring. Flooding a target site with data. This might just be a nuisance, or a distraction for another attack. Messages appear to be derived from one source but are from another. Used to give credibility to an e-mail message, or to obtain network privileges. Malicious programs that pretend to be something else, by embedding themselves into innocuous code. The art of hiding one message within another. For instance an image file might contain a message; whilst the image might be displayed the hidden message goes undetected. The combination of software and I/O devices designed to create a whole perception not necessarily based on the physical world. Encoding a message to make it unintelligible to those who do not have the key. Sending deliberately false data (e.g. market information) to create an effect.

Propaganda

Spamming Spoofing

Viruses Steganography

Virtual reality

Encryption Lying

15.4 Beyond the present When the French philosopher Jean Baudrillard (1995) wrote a series of articles called ‘The Gulf War Did Not Take Place’, he did not mean that the events of that conflict did not occur, but that the reality of the situation had been changed by the media. The perception that what happened in the Gulf was a ‘real war’ was 306

Manipulating reality controlled by the data and context set by the media and fed to the consumer. The implication is that our senses relating the ‘real’ world to our brains is no longer the primary determinant of perception. The development of wireless technologies and its associated software and hardware has brought the spectre of the true human machine. A mobile set of gadgets could allow you to accentuate your senses (Marks, 2000; Gershenfeld, 1999; Kurzwell, 1999). Some examples are: Infrared/star light vision Ability to ‘smell’ humans Face recognition software that could identify the person standing in front of you The ability to find out where you are, and call up a map to be displayed on your retina The ability to send real-time movie images of your own situation, and so on. Who could resist these extra abilities? The applications for these technologies are enormous. Yet so is the ability to deceive. As humans become almost totally dependent on digital data for their personal operational lives the consequences of deception increase exponentially. Yet, the implications of contemporary technological development take digital data into another realm. At one level, the ability to create a virtual world where you can have a conversation with someone in Sydney whilst you are in Prague, and at the same time touch and feel that person in the bubble of a virtual world (Davenport, 2000) can stretch the abilities of those who deceive but also provide enormous potential. An even higher level of dependence is the creation of the true human-machine – the cyborg. The physical merging of mind and machine lifts the data processed by our brains from photons, volatile chemicals, and pressure to pure digital data. In the UK, a married couple have implanted microchips directly into their nervous systems (under the arm) to be able to ‘feel’ their respective ‘feelings’ (Press Association, 2000). Digital data now totally replaces ‘natural’ inputs; this is truly the digital person. Some of the consequences of this digital world, where many humans are networked and receive purely digital data into their nervous systems, are easy to imagine. Feeding ‘false’ or manipulated data into a system such as this would have 307

The Make or Break Issues in IT Management enormous implications. Ironically in a networked world, the digital enhancement of the individual would make each one vulnerable to being turned into the clone (in terms of behaviour) of everyone around. Whilst the previous argument sounds more like science fiction, many of the principles are not.

15.5 How do you identify a lie? The previous sections have briefly described some principles of deception in action. They can be summarized by saying a potential deceiver should: Provide data you want others to know Provide data that set the context for your aims Provide data that develop biases of the target in your favour. It is not necessary to provide all the data but just enough for the target to ‘join the dots’ (see Hutchinson and Warren, 2001). The act of lying is rarely admitted in organizations. The distinction between lying and such activities as advertising is also blurred. Perhaps the more neutral phrase perception management provides a vehicle to carry out meaningful dialogue in this area. In competitive organizational environments, it has always been a potential strategy to deceive competitors, regulators, clients, and even suppliers. It should be the aim of an organization to ensure that it is in control of its image, not others. As the reliance on digital devices increases, and the sophistication of the data presented to their users goes beyond just the visual and auditory, the potential for deception is increased many fold. So how do you tell when you are being deceived? The first element to examine is the context in which deception occurs. Why do individuals and organizations ‘lie’? Ford (1996) states a number of categories of motivation for lying. They can be attributed to both individuals and organizations. They can be summarized as: To influence (negatively/positively) a public image To attract attention To extricate oneself from a bad public image situation To impress public/clients To obtain market share To commit financial fraud or gain some other ‘valuable’ item 308

Manipulating reality (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 competitor, if viewed in a certain light? Lie detection is predominantly the realm of the human and use of knowledge. However, some of these tasks can be automated. For instance software can detect unwanted intrusions and check such things as the validity 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 on them detecting lies (for example, the police) do not rate above any average person. Detecting lies is not easy, especially in a digital environment where the normal cues such as body language and voice tone are missing. Sporer (1998, cited in Vrij, 2000, pp. 161–163) gives eight clues to ‘reality monitoring’, they are: Clarity – refers to the clarity and vividness of the data; is it clear, sharp, and vivid? Perceptual information – refers to sensory experiences, does it include such things as sounds, smells, tastes, tactile experiences, and visual details? Spatial information – do the data contain information about other locations? Do they set the context? Temporal information – do the data state when an event occurred? Another element that should set the context. Affect – are there any data about the ‘feelings’ created by an event? Reconstruction of the story – is it possible to reconstruct an event on the basis of the data given? Does it have a logical structure? Realism – are the data plausible, realistic, and do they make sense (in that context). Cognitive operations – are inferences made? If they are, then the data should be treated with suspicion. Of course, to create a much more plausible deception the deceiver can use these criteria. The general rule is ‘give the people what they want’. In other words, people will tend to believe data if they best fit their preconceived mental models. 309

The Make or Break Issues in IT Management The very flexibility of digital data should make everyone sceptical of it. Yet, many believe anything produced by a machine. Data, both input and output, should be pragmatically assessed by: Attempting to find any motives the presenter might have to deceive The context of the data presented The plausibility of the data How 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 occurring. It requires that much contemporarily discounted attribute – judgement. This factor is scorned in a world that believes in objective 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 basis of information provided by the senses, but this sensory input is mediated by complex mental processes that determine 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 this information after receiving it are all strongly influenced by past experience, education, cultural value, role requirements, and organization norms, as well as the specifics of the information received. Heuer was writing about the need for intelligence officers to reflect on the way they interpret data. In a sense, we are all intelligence officers in our various roles, both personal and occupational.

15.6 Conclusion Deception is a part of life, and the Internet/World Wide Web are just new tools for its practice. The flexibility of digital data is one of its great benefits yet, this very flexibility, makes the alteration of data so easy. 310

Manipulating reality Security can be defined as the function that ensures the survivability of an organization or individual, and it is within this role that deception should be studied. Knowledge of the methods of deception are essential to protect an organization’s interests. The authors carried out a survey of Australian information technology in 1999 to determine perceptions of threats to their organizations (Hutchinson and Warren, 1999). Interestingly, 66 per cent thought there was no threat of attack from competitors. This complacency might be reflective of high ethical behaviour in 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, and deception the strategy of the weak. In this case, the Internet has opened up the world to potential, ‘weak’ attackers. However, the use of deception as a tool in organizational survival should also not be overlooked. In a world where surveillance is the order of the day and is entrenched in all facets of life, deception may be the only way to escape the watchful eyes of those who wish to control. Devices watch citizens at work and at play. The locations of people, both in real time and historically, can be determined by their mobile telephone records. Financial, tax, medical, insurance, social security, purchase records – any number of personal data can be integrated and processed. In this insidious world of data collection, the most effective response might just be another massive deception.

References Baudrillard, J. (1995) The Gulf War Did Not Take Place. Power Publications, 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. Scientific American, 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 311

The Make or Break Issues in IT Management 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 Retaliation Against Hackers. Proceedings of ACIS (Australasian Conference on Information Systems) 99, December, Wellington, New Zealand. 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 and Ecstasy. The Western Australian, 7 October 2000. Turk, M. and Robinson, G. (eds) (2000) The Intuitive Beauty of Computer–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 and the Implications for Professional Practice. Wiley, Chichester.

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Index

ABN-Amro, 208–9 accounting: commitment accounting, 67 general accounting packages, 282, 291–2 ‘Act of faith’ decisions, 185–6 Adaptive customer profiling, 32 additional funding, 212, 225–26 ‘administrative man’, 182–3 advertising, 215, 216, 217 affect, 309 Allaire, Paul, 139–40 Allen, Paul, 151 Alta Vista, 216 Amazon.com, 148–9, 221, 222, 218 American Express, 27 anthropology, 128–29 anticipatory management, 165 Apple, 73 approved products, 63–5 approved suppliers, 65 architecture: IT enabled business architectures 245 organizational, 49–50 Ariba, 31 Aronson, J.E., 274, 281 assembled systems development, 170–71 attention, management of, 264 attracting customers, 30–1 authenticity, 74 authorization, 63–4 automate scenario, 114–117 automated office, 172–3

see also Office automation automated purchase order processing (POP), 69 automatic telling machines (ATMs), 4, 267 Avison, D.E., 10 Axelrod, 256–7 balanced control, 185, 186–7 banking industry, 267–8 Baudrillard, J., 306–7 begging bowl, 217–20, 225–28 behaviour, emergent, 259 benefits of IT, 41–55 case study in benefits realization, 53–4 evidence of missing benefits, 41–3 IT investment as exploration, 46–7 IT investment as religious salvation 43–6 organizational learning, 47–8, 54–5 organizational scenarios and legacy systems, 112, 114, 115, 119, 121 benefits maps, 48–53 example, 50–3 testing, 53–4 Benetton, 34 Bennis, Warren, 264 Bezos, Jeff, 221 binary logic, 130 board of directors, 125 Boo.com, 152, 220 Borders, Louis, 141 boundary, 111–12, 115, 119, 121 313

Index boundary-less office, 173 bounded rationality, 181–83, 188 Britannica.co.uk, 213 British Airways, 34 business: changing environment, 159–60 changing nature of, 252 corporate change, 161–2 corporate transformation, 162–3 redefining by IT, 240 business activities: and outsourcing, 34–6 business to business (B2B) electronic commerce, 72–3 business intelligence (BI), 268–70, 271–2, 275–8, 279 current and future usage of software 288–91, 294–6 vendors and product applications, 287–8 business models, 139–56, 203–236 business model analysis, 145–7 components, 206–10 defining, 145–6, 204–6 framework, 147–53 delivery system, 147–8, 151–2, 155 in practice, 153 profit and growth engine, 147–8, 152–3, 155 revenue generation system, 147–8, 149–51, 155 value proposition, 148–9, 155 generic, 210–225 classic cost reduction, 214–15 high stakes model, 224–25 investor funded deficit model, 217–20 new trading model, 215–17 sleight of hand model, 223–24 stock market funded deficit model 220–23 traditional trading, 211–14 314

high level and detailed, 210 insights from e-retailing, 140–42 next generation, 228–29 Nordea, 154, 155 risk and choice of model, 226–28 sustainability, 225–26 term of, 210 vs value chain, 142–145 business people, 245–6 business plans, 243 business process re-engineering (BPR), 5–6, 163 business sector productivity, 42–3 business strategy, 237–49 integration of IT in corporate strategy and, 240–46 business technologists, 170 Buy.com, 230 call centre, 111–22 Cameron, 158 camouflage, 303–4 capability, 36–7 capability maturity model (CMM), 85, 95 capital expenditure, 57–8, 66–7 Cash, J. I., 115 casino model, 220–23, 225–28 catalyst, 166 certainty, 132, 134 certification agencies, 75 Champy, J., 5 change: corporate change, 161–2 impact of IT on economy and industries, 238 impact of IT on organizations, 239 IT management and, 252–4 Charles Schwab, 25 cheap-sourcing, 26, 30, 36–7 chess, 134–5 chief information officer (CIO), 161, 242–3

Index role, 158–9, 246–8 chief technology officer, 161 choice, 183 Cisco, 32, 34, 204 Citicorp, 3, 4 clarity, 309 classic cost reduction model, 214–5, 225–28 classic profit business model, 211–14, 225–28 cognitive operations, 309 Cognos, 296 Cohen, 256–7 Cohen, M.D., 183 collaboration, 225–26 commitment accounting, 67 communication, 130 company vision, 112–3, 115, 119, 121 competencies: core, 29, 242 organizational, 49–50, 51 competitive advantage, 3–4 competitive positioning, 238, 242 e-sourcing, 34–6 complementors, 245 complex adaptive systems, 254–65 managing, 258–60 managing in the complex environment 263–4 in the real IT world, 260–63 complicated systems, 256 confidentiality, 74 consultants’ role, 12–13 context: and deception, 301, 302 IT as contextual factor, 237–49 contingency view, 10 contracts, 20, 21, 38 control: balanced, 185, 186–7 of expenditure, 60 external controls, 162, 167–8 internal controls, 162, 168–9

controlled items, 64 core competencies, 29, 242 core investments, 206–7 corn-seed investments, 206–7, 208–9 corporate change, 161–2 corporate strategy, 141–2, 237–49 integration of IT, 240–46 corporate transformation, 162–3 cost reduction business model, 214–15 225–28 Costello, G., 229 costs, 21, 270 costing and purchasing IT, 60 costs and benefits management, 77–118 e-sourcing and, 36–7 ongoing costs of investment, 209–10 organizational scenarios and legacy systems 112, 114, 115, 119, 121 quick scan and full life cycle management 89, 92, 93 coupled systems, 73 Cronin, M., 143–4 Crystal Reports, 296 culture, 52 current expenditure, 57–8 customer/market positioning, 242 customer relationship management (CRM) 279–80, 286, 291, 294 customer resource life cycle, 29–32 customer support, 31 customizing service, 31 cyborg, 307 data, 9 and deception, 301, 302 information value chain, 268–70 data manipulation, 300–312 data mining, 278, 287, 288, 294–5 data warehousing, 277–8, 287, 288, 294–5 315

Index database (DB) applications, 272, 273–4, 275, 279 current and future usage of software 288–91, 292–3 vendors and product applications, 284 database management systems (DBMS) 274, 275, 284, 285 D’Aveni, R.A., 242 dazzling, 304–5 Dearden, J., 158 debt capital, 209, 219 deception, 300–312 detecting lies, 308–10 future of, 306–8 principles of, 301–303 types of, 302–303 on the Web, 303–306 decision making, 175–202 bounded rationality, 181–3, 188 classical model of rational, 180–81 IT and e–sourcing decisions, 34–7 IT people and, 132, 134 ‘P4’ model, 187–97 quality of, 178–80 styles, 184–87 delivery system, 147–8, 151–2, 155 Dell Computers, 32–4, 35–6, 73, 207, 213 design, 183 desktop databases, 284, 292 desktop publishing (DTP), 282, 291–2 detail, 210 development teams, 171 digital value system, 143–4 Direct Line, 27, 28 Directline.com, 28 disinformation, 304, 305 ‘distractions’, 35–6 dot.coms, 139, 223 double-loop learning, 192 driving purpose, 258, 260–61, 262 316

Drucker, P.F., 251–2 e-auctions, 213 e-bay.com, 213 e-business models see business models e-commerce, 281, 287, 291, 293–4 economy, 238 eCredit.com, 31 EDI-CON, 70 EDIFACT (EDI for administration, commerce and trading), 70 EDIFICE, 70 e-fulfilment, 31 electronic data interchange (EDI), 70–5, 293–4 impact of the Internet, 71–4 security, legal issues and trust, 74–5 electronic document management systems 283 electronic funds transfer (EFT), 70 electronic mail (e-mail), 70, 283, 291 eLuxury.com, 213 e-malls, 213 emergent behaviour, 259 emergent strategy, 184 encryption, 306 end-to-end approach, 278 enterprise DBMS, 284, 292 enterprise resource planning (ERP), 7–8, 274–5, 276, 293–4, 295–6 extensions, 279–81, 294 vendors and product applications, 284–87 environment, 259, 261, 263 e-procurement, 56–7, 69–75 EDI, 70–5 traditional tools, 69 equity capital, 209, 219, 220–23 e-retailing, 140–42 e-shops, 213 E*Trade, 154

Index evaluation of cost/benefit management 84–5, 86, 93–5 evolutionary systems development, 170 expenditure, 66–7 capital, 57–8, 66–7 control of, 60 current, 57–8 spending on IT, 56, 177, 178 unplanned, 68 expense expenditure, 66 explanatory logic, 112, 113, 115, 119, 121 exploration, 46–7 external controls, 162, 167–8 extranets, 74 facilitation, 166 failure, IT, 11–12 ‘fashions’ in IT, 1–16 business process re–engineering, 5–6 ERP, 7–8 information systems development, 9–12 knowledge management, 8–9 outsourcing, 6–7 role of consultants, 12–13 strategic information systems, 2–4 fax (facsimile), 291–2, 295 Federal Express, 3–4 federal model of control, 167 federated networks, 167–8 financial services organizations, 77–118 first mover, 3–4 Ford, C.V., 308–9 fractal rules, 258–9, 261, 262–3 Freeserve.com, 220, 223–24 full life cycle management, 77–107 benefits management, 83 cost management, 82 development stage, 81, 92

evaluation, 94, 104 exploitation, 84–5, 93, 102 identification, 90, 97 justification, 91, 98 planning stage, 80 quick scan elements, 97 –, 105 realization, 101 research findings, 88 research method, 87 time schedule management, 83 function, IT, 159–61, 162, 163–4, 252–4 future proofing, 120–22 futuribles, 41, 47 fuzzy logic, 129–30 ‘garbage can’ model, 183 Gartner Group, 158, 178 Gates, Bill, 144 general accounting packages, 282, 291–2 generalizations, 131 generic approved product policy, 63 generic business models, 210–225 classic cost reduction, 214–15 high stakes model, 224–25 investor funded deficit model, 217–20 new trading model, 215–17 sleight of hand model, 223–24 stock market funded deficit model 220–23 traditional trading, 211–24 goals, 184–7 Grainger, 31 Greenspan, Alan, 41 groupware, 283, 292, 295 growth products, 288–90 GSM networks, 144–5 Gulf War, 306–7 Hamel, G., 146, 242 Hammer, M., 5 317

Index hardware and software management, 162, 172 Heuer, R.J., 310 high-level business models, 199 see also Generic business models high stakes model, 224–25, 225–28 Hirschheim, R., 206 Homegrocer.com, 141 honeypots/honeynets, 306 human machine, 307–8 hybrid databases, 284, 295 hybrid products, 288–90 Idenburg, P.J., 184 identification of project proposals, 78–81, 85–6, 87–8 ignorance premium, 230 impact, 168 incremental logic, 184 individual characteristics, 49–50, 51, 52 industries, 238 informate scenario, 114–17 information: deception and, 301, 302 informing customers, 31 value chain of, 268–70 view of, 112, 113–4, 115, 119, 121 information bases, 50–4 information and communications technology (ICT) see Information technology information delivery systems, 267– 99 current and future usage of software 288–91 extended classification, 279–81 general trends, 288–96 proposed classification, 270–78 vendors and product applications in extended matrix, 281–8 information systems (IS), 269 IS strategy, 58–9, 61–2 318

information systems development, 9–12 information technology (IT), 157–74, 237–49 changes in economy and industries, 238 changes in organizations, 239 changing IT function, 159–61 characteristics and purchasing, 57–8 impact of change on business, 252–3 integration in corporate strategy and management, 240–46 IT governance vs IT management, 247–8 IT organization in, 2005, 161–73 external controls, 162, 167–8 hardware and software management 162, 172 internal controls, 162, 168–9 IT function, 162, 163–4 IT management, 162, 164–5 IT self-image, 162, 165–6 IT staffing, 162, 169–70 mission, 161–3 systems development, 162, 170–71 in the workplace, 162, 172–3 pervasive environmental factor, 237, 246–8 purchasing see purchasing responsibilities of IT, 159–60 revolution, 126–27 speed of change and development, 59–60 information value chain, 268–70 infrastructure activities, 20 in–house sourcing (insourcing), 19, 22–3, 27, 30, 36–7 innovation, 244 integrated strategy, 240–46 intelligence, 183

Index intelligent agents, 73–4 interactions, 257 internal controls, 162, 168–9 internal development, 24–6, 30 Internal Revenue Service, 178 internal sustainability, 225–26 Internet, 228–29 deception on the Web, 303–6 e-business model options, 203–236 impact on purchasing, 71–4 security and trust, 31, 74–5 sourcing Internet implementation capability, 24–9 interpersonal skills, 132 investment, 206–10 funding and outgoing costs, 209–10 IT investment see Investment decisions; IT investment types of, 206–9 investment appraisal process, 188, 189, 190–93 investment decisions, 175–202 bounded rationality, 181–3, 188 classical model of rational decision making, 180–81 investment issues and management challenges, 176–8 ‘P4’ decision model, 187–97 product and process dimension, 184–7 quality of decision making, 178–80 investment entrapment, 191 investor funded deficit model, 217–20, 225–28 Iridium, 144–5 irreducible costs, 270 IS strategy, 58–9, 61–2 IT costs and benefits management, 77–96 IT department, 67–8, 158 IT failure, 11–12

IT function, 159–61, 162, 163–4, 252–4 IT investment: benefits of see Benefits of IT decisions see Investment decisions as exploration, 46–7 productivity paradox, 41–3 quick scan and full life cycle management, 77–118 as a religious salvation, 43–6 IT mission, 161–3 IT people, 125–38 IT staffing, 158, 162, 169–70 organizational politics, 133–5 as shamans, 129–30 stereotype, 131–3, 136 task, process and people, 135–7 as tribe, 127–28, 130–31 IT purchasing see purchasing IT self-image, 162, 165–6 IT staffing, 158, 162, 169–70 see also IT people Jamjar, 27 Janis, I.L., 179 Johnstone, Edward, 220 judgement, 310 justification of project proposals, 102, 119 Keynes, John Maynard, 203, 231 knowledge, 301, 302 knowledge management, 8–9 KPN Telecom, 209 ‘Kurdish rebel’ Web site, 304 labour productivity, 41–3 Lacity, M., 206 language, 130 Lastminute.com, 223 Laudon, J.P., 273–4, 277 Laudon, K.C., 273–4, 277 Leadbeater, Charles, 228 leadership, 259–60, 263–4 319

Index learning, organizational, 47–8, 54–5, 191–2 learning curve costing, 229–30 learning experience, 185, 186 learning process, 184 legacy systems, 108–124 evaluation framework, 109–120 second iteration of scenarios, 120–22 legal issues, 75 life cycle: customer resource life cycle, 29–32 full life cycle management, 77–118 limes, 250 line management, 78, 90, 94–5 Linux operating system, 256, 259 Lloyds, 209 logic, 112, 113, 115, 119, 121 logistical streams, 146, 147 London Stock Exchange, 11, 178 loss leaders, 216 lying, 306 detection of lies, 308–10 Madigan, C., 12–13 Mahadevan, B., 146, 205 management: integration of corporate strategy and ICT, 240–46 style, 263–4 MangoClick.com, 220 manipulation of data, 300–312 Mann, L., 179 manufacturing productivity, 42–3 market attractiveness, 238 market creation, 244–5 marketing, 240–41 mature products, 288–90 maverick model, 224–25, 225–28 meaning, attention, self and trust (MAST) 264 Merck.ltd.co.uk, 213 methodologies, 260–62 320

metrics, 168 mimicry (spoofing), 304, 305, 306 mission, IT, 161–3 mixed development paths, 28–9 Moai Technologies, 31 mobile telecommunications, 142–3, 144–5 moral imperatives, 126–27 Motorola, 144 Mr Mistoffelees model, 223–24, 225–28 multiple streams of income, 215–17 multiple suppliers, 20–1 Multiview approach, 10–11 must-do investments, 206–7, 209 NATO look–alike Web site, 304, 305 ‘necessary evils’, 35–6 new economic logic, 229–31 New Economy, 176 new trading model (new economy model) 215–7, 225–28 New Zealand teachers payroll system, 11 Newton, Isaac, 255 non-repudiation, 75 Nordea, 154, 155 object-oriented approaches, 9 object-oriented DBMS (OODBMS), 285, 293, 295 object/relational DBMS (ORDBMS), 285, 293, 295 office automation (OA), 272–3, 279 current and future use of software 288–91, 291–2 vendors and product applications, 282–3 office integration software, 283 OLAP (on-line architecture platform), 278, 278, 288, 294–5 omniscience, 181, 182

Index online transaction processing (OLTP), 272, 274–5, 279 see also Systems applications open electronic markets, 73 operations, 21, 262–3 ‘order winners’, 35 organizational architecture, 49–50 organizational competencies, 49–50, 51 organizational learning, 47–8, 54–5, 191–2 organizational politics, 133–5, 188, 189, 194–5 organizational scenarios, 109, 110–122 second iteration, 120–22 organizational structure, 112, 114, 115, 119, 121 organizations: impact of IT, 239 rational model and political model, 194–5 O’Shea, J., 12–13 outsourcing, 6–7, 17–40 capabilities for effectiveness, 38–9 core competencies, 29 customer resource life cycle, 29–32 effective IT and e–sourcing decisions 34–7 overview of developments, 18–20 sourcing Internet implementation capability 24–9 track record of using external IT/e-business services, 20–4 virtual organization, 32–4 overtrading, 212–3 ‘P4’ decision making model, 187–97 participation, 188, 189, 194 politics, 188, 189, 194–7 process, 188, 189, 190–93 product, 188, 189, 189–90 ‘paperless office’, 126

Parr, A.N., 11–12 participation, 188, 189, 194 participative approaches, 9 partnerships, 245 outsourcing, 18–20, 27, 30, 36–7 Paylinx, 31 payments, security and, 31 Pellissier, R., 272 people, IT see IT people perception management, 308 perceptual information, 309 personal productivity tools, 271–2 see also Office automation plan, do, check, act cycle, 192–3 planning, 9 rational, 184, 185, 186 political model, 194–5 politics, organizational, 133–5, 188, 189, 194–7 Porter, M., 140, 204, 229, 242 post-implementation reviews, 191, 261–2 Prahalad, C.K., 242 prestige investments, 206–7, 208 prevention, 262, 263 prices, 230 share prices, 221–22 prioritised scenario, 117–8, 119 private placements, 218–9 proactive management, 164–5 problem solving, 262, 263 process: approaches, 9 dimension of investment decisions, 184–7 IT people, task and, 135–7 ‘P4’ decision model, 188, 189, 190–93 productivity paradox, 41–3 products: applications in extended information delivery matrix, 281–8 321

Index approved, 63–5 current and future use of information delivery software, 288–91 opportunities for new products, 240 ‘P4’ decision model, 188, 189, 189–90 product dimension of investment decisions 184–7 profit: classic profit model, 211–14, 225–28 investment, profitability and risk, 207–9 maximization, 182 new economic logic, 230–31 profit and growth engine, 147–8, 152–3, 155 programmable decisions, 181 project champions, 24–5, 194 propaganda, 304, 305, 306 prototyping approaches, 9 Prudential Insurance, 178 public key infrastructure (PKI), 75 purchasing, 56–76 purchasing IT, 56, 57–69 complications, 59–61 components of IT purchasing policy 62–3 elements of IT purchasing policy, 63–9 IS strategy and, 61–2 primary objectives, 57–8 purchasing procedures, 66–9 secondary objectives, 58–9 using IT to purchase, 56–7, 69–75 EDI, 70–5 security, trust and legal issues, 74–5 traditional tools, 69 purpose, 258, 260–61, 262 ‘qualifiers’, 35 322

quality of decision making, 178–80 quick scan tool, 77–118 elements, 86–95 rational decision making, 180–81 bounded rationality, 181–3, 188 rational model, 194–5 rational planning, 184, 185, 186 realism, 309 reality monitoring criteria, 309 realization of projects, 112 reconstruction, 309 religious salvation, IT investment as, 43–6 resource view, 113–4 responsibilities of IT, 159–60 retailing, 140–42 revenue generation systems, 147–8, 149–51, 155 revenue streams, 146, 147 reviews, post-implementation, 191, 261–2 Richard, G., 276 Riel, P.F., 270 risk: and choice of business model, 226–28 investment and, 207–9 organizational scenarios and evaluating legacy systems, 112, 114, 115, 119, 121 Roach, Stephen, 41 roles, 112, 113, 115, 121 Royal Bank of Scotland (RBS), 28 rules, fractal, 258–9, 261, 262–3 SABRE, 3, 4 salvation, IT investment as, 43–6 SAP, 7, 8, 293, 294, 295–6 satisficing, 182–3 scenario building, 109, 110–122 scope creep, 60 scurvy, 250

Index Seagate, 296 secondary income, 215–7 security, 311 on-line purchasing and, 31, 74–5 selection, 257, 261–2 selective outsourcing, 18–19, 20, 22 self, management of, 264 self-image, IT, 162, 165–6 Senge, P., 217, 262 senior managers, 131–2 sensing, technologies and, 307 service level agreements, 93 shamans, 129–30 share prices, 221–22 Sheehan, George, 141 short-term contracts, 20 Simon, H., 182–3 single-loop learning, 192 skilled generalists, 169 ‘skunk works’, 24–6 sleight of hand model, 223–24, 225–28 Smart, 73 Smith, Fred, 151 society, 128–29 virtual societies, 127–28 software and hardware management, 162, 172 software usage, 288–96 spamming, 305, 306 spatial information, 309 specialists, 169–70 specific approved product policy, 63 spending see expenditure spoofing, 304, 305, 306 spreadsheets, 282, 291 staffing, IT, 158, 162, 169–70 see also IT people stakeholder analysis, 187 stakeholders, 122–23 degree of agreement, 196–7 investment decision making, 194–7

standard operational applications, 271–2 see also Systems applications status quo scenario, 110, 111–14 steganography, 306 stereotyping, 130–31 IT stereotype, 131–3, 136 stock market funded deficit model, 220–23, 225–28 Strassman, Paul, 43 strategic agenda, 243 strategic decision support systems, 278 strategic decisions see investment decisions strategic information systems, 2–4 strategic management, 77–8, 81, 87, 89, 94 strategic partnerships, 18–20, 27, 30, 36–7 strategy, 21, 237–49 emergent strategy, 184 integration of IT in corporate strategy and management, 240–46 IS strategy, 58–9, 61–2 IT functions, 163–4 traditional IT strategy and role of CIO 246–8 strategy formulation, 244–6 structure, organizational, 112, 113, 115, 119, 121 suppliers: approved, 65 multiple, 20–1 supply chain management (SCM), 280–81, 287 supply and demand, 268–70 support costs, 270 sustainability, 225–26 system costs, 270 systems applications, 272, 274–5, 276, 279 323

Index current and future usage of software 288–91, 293–4 vendors and product applications, 284–7 systems approaches, 9 systems development, 162, 170–71 systems development life cycle (SDLC) 253–4 Tapscott, D., 162 task, 135–7 Taurus system, 11, 178 technological capabilities, 49–50, 51, 52 technological costs, 270 technology: changing and IT function, 159– 60 and human perception, 307–8 impact of change on business, 252–3 see also Information technology technology strategy, 172 technophilia, 43–6 temporal information, 309 term of business model, 210 Tesco, 28, 141–2 Tesco.com, 28, 140–41, 141–2 Tesco Personal Finance, 28 Timmers, P., 145–6, 205 ‘Today’s CIO is Tomorrow’s CEO’ seminar, 136 Torvalds, Linus, 259 total cost of ownership (TCO) model, 85 total outsourcing, 19–20, 22, 23 traditional trading business model, 211–14, 225–28 transacting, 31 transactional databases, 271–2 see also Database applications transform scenario, 114–7 transformation, corporate, 162–3 324

tribes, 127–28, 130–31 trust, 74–5, 264 Turban, E., 274, 281 two level problem solving, 262, 263 unplanned expenditure, 68 US labour productivity growth, 42–3 value, delivering, 168–9 Value America, 151 value chain, 142–5, 242 value chain of information, 268–70 value management, 192–3 value proposition, 148–9, 155 value streams, 146, 147 variation, 257 vendors, 281–8 venture capitalists, 219 Verbind, 32 video conferencing, 283 view of information, 112, 113–4, 115, 119, 121 virtual organization, 32–4 virtual reality, 306 virtual societies, 127–28 viruses, 304, 306 vision, 112–113, 115, 119, 121 voice recognition, 283, 292 Vontobel, 209 Web sites, deception on, 303–6 Webvan, 141 Wessel, David, 217, 228 Winn, Craig, 151 wireless technologies, 307 Woodall, John, 250 Wood-Harper, A.T., 10 word processing, 282, 291 workflow systems, 283 workplace, IT in, 162, 172–3

Index Xerox Corporation, 139–40

ZedZed.com, 220 Zuboff, S., 116

Yahoo!, 149, 216, 217

325