Advanced Topics in Global Information Management, Volume 1

Advanced Topics in Global Information Management

Felix Tan

I DEA GROUP PUBLISHING

Advanced Topics in Global Information Management Volume 1

Felix B. Tan University of Auckland, New Zealand

This book is a release of the Advanced Topics in Global Information Management Series

Idea Group Publishing

Information Science Publishing

Hershey • London • Melbourne • Singapore • Beijing

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Mehdi Khosrowpour Jan Travers Michele Rossi Amy Bingham LeAnn Whitcomb Tedi Wingard Integrated Book Technology

Published in the United States of America by Idea Group Publishing 1331 E. Chocolate Avenue Hershey PA 17033-1117 Tel: 717-533-8845 Fax: 717-533-8661 E-mail: [email protected] Web site: http://www.idea-group.com and in the United Kingdom by Idea Group Publishing 3 Henrietta Street Covent Garden London WC2E 8LU Tel: 44 20 7240 0856 Fax: 44 20 7379 3313 Web site: http://www.eurospan.co.uk Copyright © 2002 by Idea Group Publishing. All rights reserved. No part of this book may be reproduced in any form or by any means, electronic or mechanical, including photocopying, without written permission from the publisher. ISBN 1-930708-43-2 Advanced Topics in Global Information Management-vol. 1 is part of the Idea Group Publishing series named Advanced Topics in Global Information Management (Series ISSN 1537-9302 ) eISBN 1-59140-029-5 British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

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Data Mining: A Heuristic Approach, Hussein Aly Abbass, Ruhul Amin Sarker & Charles S. Newton ISBN: 1-930708-25-4 / eISBN: 1-59140-011-2 / 310 pages / US$89.95 / © 2002 Managing Information Technology in Small Business: Challenges and Solutions, Stephen Burgess ISBN: 1-930708-35-1 / eISBN: 1-59140-012-0 / 367 pages / US$74.95 / © 2002 Managing Web Usage in the Workplace: A Social, Ethical and Legal Perspective, Murugan Anandarajan & Claire A. Simmers ISBN: 1-930708-18-1 / eISBN: 1-59140-003-1 / 386 pages / US$74.95 / © 2002 Challenges of Information Technology Education in the 21st Century, Eli Cohen ISBN: 1-930708-34-3 / eISBN: 1-59140-023-6 / 290 pages / US$74.95 / © 2002 Social Responsibility in the Information Age: Issues and Controversies, Gurpreet Dhillon ISBN: 1-930708-11-4 / eISBN: 1-59140-008-2 / 282 pages / US$74.95 / © 2002 Database Integrity: Challenges and Solutions, Jorge H. Doorn and Laura Rivero ISBN: 1-930708-38-6 / eISBN: 1-59140-024-4 / 300 pages / US$74.95 / © 2002 Managing Virtual Web Organizations in the 21st Century: Issues and Challenges, Ulrich Franke ISBN: 1-930708-24-6 / eISBN: 1-59140-016-3 / 368 pages / US$74.95 / © 2002 Managing Business with Electronic Commerce: Issues and Trends, Aryya Gangopadhyay ISBN: 1-930708-12-2 / eISBN: 1-59140-007-4 / 272 pages / US$74.95 / © 2002 Electronic Government: Design, Applications and Management, Åke Grönlund ISBN: 1-930708-19-X / eISBN: 1-59140-002-3 / 388 pages / US$74.95 / © 2002 Knowledge Media in Health Care: Opportunities and Challenges, Rolf Grutter ISBN: 1-930708-13-0 / eISBN: 1-59140-006-6 / 296 pages / US$74.95 / © 2002 Internet Management Issues: A Global Perspective, John D. Haynes ISBN: 1-930708-21-1 / eISBN: 1-59140-015-5 / 352 pages / US$74.95 / © 2002 Enterprise Resource Planning: Global Opportunities and Challenges, Liaquat Hossain, Jon David Patrick & M. A. Rashid ISBN: 1-930708-36-X / eISBN: 1-59140-025-2 / 300 pages / US$89.95 / © 2002 The Design and Management of Effective Distance Learning Programs, Richard Discenza, Caroline Howard, & Karen Schenk ISBN: 1-930708-20-3 / eISBN: 1-59140-001-5 / 312 pages / US$74.95 / © 2002 Multirate Systems: Design and Applications, Gordana Jovanovic-Dolecek ISBN: 1-930708-30-0 / eISBN: 1-59140-019-8 / 322 pages / US$74.95 / © 2002 Managing IT/Community Partnerships in the 21st Century, Jonathan Lazar ISBN: 1-930708-33-5 / eISBN: 1-59140-022-8 / 295 pages / US$89.95 / © 2002 Multimedia Networking: Technology, Management and Applications, Syed Mahbubur Rahman ISBN: 1-930708-14-9 / eISBN: 1-59140-005-8 / 498 pages / US$89.95 / © 2002 Cases on Worldwide E-Commerce: Theory in Action, Mahesh Raisinghani ISBN: 1-930708-27-0 / eISBN: 1-59140-013-9 / 276 pages / US$74.95 / © 2002 Designing Instruction for Technology-Enhanced Learning, Patricia L. Rogers ISBN: 1-930708-28-9 / eISBN: 1-59140-014-7 / 286 pages / US$74.95 / © 2002 Heuristic and Optimization for Knowledge Discovery, Ruhul Amin Sarker, Hussein Aly Abbass & Charles Newton ISBN: 1-930708-26-2 / eISBN: 1-59140-017-1 / 296 pages / US$89.95 / © 2002 Distributed Multimedia Databases: Techniques and Applications, Timothy K. Shih ISBN: 1-930708-29-7 / eISBN: 1-59140-018-X / 384 pages / US$74.95 / © 2002 Neural Networks in Business: Techniques and Applications, Kate Smith and Jatinder Gupta ISBN: 1-930708-31-9 / eISBN: 1-59140-020-1 / 272 pages / US$89.95 / © 2002 Managing the Human Side of Information Technology: Challenges and Solutions, Edward Szewczak & Coral Snodgrass ISBN: 1-930708-32-7 / eISBN: 1-59140-021-X / 364 pages / US$89.95 / © 2002 Cases on Global IT Applications and Management: Successes and Pitfalls, Felix B. Tan ISBN: 1-930708-16-5 / eISBN: 1-59140-000-7 / 300 pages / US$74.95 / © 2002 Enterprise Networking: Multilayer Switching and Applications, Vasilis Theoharakis & Dimitrios Serpanos ISBN: 1-930708-17-3 / eISBN: 1-59140-004-X / 282 pages / US$89.95 / © 2002 Measuring the Value of Information Technology, Han T. M. van der Zee ISBN: 1-930708-08-4 / eISBN: 1-59140-010-4 / 224 pages / US$74.95 / © 2002 Business to Business Electronic Commerce: Challenges and Solutions, Merrill Warkentin ISBN: 1-930708-09-2 / eISBN: 1-59140-009-0 / 308 pages / US$89.95 / © 2002

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Advanced Topics in Global Information Management Table of Contents Preface ........................................................................................................... viii Felix B. Tan, University of Auckland, New Zealand Acknowledgments ..........................................................................................iii Section I: Global Themes Chapter I Multilingual Electronic Commerce in a Global Economy ......................... 1 Aryya Gangopadhyay and Zhensen Huang University of Maryland Baltimore County, USA Chapter II Electronic Commerce and Strategic Change within Organizations: Lessons From Two Cases ................................................ 12 Robert D. Galliers, London School of Economics, UK Sue Newell, Royal Holloway College, University of London, UK Chapter III Trust in Internet Shopping: Instrumental Development and Validation through Classical and Modern Approaches ................... 25 Christy M. K. Cheung and Matthew K. O. Lee City University of Hong Kong, Hong Kong Chapter IV The Integral Role of Information Technology in Achieving Business Strategy Success: Managing the Information Resources of Global Competitors .............................................................. 42 Jeffrey D. Katz, Kansas State University, USA Chapter V The New Realities of Online Trading in the New Global Marketplace ...................................................................................... 63 Bridget Allgood, University College Northampton, UK

Chapter VI The Impact of Culture on the Development of Information Systems: A Case Study ................................................................................ 74 Trevor T. Moores, University of Nevada Las Vegas, USA Frank H. Gregory, Independent Consultant, Thailand Chapter VII Dysfunctional Development Pathways of Information and Communication Technology: Cultural Conflicts .............................. 83 G. Roland Kaye and Stephen Little Open University Business School, UK Chapter VIII Ten Lessons That Internet Auction Markets Can Learn from Securities Market Automation .......................................................... 97 J. Christopher Westland, Hong Kong University of Science and Technology, Hong Kong Chapter IX Transnational Information Systems: Development and Management Issues ........................................................................... 120 Paul Mantelaers and Wander van den Berg Delft University of Technology, The Netherlands Chapter X The Place of ICT in Global Planning ....................................................... 136 Abel Usoro, University of Paisley, UK Chapter XI The Cultural Construction of Information Technology ........................ 150 Vanessa Dirksen, Universiteit van Amsterdam, The Netherlands Section II: Regional Perspectives Chapter XII Survey of IT Outstanding Experiences in US and UK Organizations ..................................................................... 160 Mary Cecelia Lacity, University of Missouri–St. Louis, USA Leslie P. Willcocks, Oxford University, UK

Chapter XIII Management Integration through Software Applications: Japanese Manufacturing Firms in the UK Exert Control .................... 190 John Kidd and Tessa Yuk Lan Yau Aston Business School, Birmingham, UK Chapter XIV Can National Information Infrastructures Enhance Social Development in the Least Developed Countries? .................... 207 Peter Nelson Meso and Nancy Bogucki Duncan Kent State University, USA Chapter XV Contract, Control and ‘Presentiation’ in IT Outsourcing: Research in Thirteen UK Organisations ................................................ 227 Thomas Kern, Erasmus University Rotterdam, The Netherlands Leslie Willcocks, University of Oxford, UK Chapter XVI A Systematic Model to Integrate Information Technology into Metabusinesses: A Case Study in the Engineering Realms ................................................................................... 250 Luiz Antonio Joia, Brazilian School of Public Administration, Getulio Vargas Foundation, Brazil Chapter XVII Facial Social Risks in IT Development in South Africa– Learning from Scandinavia ........................................................................ 268 Helana Scheepers, University of Pretoria, South Africa Lars Mathiassen, Aalborg University, Denmark Chapter XVIII IS Project Characteristics and Performance: A Kuwaiti Illustration ................................................................................. 290 Adel M. Aladwani, Kuwait University, Kuwait Chapter XIX Information Systems Leadership Roles: An Empirical Study of Information Technology Managers in Norway ....................... 304 Petter Gottschalk, Norwegian School of Management, Norway

Chapter XX The Problem of Networked Organizations in India: A Case Study ............................................................................................... 320 Gurpreet S. Dhillon and Trevor T. Moores University of Nevada Las Vegas, USA Ray Hackney, Manchester Metropolitan University, UK Chapter XXI Knowledge Assets in the Global Economy: Assessment of National Intellectual Capital ................................................................. 329 Yogesh Malhotra, Florida Atlantic University, USA Chapter XXII The Nature of E-Loyalty in B2C E-Commerce ...................................... 346 Daniel Tomiuk and Alain Pinsonneault McGill University, Canada Chapter XXIII Generic Attributes of IS Graduates: An Analysis of Australian Views .............................................................. 370 Robert Snoke and Alan Underwood Queensland University of Technology, Australia About the Authors ...................................................................................... 385 Index .......................................................................................................... 393

viii

Preface A growing body of knowledge is being accumulated in the area of global information management (GIM). Research in this field has grown significantly in the 1990’s. Not only are established information systems (IS) journals publishing an increasing amount of GIM research, but there are now journals like the Journal of Global Information Management that publish research specific to the field. What exactly is global information management? GIM research can be broadly considered to be of two types–one that is global and the other regional. GIM is a field of study that examines the development, implementation, management and use of IS in a global/international context (for example, global sourcing/supply chain management, global planning in multinational companies, global e-business strategies, and cultural/language issues). At the same time, GIM research also deals with management, technological and use of IS issues in a single- or multi-country organizational environment (for example, outsourcing experiences in U.S. and U.K. organizations, national information infrastructures in less developed countries, and IS project characteristics and performance in Kuwait). Topics of study in GIM research are therefore highly diverse. This book contains a selection of research papers on a wide range of GIM topics. It is hoped that the book will advance our understanding of the field. It is the first of a series of books on the subject. The book is organized into 2 sections–global themes and regional perspectives.

Global Themes The chapters in this section explore various IS issues in a global/international setting. The chapter by Gangopadhyay and Huang examine the issues relating to multilingual electronic commerce, in particular, the nature of user interactions in multilingual electronic catalogs. Galliers and Newell review and contrast the experiences of two multinational companies in attempting significant change projects incorporating information and communication technologies. Cheung and Lee develop and test a model on trust in the context of Internet shopping. Katz considers the impact of culture and business strategy on the organizational and information technology infrastructures of global competitors. Allgood discusses how the global nature of Internet-based share trading impacts the players in the competitive stock brokering environment. Moores and Gregory report on a case study that highlights the difficulties in applying Soft Systems Methodology in the development of IS in an Eastern culture. Kaye and Little argue that the assumptions of universality and

ix common linear pathways of development are flawed because of cultural conflicts. Westland explores the lessons Internet auction markets can learn from securities market automation by considering exchanges in Chile, Russia, and China. Mantelaers and van den Berg investigate issues relating to the development and management of transnational information systems. Usoro probes how global planning is achieved in multinational companies in the U.K. and South Africa. Dirksen calls for more cultural considerations in the study of information systems.

Regional Perspectives The chapters in this section delve into various IS issues in a single- or multi-country organizational setting. The chapter by Lacity and Willcocks detail the results of a survey of IT outsourcing experiences in U.S. and U.K. organizations. Kidd and Yau discuss the nature of computer software that has been imported from Japan to the UK to control imported production systems and /or to control management data flows. Meso and Duncan study the relationship between national information infrastructure and social development, suggesting ways governments of least developed countries may enhance their nations’ growth by developing strategic plans for national information infrastructure. Kern and Willcocks present findings from thirteen UK organizations on the role of outsourcing contract and its purpose for ensuring control over the client’s outsourcing destiny. Joia develops and tests a model to link effectively different information technologies in order to coordinate a metabusiness using a case study of a major engineering firm in Brazil. Scheepers and Mathiassen consider the development and implementation of information technology in South Africa based on experiences in Scandinavia. Aladwani discusses why managers cannot rely on prescriptions suggested by IS projects research in developed countries to understand IS projects in developing countries. Gottschalk presents results from a survey done in Norway on IS managers’ leadership roles. Dhillon, Moores and Hackney argue that many emerging economies, like India, may face potential misalignment of interests with the advent of networked organizations. Malhotra contends that there is a need for assessing knowledge capital at the national level and discusses current and future assessment methods. Tomiuk and Pinsonneault offer a conceptual framework to better understand the assess the impact of information technology on customer loyalty in retail banking. Snoke and Underwood investigate the differences between academic and industry views of the desired generic attributes of IS graduates in Australia using a Delphi study.

x

Acknowledgments I am grateful to the authors. Without their contributions this book would not have been possible. I would also like to thank Ms. Jan Travers, Dr. Mehdi Khosrowpour, and the team at Idea Group Publishing for their efforts and assistance in getting this book to print. Felix B. Tan August 2001

Section I Global Themes

Multilingual Electronic Commerce in a Global Economy 1

Chapter I

Multilingual Electronic Commerce in a Global Economy Aryya Gangopadhyay and Zhensen Huang University of Maryland Baltimore County, USA

The purpose of this research is to further the knowledge required for building electronic commerce systems that operate in multiple languages in global settings. The issues in multilingual electronic commerce are presented in two parts. First we describe a bilingual electronic catalog that can be used by online retailers for selling products and/or services to customers interacting in either English or Chinese that was developed to investigate into the nature of user interactions in multilingual electronic catalogs. Second, we discuss issues in developing multilingual electronic catalogs.

INTRODUCTION As all of commerce is converging on the Internet, the nature of business is changing rapidly. One of the main features of business on the Internet is the ability to transcend geographic boundaries. But along with the benefits of the widespread outreach of the virtual marketplace come many challenges. An example of such a challenge is to provide costeffective interchange across language and culture. Many organizations are confronted with the requirement of making their products or services available in multiple languages, particularly in their Asian and European markets. Internationalization of systems may involve enabling the input and display of non-English characters, changing default formats for date, time, currency, and measuring units, and using Unicode to handle the mix of European and Asian characters for complex operations such as rolling up data from multiple sites in many languages around the world1 . While language technology (Nirenburg, 1992; Onyshkevych & Nirenburg, 1995; Sheremetyeva & Nirenburg, 1996) is making rapid progress, much research is needed in managing and accessing multilingual information in order to reach full potential of global electronic commerce (e.g., Malhotra, 1997, 1998). Copyright © 2002, Idea Group Publishing.

2 Gangopadhyay & Huang

The purpose of this research is to further the knowledge required for building information systems that operate in multiple languages. Specifically, we focus on studying user behavior in performing various tasks in a multilingual system. In order to study user behavior and performance in a multilingual electronic commerce setting, we have designed a bilingual electronic catalog which can be used by online retailers for selling products and/ or services to customers interacting either in English or Chinese. An electronic catalog is a graphical user interface that presents product and/or service information to users, typically using the World Wide Web. An electronic catalog is a key component of electronic commerce that has been used for business-to-consumer commerce as well as business-to-business commerce (Adam et al., 1998). Although the term “electronic catalog” might sound like an electronic extension of chapter catalogs, it offers features that are far beyond those found in chapter catalogs. Such features include computational services such as efficient browsing and searching, online order processing such as checking out products using shopping carts and secure payment mechanisms, and backend processing such as integration with company databases (Segev et al., 1995). These features have extended the role of electronic catalogs to the point of being used as electronic storefronts. With the rapid proliferation of electronic commerce both in local and global markets, there is an increasing need to provide support for internationalization such as foreign currencies, different date and time formats, sort order, and multiple languages (Broin, 1999). The need for providing multilingual support is echoed by the rapid increase of non-English speaking users in the Internet. The rest of the chapter is organized as follows. In the next section we describe the electronic catalog and its components. Next, we discuss issues related to language preferences by bilingual users, based on an experimental study. Next we discuss various issues in designing multilingual systems. The last section contains our conclusions and future research directions.

A BILINGUAL ELECTRONIC CATALOG Description of the Catalog A prototype electronic catalog has been implemented in the World Wide Web using ColdFusion 4.0 as the front end, which is connected to a Microsoft Access database at the back end, using an ODBC driver. The catalog is composed of two identical interfaces in two languages: English and Chinese. Following the unified content model (Doherty, 1999), the English interface has been translated element by element into the Chinese interface, with the only difference being the order in which the products are sorted. The purpose of using the unified content model was to eliminate any presentation bias in user preferences. The front-end interface is shown in figure 1, which shows two language options (English and Chinese) and two separate applications (Office Supplies and Food Market). Figures 2a-2b show the second-level interface that is invoked once a user selects Figure 1: The front-end interface

Multilingual Electronic Commerce in a Global Economy 3

Figure 2a: Three modes of search in English

Figure 2b: Three modes of search in Chinese

the Food Market application in the English and Chinese versions, respectively. There are three modes of operations that a user can select in order to interact with the system: browsing mode, searching mode, and matching mode. In browsing mode, the user is looking at the products available in the catalog without having any specific item in mind, which is supported by the list box “Select the category:” in Figure 2a. In searching mode, the user is searching for a product class without having a specific item in mind, which is supported by the list box “Select the subcategory:” in Figure 2a. In matching mode, the user has a specific item in mind,

4 Gangopadhyay & Huang

which is supported by the text box “Search by keyword:” in Figure 2a. Once the user selects a category, all products in that category are listed at the next level interface, an example of which is shown in Figures 3a and 3b for the English and Chinese versions, respectively.

Figure 3a: Category selection in English

Figure 3b: Category selection in Chinese

Multilingual Electronic Commerce in a Global Economy 5

When an item is finally selected, the product information is displayed. At this point the user has the option to include the product in the shopping cart, continue to shop, or go back to the initial interface, as shown in Figures 4a and 4b for the English and Chinese versions, respectively. The second level interfaces for the Office Supplies application are shown in Figures 5a and 5b for the English and Chinese versions respectively.

Language Preferences The system described above was used in an experiment to study how bilingual users exhibit language preferences in interacting with system. The details of the experimental design and test results are described in Gangopadhyay and Huang (2000). From these experiments we developed several implications for future research and practice in global electronic commerce. Firstly, users clearly indicated that they preferred to use their ethnic language (Chinese, in this case) when searching for ethnic products because it is difficult to translate them into another language such as English. Hence although the unified content

Figure 4a: Product information in English

Figure 4b: Product information in Chinese

6 Gangopadhyay & Huang

Figure 5a: Office supplies application–English

Figure 5b: Office supplies application–Chinese

model (Doherty, 1999) is easier to implement in a global electronic commerce system, it may not be a good strategy, from a user interface standpoint, for all product categories. Another closely related issue is the level of understanding of the information presented for bilingual users. The experimental results indicate that the subjects performed tasks equally well in both Chinese and English when dealing with structured information. However, when dealing with unstructured information, there was a significant improvement in their performance when the language of interface was Chinese as opposed to English. While it will take more research to establish a relationship between language preference and

Multilingual Electronic Commerce in a Global Economy 7

information complexity, such research can render significant insights into the design of multilingual interfaces for global electronic commerce. In multilingual systems that depend on word-for-word translation from one language to another, a lot of information may be lost during the translation process. For example, it is hard to tell the differences between “table” and “desk” in Chinese. In these cases, images may be helpful to present product information. It is also worthwhile to study the effect of multimedia information on user performance and satisfaction in global electronic commerce.

DESIGN ISSUES IN MULTILINGUAL SYSTEMS One of the major problems in global electronic commerce stems from differences in language and format, disparity in catalogs, lack of flexibility in the way information is organized, and case-to-case translations (Leger et al., 2001). Typically, there are several groups of users interacting with a multilingual system in global electronic commerce: manufacturers, content providers, and users. Manufacturers and content providers add new products, delete and modify existing product information, and maintain articles, descriptions, and other information about products. Users are the customers that interact with the system to gather information, search for specific products, and perform business transactions, including purchases and returns. In a system that supports multilingual electronic commerce, the content providers would like to manage the content in their own language but reach customers from many different nationalities, without having to deploy large translation resources. The users, likewise, would like to interact with the system in their own native language without having to worry about the location of the organization housing the system and their language preferences. There are several functions that have to be supported in this context: 1. Natural language interface: Since both content providers and users interact with the system in their native language, the system contains a natural language processor. In addition to extracting the meaning of the requests made by the users and content providers, the system must also be able to integrate and classify new product information using domain knowledge. 2. Maintaining multilingual catalogs: Since the products and services that are offered must be made available in many languages, an automated language translator must be available to create and maintain catalogs in multiple languages. 3. Business support: In addition to the above, support for special business transactions must be provided in multiple languages. Examples of such transactions include contract negotiation, product liability information, and copyright protection.

Ontology-Based Multilingual Support Most of the recent developments on machine translation and natural language support in multiple languages make use of ontologies for modeling domain knowledge (e.g., Agnesund, 1997, Leger et al., 2000) as well as linguistic knowledge (Mahesh et al., 1995; Bateman et al., 1994; Simons et al., 1995). In addition to natural language support, ontologies are also being used in adding semantics to structured languages such as XML (e.g., Erdmann et al., 2001). The main advantage of using ontologies is that knowledge can be captured in a languageindependent manner. Agnesund (1997) raises two fundamental questions for developing

8 Gangopadhyay & Huang

ontologies: how to choose the concepts in an ontology, and how to relate these concepts to lexical terms. There are several approaches to address these issues. For example, it is possible to choose concepts based on the lexicon of the langauage (Bateman et al., 1994). In this implementation, if a concept has no lexical counterpart, it will not be represented in the ontology. On the other hand, concepts that have lexical counterparts will have a one-to-one mapping. This can lead to the problem that if a concept does not have a lexical representation in a language, then it cannot be translated into it. The other approach is to divide the semantics of a concept between the lexicon and the ontology (Mahesh et al., 1995), where the language-specific knowledge is represented in the lexicon and language-neutral knowledge is represented in the ontology. The problem with this approach is that without a formal basis for choosing concepts the development of the ontology becomes unpredictable as new languages are added to the system. The solution suggested in Agnesund (1997) is to include language-specific knowledge into the lexicon, which then serves as the ontology. In our methodology, choice of concepts does not pose any great challenge since the domain is fairly specific. However, linking concepts with lexical entries in different languages is still a problem, as there may not be a lexical counterpart of a concept in every language that the system supports. We solve this problem by adding a semantic entry to every lexical term. When a term or a phrase is translated from one language into another, instead of direct translation, it is transliterated through the ontology. This can provide a contextual foundation for the translation and can also accommodate situations where a certain word or phrase in one language may not have a counterpart in another language. To illustrate, let us assume that a retailer has a product called “Kung Pao Sauce” that is being sold through a multilingual electronic commerce system. The ontologial entry corresponding to this product would be as shown in Figure 6. With this ontological entry, we can translate “Kung Pao Sauce” into Spanish as “Un listo utilizar sichuanestilo revolver-fríe la salsa,” instead of just “Salsa de Kung Pao,” which would have been a word-for-word translation. Furthermore, if the user searches for “Especias de Sichuan,” or “Sichuan Spices,” the system identifies “Kung Pao Sauce” as one of the possible products that the user is looking for. Once again, the search is facilitated with the help of the ontology.

System Architecture The system for multilingual electronic commerce would typically consist of a natural language processor for each language supported by the system, a machine language translator, an ontology server, and a series of agents to facilitate interactions among the various components. The agents are used for mapping a natural language query into an ontological representation, integrating product and service offerings from multiple vendors Figure 6: An ontology entry Term: Kung Pao Sauce

Semantics: A ready -to-use Sichuan-style stir-fry sauce. Superclass: Sichuan Spices Subclass: None

Multilingual Electronic Commerce in a Global Economy 9

into one composite system, and providing relevant feedback to the end user. One of the major architectural issues in designing such systems is to decide the extent and scope of ontologies used in the system. For example, it is possible to create language specific local ontologies, or language independent global ontologies, or a hybrid architecture. The advantage of having local ontologies is to be able to capture linguistic knowledge as well as emphasize language-specific terms and phrases for which there may not be any counterpart in other languages. Global ontologies, on the other hand, are more effective in capturing languageindependent knowledge, and linguistic domain knowledge is less emphasized. Wache et al. (2001) argue in favor of hybrid ontologies that can be designed to capture both languagespecific as well as language-independent domain knowledge. The system architecture we propose for multilingual support is shown in Figure 7, which is based on the hybrid approach. In this architecture, each source is described by its own ontology. The domain ontology servers combine the local ontologies using a shared vocabulary. Users specify their requirements in any of the languages supported by the system. The natural language processor extracts the intent of the query and passes it onto the appropriate domain ontology server, which then retrieves the result from the corresponding data source through the local ontology. Content providers, on the other hand, specify content specification through the appropriate data source in their preferred language. The local ontology is either created or modified and the shared vocabulary is modified accordingly. The system is currently under development to support five languages: English, Chinese, Spanish, French, and German. Figure 7: System architecture

10 Gangopadhyay & Huang

CONCLUSION In this chapter we have described the design and implementation of multilingual electronic commerce. We discussed experimental results for testing language preferences for users based on the task and product characteristics. A bilingual electronic catalog has been implemented in English and Chinese and two applications have been developed: office supplies and food market. For each application, there are three methods that a subject can use to search for a certain item: browsing, directed search, and exact match using keywords. Through these experiments, we have established a linkage between language preferences and task and product characteristics in using electronic catalogs. We have also described issues in multilingual electronic commerce and suggested a methodology for using ontologies to provide multilingual support. We have described a prototype that is currently under development. Future plans include conducting larger experiments with multilingual electronic catalog and identifying how the differences in language and culture affect the usability of such systems.

ENDNOTE 1 http://www.sybase.com/detail/1,3693,1009232,00.html

REFERENCES Adam, N. R., Dogramaci, O., Gangopadhyay, A. and Yesha, Y. (1998). Electronic Commerce: Business, Technical, and Legal Issues. New York: Prentice-Hall. Agnesund, M. (1997). Representing culture-specific knowledge in a multiligual ontology. In Proceedings of the IJCAI-97 Workshop on Ontologies and Multilingual NLP. Bateman, J., Magnini, B. and Rinaldi, F. (1994). The generalized Italian, German, English upper model. In Proceedings of the ECAI-94 Workshop on Implemented Ontologies, 35-45. Amsterdam. Broin, U. Ó. (1999). International aspects of user interface design. MultiLingual Computing & Technology, 10(3), 50-54. Computer Economics. (2001). English will Dominate Web for Only Three More Years. Retrieved from the World Wide Web: http://www.computereconomics.com/new4/pr/ pr990610.html. Doherty, W. (1999). Creating multilingual Web sites. MultiLingual Computing & Technology, 10(3), 34-37. Erdmann, M. and Studer, R. (2001). How to structure and access XML documents with ontologies. Data and Knowledge Engineering, 36, 317-335. Gangopadhyay, A. and Huang, Z. (2000). Online user interaction with electronic catalogs: Language preferences among global users. Journal of Global Information Management (Special Issue on Knowledge Management), 8(3), 16-23, July-September. Leger, A., Lehtola, A. and Villagra, V. (2001). MKBEEM—Developing multilingual knowledge-based marketplace. ERCIM News, July, (46). Mahesh, K. and Nirenburg, S. (1995). A situated ontology for practical NLP. In Proceedings of the IJCAI-95 Workshop on Basic Ontological Issues in Knowledge Sharing, 19-21, Montreal.

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Malhotra, Y. (1997). Knowledge management in inquiring organizations. In the Proceedings of 3rd Americas Conference on Information Systems (Philosophy of Information Systems Mini-track), 293-295. Indianapolis, IN, August 15-17. Malhotra, Y. (1998). TOOLS@WORK: Deciphering the knowledge management hype. Journal for Quality & Participation (Special issue on Learning and Information Management), 58-60. July-August, 21(4). Nirenburg, S. (1992). Text planning with opportunistic control. In Kittredge, R. (Ed.), Machine Translation Special Issue on Natural Language Generation, 7(1-2), 99-124. Onyshkevych, B. and Nirenburg, S. (1995). A Lexicon for knowledge-based MT. Machine Translation, 10(1-2). Segev, A., Wan, D. and Beam, C. (1995). Designing electronic catalogs for business value: Results of the commercenet pilot. Technical Report. The Fisher Center for Management and Information Technology, October, Haas School of Business, University of California, Berkeley. Simons, G. and Thomson, J. (1995). Multilingual data processing in the CELLAR environment. Paper presented at Linguistic Databases, March 22-23, University of Groningen, Centre for Behavioral and Cognitive Neurosciences. Sheremetyeva, S. O. and Nirenburg, S. (1996). Empirical modeling in computational morphology. Nauchno-Technicheskaja Informacija (Scientific and Technological Information), Series 2, Issue 7. Wache, H., Vögele, Visser, U., Stuckenschmidt, H., Schuster, G., Neumann, H. and Hübner, S. (2001). Ontology-based integration of information—A survey of existing approaches. Submitted to IJCAI-01 Workshop on Ontologies and Information Sharing. Retrieved from the World Wide Web: http://www.informatik.uni-bremen.de/~heiner/ paper-pages/ois01a.html.

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Chapter II

Electronic Commerce and Strategic Change within Organizations: Lessons from Two Cases Robert D. Galliers London School of Economics, UK Sue Newell Royal Holloway, University of London, UK

This article reviews and contrasts the experiences of two major companies in attempting significant change projects incorporating information and communication technologies. It does so by utilizing and critiquing the MIT “Management in the 1990’s” model and by reflecting on socio-technical approaches to organizational change. It makes the point that while much of current attention is on electronic commerce as it pertains to industry transformation and interorganizational relations, it is nonetheless a phenomenon that can impact complex internal relations and communication. Additionally, conclusions are drawn with respect to the process of change and the need for further longitudinal studies when researching change projects of this kind.

INTRODUCTION It goes without saying that electronic commerce has been a major topic of interest in recent years, with considerable importance being placed on the opportunities provided by information and communication technologies (ICTs) to improve coordination between businesses and with customers. Electronic commerce resonates as a potential means of finding solutions to some of the inter-organizational communication issues that confront modern-day businesses. However, with globalization, companies are themselves increasAppeared in Journal of Global Information Management, vol. 9, no. 3, 2001. Reprinted by permission.

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ingly widely dispersed geographically so that internal communications are also more difficult and complex. ICTs can therefore also potentially improve communication between individuals and groups within an organization. This suggests that we might usefully broaden and unpack the concept of electronic commerce to include intraorganizational collaboration and partnerships. For example, corporate intranets, ERP systems, corporate databases, and even internal email systems are all examples of electronic commerce that are increasingly used within a company. These ICTs enable data, knowledge, and information to be shared even when the individuals involved are widely distributed. However, while intraorganizational electronic commerce can provide a communication link between people who are functionally, hierarchically, or geographically separated, this does not necessarily mean that the social and psychological barriers between groups will be broken. The cases reported in this paper demonstrate very clearly that technology per se will not automatically improve communication between groups where long-standing barriers exist. The importance of breaking down functional and hierarchical barriers has long been recognized in the information systems world. In academia, our roots in systems thinking provide us with a conceptual base for viewing organizational issues from a process orientation, with information requirements being associated with those activities necessary to achieve a desired purpose (e.g., Checkland, 1981). This so-called “infological approach” has been paralleled by what might be called a datalogical perspective, where the focus is on an analysis of the data entities–and their relationships–required to provide necessary information (Martin, 1982). These concepts have found practical form in such phenomena as database technologies and approaches, and more recently in business process reengineering (BPR), knowledge management, and knowledge management systems (KMS) (see, for example, Davenport, 1993; Alavi & Leidner, 1999). This paper describes research concerning two companies that have been seeking to improve collaboration and communication internally across functional and departmental boundaries through the use of ICT. In one case the development and introduction of the ICTbased system leads to unintended, negative effects; in the other, there is preliminary evidence to suggest that the results have been much more positive. The experiences of the two companies help to reinforce lessons that have been known for some time,1 as well as provide new insights. The fact that these two cases are contemporary, and that there appears to be evidence that some of the lessons of the past have been forgotten or have remained unheard, suggests that the comparison may be enlightening.2 The paper is structured as follows. Following this introduction, we will describe the methodology followed in the research upon which the case studies are based. Then we will briefly outline important aspects of each case, the first concerning the experiences of a major multinational bank in implementing KMS, and the second describing the somewhat more emergent and holistic approach adopted by a major international airline. In the next section, we will attempt to extract from the two cases those features that appear to be key. The concluding section provides something of a reflection on more general lessons, in terms of what remains to be done in the current research effort and potentially useful directions for future research in this area.

METHODOLOGY Qualitative methods were used to explore the impact of ICTs on intraorganizational processes since these methods allow the researcher to examine the phenomenon of interest in its natural setting. Case studies were considered most appropriate, since they allow for the

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adoption of multiple data collection methods (Yin, 1984), which was thought to be important in order to develop the rich case descriptions needed to build theoretical understanding. Case studies generate insightful stories, rather than statistical information, and permit a better understanding of organizational complexity from an insider’s viewpoint (Mitchell, 1983), allowing the researcher to formulate a more holistic perspective on the studied phenomenon (Van Maanen, 1979). The cases reported in this paper were drawn from a larger pool of cases that have focused on investigating innovation processes in both manufacturing and service organizations across Europe. These two cases have been selected because they allow some interesting comparisons in relation to intra-organizational electronic commerce. Exploring the contextual similarities and differences between the cases is useful for examining their impacts on intra-organizational electronic commerce (Orlikowski, 1993). Methods of data collection included interviews, on-site observation, and documentation. Adopting multiple methods is important not only to enhance the richness of the findings, but also to ensure validity through the process of triangulation (Stake, 1995). The research in each case was conducted over a period of approximately 18 months. This included four visits to the bank during this period and two to the airline. The interviews, in both cases, were conducted primarily with project team members and sponsors and included individuals from various hierarchical levels and divisions. The interviews were conducted face-to-face, using a semi-structured interview schedule, and were tape recorded and later transcribed. The interviews varied in length, but most were between one-and-a-half to two hours. The on-site observation took place during visits to the companies and allowed informal conversations with project members during coffee and lunch breaks. In the bank, a two-day workshop was attended which greatly increased the opportunity for informal as well as formal research material to be collected. This allowed the researchers to make sense of the situation from an insider’s point of view (Evered & Louis, 1981). The on-site interviews at the airline were supplemented by telephone discussions, and further clarification regarding specific issues was provided via e-mail communication. Documents, such as minutes, reports, and intranet sites related to the projects were used to further enhance the richness of the material collected. Observation of subsequent developments has taken place through study of media articles, press releases, and the like. As is typical in inductive studies, writing the case studies was an iterative process in which the data were constantly revisited. Triangulation across the different sources of primary and archival case material revealed a high level of consistency, so that the “story” described in each case can be said to be valid. While there were no preconceived hypotheses at the outset of the inquiry, patterns emerged from the data which suggested the potential for using the MIT model (Scott Morton, 1991, p. 20) to compare the two cases in relation to their electronic commerce projects (see below).

CASE 1: THE BANK The bank has around 70,000 employees and operates in approximately 70 countries worldwide, with its headquarters in Europe. The bank was formed from a merger of two banks from the same country and has subsequently grown via the acquisition of banks in the various countries in which it now operates. ICT has always been an important priority in the bank, as evidenced by the fact that it is the fifth highest spender on IT in Europe. Its structure and functioning is highly decentralized, with resources allocated to the independent divisions and with very few resources retained at the center. It consists of a number of different product divisions including domestic, international, and investment banking.

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A problem that was exercising the minds of top management in this bank was that they had recently lost a key account thanks to the perceived inability of the bank to adopt similar procedures and provide similar services in the countries in which the global client company was operating. Exasperated by the bank’s apparent inability to present a “common face” worldwide (despite this being a stated strength in its marketing literature), the client company took its business to a rival. The bank’s reaction to this event was to set up a pilot intranet project. This pilot project was a key part of its “Vision 2000” strategy, which was aimed at creating “The Networked Bank.” The strategic intent of this project was thus to create a network across the bank so that knowledge and information could be shared more effectively across functions and geographically dispersed sites. This, it was assumed, would lead to the common adoption of defined “best practices” and so stimulate the integration of procedures and services across the bank. However, in direct contrast to the stated strategy, the actual impact was that the existing boundaries between functions and dispersed business units were reinforced. This was because, during the 18 month life of the pilot, in excess of 150 known intranets had been set up by individual departments in individual countries. Once this became evident, the bank called together representatives (both banking and IT) from its major national sites worldwide with a view to investigating how to coordinate this emerging web of intranets and achieve the stated strategic objectives. The idea was that this might help reduce response variety in the different countries. The meeting took place over two days at the bank’s headquarters. Two problems emerged almost instantaneously. First, the banking representatives were “too busy” to attend both days - having attended the first “strategic focus” day, they left their IT colleagues to “sort out the technical details” on the second day. Second, the IT representatives on the second day focused exclusively on technical solutions and came to the conclusion that the way forward was to create a corporate portal through which individuals could navigate the myriad of intranets. However, these national IT representatives were so energized as a result of these discussions that many of them set about designing their very own “corporate” portal. Within ten days the Bank was the “proud owner” of six or seven “corporate” portals, each with its own characteristics and idiosyncracies–and there were more on the way. In other words, the bank’s knowledge management system (KMS) turned out to be many KMSs and the original objective of presenting a common client interface was lost. Additionally, while making available a considerable quantity of apparently usable and useful data, few of the bank’s employees found their KMS to be particularly useful in their dealings with clients–or anything else for that matter. In one department in one country, and this appeared to be the most established of the intranets, the best that anyone could come up with when asked how it was being used was “to look up the company bus timetable.” A key problem in this case was that the vision of a “global” bank was in stark contrast to the existing culture and structure of the bank. The bank had grown largely through acquisition and merger, and each of these acquired banks had been left very much to operate using their home-grown procedures, offering the particular services they had historically provided. There had been no attempt to standardize, and indeed the culture of decentralization was built into the distribution of resources and the performance management measures used. Thus, when the pilot intranet project was started, each nationally-located bank and department recognized the potential usefulness of this technology for improving its own internal efficiencies. However, there was no reason for each to consider the potential of the technology for communicating and sharing information and knowledge across the existing internal boundaries, since there was no real incentive for them to do so. Thus, while all were aware of the stated vision, and indeed during interviews related their own intranet initiatives

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to this globalizing vision, each unit was most concerned with using its own resources for establishing internal efficiencies. Collaborating with other units would take time and resources away from this focus, at least in the short term. The result was that a strategy aimed at coordinating knowledge and information across the bank actually resulted in a great deal of reinvention, as each unit developed its own applications for sharing across its own uniquely developed intranet. There were examples given during interviews of how significant sums of money (c. $500,000) had been spent on developing intranet applications for knowledge sharing in one department, only for those involved to later find that similar sums had been spent by other units developing very similar if not identical applications elsewhere.

CASE 2: THE AIRLINE The second case is of one of the world’s largest international passenger airlines based in Europe. It had 356 aircraft in December 1999, operating over one thousand flights a day, and flying 45 million passengers in 1998-99. It has approximately 64,000 staff worldwide, 80% of them based in Europe. Originally a publicly-owned company, it was privatized in 1987. It is now owned entirely by private investors with around 265,000 shareholders, including 71% of the company’s own employees. The airline market has become increasingly fierce and had led to a drop in profits for the company in both 1998-99 and 1999-2000. The company’s response was to target profitable passenger segments and to work more closely with other airline companies in global alliances. These partnerships give the airline a presence in all major world markets. The issue confronting this airline was that many of its central departments were housed in different buildings with consequent inefficiencies and complex communications. A new headquarters was therefore planned, presenting an opportunity to upgrade systems and communications, utilizing the very best in modern ICT, and to house the c. 3000 employees involved. A project team was set up, with a representative from each of the departments affected by the proposed office move. The chair of the project team reported to a steering committee comprising senior executives and chaired by a main board member. The initial major objective was for the move–a $320m investment–to reap annual savings of at least $25m through streamlined procedures, reduced paper usage, and reductions in headcount. The project was quickly perceived (by both the steering committee and the project team members) as representing an opportunity not only to save money but to improve communications across departmental boundaries and to enable creative, innovative thinking to take place. This did result in significant savings with, for example, 89 tons of paper having been saved in the first five months of operation in the new building. In addition, however, further benefits ensued. Primarily a partnership between those responsible for office design and the IT and Human Resource Management departments, the project’s scope soon expanded to include new ways of working, streamlined procedures, and extensive training programs for all involved in the move–including the CEO. Everyone was expected to participate, and ideas about potential innovations were actively sought: the very process of preparing for the move set the tone for the new working environment, with knowledge sharing and knowledge creation being both encouraged and rewarded. Those involved recognized that the potentially disruptive and unsettling experience of a major office move, combined with new procedures, new technology and systems, not to mention downsizing, could be perceived in a much more positive light, were the approach to be inclusive and participative. Furthermore,

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excitement and pride might actually be generated in looking forward to the new opportunities available in the new working environment. The fact that the media also took considerable interest in the project added to the sense of expectancy being generated by the move. Communication was seen to be key throughout and this was achieved through face-to-face briefings, discussion groups, training programs, videos, newsletters, and the like. The new headquarters was designed to enable informal, ad hoc meetings to take place in, for example, coffee bars located on either side of the main thoroughfare. Individual offices and meeting rooms are few and far between (even the CEO did not have his own office), with “hot desking” being the norm, and mobile cell-phones being used to ease mobility and communication. The intranet is used extensively, for example, for booking travel (and for claiming the related travel expenses), for gleaning information on both corporate and individual customers (either in response to inquiries or proactively for direct marketing purposes), and for communicating with company offices and major client organizations worldwide. It is too early to judge the longer term benefits (and drawbacks) of the move, which has not been without its teething problems, of course. For example, the hot desking concept has not been entirely successful, with individuals deliberately leaving their belongings behind on “their” desk in an attempt to reserve their own spaces. In addition, others have been somewhat unsettled by the lack of a “home,” given their need to “belong,” while the continuing need to drive down costs even further has raised tensions. From the systems perspective, it is clear that further modifications to user interfaces may be required since infrequent use leads to forgetfulness, which in turn has a tendency to raise frustrations about “the technology.” Further, the initial euphoria attached to the move to the new building, which, as already indicated, had attracted considerable media interest and critical acclaim, died down considerably over time. This perfectly natural decline in enthusiasm was exacerbated, for example, by adverse market and media reaction to certain of the airline’s highprofile strategic decisions and the subsequent replacement of the CEO. Despite this and some of the problems mentioned above, many of the sought-after benefits have been achieved, and communication appears to be more open and streamlined, with informality having been retained, despite the new formal procedures. Morale remains high, despite the company’s somewhat disappointing financial results and the continuing intense competition it faces.

REFLECTIONS: KEY ISSUES While considerably more research has to take place in both organizations in order properly to reflect on the widely differing experiences of the two companies, some initial comments can be made. The two cases are clearly rather different, but in both the focus was on using ICT to facilitate communication and knowledge sharing across their dispersed operations. In other words, both organizations were attempting to use electronic commerce to transform intraorganizational relations, in particular by encouraging greater coordination and collaboration across departments and business units. In both cases, top management was committed to change and saw each project as being strategically important from the point of view of the business. While both change projects were to be enabled by ICT, both were essentially “business-driven.” In the case of the bank, however, it would seem that the project was initially conceived, and remained, one of superimposing an ICT on to an existing organizational structure, with little in the way of changed work practices. For example, departmental boundaries and

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authority remained untouched, with each department remaining responsible for its own “slice of the action.” An ICT-based KMS was perceived to be the answer, with it being “parachuted” on top of the existing organization. Making apparently useful data available for everyone would lead to the common client interface that was considered essential to retain key customers. For the airline, what was initially an office move, conceived for the purposes of cost reduction and greater efficiency, soon became an opportunity radically to streamline office procedures, reduce paperwork, and improve communication–both internally and externally. What emerged was what we might view as a socio-technical design for the new building and the people in it. Perhaps the irony in this comparison is that while the bank actively sought improved customer relationship management and internal communication, the airline achieved it without planning to do so. We might characterize the bank’s approach as a case of “top-down,” business-driven planning, while the airline’s management gave their project team broad guidelines (and tough financial targets) but the freedom to be creative and the ability to allow ideas to emerge from knowledge sharing. It has often been said that it is easier to effect change when there is a sense of crisis. Paradoxically, however, it was the bank that saw itself as facing a crisis, while the airline simply wanted to become more competitive by being more efficient–seeing the issue as simply the on-going business of competing in what is a cut-throat industry. In addition, it is clear that while the bank expected that the mere provision of a KMS would lead to the improvements they sought, the airline took considerable steps to inform, motivate, and energize those concerned, both before the move and afterwards. Utilizing the MIT “Management in the 1990’s” model (Scott Morton, 1991), we can map the alternative approaches adopted by the two case companies. Figure 1 illustrates the MIT model in outline, while Figure 2 provides a comparison of the paths followed by the bank and the airline. Essentially, the original model attempts to illustrate the nature of strategic change and fit. The model emphasizes (after Leavitt, 1965) that a change in any of the five elements will have an impact on the other four elements. It also reminds us that there is more to the management of change than the early advocates of business process reengineering would have had us believe (Galliers & Swan, 1999), given their emphasis on process innovation on the back of ICT alone (e.g., Davenport, 1993). While Figure 1 might be seen as an idealized version of an holistic approach to organizational change and fit, Figure 2 represents the stark reality of the approaches adopted in the two case companies.

Figure 1: The MIT model of strategic change and fit Structure (intra- & interorganizational)

Strategy

Management Processes Individuals (roles, values, capabilities …)

Socio-, economic, technological environment

Technology

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The model in Figure 1 depicts all the elements as being interrelated, but in practice the dominant assumption has been that technology must be aligned to the established strategystructure fit (Scott Morton, 1991). In other words, a firm must first develop its strategy, then design the structure to support this strategy, and finally build new management processes, align IT, and ensure that appropriate roles are created and individuals are trained (McGee & Prusak, 1993). Comparing the two cases against these normative assumptions, it is clear that neither case company operated according to this “best practice” prescription. Essentially the bank’s approach was little more than identifying a technological solution to a perceived business problem. It was assumed that, having articulated the strategy, all that was necessary was to align the selected ICT with this strategy. Unfortunately, this ignored the existing management processes and individual roles and skills, as well left the organizational structure unchanged. Recall, too, that the individual national banks were essentially operating in opposition to the newly defined strategy. Hence, the approach ignored the organizational environment, let alone the wider socio-economic environment. In this situation, as the MIT model would suggest, the impact of the ICT (in this case intranet technology used as a KMS) was limited and certainly did not result in the strategic changes intended. In contrast, the airline, taking into account the socio economic environment in which it was operating, initially converted its strategy (i.e., to improve efficiency and cut costs by moving disparate functional units into a single location) into required changes in structure and business processes. Shortly after its formation, members of the project team saw the wider opportunities afforded by the move, more specifically in terms of a new working environment, enabled by ICT (in this case an intranet/KMS), and the pressing need to develop new roles and skills. Importantly, the development of the technology support for the new strategy as well as the roles and management processes were much more emergent than is suggested by the MIT model. There was never any explicit attempt to align the ICT available with the strategy. What is more, and this is not adequately illustrated by the MIT model, the process by which they went about the change project was key, with participation and inclusiveness being the watchwords. In other words, the process of IT implementation management in the airline appeared to be crucial to the success experienced, especially in terms of involving potential users as widely as possible and letting solutions emerge and

Figure 2: The two approaches compared

Environment Structure Stru cture

Strategy

Management Processes

Stra teg y

Technology

Ma nag ement P ro ces ses Indiv iduals

Individuals

Environment

Technolo gy

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evolve as individuals interacted and learned about the available technologies. Similarly, Yetton (1997) argues that successful IT management is often more evolutionary than the strategic alignment approach advocated.

CONCLUSIONS AND FUTURE RESEARCH In many ways, the message from this comparison is not new–i.e., that we should not expect business improvements to come from ICT alone, but we should see such change projects as being essentially about human beings, about social systems … albeit with a technological component. After all, this has been the mantra of the socio-technical school for the past 50 years or so. Having said that, the fact that we can observe such differing experiences in implementing change on the back of ICT at the beginning of the 21st century suggests that much has still to be learned in this respect. This is perhaps particularly true now, given that such flexible ICT as intranet technology is both commonplace and accessible, and its promise is well known among even the most troglodyte of business executives. In selling solutions as the IT industry is prone to do, it is not unreasonable to expect that executives might be lulled into a false sense of security when investing in those solutions. We have seen here that a business-driven, top-down approach, even with top management commitment, may well be necessary but not sufficient to effect change that brings about business benefits. We have also seen that a broader conception of an IS change project (taking into account people and their modes of working and communicating) seems more likely to bring about beneficial results–even unexpected ones. Creating the conditions for emergence and serendipity appears to hold considerable promise in this context. The related concepts of “bricolage” (Ciborra, 1992) and improvisation (Orlikowski, 1996; 1997) have recently been introduced in the context of ICT management, and the airline case certainly appears to support the argument of letting ICT applications evolve as people use and experiment with them. The use of the term “evolve” is both deliberate and important in this context. Often, debate in the field of business strategy has focused on the two schools of thought concerned with emergent and deliberate strategies (cf., Mintzberg, 1989). This finds form in the IS literature, in addition (e.g., Orlikowski, 1996). In both cases considered here, however, the strategy was evidently deliberate and emanated from “the center.” In the case of the bank, the strategy was limited to the development of a technological solution imposed on an “alien” culture. It therefore failed, at the time of writing at least, to bring about the desired results. Conversely, in the case of the airline, a more broadly based, but nonetheless deliberate, strategy was formulated. In contrast to the bank, however, an appreciative climate was fostered, enabling greater acceptance of the proposed strategy. Additionally, a climate of mutual learning developed, thus enabling the strategy to evolve in the light of experience. While the findings here support a socio-technical view of organizational change, they also take us beyond this, since even here the process of change has been underexamined. For example, both companies involved multifunctional project teams in implementing the change programs. However, there was a significant difference in how these teams operated (i.e., in their processes). In the bank, the different functions worked essentially independently, even when they were supposedly working on a joint project. This was demonstrated most clearly at the two-day workshop. Knights and Wilmot (1997) refer to this as mechanistic pooling, which they define as occurring where “each member of the pool takes a different ‘slice’ of the project and the work then proceeds with the minimum of communication between

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its members” (p. 19). In the airline, on the other hand, the project team was much more clearly engaged in joint knowledge production, where the knowledge from the different functional specialists was shared and integrated to produce new solutions which were accepted by those involved. These micro-level processes appeared to be essential to the relative success of the two cases but are not captured by static and more messo-level models of organizational change. The MIT model may provide a useful starting point for examining the impact of intraorganizational electronic commerce, but what is now needed is longitudinal research that tracks and monitors the messy and sometimes tortuous process by which this change takes place. In this vein, ongoing research in the two case study companies is taking place with a view to ascertain more clearly the repercussions of the two initiatives, over time, both in terms of intended and unintended effects. We cannot assume that the only outcomes in the case of the bank are entirely negative, nor that in the case of the airline, they are entirely positive. Pennings (1998), for example, has highlighted the lagged effects of ICT investments, and Pettigrew (1990) counsels longitudinal research in the context of change projects. While the research described here was clearly longitudinal (being conducted over a period of 18 months), the projects which are being considered here are ongoing in the sense that in neither case has the technology been fully appropriated. Appropriation occurs when a new technology that has been implemented has become routine (Clark & Staunton, 1989). With complex technologies implemented in large global companies, this is likely to take a very long time, if indeed it ever happens. So, here we have considered the initial impacts only of two ICT implementation projects. However, with the pressure on academics to publish, and with the limits to research funding available, it is often very difficult to conduct longitudinal research over extended periods, covering the entire innovation process from agenda formation (when the idea for implementing a particular new technology is first tabled) through to appropriation. This means that many of our research findings are likely to provide only a snapshot (or at least only a small movie extract) of the ICT management process. Given the importance noted here of emergence and evolution, this suggests a problem for those interested in this area and poses a significant challenge for IS research more generally. Discussion and debate as to how to resolve this problem is urgently needed so that we prevent oversimplification of ICT-based change which tends to highlight the failures rather than the successes. Successes are likely to take considerable time to emerge and not be captured by the snapshots that commonly get taken through the research process conducted in real time. On the other hand, retrospective accounts suffer from post-hoc rationalizing and justification so that much of the emergent and messy process of ICT-based change is concealed (Lanzarra, 1999). There is some additional learning that might potentially be gleaned from this comparison. The lack of a cumulative tradition in IS has been highlighted and criticized for some time (e.g., Keen, 1980). More recently, and in a similar vein, one of the authors of this paper has expressed his concern regarding our propensity in the IS field to study emerging phenomena in isolation. In doing so, he highlighted, as examples, KMS and electronic commerce at this point in the development of our subject area (Galliers, 1999). It would seem, certainly on the face of it, that the experience of both the airline and the bank would lend some weight to further research in which electronic commerce and KMS are considered as related phenomena in the context of the kind of strategic change reported on here. Finally, in relation to intraorganizational electronic commerce per se, there is an important difference between the two cases that needs to be considered. Specifically, while the bank relied wholly on a virtual space (the intranet) to facilitate improved internal

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communication and collaboration, the airline incorporated an improved physical as well as virtual space as part of its change program. The new building designed by the airline not only colocated individuals from the different functional areas but also created places where people could meet, both formally and informally. Nonaka and Konno (1994) develop the concept of “Ba” to highlight the need for “space” in the knowledge creating company. While some of these “Bas” are virtual, others require a shared physical space. It is tempting to argue that the airline was relatively more successful precisely because its change strategy that encouraged greater interdepartmental collaboration, perhaps serendipitously, gave employees access to both a virtual and a physical space in which to interact with colleagues. This suggests that intraorganizational electronic commerce will need to be carefully integrated with face-to-face opportunities for interaction for the benefits of such virtual communication to be more fully exploited.

ENDNOTES 1 Through, for example, the work of those associated with the socio-technical school of thought (e.g., Mumford, 1983; 1987), particularly in relation to Information Systems (IS) failures (e.g., Bostrom & Heinen, 1977a,b) and a more balanced, non-technologically deterministic and emanicapatory approach to IS development and implementation. (e.g., Bjerknes et al., 1987). 2 The fact that a new book (Coakes et al., 2000) has recently been published on new thinking and contemporary accounts of the socio-technical approach suggests that we are not alone in this belief.

REFERENCES Alavi, M. and Leidner, D. E. (1999). Knowledge management systems: Issues, challenges, and benefits. Communications of the Association for Information Systems, 1(7), February. http://cais.isworld.org/articles/1-7/article.htm. Bjerknes, G., Ehn, P. and Kyng, M. (Eds.). (1987). Computers and Democracy: A Scandinavian Challenge. Aldershot, UK: Avebury. Bostrom, R. P. and Heinen, J. S. (1977a). MIS problems and failures: A socio-technical perspective, Part 1: The causes. MIS Quarterly, 1(3), September. Bostrom, R. P. and Heinen, J. S. (1977b). MIS problems and failures: A socio-technical perspective, Part 2: The application of socio-technical theory. MIS Quarterly, 1(4), December. Checkland, P. B. (1981). Systems Thinking. Systems Practice. Chichester, UK: Wiley. Ciborra, C. U. (1992). From thinking to tinkering: The grassroots of strategic information systems. The Information Society, 8, 297-309. Clark, P. and Staunton, N. (1989). Innovation in Technology and Organization. London, UK: Routledge. Coakes, E., Willis, D. and Lloyd-Jones, R. (Eds.). (2000). The New Socio-Tech: Graffiti on the Long Wall. London, UK: Springer-Verlag. Davenport, T. H. (1993). Process Innovation: Reengineering Work through Information Technology. Boston, MA: Harvard Business School Press.

Electronic Commerce and Strategic Change within Organizations

23

Evered, R. and Louis, M. R. (1981). Alternative perspectives in the organizational sciences: “Inquiry from the inside” and “inquiry from the outside.” Academy of Management Review, 6, 385-395. Galliers, R. D. (1999). Towards the integration of e-business, knowledge management and policy considerations within an information systems strategy framework. Journal of Strategic Information Systems, 8(3), September, 229-234. Galliers, R. D. and Swan, J. (1999). Information systems and strategic change: A critical review of business process re-engineering. In Currie, W. L. and Galliers, R. D. (Eds.) Rethinking Management Information Systems: An Interdisciplinary Approach, 361-387. Oxford, UK: Oxford University Press. Keen, P. G. W. (1980). MIS research: Reference disciplines and a cumulative tradition. Proceedings: 1st International Conference on Information Systems,9-18. Philadelphia, PA, December. Knights, D. and Wilmott, H. (1997). The hype and hope of interdisciplinary management studies. British Journal of Management, 8, 9-22. Lanzarra, G. (1999). Between transient constructs and persistent structures: Designing systems in action. Journal of Strategic Information Systems, 8(4), 331-350. Leavitt, H. J. (1965). Applying organizational change in industry: Structural, technological and humanistic approaches. In March, J. G. (Ed.), Handbook of Organizations. Stokie, IL: Rand McNally. Martin, J. (1982). Strategic Data Planning Methodologies. Englewood Cliffs, NJ: PrenticeHall. McGee, J. and Prusak, L. (1993). Managing Information Strategically. New York, NY: Wiley. Mintzberg, H. (1989). Strategy formation: Ten schools of thought. In Fredricson, J. (Ed.), Prospectus on Strategic Management. New York, NY: Ballinger. Mitchell, J. C. (1983). Case and situation analysis. Sociological Review, 31, 186-211. Mumford, E. (1983). Designing Human Systems: The ETHICS Approach. Manchester, UK: Manchester Business School. Mumford, E. (1987). Sociotechnical Systems Design: Evolving Theory and Practice. In Bjerknes et al. (Eds.), 59-76. Nonaka, I. and Konno, N. (1998). The concept of ‘Ba’: Building a foundation for knowledge creation. California Management Review, 40(3), 40-54. Orlikowski, W. J. (1993). CASE tools as organizational change: Investigating incremental and radical changes in system development. MIS Quarterly, 17, 309-340. Orlikowski, W. J. (1996). Improvising organizational transformation over time: A situated change perspective. Information Systems Research, 7(1), 63-92. Orlikowski, W. J. (1997). An improvisational model of change management: The case of groupware technologies. Sloan Management Review, Winter. Pennings, J. (1998). Innovations as precursors of organizational performance. In Galliers, R. D. and Baets, W. R. J. (Eds.). Information Technology and Organizational Transformation: Innovation for the 21st Century Organization, 153-178. Chichester, UK: Wiley. Pettigrew, A. M. (1990). Longitudinal field research on change: Theory and practice. Organization Science, 1(3), 267-292. Sauer, C., Yetton, P. W. & Associates. (1997). Steps to the Future: Fresh Thinking on the Management of IT-Based Organizational Transformation. San Francisco, CA: Jossey-Bass. Scott Morton, M. S. (Ed.). (1991). The Corporation of the 1990s: Information Technology and Organizational Transformation. New York, NY: Oxford University Press.

24 Galliers & Newell

Stake, R (1995). The Art of Case Study Research. London, UK: Sage. Van Maanen, J. (1979). Reclaiming qualitative methods for organizational research. Administrative Science Quarterly, 24, 520-526. Yetton, P. W. (1997). False Prophecies, Successful Practice, and Future Directions in IT Management, 27-54. Sauer, Yetton & Associates. Yetton, P. W., Johnston, K. D. and Craig, J. F. (1994). Computer-aided architecture: A case study of IT and strategic change. Sloan Management Review, 35(4), 57-67. Yin, R. K. (1984). Case Study Research–Design and Methods. London, UK: Sage.

Trust in Internet Shopping 25

Chapter III

Trust in Internet Shopping: Instrumental Development and Validation through Classical and Modern Approaches Christy M. K. Cheung and Matthew K. O. Lee City University of Hong Kong, Hong Kong

Despite the phenomenal growth of Internet users in recent years, the penetration rate of Internet shopping is still low, and one of the most often cited reasons is the lack of consumers’ trust (e.g., Hoffman et al., 1999). Although trust is an important concept in Internet shopping, there is a paucity of theory-guided empirical research in this area. In this paper, a theoretical model is proposed for investigating the nature of trust in the specific context of Internet shopping. In this model, consumers’ trust in Internet shopping is affected by propensity to trust and two groups of antecedent factors, namely, “trustworthiness of Internet vendors” and “external environment.” Trust, in turn, reduces consumers’ perceived risk in Internet shopping. As an important step towards the rigorous testing of the model, the necessary measurement instrument has been developed with its reliability and validity empirically tested. The psychometric properties of the measurement instrument have been investigated using both a classical approach (based on Cronbach’s alpha and exploratory factor analysis) and a contemporary approach (based on structural equation modeling techniques), as a way of methods triangulation for validating instrument properties. The resulting instrument represents a rigorously developed and validated instrument for the measurement of various important trust-related constructs. This research contributes to the development of trust theory in e-commerce and add to the repository of rigorous research instruments for IS survey researchers to use. Appeared in Journal of Global Information Management, vol. 9, no. 3, 2001. Reprinted by permission.

26 Cheung & Lee

INTRODUCTION The growth of the Internet and its user base in recent years has been truly phenomenal. As of November 2000, the estimated number of people online has exceeded 407 million1 and the annual growth rate remains high. Enormous potential therefore exists for the use of the Internet for the purchase of goods and services (“Internet Shopping”). However, this potential remains largely untapped, as market surveys2 have confirmed that many Internet users are still reluctant to make purchases on the Internet. One of the most often cited reasons for consumers not purchasing from Internet shops is the lack of trust, which stops or discourages consumers from entering into exchange relationships with Internet shops (e.g., Hoffman et al., 1999). Despite the importance of trust in consumer-based electronic commerce, little theory-guided empirical research has been undertaken to understand the nature of trust, its antecedents, and its consequences in the specific context of Internet shopping. The few research papers available (e.g., Jarvenpaa et. al., 1999) tend to focus on very small models, ignoring many potentially important constructs (e.g., trust propensity, privacy, and security) suggested by the rich but distant literature on trust. Thus, more research is called for. In addition, the study of e-commerce trust has been hampered by a lack of validated measurement instruments in the literature. As a step towards bridging this gap, this paper proposes a research model of trust in Internet shopping and presents the development of an empirically validated measurement instrument for testing the trust model. This paper is presented as follows. The first section reviews literature on trust. Then we present the research model and propositions and describe the instrument development, validation process, and results. Finally, conclusions of the findings and suggestions for future research are provided.

TRUST The notion of trust has been examined under various contexts over the years, for example, in bargaining (Schurr & Ozanne,1985), industrial buyer-seller relationships (Doney & Cannon, 1997), distribution channels (Dwyer, Schurr & Oh, 1987), partner cooperation in strategic alliances (Das, 1998), and the use of market research (Moore et al., 1993). Different theoretical perspectives have been used in these studies, which may be aggregated into three categories (Lewicki & Bunker, 1995): 1. The views of personality theorists, conceptualizing trust as a belief, expectancy, or feeling which is deeply rooted in the personality and has its origins in the individual’s early psychological development. 2. The views of sociologists and economists, conceptualizing trust as a phenomenon within and between institutions, and as the trust individuals put in those institutions. 3. The views of social psychologists, characterizing trust in terms of the expectation and willingness of the trusting party engaging in a transaction, the risks associated with and acting on such expectations, and the contextual factors that serve to either enhance or inhibit the development and maintenance of that trust. Although the social-psychological perspective appears to be most relevant in the understanding of consumer trust in Internet shopping as this perspective focuses on transactions, the other perspectives also contribute to our understanding of trust in this context in their unique ways. For example, it would be insufficient to consider consumers’ trust in Internet shopping without examining the trust propensity (which is a personality trait) of the consumers concerned.

Trust in Internet Shopping 27

The distant literature on trust across a wide variety of disciplines provides a useful basis on which to investigate consumer trust, its antecedents, and its consequences in the context of Internet shopping. However, most of the literature still suffers from the problems identified by Mayer and Davis (1995). Confusions between trust and its antecedents still abound. For example, in Kini and Choobineh (1999) the definition of trust included the sources of trust itself. In addition, most of the literature does not contain empirical supporting evidence. In the context of consumer trust in Internet shopping, theory-guided empirical study is rare. This severe lack of theory-guided empirical studies is critically impeding our understanding of consumers’ trust in Internet shopping.

RESEARCH MODEL AND PROPOSITIONS This research synthesizes the diverse literature on trust in order to develop an integral research model of consumer trust in Internet shopping (CTIS). According to Hardin (1992), trust is a three-party relation involving properties of a trustor, attributes of a trustee, and a specific context in which trust is conferred. As depicted in Figure 1, trust in Internet shopping is affected by a consumer’s propensity to trust, the trustworthiness of an Internet vendor, and relevant external environmental factors impacting Internet shopping transactions. Limerick and Cunnington (1993) also argued that trust can reduce uncertainty about the future and is a necessity for a continuing relationship with participants who have opportunistic behavior. The essence of risk is uncertainty about the future. Thus, the formation of trust, in turn, reduces consumers’ perceived risk of Internet shopping.

Figure 1: A conceptual model of trust in Internet shopping Trustworthiness of Internet Vendor Perceived Security Control Perceived Privacy Control Perceived Integrity Perceived Competence External Environment

Trust in Internet Shopping

Third Party Recognition Legal Framework Propensity to Trust

Cultural Environment

Experience

Perceived Risk

28 Cheung & Lee

Trustworthiness of Internet Vendor The perceived trustworthiness of a party is often suggested as an important antecedent of trust. There is a long line of research (summarized in, for example, Mayer et al., 1995) examining the influence of perceived trustworthiness on the building of trust. Mayer et al. (1995) found that three factors–ability, integrity, and benevolence–are consistently related to trust in most previous studies. Hence, these factors are included in our model. In addition, in the specific context of this study, two new factors are added to the model to reflect the specific nature of Internet shopping. These two factors are perceived security control (PSC) and perceived privacy control (PPC). PSC and PPC are critical characteristics of Internet shopping transactions affecting the development of Internet users’ trust in Internet shopping. Previous studies find that these two factors are the major concerns of Internet users. In particular, privacy is the number one consumer issue facing the Internet (Benassi, 1999; Hoffman et al., 1999; Wang et al., 1998).

Perceived Security Control (PSC) In this study, perceived security control refers to the Internet users’ perception on the Internet vendors’ ability to fulfill security requirements, such as authentication, integrity, encryption, and nonrepudiation. Consumers tend to have a better trust in Internet shopping if a higher level of security is believed to exist. Therefore, the proposition is: Proposition 1: The perceived security control of Internet vendors is positively related to CTIS.

Perceived Privacy Control (PPC) In this study, perceived privacy control is conceived as the Internet users’ perception of the ability of Internet vendors in protecting consumers’ personal information collected from its electronic transactions from unauthorized use or disclosure. Consumers tend to have a better trust in Internet shopping if they perceive their privacy information as being well protected. Therefore, the proposition is: Proposition 2: The perceived privacy control of Internet vendors is positively related to CTIS.

Perceived Integrity (PI) In this study, perceived integrity refers to the perception of Internet users on the honesty of Internet vendors. For instance, whether they have consistent actions, whether their actions are congruent with their own words, and whether their transactions with consumers are fair. Integrity gives rise to trust. Therefore, the proposition is: Proposition 3: The perceived integrity of Internet vendors is positively related to CTIS.

Perceived Competence (PC) Perceived competency, in this study, is defined as the Internet consumers’ perception on the skills, abilities, and expertise of Internet vendors. Consumers tend to have a higher trust in Internet shopping if they think Internet vendors are competent. Therefore, the proposition is: Proposition 4: The perceived competence of Internet vendors is positively related to CTIS.

Trust in Internet Shopping 29

External Environment According to Lewicki and Bunker (1996), trust is context specific. In the faceless world of electronic commerce, third party recognition and a legal framework are two key environmental and contextual factors affecting the formation of consumers’ trust. Benassi (1999) argued that third party recognition, such as that provided by organizations such as TRUSTe, can help build consumers’ trust on the Internet and, in turn, accelerate the growth of the Internet. The Graphics, Visualization, & Usability Center’s (GVU) 10th WWW User Survey 3 also reported that a majority (over 70%) of Internet users worldwide wanted more new laws to protect their privacy online.

Third Party Recognition (TPR) In this study, third party recognition refers to the assurance of the trustworthiness of Internet vendors by third party recognition bodies. Thus, the proposition is: Proposition 5: The perceived effectiveness of the third party recognition is positively associated with CTIS.

Legal Framework (LF) In this study, legal framework refers to the law and code of practice established to protect Internet shoppers during electronic transactions. An effective legal framework can enhance consumers’ trust in Internet shopping. Thus, the proposition is: Proposition 6: The perceived effectiveness of the legal framework is positively associated with CTIS.

Propensity to Trust (PTT) Propensity to trust is a stable, within-party factor that affects the likelihood that a party will trust another party. People with different cultural backgrounds, personality types, and developmental experiences vary in their propensity to trust (Hofstede, 1980). People living in an environment with a strong culture of trust tend to have a higher propensity to trust. People who have a positive experience with the Internet also tend to be more trusting of Internet transactions. This propensity to trust is viewed as a personality trait that leads to generalized expectations about the trustworthiness of others. Mayer et al. (1995) have suggested that trust propensity has a direct impact on the formation of trust. Thus, the propositions are: Proposition 7: The strength of a trusting cultural environment is positively associated with PTT. Proposition 8: Prior positive personal experience in Internet usage is positively associated with PTT. Proposition 9: PTT is positively associated with CTIS.

Consequence of Trust: Perceived Risk (PR) Perceived risk is very powerful in explaining consumers’ behavior, since consumers tend more often to avoid mistakes than to maximize utility in purchasing (Mitchell, 1998). In particular, perceived risk is higher in Internet shopping than in the traditional mode of shopping because, for instance, a consumer will not be able to physically examine the appropriateness of a product before a purchase decision is made. Peter and Ryan (1976)

30 Cheung & Lee

argued that perceived risk generally consists of two components, one related to an uncertainty or probability of loss notion and the other related to a consequence or the importance of the notion of loss. In this study, perceived risk refers to the Internet users’ perception on the possibility of yielding unexpected outcomes with undesirable consequences. Many prior studies (Dion et al., 1995; Doney & Cannon, 1997; Morgan & Hunt, 1994) have discovered a strong relation between risk and the concept of trust. As suggested by Selnes (1998), perceived risk in a buyer-seller relationship is reduced by trust. Therefore, the proposition is: Proposition 10: CTIS is negatively associated with perceived risk in Internet shopping.

INSTRUMENT DEVELOPMENT A systematic and rigorous approach of developing measurement instruments is strongly advocated in the IS discipline. IS scholars (e.g., Bailey & Pearson, 1983; Ives et al., 1983; Doll & Torkzadeh, 1988; Davis, 1989) have claimed that constructs with strong theoretical justification and measures with high degrees of reliability and validity are prerequisites to cumulative knowledge in IS research. Since this study is one of the first empirical studies of trust in Internet shopping, a large part of the measurement instrument had to be developed from scratch, rather than be borrowed from the literature. The process of instrument development in this study is mainly divided into three stages. They are: (1) item creation, (2) scale development, and (3) instrument testing.

Stage 1: Item Creation Churchill (1979) recommended a series of techniques in generating measurement items, including literature searches, experience surveys, critical incident analysis, focus groups, and in-depth interviews. The use of these methods can enable the generation of measurement items with a relatively high degree of content validity (Moore & Benbasat, 1991). In this study, forty-one items were generated using the following three methods and all these measurement items are listed in Appendix 1. 1. Literature searches–five validated measurement items were obtained from the literature. 2. Focus groups–the items were generated through the discussion of the research topic with eight academic staff in the business faculty of a large university. 3. In-depth interviews–the items were obtained from personal interviews with six research students in the IS department of a local university.

Stage 2: Scale Development In this study, four judges who were experts in IS were requested to do the card sorting. As there were eleven constructs and forty-one items in the sample item pool, the card-sorting process was simplified with labels and definitions of constructs provided for categorization. Theoretically, if an item was correctly placed in a particular category, it was considered to display initial convergent validity with the related construct and discriminant validity with the others. Two measurements, Cohen’s (1960) Kappa and item placement ratio, were computed to assess the reliability of the sorting procedures and the construct validity of the scales. With

Trust in Internet Shopping 31

reference to previous studies (Vessey, 1989; Jarvenpaa, 1989; Todd & Benbasat, 1989), an acceptable score of Kappa should be greater than 0.65. In addition, high degree of “correct” placement of items within them can be considered to demonstrate a high degree of construct validity. In this study, the average inter-judge agreement score is 0.96, and the overall placement ratio of items to target constructs is 95.73%. In sum, a high level of agreement is found among the judges, and a high degree of convergent and discriminant validity of the scale is obtained. (Details of the two measurements are reported in Appendix 2.)

Stage 3: Instrument Testing Pilot Test A self-administrated questionnaire was distributed to 40 research students and academic staff (who were not involved in the previous stages of instrument development) in the faculty of business of a large university. Item-to-total score correlation and the effects of deleting items on Cronbach’s alpha were worked together to determine candidate items for further studies. Synthesizing all the previous procedures and iteration results, five items were removed from the item pool. As illustrated in Table 1, one item was removed from each of the five constructs, including “perceived security control,” “perceived privacy control,” “perceived integrity,” “perceived competence,” and “cultural environment.” In accordance with Hair et al. (1998), Cronbach’s alpha for each construct should be greater than 0.70. As shown in Table 1, most of these constructs have a Cronbach’s alpha larger than 0.70, except the construct “perceived security control” with an alpha of 0.68.

Field Test A refined self-administered questionnaire was distributed to the management information systems (MIS) students from the school of business in a large university, and a total of 405 usable questionnaires were collected. Before the scales were subjected to any statistical analysis, a thorough examination of the psychometric properties of measuring items was performed. The instrument validation process consisted of both classical approach (item-to-total score correlation, Cronbach’s alpha, and exploratory factor analysis) and contemporary approach (structural equation modeling) (Bagozzi, Yi, & Phillips, 1991). The aims of using these approaches as a way of method triangulation were to ensure the development of a rigor measurement instrument.

Classical Approach Similar to the pilot test, item-to-total score correlations and Cronbach’s alpha were applied to evaluate the reliability. In accordance with Table 2, all Cronbach’s alphas exceed 0.70 and all item-to-total correlations are greater than 0.70 (except one item in the construct “cultural environment”). For assessing the validity of the instrument, the 36 items were subjected to exploratory factor analysis (EFA). In an attempt to improve the interpretation and to obtain some theoretically meaningful factors, orthogonal rotational, EQUIMAX rotation,4 was applied to these items and an eleven-construct solution with a total of 74.63% variance extracted was obtained. Except for one item in the construct “perceived risk” that loaded higher on the construct “trust,” all the remaining items loaded on their respective theoretical constructs correctly. The factor loading matrix is shown in Appendix 3.

32 Cheung & Lee

Contemporary Approach Structural equation modeling (SEM) techniques are very useful in validating measurement instruments (Steenkamp & Trijp, 1991). LISREL (LInear Structural RELations) and PLS (Partial Least Squares) are two commonly used second-generation multivariate techniques to test psychometric properties of measurement instrument through SEM. Because of the ability to estimate latent model under conditions of non-normality and small sample sizes, PLS has been widely adopted in IS research (Chin, 1998; Compeau & Higgins, 1995; Vandenbosch & Higgins, 1996). In this study, we will evaluate the measurement model of PLS for instrument validation. Composite reliability and average variance extracted are used to assess the reliability of the constructs, and they are reported in Table 3. The acceptance value of composite reliability is 0.70 (Hair et al., 1998), and it is found that all constructs have a high degree of internal consistency. Another reliability measure, average variance extracted, reflects the overall amount of variance in the items accounted for by the latent construct. According to Fornell & Larcker (1981), average variance extracted is a more conservative measure than composite reliability, and their suggested acceptable level of average variance extracted is 0.50 or above for a construct. As shown in Table 3, all average variance extracted of constructs are greater than 0.50. Fornell and Larcker (1981) suggested that average variance extracted can also be used to evaluate discriminant validity. To demonstrate the discriminant validity of the constructs, average variance extracted for each construct should be greater than the squares of the Table 1: Cronbach’s Alpha of the eleven constructs in pilot study Construct

No. of Items

Cronbach’s Alpha

Item(s) Removed

Perceived Security Control

3

0.68

Internet vendors have the ability to verify Internet shoppers’ identity for security purpose.

Perceived Privacy Control

3

0.81

Perceived Integrity

3

0.73

Internet vendors will sell my personal information to the third parties without my permission. I will not be overcharged by Internet vendors during sales transactions.

Perceived Competence

3

0.90

Most Internet vendors have a good reputation.

Propensity to Trust Cultural Environment

4 3

0.93 0.74

None A high degree of trust exists in

Experience

3

0.89

my family. None

Third Party Recognition Legal Framework

3 3

0.85 0.85

None None

Trust Perceived Risk

4 4

0.70 0.82

None None

Trust in Internet Shopping 33

Table 2: Psychometric properties of measurement instrument (classical approach) * Item does not load into its target construct. Item

Item-to-total score correlation

Factor loading to “target” construct

a1a a1b a1c a1d

0.88 0.87 0.86 0.83

0.83 0.83 0.82 0.81

a2a a2b a2c

0.89 0.86 0.68

0.89 0.85 0.59

a3a a3b a3c

0.88 0.92 0.90

0.86 0.92 0.89

b1a b1b b1c

0.84 0.85 0.78

0.85 0.83 0.49

b2a b2b b2c

0.84 0.86 0.86

0.72 0.78 0.70

b3a b3b b3c

0.83 0.87 0.83

0.73 0.73 0.75

b4a b4b b4c

0.84 0.89 0.90

0.63 0.82 0.86

c1a c1b c1c

0.82 0.85 0.86

0.70 0.81 0.75

c2a c2b c2c

0.78 0.91 0.89

0.63 0.88 0.87

d1a d1b d1c d1d

0.86 0.88 0.83 0.75

0.68 0.64 0.60 0.70

d2a d2b d2c d2d

0.89 0.85 0.76 0.86

-0.71 -0.73 -0.41* -0.66

Propensity to Trust (α = 0.88)

Cultural Environment (α = 0.75)

Experience (α = 0.88)

Perceived Security Control (α = 0.76)

Perceived Privacy Control (α = 0.81)

Perceived Integrity (α = 0.79)

Perceived Competence (α = 0.85)

Third Party Recognition (α = 0.79)

Legal Framework (α = 0.83)

Trust (α = 0.85)

Perceived Risk (α = 0.86)

correlations between the constructs and all other constructs. By examining Table 4, it is obvious that all squared correlations between constructs are smaller than the average variance extracted of their respective constructs. In view of the results obtained from classical and contemporary approaches, two problematic items are found in the constructs “cultural environment” and “perceived risk.” First, a relatively low item-to-total scores correlation (0.68) is found in the item “I am living

34 Cheung & Lee

Table 3: Psychometric properties of measurement instrument (contemporary approach)

Propensity to Trust ρ=0.92 σ=0.73 Cultural Environment ρ=0.85 σ=0.66 Experience ρ=0.92 σ=0.80 Perceived Security Control ρ=0.85 σ=0.65 Perceived Privacy Control ρ=0.88 σ=0.72 Perceived Integrity ρ=0.88 σ=0.71 Perceived Competence ρ=0.91 σ=0.76 Third Party Recognition ρ=0.88 σ=0.71 Legal Framework ρ=0.90 σ=0.74 Trust ρ=0.90 σ=0.70 Perceived Risk ρ=0.91 σ=0.71

Item

Factor Loading

Standard Error

tstatistic

a1a a1b a1c a1d

0.88 0.88 0.85 0.81

0.02 0.01 0.02 0.03

43.78 62.92 43.78 29.91

a2a a2b a2c

0.88 0.88 0.66

0.03 0.02 0.08

33.30 38.92 8.54

a3a a3b a3c

0.89 0.94 0.85

0.26 0.22 0.25

3.45 4.35 3.38

b1a b1b b1c

0.77 0.79 0.86

0.10 0.07 0.04

7.39 10.82 21.01

b2a b2b b2c

0.81 0.84 0.89

0.03 0.02 0.02

28.67 40.25 52.83

b3a b3b b3c

0.80 0.88 0.84

0.03 0.02 0.03

24.09 35.64 25.24

b4a b4b b4c

0.84 0.90 0.88

0.02 0.02 0.03

36.37 45.81 33.50

c1a c1b c1c

0.83 0.88 0.81

0.19 0.25 0.24

4.29 3.49 3.42

c2a c2b c2c

0.83 0.89 0.86

0.04 0.03 0.04

22.51 29.20 21.19

d1a d1b d1c d1d

0.87 0.89 0.83 0.74

0.02 0.02 0.02 0.04

46.65 59.45 44.62 20.87

d2a d2b d2c d2d

0.89 0.87 0.75 0.85

0.01 0.02 0.04 0.03

76.72 52.89 17.22 30.48

Composite Reliability (ρ) =

p

(∑

i =1

p

(∑

i=1

λ

Variance Extracted (σ) =

λ

i

p

i

) 2 + (∑

i =1

p

)2

Var ( ε

∑ λ i

))

Note: λ = Factor loading; ε = Measurement error

p

∑ λ i=1

2 i

+

i=1 p

2 i

∑ Var i=1

(ε

i

)

Trust in Internet Shopping 35

Table 4: Squared correlations between constructs (diagonal elements are average variance extracted) PTT CE EXP PSC PPC PI PC TPR LF Trust PR

PTT 0.73 0.15 0.00 0.05 0.04 0.00 0.03 0.06 0.01 0.01 0.00

PI PC

CE

EXP

PSC

PPC

PI

0.66 0.03 0.02 0.01 0.00 0.00 0.03 0.02 0.00 0.00

0.80 0.03 0.04 0.04 0.07 0.01 0.02 0.00 0.00

0.65 0.41 0.25 0.19 0.10 0.13 0.10 0.10

0.72 0.21 0.19 0.14 0.17 0.21 0.13

0.71 0.30 0.04 0.10 0.21 0.09

Keys: PSC = Perceived Security Control PPC = Perceived Privacy Control PI = Perceived Integrity PC = Perceived Competence PTT = Propensity to Trust

0.76 0.18 0.03 0.10 0.04

TPR

LF

Trust

PR

0.71 0.12 0.02 0.05

0.74 0.09 0.10

0.70 0.59

0.71

CE = Cultural Environment LF = Legal Framework TPR = Third Party Recognition PR = Perceived Risk EXP = Experience Trust = Trust

in a high trust society” of the construct “cultural environment.” Second, exploratory factor analysis indicates that the item “There are negative outcomes on Internet shopping” of the construct “perceived risk” loaded higher to the construct “trust.” Despite the problems identified, the two items will still be retained for further analysis. According to Chin (1998), factor loading of 0.50 or 0.60 may still be acceptable if there exist additional indicators in the block for comparison basis. “Cultural Environment” is a threeitem construct and the factor loading of the problematic item is 0.68, which is acceptable and should be retained. In contrast, item “perceived risk,” identified as problematic in the exploratory factor analysis, fits well in the structural equation modeling analysis. In particular, it exhibits a relatively high factor loading to its own construct (0.75), and the average variance extracted of its construct is (0.71) higher than all the squared correlations of other constructs. As suggested by Segars and Grover (1993), one of the shortcomings of exploratory factor analysis is that it tends to search for factors in an exploratory way, and the factor solution obtained is just one of an infinite number of possible solutions. Thus, all the 36 items validated through structural equation modeling techniques should be retained in the instrument.

CONCLUSIONS Drawing from findings of recent electronic commerce research and integrating trust theories from the fields of marketing, psychology, and sociology, this study proposes a conceptual model for the investigation of trust, its antecedents, and its consequences in the context of Internet shopping. Also, a 36-item measurement instrument with high reliability and validity for the trust model was developed systematically and validated using both classical and contemporary approaches. Consistent results from both approaches provide users with additional confidence in the desired psychometric properties of the instrument.

36 Cheung & Lee

This proposed research model improves our understanding of trust and electronic commerce and adds to the existing literature. Now that the research model is developed and the measurement instrument has been validated, the stage is set for the empirical testing of the theoretical model, which is an obvious area of future work. The results of such testing will help to clarify and enrich the relevant theories and extend their boundaries. In addition, the results can inform the management of Internet shops how they can manipulate trust antecedents to increase consumers’ trust and hence improve the chances of consumer purchasing from their Internet shops. Finally, the validated research instrument adds to the repository of rigorous research instruments for IS survey researchers to use, thus helping to develop a cumulated tradition for research in the IS discipline.

ENDNOTES 1 http://www.nua.ie/surveys/how_many_online/ 2 Neilsen//NetRatings e-Commerce ratio, Q4,2000, http://www.eratings.com 3 GVU 10th WWW User Survey Report, May 14, 1999: http://www.gvu.gatech.edu/ user_surveys/survey-1998-10/graphs/privacy/q59.htm 4 In practice, the objective of all methods of rotation is to simplify the rows and columns of the factor matrix to facilitate interpretation. The EQUIMAX approach is a compromise between two frequently used methods, QUARTIMAX and VARIMAX. Rather than concentrating either on simplification of the rows or on simplification of the columns, it tries to accomplish some of each.

ACKNOWLEDGMENT The work described in this paper was partially supported by grants from the Research Grants Council of the Hong Kong Special Administrative Region, China [Project Nos. CityU 1191/98H and CityU 1204/97H].

Trust in Internet Shopping 37

APPENDIX 1 Construct

Item

Sources

Percei ved S ecurity Control a1a Internet vendors implement security measures to protect Internet shoppers.

New item

a1b a1c

New item New item

Internet vendors have the ability to verify Internet shoppers' identity for security purposes. Internet vendors usually ensure that transactional information is protected fro m being accidentally altered or destroyed during transmission on the Internet.

a1d I feel secure about the electronic payment system of Internet vendors. Percei ved Privac y Control a2a Internet vendors will sell my personal information to the third parties without my permission.

New item

a2b

New item

Internet vendors are concerned about consumers’ privacy.

New item

a2c

Internet vendors will not divulge consumers’ personal data to other parties.

New item

a2d

I feel sa fe about the privacy control of Internet vendors.

New item

Percei ved Integrity a3a Internet vendors will not charge Internet shoppers more for Internet shopping. a3b

New item

Internet vendors are honest to their consumers.

Moorman et al., 1993

a3c

Internet vendors act sincerely in dealing with customers.

Moorman et al., 1993

a3d

I will not be overcharged by Internet vendors during sales transactions.

New item

Percei ved Competence a4a Internet vendors have the ability to handle sales transactions on the Internet.

New item

a4b

New item

Internet vendors have sufficient expertise and resources to do business on the Internet.

a4c

Internet vendors have adequate knowledge to manage their business on the Internet.

a4d

Most Internet vendors have a good reputation.

New item Doney & Cannon, 1997

Propensity to Trust b1a It is easy for me to trust a person/thing.

New item

b1b

My tendency to trust a person/thing is high.

New item

b1c b1d

I tend to trust a person/thing, even though I have little knowledge of it. Trusting someone or something is not difficult.

New item New item

Cultural Environment b2a A high degree of trust exists in my fa mily.

New item

b2b

People of my co mmunity trust each other.

New item

b2c

I a m living in a high-trust society.

New item

b2d

My friends are generally trustworthy.

New item

Experienc e b3a Using the Internet has been a good experience to me personally.

New item

b3b

I have positive experiences when using the Internet.

New item

b3c

I have good experiences when using the Internet.

New item

Third Part y Recognition c1a There ar e many reputable third party certification bodies available for assuring the trustworthiness of Internet vendors. c1b I think third party recognition bodies are doing a good job. c1c

Existing third party recognition bodies are adequate for the protection of Internet shoppers’ interest.

New item New item New item

Legal Framework c2a

The e xisting business code of conduct is sufficient for the protection of Internet shoppers’ interest.

New item

c2b

The e xisting law is adequate for the protection of Internet shoppers’ interest.

New item

c2c

The e xisting legal fra mework is good enough to protect Internet shoppers.

New item

Trust in Internet Shopping d1a Internet shopping is unreliable.

New item

d1b

Internet shopping cannot be trusted; there are just too many uncertainties.

d1c

In general, I cannot rely on Internet vendors to keep the promises that they make.

Chow & Holden, 1997

d1d

Anyone trusting Internet shopping is asking for trouble.

Chow & Holden, 1997

Percei ved Risk d2a Internet shopping is risky.

New item

New item

d2b

Shopping on the Internet entails uncertainty or vulnerability.

New item

d2c

There ar e negative outcomes fro m Internet shopping.

New item

d2d

I find it dangerous to shop on the Internet.

New item

38 Cheung & Lee

APPENDIX 2

Interviewer

Degree of Agreement Kappa

Interviewer

1 2 0.97 1 3 0.95 1 4 0.97 2 3 0.97 2 4 0.95 3 4 0.95 Table of degree of agreement–Kappa coefficient

ACTUAL CATEGORIES TARGET PSC PPC CATEGORY PSC 16 PPC 16 PI 2 PC PTT CE LF 2 TPR PR EX T Total Placement: 164

PI

PC

PTT

CE

13

LF

TPR

PR

EX

T

TOTAL

1 16 16 16

2

8 12 16 12 16 Hits:

Table of item placement ratio

Keys: PSC = Perceived Security Control PPC = Perceived Privacy Control PI = Perceived Integrity PC = Perceived Competence PTT = Propensity to Trust CE = Cultural Environment LF = Legal Framework TPR = Third Party Recognition PR = Perceived Risk EX = Experience T = Trust

157

Overall Hit Ratio:

16 16 16 16 16 16 12 12 16 12 16 95.73%

TOTAL % 100.00 100.00 81.25 100.00 100.00 100.00 66.67 100.00 100.00 100.00 100.00

.831 .827 .822 .809 .144 .198 .117 2.914E-02 6.256E-02 3.163E-03 3.815E-02 1.378E-02 .149 7.851E-02 3.039E-02 .133 -7.56E-03 4.556E-02 7.703E-02 6.529E-02 8.445E-02 6.088E-02 9.701E-02 1.940E-02 .123 .128 5.703E-02 1.220E-02 .110 7.726E-02 5.060E-02 2.448E-02 -8.57E-02 -9.78E-03 -.108 -9.87E-02

1

.122 .100 3.339E-02 -3.20E-02 -.120 -4.98E-02 .355 -5.00E-04 1.653E-02 -7.30E-03 5.747E-02 2.753E-02 -.115 .111 .136 1.847E-02 .127 2.937E-02 .137 .129 5.019E-02 1.137E-02 5.907E-02 .110 -8.83E-02 .128 -8.36E-03 -1.99E-02 .680 .637 .599 .701 -.425 -.410 -.526 -.365

2

3 9.882E-02 -1.11E-02 .129 -5.65E-03 4.401E-02 .145 -.308 -1.98E-02 -8.03E-03 9.607E-03 -1.81E-02 1.328E-02 .388 -2.38E-02 -1.24E-02 .269 6.384E-02 .193 6.363E-02 -2.37E-02 7.344E-02 5.956E-02 -2.34E-02 7.573E-02 .148 -3.95E-02 .104 7.552E-02 .401 .479 .430 .227 -.709 -.727 -.412 -.664

Extraction Method: Principal Component Analysis. Rotation Method: Equamax with Kaiser Normalization. a. Rotation converged in 12 iterations.

a1a A1B A1C A1D A2A A2B A2C A3A A3B A3C B1A B1B B1C B2A B2B B2C B3A B3B B3C B4A B4B B4C C1A C1B C1C C2A C2B C2C D1A D1B D1C D1D D2A D2B D2C D2D

4 -3.94E-03 2.713E-02 2.421E-03 .118 5.652E-02 2.419E-02 .177 .856 .919 .891 .119 8.866E-02 -3.00E-02 .140 -1.98E-02 -3.35E-02 4.135E-02 2.552E-02 .105 .105 5.577E-02 8.206E-02 5.266E-02 2.379E-02 -7.58E-03 2.879E-03 -8.37E-02 -2.45E-02 -5.38E-02 -3.41E-02 1.606E-03 6.883E-02 3.021E-02 3.045E-02 -5.50E-02 -2.60E-02 .116 7.889E-02 5.303E-02 1.445E-02 4.248E-02 4.984E-02 3.747E-02 -1.31E-02 -3.69E-02 -4.57E-02 4.600E-02 .135 .101 .145 .166 .268 8.737E-02 .161 .134 3.029E-02 .114 8.641E-02 .154 .153 .211 .628 .881 .873 .122 .165 .116 -8.26E-02 -.133 -.151 4.752E-02 -3.19E-02

5

Component 6 5.117E-02 9.908E-02 7.023E-02 6.023E-02 4.978E-02 -8.56E-02 .185 7.749E-02 1.712E-02 8.194E-02 .153 .123 8.840E-02 .186 .159 8.921E-02 .262 .191 .184 .628 .823 .860 9.582E-02 .191 .214 .135 2.354E-02 9.061E-02 3.894E-03 7.306E-02 4.344E-02 .187 -7.16E-02 -2.60E-02 -.145 -.122

Rotated Component Matrix 7 5.372E-02 6.082E-02 .155 3.872E-02 2.781E-03 6.279E-02 7.060E-02 -1.18E-03 3.167E-02 2.637E-02 8.721E-02 .218 .409 .716 .779 .697 .169 .322 8.016E-02 .150 .185 8.681E-02 7.519E-02 .129 .164 .133 .140 .177 .184 .124 .109 7.068E-02 -8.96E-02 -7.65E-02 -8.40E-02 -.140

a

8 7.308E-02 .121 2.046E-02 .101 3.080E-02 5.243E-02 8.984E-02 1.967E-03 4.432E-02 8.863E-03 .118 5.998E-02 8.803E-02 9.165E-02 .152 .176 -6.24E-03 .156 .157 .278 .129 .165 .702 .810 .750 .322 .122 .105 -4.81E-02 2.618E-02 -2.40E-02 .147 -.103 -8.20E-02 -.269 -.184

9 9.618E-02 4.567E-02 3.877E-02 1.058E-02 3.769E-02 9.067E-02 2.794E-02 2.230E-02 6.927E-02 4.233E-02 9.068E-02 4.609E-02 .136 .155 .164 .239 .732 .733 .751 .352 .208 .147 .200 8.012E-02 1.803E-02 .235 9.793E-02 4.408E-02 .157 .155 .169 .197 -.139 -.136 -4.30E-02 -.154

10 7.412E-02 1.358E-02 4.405E-02 8.637E-02 5.936E-02 .102 -5.64E-02 8.579E-02 5.309E-02 6.459E-02 .847 .828 .491 .277 .118 .201 1.427E-02 9.630E-02 .193 .132 .115 .188 .343 2.180E-02 5.158E-02 7.741E-02 .103 9.886E-02 .137 .115 .156 -3.99E-02 -5.33E-02 -6.64E-02 9.851E-02 -6.05E-02

.155 .207 .138 .148 .889 .846 .591 .107 5.628E-02 1.581E-02 7.353E-02 5.824E-02 2.102E-02 3.967E-02 .117 -3.85E-03 9.843E-02 2.800E-02 9.496E-02 -4.07E-03 .120 -2.55E-02 .137 1.889E-03 .101 -3.79E-02 7.032E-02 9.713E-02 3.823E-02 9.312E-03 -7.37E-02 -6.07E-04 -6.11E-02 -7.70E-02 -2.08E-02 -2.27E-02

11

APPENDIX 3: FACTOR LOADING OF THE MEASUREMENT INSTRUMENT

Trust in Internet Shopping 39

40 Cheung & Lee

REFERENCES Bagozzi, R. P., Yi, Y. and Phillips, L. W. (1991). Assessing construct validity in organizational research. Administrative Science Quarterly, 36(3), 421-458. Bailey, J. E. and Pearson, S. W. (1983). Developing a tool for measuring and analyzing computer satisfaction. Communications of the ACM, 26(10), 785-793. Benassi, P. (1999). TRUSTe: An online privacy seal program. Communications of the ACM, 42(2), 56-59. Chin, W. W. (1998). The Partial Least Squares Approach for Structural Equation Modeling. Modern Methods for Business Research, 295-336. Marcoulides G.A. Hillsdale, NJ: Lawrence Erlbaum Associates. Chow, S. and Holden, R. (1997). Toward an understanding of loyalty: The moderating role of trust. Journal of Managerial Issues, 15(3), 275-298. Churchill, G. A. (1979). A paradigm for developing better measures of marketing constructs. Journal of Marketing Research, (16), 64-73. Cohen, J. A. (1960). A coefficient of agreement for nominal scales. Educational and Psychological Measurement, (20), 37-46. Compeau, D. R. and Higgins, C. A. (1995). Application of social cognitive theory to training for computer skills. Information Systems Research, (6), 118-143. Das, T. K. (1998). Between trust and control: Developing confidence in partner cooperation in alliances. The Academy of Management Review, 23(3), 491-513. Davis, F. D. (1989). Perceived usefulness, perceived ease of use, and user acceptance of information technology. MIS Quarterly, 13(3), 319-340. Dion, P., Easterling, D. and Miller, S. J. (1995). What is really necessary in successful buyerseller relationships? Industrial Marketing Management, 24(1), 1-9. Doll, W. J. and Torkzadeh, G. (1988). The measurement of end-user computing satisfaction. MIS Quarterly, 12(2), 259-274. Doney, P. M. and Cannon, J. P. (1997). An examination of the nature of trust in buyer-seller relationships. Journal of Marketing, (61), 35-51. Dwyer, R. F., Schurr, P. H. and Oh, S. (1987). Output sector munificence effects on the Internal political economy of marketing channels. Journal of Marketing Research, (24), 347358. Fornell, C. and Larcker, D. F. (1981). Evaluating structural equation models with unobservable variables and measurement error. Journal of Marketing Research, (18), 39-50. Hair, J. F., Anderson, R. E., Tatham, R. L. and Black, W. C. (1998). Multivariate Data Analysis (5th edition). Englewood Cliffs, NJ: Prentice Hall. Hardin, R. (1992). The street-level epistemology of trust. Politics and Society, (21), 505-529. Hoffman, D. L., Novak, T. P. and Peralta M. (1999). Building consumer trust online. Communications of the ACM, 42(4), 80-85. Hofstede, G. (1980). Motivation, leadership, and organization: Do American theories apply abroad? Organizational Dynamics, 9(1), 42-63. Hulland, J., Chow, Y. H. and Lam, S. (1996). Use of causal models in marketing research: A review. International Journal of Research in Marketing, (13), 181-197. Ives, B., Olson, M. H. and Baroudi, J. J. (1983). The measurement of user information satisfaction. Communications of the ACM, 26(10), 785-793. Jarvenpaa, S. L. (1989). The effect of task demands and graphical format on information processing strategies. Management Science, 35(3), 285-303. Jarvenpaa, S. L., Tractinsky, N. and Vitale, M. (1999). Consumer trust in an Internet store. Information Technology and Management, 1(1-2), 45-72.

Trust in Internet Shopping 41

Kini, A. and Choobineh, J. (1998). Trust in electronic commerce: Definition and theoretical considerations. Proceedings of the 31st Hawaii International Conference on System Sciences (HICSS), 51-61. Lewicki, R. J. and Bunker, B. B. (1995). Trust in relationships: A model of trust development and decline. Conflict, Cooperation, and Justice. San Francisco, CA: Jossey-Bass. Lewicki, R. J. and Bunker, B. B. (1996). Developing and maintaining trust in work relationships. Trust in Organizations: Frontiers of Theory and Research. Sage Publications. Limerick, D. and Cunnington, B. (1993). Managing the New Organization. San Francisco, CA: Jossey-Bass. Mayer, R. C. and Davis, S. F. (1995). An integrative model of organizational trust. Academy of Management Review, 20(3), 709-734. Mitchell, V. W. (1999). Consumer perceived risk: Conceptualizations and models. European Journal of Marketing, 33(1-2), 163-195. Moore, G. C. and Benbasat, I. (1991). Development of an instrument to measure the perceptions of adopting an information technology innovation. Information Systems Research, 2(3), 192- 222. Moore, C., Deshpande, R. and Zaltman, G. (1993). Factors affecting trust in market research relationships. Journal of Marketing, (57), 81-101. Morgan, R. M. and Hunt, S.D. (1994). The commitment-trust theory of relationship marketing. Journal of Marketing, (58), 20-38. Peter, J. L. and Ryan, M. J. (1976). An investigation of perceived risk at the brand level. Journal of Marketing Research, (13), 184-188. Schurr, P. H. and Ozanne, J. L. (1995). Influences on exchange processes: Buyers’ preconceptions of a seller’s trustworthiness and bargaining toughness. Journal of Consumer Research, (11), 939-953. Segars, A. H. and Grover, V. (1993). Re-examining perceived ease of use and usefulness: A confirmatory factor analysis. MIS Quarterly, 17(4), 517-525. Selnes, F. (1998). Antecedents and consequences of trust and satisfaction in buyer-seller relationships. European Journal of Marketing, 32(3-4), 305-322. Steenkamp, J. E. M. and van Trijp H. C. M. (1991). The use of LISREL in validating marketing constructs. International Journal of Research in Marketing, (8), 183-199. Subramanian, A. and Nilakanta, S. (1994). Measurement: A blueprint for theory building in MIS. Information and Management, 26(1), 13-20. Todd, P. A. and Benbasat, I. (1989). An experimental investigation of the impact of computerbased decision aids on the process of preferential choice. Working Paper, School of Business, Queen’s University. Vandenbosch, B. and Higgins, C.(1996). Information acquisition and mental models: Investigation into the relationship between behavior and learning. Information Systems Research, 7(2), 198-214. Vessey, I. (1984). An investigation of the psychological processes underlying the debugging of computer programs. Unpublished Ph.D. Dissertation, Department of Commerce, University of Queensland. Wang, H. Q., Lee M. K. O. and Wang, C. (1998). Consumer privacy concerns about Internet marketing. Communications of the ACM, 41(3), 63-70.

42 Katz

Chapter IV

The Integral Role of Information Technology in Achieving Business Strategy Success: Managing the Information Resources of Global Competitors Jeffrey D. Katz Kansas State University, USA

This chapter examines the impact of culture on the organizational and information technology infrastructures of global competitors while considering the role business strategy plays on both infrastructures. Information technology is increasingly becoming a focal point of the firm’s business strategy for internally derived competitive advantage, as well as a means for linking to the firm’s supply chain partners. Prior research has suggested that when managers consider how culture impacts the information flow and structure of the organization and its supply chain partners, a more effective “fit” between business strategies and performance results. A conceptual framework is proposed comparing national cultures and two important organizational factors—components of organizational structures and components of information systems. Specifically, the framework helps explain how organizational structures and information technology will vary based on national culture within the confines of the firm’s chosen competitive strategy. Examples from three cultures are used to demonstrate how international managers and researchers may better understand the impact of cultural differences on the operations of firms choosing to compete in international markets. Finally, propositions are offered for future empirical testing by information management researchers. Copyright © 2002, Idea Group Publishing.

The Integral Role of Information Technology 43

INTRODUCTION Information technology has fundamentally altered the way firms compete. It has added electronic methods to the firm’s business strategy, forced information technology to the center of the firm’s strategic thinking, and has clearly become a central focus in business integration through the streamlining of the supply chain (Betz, 2001). Strategic information systems now serve to “network” the supply chain by integrating business strategy and information technology (Pun & Lee, 2000). According to Cross (2000), “Information and communication technologies are forcing managers to rethink and reshape their business strategies, their use of technology, and their relations with suppliers and customers. The convergence of new technologies, hypercompetitive markets, and ‘heat-seeking’ financial and human capital that quickly flow to new and untested business models now threatens a number of traditional business models and processes.” (p. 36). However, when organizations expand across national borders, managers are faced with a host of conditions differing from those affecting their domestic operations. These include differences in national cultures, competitive strategies, information sharing processes and worker expectations (Lynn, 1999; Shore & Venkatachalam, 1996). In addition, in international expansions managers are under increased pressure to integrate and coordinate multicountry operations resulting in the need to use human and information resources as effectively as possible (Shore, 1996). Ensuring that workers in every location share knowledge accurately, and in a timely manner, is part of the human resource and information system managers’ responsibilities. This can be a daunting task. For example, global competition in the oil industry led British Petroleum to initiate the International Management Project to implement sweeping changes in the oil company’s global management structure, information sharing processes and corporate culture. The goal of the Project was to achieve management consensus on organizational roles and responsibilities, implement effective information sharing , and develop an organizational structure that would encourage flexible networks rather than formal, face-to-face meetings (Siddall, Willey & Tavares, 1992). Thus, in the push to expand operations to the global marketplace, organizations’ information systems are playing an increasingly key role. In contrast to their operations in the United States, managers are discovering that processes for sharing information are not easily transportable across borders (Ein-Dor, Segev & Orgad, 1993). In order to achieve timely information system implementation, the systems must be developed with an in-depth understanding of local factors (Barker, 1993). Recent research in the area of information technology and information sharing has proposed contingency models explaining how information systems should be based on the need for organizational “fit” by taking into account key external factors (Henderson & Venkatraman, 1991), as well as differences between headquarters and subsidiary operations (Cheung & Burn, 1994). According to contingency theory, competitive strategies and organizational infrastructures should “fit” the external and internal factors influencing the firm in order to achieve superior competitive performance (see for example, Andrews, 1987; Chandler, 1962; Child, 1972; Porter, 1985). Recent research regarding how firms are structured suggests that values underpinning the formal organizational structure convey important information for workers to execute the mission of the firm within the confines of management’s chosen business strategies (Gibson, 1994; Hinings, Thibault, Slack & Kikulis, 1996). For example, Leidner, Carlsson, Elam and Corrales (1999) document the differences in how managers perceive the benefits of information sharing processes as they

44 Katz

relate to decision support and structure in Mexico and Sweden. The authors conclude that cultural differences must be fully understood before information technology can be applied across borders by a firm. Conveying timely and accurate information to workers inside the firm, as well as to members of the firm’s supply chain partners, in a familiar format based on their cultural expectations, is especially important when firms expand into new markets. Managers are responsible for designing effective organizational and information infrastructures to guide workers in these new competitive environments (Harrigan & Dalmia, 1991). Ideally, organizational and information system infrastructures should: 1. help implement the firm’s business strategy, 2. guide how work is performed, 3. guide how information is shared, and 4. determine the effectiveness of managerial decision making within the parameters of the firm’s chosen goals and strategies (Harris & Harris, 1988). For example, a five-year, multimillion dollar study identified the theory of strategic alignment which proposes that the alignment between the firm’s strategy, organizational structure and information technology, as the key to successful global competition in the future (Pankratz, 1991). More recently, Katz, Zarzeski and Hall (1997) empirically examined the relationship between culture, the competitive environment affecting the firm, organizational strategies and firm performance. They found that strategies under the control of functional managers, which are consistent with the goals of the organization and properly “fit” the culture and industry environments in which the firm operates, result in superior performance. In a more directly related article by Shore and Venkatachalam (1995), the authors describe how national culture affects the analysis and design of information systems, which includes strategic information systems planning, system design and implementation. In this chapter, a framework is presented that focuses on the relationships between the culture in which an international firm chooses to compete, how to properly organize the firm based on the host country culture, and how to structure information systems to most effectively use information resources within the firm’s chosen competitive strategy. The discussion begins by defining cultural differences, business strategy, organizational structure and information technology, including the components of each factor that may vary in different cultural situations. Figure 1 graphically displays the relationships between these factors (culture, organizational infrastructure and information systems infrastructure), while also considering the impact of the firm’s business strategies. The model is then extended to two frameworks for understanding how culture affects organizational structure and information sharing (Table 1, Panels A and B). Finally, the frameworks are brought together by applying them to three countries (Table 2) as examples of how managers may apply the frameworks when expanding the operations of their firm to specific cultures. Research propositions and suggestions are provided for testing the framework as a way to encourage future empirical verification.

NATIONAL CULTURE Based on the results of an international empirical study, Hofstede (1980) proposed that the underlying national culture affects the attitudes and information processing of workers. Four factors were suggested which affect worker values: individuality, masculinity/femininity, uncertainty avoidance and power distance. More recently, Hofstede (1991) focused on cultural factors affecting organizational infrastructures cross-nationally by asking two specific questions: 1) what rules or procedures will be followed to attain the desired ends of

The Integral Role of Information Technology 45

Figure 1: Relationships between culture, strategy, structure and information technology

External Environment (Strategic Fit)

Organizational Culture National Culture

Business Strategies

Task Environment (Functional Integration)

Organizational Infrastructure

Information Technology Infrastructure

Adapted from: Hofstede, 1991 and Henderson & Venkatraman, 1993

the organization, and 2) who has the power to decide? He proposed that cultural norms regarding uncertainty avoidance influence the answer to the first question, while cultural norms regarding power distance influence the answer to the second question. To understand why managers make decisions affecting the design of organizational infrastructures, uncertainty avoidance and power distance have been suggested as important factors of national culture impacting the motivations of workers and behaviors of decision makers (Harvey, 1997; Png, Tan & Wee, 2001; Routamaa, 1985). Briefly, uncertainty avoidance is the extent to which people feel threatened by ambiguous situations and have created infrastructures to avoid these situations. Power distance is the extent to which less powerful members of organizations accept that power is distributed unequally. Power distance creates the motivation for workers to rely on the authoritative role of managers (Hofstede, 1980). Each cultural component is addressed more fully in the following subsections.

Uncertainty Avoidance The extent that people of a culture are threatened by ambiguous situations, and adjust their workplace to avoid these situations, is ambiguity avoidance. Countries with people

46 Katz

who do not like uncertainty tend to have high needs for security and a strong belief in experts. Example countries include Germany, Spain, and Japan (Hofstede, 1980). Countries having a low level of uncertainty avoidance tend to use less formal rules. Conversely, workers in countries having a high level of uncertainty avoidance prefer to have a structure where a system of rules is strongly established (Hofstede, 1991). Coordination of information systems and feedback is favored in countries with high levels of uncertainty avoidance (Jaeger, 1984; Png et al., 2001). Workers in these countries find this is a good way to handle conflict, because the emphasis on standardization of skills is stronger in countries having lower levels of uncertainty avoidance. Thus, face-to-face meetings, or sharing of information electronically, become preferred coordination techniques to formal rules and procedures.

Power Distance The extent less powerful members accept that power is distributed unequally is power distance. In high power distance countries such as France, South Korea and India, organizations tend to have taller, or pyramidal, structures (Hofstede, 1980). In high power distance cultures, task specialization is important where productivity and technical expertise are required. Conversely, in countries having low levels of power distance, the work force tends to be less specialized. In countries having high levels of power distance workers prefer a high level of authority centralization and minimal sharing of information using technology. Conversely, in countries having low levels of power distance workers will prefer decentralization of authority and access to information through technology. Thus, in countries having lower levels of power distance workers will prefer organizational structures that are flatter, and these organizations will have less supervisory personnel. Since the concept of authority delegation is closely linked to decentralization, Hofstede (1991) predicts that countries having high levels of power distance will employ lower levels of delegation. The implications are that in terms of job autonomy, the higher the power distance, the lower the job autonomy expectations of the workers and the less information will be shared. Although the structure of a firm or its information system design in one country may appear to have the same reasons and approaches for information flows as those located in other countries, how workers interpret these structures, and rely on information needs, varies from country to country (Ein-Dor, et al., 1993; Harvey, 1997; Hortum & Muller, 1989; Lewis & Shea, 1996; Png, Tan & Wee, 2001). Thus, organizational structure and information technology infrastructure are the means for conveying information to workers, while designing both systems is about how and why the means are chosen by managers (DeLisi, 1990; Jones, 1995; Shore & Venkatachalam, 1995). For example, a recent study by DiBella (1996) reports the difficulty encountered by one company, which resulted from the different cultural orientations of workers, when managers attempted to change the organizational structure. “The failure to realize intended change is not due to poor managerial communication but from the innate fragmentation of meaning that comes from cultural differences” (DiBella, 1996: 352). In another study by Broderick and Boudreau (1991) it was found that information technology was key to enhancing performance when it was also linked to the strategy, organizational structure and culture of the firm. In a more recent study, Png et al. (2001) examined the corporate adoption of information technology based on uncertainty avoidance and power distance. Their results suggest that firms headquartered in countries with higher levels of uncertainty avoidance

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were less likely to adopt newer information sharing technologies. Although their study was broad-based and documented information technology practices in 153 firms in 24 countries, the study did not examine the changes necessary when firms expand across borders based on the expectations of workers and supply chain partners residing in other countries. Finally, Garfield and Watson (1997) report differences in information infrastructures based on national culture.

Summary With the enhanced competitive success of global competitors as the primary goal, a framework is presented for better understanding how culture affects the way firms and information systems are organized within the context of the firm’s chosen competitive strategy. This is an important issue since designing processes to focus the use of resources is a discretionary managerial function that human resource and information technology managers often must make—and one of the most commonly used tools for implementing business strategies (Carillo & Kopelman, 1991). Prior research has suggested that if organizational and information infrastructures are not developed in concert with an understanding of underlying national cultures, the implementation and ultimate success of business strategies will be severely impaired (Calori, Lubatkin & Very, 1994; Ein-Dor et al., 1993; Hill, Loch, Straub & El-Sheshai, 1998; Mascitelli, 1999).

BUSINESS STRATEGY Recent research has identified the importance of the relationship, or “fit”, between the firm’s competitive condition, the strategy chosen to achieve the firm’s goals and the use of information technology in the ultimate success of the firm. According to Shore and Venkatachalam (1996), the competitive environment affects the firm’s choice of competitive strategy, which in turn affects the firm’s organizational and information technology infrastructure choices. For example, Floyd and Wooldridge (1990) examined the competitive strategies of 127 banks and reported that competitive strategies have a significant effect on information technology adoption. Their study examined the competitive behavior of firms within a single industry (retail financial services) but did not consider strategies used by international competitors, which may be impacted by the underlying national culture. According to Porter (1985) there are two basic business strategies adopted by firms in an effort to compete within an industry: Low-cost leadership and differentiation. Applying these generic strategies to the international competitive environment, Porter (1990) suggests firms will implement a particular business strategy either on a country-by-country or global basis. That is, firms choosing to expand into international markets will decide whether using a particular business strategy for one country, or all countries, will be an effective method to achieve its goals. Recently, Katz, Werner and Brouthers (1999) examined the role played by underlying national culture on the competitive strategies of international banks. They reported that national culture affects the firm’s chosen business strategy that in turn impacts the performance of the firm. According to Katz, et al. (1999), Japanese banks competing in the international marketplace will tend to focus on attaining market share at the expense of short-term profits by using a low-cost leadership strategy focusing on the commercial banking sector while U.S. banks tend to target enhanced profitability by implementing a differentiation strategy in the retail segment of the banking industry. Henderson and Venkatraman (1991) proposed the Strategic Alignment Model that considers the use of information technology in the firm’s business strategy execution. The

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Model contains two key dimensions: strategic fit and functional integration. Strategic fit recognizes the need to position the firm in an external marketplace where growth can take place while functional integration addresses how to best structure internal systems to execute the business strategy of the firm. Figure 1 depicts the conceptual relationship between these factors. In this conceptual model, organizational structure is proposed to be affected by two externally focused processes, culture and strategy, while information technology infrastructure is proposed to maintain a reciprocal, or “fit”, relationship with organizational structure. In extending the Strategic Alignment Model, Venkatraman, Henderson and Oldach (1993) propose that four basic domains of strategic choice exist for each firm: business strategies, information technology strategies, organizational infrastructure, and information technology infrastructure. As reflected in Figure 1, the first two comprise the strategic fit of the organization to its external environment while the latter two comprise the functional integration of the firm (which is also referred to as the firm’s task environment). Venkatraman et al. (1993) also suggest the approach for achieving strategic “fit” should include governance processes, technology capabilities, human resource capabilities and value management processes which are based on access to information by different groups in the firm. Thus, according to Day and Wendler (1998) the role of top managers of firms choosing to compete in international markets have shifted from master entrepreneurs to architects responsible for, “...designing the organization to achieve the best tradeoff between personal initiatives and enforced cooperation (p.4).” Nelson and Clark (1994) suggest a research agenda for information systems that encourages the inclusion of the firm’s strategic, cultural, organizational, and decision contexts. Their research model indicates that if all relevant contexts are considered, positive firm performance outcomes result. Figure 1 addresses these four factors by identifying two (culture and business strategy) that are affected by strategic fit with the external environment and two factors (organizational infrastructure and information technology infrastructure) affected by functional integration resulting from the firm’s task environment. It is the domain of functional integration in which human resources and information systems managers must operate, and the focus of the framework described in this chapter The impact of information sharing on business strategy success was recently addressed by Lee and Whang (2000) with a special focus on the role of the supply chain. The authors propose that for tight coordination to occur between supply chain partners and the firm’s workers, information sharing must be effective and match the firm’s business strategy. They suggest that critical, shared information may include inventory levels, sales forecasts, order status, and production schedules. Clearly, information technology, particularly information sharing processes, impact the firm’s ability to achieve its business strategy. This occurs through the firm’s ability to effectively share information with its workers and supply chain partners.

ORGANIZATIONAL INFRASTRUCTURE An organization is a goal-directed group of individuals (Aldrich, 1979; Daft, 1983; Hall, 1977). The core of every organization consists of internal relationships, such as how tasks are defined, how information and decision processes are communicated, and how reward systems are designed, which should closely fit the mission and strategy of the firm in order to achieve a reasonable level of individual cooperation and competitive success (Child, 1972; Ouchi, 1978; Gibson, 1994). These relationships define what the organization is and how it

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works (Daft & Steers, 1986). Managers have the authority to use organizational and information technology infrastructures to control these relationships (Child, 1972; Galbraith & Nathanson, 1978; Harrigan & Dalmia, 1991; Day & Wendler, 1998). More recently, several authors have suggested that supply chains are beginning to behave as cohesive groups of individuals, much like workers in a single organization, to achieve mutually beneficial goals (Bowersox, Closs & Stank, 2000). For example, according to Lee and Whang (2000), supply chain partners now work in tight coordination due to technological advances that have enhanced the level of information sharing. Bovel and Martha (2000) suggest the traditional supply chains characterized by the “demand-pull” are being replaced by “value-nets” which they describe as, “…a dynamic network of customer/supplier partnerships and information flows…activated by real customer demand and is capable of responding rapidly and reliably to customer preferences.” (p. 24). Whether they are individuals or supply chain partners, five basic organizational characteristics, or factors, comprise the organizational infrastructure of most firms or groups of firms. They are: division of work, degree of specialization, level of decentralization, type of coordination, and degree of formalization (Daft & Steers, 1986; Pugh, Hickson, Hinnings & MacDonald, 1969). Each is discussed in greater detail in the following subsections.

Division of Work The division of work refers to the assignment of tasks among individuals, or supply chain partners, to achieve shared goals. This dimension reflects the predictability and routine-ness of assigned tasks (Dessler, 1976). Division of work is implemented by the creation of departments or through the use of information sharing mechanisms. Departmentalization explicitly defines tasks and reporting relationships and can be accomplished according to organizational purpose (product, customer or location) or by process (dividing work into managerial functions such as planning, organizing and controlling). Integrating processes are used to facilitate communication and coordination among organizational subunits (Lee & Whang, 2000). Such processes include establishing liaison roles, assigning task forces, and using permanent teams or committees to coordinate activities (Galbraith, 1973).

Specialization Specialization occurs when assigning tasks in specific areas results in greater productivity than when several steps of work are accomplished independently. Organizing workers or supply chain members by specialty allows for the further development of expertise and a focus on an area of competitive advantage (Bowersox et al., 2000). According to organization theory, the more work is divided, the more efficient the process should become (Jones, 1995). The degree of specialization is measured by role specificity and task structure. For example, an automotive engineer working in a design department of a large automaker might specialize in the design of impact resistant bumpers, while an engineer working in a smaller automaker might be responsible for the design of the entire automotive frame.

Decentralization How much authority a worker or supply chain partner has is determined by the degree of decentralized decision-making (Udell, 1967; Bovel & Martha, 2000). These dimensions reflect the vertical nature of the organization. Decentralization addresses two important

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structural characteristics: the number of hierarchical levels and the span of control. Decentralization is more than delegation of authority. It is also the process of controls through the number of levels and the span of control in the organization (Drucker, 1946; Forehand & Gilmer, 1965; Ouchi, 1978).

Coordination In addition to the horizontal and vertical aspects of organizations, coordination is also important. Coordination is the fitting together of job performance, or the linking of individual efforts, for the accomplishment of major organizational objectives (Dessler, 1976). Coordination is the process of achieving effort among the different subsystems in performing tasks. Coordination of information systems and feedback are particularly important when the firm’s environments involve rapid changes in competitive factors, such as in high technology industries (Emery & Trist, 1965).

Formalization Formalization is the degree that rules are placed in definitive form, thus making them rigid. Rules can be defined objectively and subjectively. For example, structures that emphasize written objectives, standards in decision-making, and bookkeeping standards might be more formalized in one firm than another. Often, formalization is associated with higher levels of bureaucracy and centralized decision-making (Blackburn, 1982).

Typical Organizational Structures Three common organizational structures are: functional structure, unit structure and matrix structure (Daft and Steers, 1986). In the functional structure, workers performing the same kind of task are grouped in the same department or supply chain partner. A functional structure is preferred when efficiency within a highly technical field is a major goal. In the unit structure, functions are grouped around products, lines of products, or services. When the firm’s external environment is unstable, when firms are large and complex, or when technology causes interdependence between functions and success is based on innovation, a self-contained unit structure is often the most commonly used organizational form. Finally, the matrix structure is a combination of the unit and functional structures. Matrix structures are typically employed when firms are medium to large in size and when the firm’s external environment is very uncertain (Aldrich, 1979; Emery & Trist, 1965). Table 1-Panel A depicts the conceptual relationships between national culture and organizational structure. For example, it is proposed that under conditions of high uncertainty avoidance and high power distance, managers will organize in a more structured and bureaucratic organizational form. Conversely, in cultures having lower levels of uncertainty avoidance and lower levels of power distance, managers will organize in a flatter and more decentralized structure. Table 1-A focuses on the relationship between national culture and organizational structure while assuming the business strategy of the firm is already chosen. That is, the table assumes the business strategy choice of the firm is external to the decision making authority of functional managers but that national culture will continue to systematically affect organizational structure decisions. Thus, based on the model contained in Figure 1, organizational structure decisions made by managers will be affected by external factors including the firm’s national culture and previously chosen business strategy. How a firm, or group of firms comprising the supply chain, is organized affect managers’ approach toward designing the information

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sharing system. For example, a firm employing a low-cost leadership business strategy in response to a national culture that encourages competition through high worker productivity, such as Japan, will likely result in decisions to implement an organizational infrastructure encouraging production efficiency, such as the functional organizational structure, and information systems that monitor and share the achievement of production costs (Yeh, 1991; Leidner, et al., 1999). The more specific role of culture on information technology is further discussed in the following section.

INFORMATION TECHNOLOGY INFRASTRUCTURE Just as organizational structure plays a role in the implementation of the firm’s business strategy, so does information technology. There are two fundamental sources of information sharing that enhance the application of the firm’s chosen business strategy: 1. the ability to assess the external environment of the firm more rapidly, and 2. the ability to assess organizational resources and capabilities already controlled by the firm. Both business strategy approaches, low- cost leadership and differentiation, indirectly impact the use of information technology. For example, the low-cost leader will likely rely on information systems to both scan the external environment for opportunities to reduce the costs of production and monitor the use of existing organizational resources thereby ensuring the most effective use possible. However, many barriers to the use of information technology across borders involve the expectations and reactions of workers and how they apply information technology based on culture (Lin, Vassar & Clark, 1993; Straub, 1994). It has been argued that taking into consideration the cultural norms relating to information technology will make information sharing more effective (Ein-Dor et al., 1993; Harvey, 1997; Kitchell, 1995; Shore & Venkatachalam, 1995; 1996). Therefore, the use of information technology to extend the decision-making of managers is necessary, particularly when firms adopt an international expansion strategy (Nelson & Clark, 1994; Leidner et al., 1999; Png et al., 2001). The encouragement for managers to broadly share information electronically, however, has not received unanimous acceptance because of concerns about inter-group conflict and information overload to groups not directly responsible for strategy-related decisions. Cook and Eining (1993) propose three elements of an information system that should be considered in the design of an information system: inputs, processors and outputs. The authors suggest the range of access to each information system element (inputs, processors and outputs) will lie along a “sharing” continuum from “need to know” to “complete access.” According to Cook and Eining (1993), one of the assumptions underlying sharing data and processing systems is that improved communication and decision making will result by, “...reducing the uncertainty associated with incomplete information (p.55).” Table 1-Panel B depicts the proposed relationship between national culture and the elements of information sharing infrastructure. It is proposed that high levels of uncertainty avoidance in a culture will result in the need to share information as widely as possible in an effort to reduce decision maker uncertainty. Conversely, in cultures with high levels of power distance access to information systems will not be as widely shared in order to maintain the power base of those in control of the organization. The table assumes the business strategy of the firm and organizational infrastructure decisions are fixed in order to focus on the specific impact of national culture on information technology.

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Table 1: Panel A -Relationship between national culture and organizational infrastructure Dimension of Organizational Structure

Level of Uncertainty Avoidance High

Low

Level of Power Distance High

Low

Division of Work More functional

Less functional

More functional

Less functional

Specialization

More

Less

More

Less

Decentralization

Less

More

Less

More

Coordination

Lower

Higher

Lower

Higher

Formalization

Higher

Lower

Higher

Lower

Table 1: Panel B - Relationship between national culture and information system infrastructure Dimension of IT Infrastructure

Level of Uncertainty Avoidance

Level of Power Distance

High

Low

High

Low

Inputs

Shared

Not Shared

Not Shared

Shared

Processors

Shared

Not Shared

Not Shared

Shared

Outputs

Shared

Not Shared

Not Shared

Shared

APPLICATION OF THE FRAMEWORKS IN THREE CULTURES The following subsections provide a description of the differences between American, Japanese, and French organizational infrastructures. The U.S. and Japan were chosen because of the high level of international expansion common to both countries and because the two cultures are often located on opposite ends of the Hofstede (1980) measures of national culture. France was chosen as a representative country of the European Union and is typical of the social democracies found in the EU. The purpose is to explore how Table 1Panels A & B may be applied to distinctly different cultures. Table 2 displays the proposed organizational and information system differences in each country. The goal of Table 2, and the following narrative, is to demonstrate how managers may apply the relationships contained in Table 1 to specific cultures and nations.

Japan The Japanese culture, according to Hofstede (1980), is high in uncertainty avoidance and moderate in power distance. In Japan, the preferred organizational structure is functional (Subhash & Marks, 1993). Lincoln, Hanada and McBride (1986) conducted a study comparing fifty-five American and fifty-one Japanese manufacturing employees.

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Table 2: Comparison of organizational and information sharing infrastructures in three countries Dimensions of Organizational Structure

Japan

United States

France

More functional

More self-contained

More functional

Moderate High

Moderate Low

High Moderate

Taller structures Moderate to High Low

Flatter structures Low High

Taller structures High Low

Coordination 1. Task routines 2. Planning 3. Integration

High More formal Higher

Low Less formal Moderate

Moderate to High Less formal Moderate

Formalization

Moderate/High

Moderate/Low

High

IS Inputs

Shared

Not Shared

Not Shared

IS Processors

Shared

Shared

Not Shared

IS Outputs

Shared

Shared

Not Shared

Division of work Departments are: Specialization 1. Horizontal 2. Vertical Decentralization 1. Hierarchy 2. Span of control 3. Autonomy

While three-quarters of the functions common to U.S. and Japanese workers were assigned to specialists in Japanese plants, American firms favored work teams and cross training. Thus, cross-functional expertise seems to be greater in the United States than in Japan. With regard to uncertainty avoidance, in a comparative study of organizational characteristics between Japan and the United States, Yeh and Sagafi-Nejad (1987) contrasted the decision-making freedom of American workers to that found among workers in Japanese firms. The authors reported that American workers made their own decisions and their own rules more easily. This is consistent with other research emphasizing greater job autonomy in United States than in Japan reflecting the differences in the levels of uncertainty avoidance between the two cultures (Tsuda, 1985). By comparison, Japan is closer to France than to the United States in standardization of work processes. However, teamwork is also a very important aspect of the Japanese workplace, thereby moderating the level of standardization (Sai, 1995). In addition, Japanese workers tend to form cohesive teams with a leader who is clearly distinguished (Subhash & Marks, 1993). In contrast, the leader is more an arbitrator than in western teams. In order to reach a proper level of coordination, it is not unusual to see teamwork span departmental boundaries (Goldman, 1994). In Japan, communication is purposely ambiguous to encourage group responsibilities for tasks. Thus, organizational coordination is more implicit in Japan than in the United States where managers are encouraged to delegate specific tasks and hold subordinates accountable (Barsoux & Lawrence, 1990; Hortum & Muller, 1989; Lauenstein, 1985).

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There are also differences in the cultural effects of information system design and access. For example, according to Bowonder and Miyake (1993), Japanese firms employ several key ways to ensure the sharing of information such as concurrent engineering, horizonal information flows, technology fusion, and corporate networking for integrating managerial functions and information systems. The authors report how Hitachi, Ltd. and Nippon Steel Corp. use integration processes to combine managerial control systems (organizational structure) and information flow structures (information system infrastructures) (Bowonder & Miyake, 1992). Finally, Palvia (1996) documents the Information Innovation Department at NKK Corp. which is involved in information technology and information systems to automate various processes at the company. At the heart of the automation process is the installation of a networked communication system to ensure everyone from the CEO to the clerical staff has complete access to all company information.

United States The United States scores relatively low on the uncertainty avoidance dimension but higher than Japan on the power distance scale. This means that by comparison to their Japanese counterparts, Americans tend to prefer a more divisionalized form of organizational structure (Mintzberg, 1983). The degree of delegation perceived by American managers is higher in the United States than by managers in Japan (Tsuda, 1985; Yeh & Sagafi-Nejad, 1987; Yeh, 1991). Japanese firms delegate less formal authority than their American counterparts. In the United States, national culture encourages managers to use decentralized organizational structures. American managers are encouraged to push decision making down the line, because they want to achieve lower-level worker involvement in operational decisions. American organizations employ more formal rules than Japanese organizations but tend to be less formal when considering expected informal behaviors (Lincoln, Hanada & McBride, 1986). The main difference between the U.S. and Japan regarding formalization of work is that Japanese organizations tend to use more labor intensive approaches, including administrative work and bookkeeping, than U.S. firms (Yeh & Sagafi-Nejad, 1987; Yeh, 1991). In particular, these two countries seem to have almost the same approach toward written standards and schedules. However, the managerial perception is different; in Japanese firms workers rely more on informal rules and information systems than their American counterparts. With regard to information system design and access, American managers tend to follow the strategic planning approach adopted by many U.S. companies—top down. Thus, according to Pant and Hsu (1999) even though information has emerged as an agent of functional integration, the traditional strategic planning process has limited the access to information inputs and outputs to senior managers. The authors cite a fundamental disconnect between information system planning and development because of the limited access to information flows and processors evident in U.S. firms. This is particularly important because the strategic issues most crucial to U.S. firms involve aligning information technology with business strategy and allowing line managers the authority to select information technology projects most beneficial to their organizational structures (Cortada, 1998; Leidner et al., 1999).

France Consistent with many of the social democracies in the European Union, the national culture of France reflects moderate levels of uncertainty avoidance and high levels of power

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distance. In France, a first-line supervisor derives authority by virtue of belonging to the management group. The manager gives orders because he or she has been chosen to do so, a choice that sets her or him apart from subordinate workers. This highlights the fact that in France the bureaucratic organizational structure is particularly popular (Mintzberg, 1983). According to Mintzberg (1983), France, with its preference for pyramidal structure, favors a strong specialization of its workforce. In France, organizations tend to have rigid structures and are highly centralized. Compared to management practices in the U.S., the French are not willing to delegate authority extensively. Aggressive standardization of work fits the French concept of bureaucracy. The type of coordination in France tends to be based on hierarchical authority (Barsoux & Lawrence, 1990; Mintzberg, 1983). Because of the preference for the bureaucratic organizational form, the most formalized country of the three countries chosen is France (Barsoux & Lawrence, 1990; Lauenstein, 1985). With regard to information system design and access, the information revolution has been compared to the French Revolution—very painful for the French people (Kaye, 1994). French managers tend to severely limit access to information system inputs, processors, and outputs. According to Kaye (1994), top French managers need to be more involved in understanding information technology and have the ability to differentiate between being business versus technical managers. The next section presents research propositions reflecting differences in organizational infrastructures based on national culture along with suggestions for future empirical study.

RESEARCH PROPOSITIONS AND IMPLICATIONS The firm’s external environment, size, and level of technological innovation will impact managerial decisions about the firm’s business strategy that in turn will affect the infrastructure of the organization. Despite these factors, recent research suggests that a particular culture will influence managerial decisions particularly with regard to the choice of internal structures (Gibson, 1994; Dologite et al., 1997) and adoption of information technology infrastructures (Png et al., 2001; Leidner et al., 1999). Therefore, it is likely that organizational infrastructures will be more effective in one country than in another depending on whether managers are aware of the relationship between business strategy and their infrastructure design decisions on the expectation of host country workers and supply chain partners. That is, given the business strategy chosen, the international manager needs to know how to design an organization based on the underlying national culture as well as how much to share access to information system elements. In the context of the firm’s chosen business strategy, Table 1-Panel A proposes how the five components of organizational structure will vary according to national culture, while Table 1-Panel B proposes how access to the three elements of information system infrastructure will vary by national culture. Based on the understanding of the firm’s goals and strategies, the tables are designed to guide functional managers in the development of organizational and information technology infrastructures in host countries and suggest research opportunities for future empirical verification. The tables propose that countries having high levels of power distance, controlling for business strategy, will favor functional organizational structures characterized by high

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levels of centralization, low levels of delegation, and low levels of job autonomy. In these cultures, task specialization will tend to provide in-depth skill development but will result in limited cross-functional coordination. It is likely that workers in cultures with high levels of power distance will expect to have limited access to most elements of the information sharing systems. In such cultures, managers will favor hierarchical structures using rigid rules and emphasize high levels of formalization. Therefore, the following relationships are proposed. P1a In countries with high levels of power distance, host country workers will expect centralized decision making, low levels of delegation, and low levels of job autonomy. In such cultures, functional structures will be the most commonly used organizational structure. P1b In countries with high levels of power distance, host country workers will expect information system elements that are not shared at all levels of the organization. In such cultures, access to information system elements will be based on rank rather than on function in the organization. In countries having high levels of uncertainty avoidance organizational structures will tend to be more team-oriented, controlling for business strategy. Such structures are often characterized as self-contained unit structures. They will tend to have greater levels of team decision-making and lower levels of job autonomy. Cultures in this category will have written, as well as unwritten, rules that encourage informal communication. In addition, the high level of uncertainty avoidance will encourage sharing of information to ensure all members of the organization and supply chain partners, in some way, share the decisions made. Therefore, the following relationships are proposed. P2a In countries where high levels of uncertainty avoidance exist, host country workers will expect organizations that allow group decision making. In such cultures unit and matrix organizational structures will be most common. P2b In countries with high levels of uncertainty avoidance, host country workers will expect information system elements that are shared at all levels of the organization. In such cultures, access to information system elements will be based on organizational membership rather than rank. According to Knorr (1990), competitive advantage of world-class organizations will come from attention to seven dimensions: strategy and competitive positioning, information technology, organizational structure, performance measurement, cost structures, organizational skill development, and culture. The relationships previously discussed address methods to implement five of these dimensions. Recent research has begun to address issues raised with regard to propositions P1b and P2b relating to adoption of information technology differences based on national culture. Png et al. (2001) recently reported the results of a broad-based study assessing the adoption of telecommunication technology based on the firms’ home country. The authors report that firms located in higher uncertainty avoidance countries were less likely to adopt more innovative information technologies. Specifically, they indicated that a one-point increase in Hofstede’s uncertainty avoidance index would result in three percent lower likelihood of adopting more innovative information technology. However, the authors did not find a significant relationship between the level of power distance and information technology adoption. In addition, Leidner et al. (1999) surveyed managers using Executive Information Systems (EIS) in numerous organizations in three distinctly different cultures. They found significant differences in the impact of EIS on managerial decisions based on national culture. The authors concluded that information technology is used to reinforce decision

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making processes within a culture, underscoring the notion that, “cultural differences need to be understood before information technology developed for organizations in one country can be effectively implemented in organizations in another country” (p. 633). To encourage the empirical verification of the propositions, the following discussion for information management researchers and practitioners is offered. The underlying assumption of this discussion is that greater variation in organizational infrastructures exists between diverse national cultures than within a particular national culture because the differences in expectations of workers in their home country will be more similar than those of workers in a host country, controlling for the effects of business strategy.

Implications for Information Management Researchers There are several opportunities for management researchers to empirically test the propositions offered. First, the recent work by Nelson and Clark (1994) provides a framework for developing empirical assessment of our research propositions. They suggest the use of diads comprised of managers from two different cultures in which questionnaires can be administered in the managers’ native language. The questionnaires would assess differences in decision contexts and their impact on organizational and information technology infrastructure choices. An excellent example of this approach was used by Straub (1994) to assess the effect of national culture on information technology diffusion with a focus on the use of e-mail and FAX. In the case of our propositions, a beneficial empirical study would be designed as a decision making simulation measuring managerial preferences for organizing (functional, unit, or matrix structure) given different business strategies (low-cost versus differentiation) and level of information sharing for each IS element (inputs, processor and outputs). The simulation, a three-by-two-by-three design, would be administered to managers in the U.S., France, and Japan to measure their preferences for matching organizational decisions to the business strategy and national culture. The research methodology adopted by Harvey (1997) could be used as a model for this ethnographic approach. Another empirical test would involve using cross-national strategic alliances as a research site. This approach would provide an opportunity to assess how organizational infrastructures vary by national culture within the same organization and potentially in the same business strategy context. Comparing the organizational infrastructure characteristics based on venture ownership would provide an interesting test of the effect that cultural factors have on managers’ decisions to design the infrastructure of business units in different countries. That is, investigating the dominance of power distance over uncertainty avoidance in strategic alliance partners would provide useful information for international managers about how to structure organizations and information systems in different countries. This approach could be tested in a manner similar to that employed by Hill et al. (1998), in which a qualitative assessment of information technology transfer based on culture was accomplished using focus groups coupled with a field study. Under this approach, it would be possible to identify several strategic alliance partners operating in different countries, then interview focus groups of managers and workers in each location as to the fit between the national culture, business strategy, and infrastructures based on their location. The field study could be used to develop case studies regarding the organizational and information technology infrastructures in each cultural context. Finally, empirical verification of the research propositions would be possible using the approach employed by Straub (1994). In this approach, paired comparisons of workers in two cultures are measured and tested for statistical significance. In this approach, it would be advisable to experimentally control for business strategy and organizational structure,

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while allowing the level of information sharing to be Likert scaled (1-7, low-high). The objective of the experiment would be to assess the validity of Table 1-Panel B, based on the national culture of the respondents. Each approach contains advantages and limitations. However, additional empirical examination of the issues discussed in this chapter relative to supply chain behavior is believed to be a rich topic worthy of further investigation.

Implications for Global Managers Managers need to keep in mind that organizational infrastructures form the heart of business strategy implementation (Andrews, 1987). The competitive environment, organizational mission, and business strategies form the foundation for the design of the firm. Since managers influence the organizational design choices, their organizational design decisions play a significant role in the performance of the organization. The framework presented in this paper argues that managers need to maintain flexibility when designing organizational systems, especially in a host country. After formulating strategies, managers should adjust the structure to be congruent with strategy implementation and the expectations of host country nationals. Thus, the needs of workers and managers must be compatible (Hinings et al., 1996). The link between strategy formulation and strategy implementation is organizational infrastructure. Managers should clearly define tasks that reflect worker skills, information sharing, hierarchical authorities, and anticipated structural changes. Managers should design an appropriate structure that takes into account feedback of performance, compensation systems, incentives, and systems of control. Managers should provide a structure that gives an optimal chance for the task to be performed by implementing clear plans of action and by putting into place efficient systems of information and coordination consistent with cultural differences guiding worker expectations. For example, in the U.S. a self-contained unit structure is likely to be the most effective kind of structure based on worker expectations. By comparison, Japan and France display stronger levels of uncertainty avoidance and power distance than the United States. Thus, we believe it will be easier for Japanese and French managers to integrate businesses since both countries have similar preferences for organizational design factors but more difficult to integrate information systems because of their different approaches in sharing access to information system elements. On the other hand, the United States manager will likely have greater difficulties working with Japanese or French managers because the nature of the cultural differences will have an impact on how information is shared and how workers are organized.

A Few Final Thoughts This chapter focuses on the organization and to some extent members of the supply chain linked by common goals. However, it is important to acknowledge that external and internal factors may independently impact the design and success of organizational infrastructures. These might include the environment, the size of the firm, the technology available, and the goals of the firm’s dominant coalition. These factors need further consideration. In addition, much of this chapter assumes that business strategies of the firm are an externality to managerial decisions. That is, most managers will not be able to substantially change the business strategy of the firm but will have the authority to make infrastructure decisions. In this regard, Hofstede (1991) suggests six questions that researchers should take into account. First, is the goal of the prospective SBU to be more process-oriented or results-oriented? Second, should the structures be employee-oriented

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or job-oriented? Third, do employees derive their identity from the organization or from the type of jobs? Fourth, is the system for organizing closed or open to interaction with the environment? Fifth, is organizational control tight or relaxed? Finally, should the units of the structure be market-driven or more dependent on rules (normative units)? (Hofstede, 1991). These additional questions should help us better understand whether the choice of infrastructures prior to expanding globally is a systematic determinant of international success.

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Chapter V

The New Realities of Online Trading in the New Global Marketplace Bridget Allgood University College Northampton, UK Stock brokering services are available via the Internet, and investors in many countries can currently experience the benefits of Web-based share trading. Internet-based share trading is far more than completing the same transaction over the Internet. The Internet contains a wealth of information, and many sites provide sophisticated facilities that allow the investor to research and monitor investments. This paper examines how Internet based share trading differs from more traditional forms of share trading. It then explores how Internet-based share trading is changing investment practices of private individuals and goes on to discuss how (with reference to Michael Porter’s work on competition) the global nature of the Internet-based share trading will impact upon the players in the stock brokering competitive environment.

INTERNET-BASED SHARE DEALING The Internet has brought about a new opportunity for business to trade with customers electronically and fundamentally changes the way business interacts with clients (Nath et al., 1998). The stock brokering sector is particularly suited to Web-based trading, as physical goods do not need to delivered, thus eliminating the logistics problems which many ecommerce retailers experience. Internet based share-dealing services enable investors to check real time share prices and execute trades immediately (online). Payment for the shares is completed through direct debit transfer from an individual’s bank account, or a debit is made from a holding account which has previously been set up with the broker. Wap technology has emerged in recent years to allow users of Wap-enabled mobile phones to conduct share transactions. Although these systems are not as rich or sophisticated as the Internet-based services, they offer a convenient means of trading for many investors. The trend is for existing Internet-based brokers to provide additional Wap services for their clients. Copyright © 2002, Idea Group Publishing.

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Internet share dealing is often referred to as “online trading.” However, to avoid confusion with other types of online share trading systems it is referred to as Internet-based shared dealing or Web-based share dealing within this paper.

Investor Benefits Internet-based share dealing provides an improved service for investors over more traditional dealing methods. The investor is able to deal at the price viewed immediately, whereas using more traditional dealing services, an investor will often have to wait in a telephone queuing system to get through to the dealing desk and when trading may have to wait for the price of a trade to be confirmed. The Internet investor also benefits from 24-hour, 7-day-a-week access to placing orders (although outside of trading hours deals will need to be placed as “limit orders” where a limit price is given). Intense competition for clients has brought prices down, and Web-based share dealing services are typically cheaper than other forms of “execution only” dealing service. Lower prices, combined with the provision of company information services and portfolio services, make Internet share dealing an attractive option for investors who wish to use an “execution only” service in an informationrich environment. The Internet also gives investors access to deal in new products, such as equities traded on foreign exchanges, and futures and options.

Broker Benefits From the stockbroker’s viewpoint, Internet share dealing is beneficial as it allows the broker to reach a wider customer base and potentially increase market share. Webbased share trading on the Internet may well attract people to dealing who, have never dealt before, thus allowing brokers to reach new groups of customers who by virtue of using the Internet, represent a higher than average income group (Ng et al., 1998). Reduced operating costs are also seen as a benefit of Web-based share trading (Carr, 1999). The level of share trading at any time is influenced by market conditions; there are days and times when trading is particularly heavy and traditional telephone-based services have difficulties in responding to these demand peaks, resulting in investors being unable to establish contact with their brokers. Internet-based share dealing offers a cost-effective solution to the demand peak problem (although steps need to be taken to ensure good availability of services). Customer transaction information is input by the customer, then automatically passed straight through to the back office systems, then through to the retail service provider; this “straight through” processing means less staff are needed to handle the transactions. Web-based trading also has the effect of increasing the number of trades completed by Internet account holders, which generates more commission for brokers. Use of the Internet allows stock-brokering companies to build up a wealth of customer information, which can be used to focus marketing material on distinct customer profiles.

Internet-Based Share Brokers The market in the United Kingdom (UK) is growing rapidly. (In April 1999 there were just six UK based organizations providing Internet-based brokering services, now, two years later, there are over twenty-five organizations competing in this marketplace.) There are three main categories of players in this market; firstly, the traditional banks and stockbrokers who have ventured into Web-based trading; secondly newcomers who have not previously operated in this marketplace but have seen opportunities in this area; and thirdly, interna-

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tional players who have run successful Web-based trading operations in other countries and have decided to enter the UK marketplace. The United States (U.S.) market is well established, and there are more than 100 Internetbased brokering operations; many of the organizations only offer Internet dealing. It is estimated that online trading accounts for 40% of all share trades in the U.S. (Temple, 1998). It is expected that, as more people gain access to the Internet and more stockbrokers offer Internet-based share trading facilities, this style of share dealing will dramatically increase in the near future. Outside of the U.S. and UK, there are organizations operating Internet share dealing services; for example tradex.com (http://www.tradex.com) is a South African-based stockbroker specializing in Internet share dealing.

RESEARCHING AND MONITORING INVESTMENTS Financial information is ideally suited to delivery via the Internet as it can deliver rapidly changing information such as merger news and stock prices. Stockbrokers and financial institutions have traditionally had access to a wide range of information supplied through their own systems. In the past the small private investor has been less fortunate than the institutional investor and has needed to rely upon newspapers and investment advice from stockbrokers. The wealth of information, which is now available on the Internet, means that the private investor can access a range of up-to-date financial information which was previously only available to financial institutions. This information relating to news items, global markets and share prices, and trading statistics can be used to inform the private investor’s investment decisions. Information on shares, futures, options, investment trusts, unit trusts, bonds, and gilts is also available on the Internet.

Share Prices and News The investor can easily obtain information on share prices, company news, and good quality research information from a wide range of sites. Many financial sites operate at two levels, providing both free information and additional subscription-based information. The Interactive Investor site (http://www.iii.co) gives equity prices for stocks traded on the London Stock Exchange as well as other major international exchanges. The site also provides company information, historic stock price information, investment advice, and much more. More traditional sources of information, such as newspapers and business magazines, are also represented on the Internet and often incorporate powerful news searching facilities. For example the UK-based, Financial Times site (http://www.ft.com) provides the investor with the facility to search current and back issues of the newspaper for articles on a specified topic or company. A number of sites provide chat/message boards, where participants can post financial queries and comments and also respond to messages, thus forming virtual communities.

Personalized Information The Internet provides the facility to view personalized information. Thus, an investor can visit a Web site and see stock prices and company news that relate to their investment interests. Portfolio services also exist on the Internet; investors can set up their investment portfolios and then return to the Web site to view their portfolio valuations with current stock

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prices at any time. Web technology makes it possible for information to be automatically delivered and appear on a user’s PC; thus, if a share price falls below a specified limit or say, news on a particular company is reported upon, the information will be delivered to the desktop.

Personal Finance Programs There is a wide range of Personal Finance Programs designed to run on users’ PCs, which can automatically access share prices and news on the Internet. In the future, it is envisaged that personal finance programs running on investors’ personal computers will use information fed from the Internet to continually monitor and automatically take action to maximize the return on a portfolio or maintain a balanced, diversified portfolio (Eckett, 1997). Personal data such as risk preferences, preferred investment strategy, life expectancy, income, and expenditure plans might be used to personalize the program so that decisions reflect an individual’s needs. As stock markets are global in nature and respond to each other on a daily basis, with price changes in one market affecting other markets, it is also likely that these future investment programs will make and carry out investment decisions based upon global market events.

Information Services Provided by Internet-Based Stockbrokers To attract and retain investors, Internet-based brokers need to develop value added information services for their customers. Some brokers have chosen to collaborate with business partners to deliver these information services. For example, Charles Schwab (http:/ /www.schwab.co.uk), a leading U.S. and UK-Web-based stockbroker offers portfolio valuations and also access to the Reuters Company news and information service.

CHANGING INVESTMENT METHODS Access to improved market information and international information, combined with the potential for Internet trading, may well change patterns of investment, encouraging investors to explore the possibilities of global investing, day trading, and derivative products.

Investing Directly in Global Markets The global nature of the Internet means that international markets that in the past could not be monitored and accessed by the private investor are now reachable. An individual may well wish to diversify his/her portfolio by investing directly into international markets, rather than resorting to more traditional investment methods through intermediaries such as unit trust managers. Thus, an investor, say, based in the UK and wanting to buy U.S. stocks can execute the deal with a Web-based broker based in the U.S., rather than paying the traditionally high commission charges. To deal internationally, an investor will need to register with the new broker and set up an account in the appropriate currency before trading can take place. However, as global markets develop, stockbrokers acquire an international presence, and the systems technology develops, these transactions may someday be dealt with automatically. Global investing is becoming a reality as it becomes easier and cheaper; in future years it will become a natural extension of the current facilities that the Web-based investor utilizes.

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Time Proximity to Markets International time differences may also encourage investors to deal at a global level. For example, investors who are in full-time employment within the UK will find the American stock exchanges are just halfway through the trading day when they return from work, whereas the London stock exchange has closed. Thus an investor based in the UK, although geographically closer to the London stock exchange, may well be better situated to deal with stocks that trade on the American exchanges.

Day Trading Internet-based dealing may change the time span in which investors deal. As it becomes physically easier to trade shares, “day trading” may prevail. This is where investors buy and sell shares within a short time frame which are being driven up by the momentum of the market (perhaps only holding the equities for a matter of minutes). This method of trading is particularly suited to electronic markets, where investors have instant access to price information and news (Investors Chronicle, 2001).

Derivative Products Improved market information, Web-based educational material, and easier access to trading may also create demand for more sophisticated traded products, such as futures and options. A limited number of brokers already give access to these products.

CHANGES IN THE STOCK BROKERING COMPETITIVE ENVIRONMENT Web-based trading will affect the competitive environment in which stock brokering companies operate. Porter’s (1979) five forces model provides a useful framework for examining the potential impact of Internet-based trading within the competitive stock brokering marketplace. Porter describes how the nature and degree of competition within an industry depends on five forces: the threat of new entrants, threat of substitute services, bargaining power of customers, bargaining power of suppliers, and the jockeying for position among current competitors (see Figure 1).

New Entrants Web-based share trading has attracted many organizations: traditional stockbrokers wishing to exploit this new channel, foreign stockbrokers wishing to expand into global operations, organizations who already have a presence in the financial services market, such as building societies, and new start-up companies with an Internet-only presence. Internet-based financial information providers who attract customers regularly to their Websites are in an ideal position to enhance the service they offer by also offering share trading facilities. This may be through collaboration with existing stockbrokers or by setting up the venture themselves. The Web offers a cost-effective means of reaching customers. The influx of new players into this marketplace has intensified competition, as firms battle to attract and retain customers. There are a number of barriers which new entrants face. For example, investment firms need authorization and vetting by the appropriate regulatory body to conduct business

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Figure 1: The potential impact of Internet-based trading on the competitive place (adapted from Porter, 1979) Threat of New Entrants

Organizations providing Internet-based dealing services Power of Suppliers

Power of Buyers Increased bargaining power of investors

Rivalry amongst existing stockbrokers

Market makers who quote prices at which they will buy and sell shares, thus creating a share market.

Threat of Internet-based dealing providing a value added, low-cost service

Threat of Substitute Products

within a country (i.e., the Financial Services Authority to conduct investment business in the UK). Also new entrants may find it difficult to gain new customers in a marketplace where customers are loyal to “their” brokers.

Substitute Service Internet-based share trading offers an attractive alternative to current dealing arrangements for many investors. They are likely to be price sensitive to commission charges due to the fact that they are buying a standard product (e.g., 100 British Telecom shares). Also, as investors are seeking to make money from share dealing, they are by nature price sensitive and will be attracted to the lower-cost substitute services. This is coupled with the fact that Web-based share dealing services offer an improved service in an information-rich environment over other types of execution-only services (such as telephone dealing), which means that Internet dealing will be attractive to investors. However, there are some switching considerations that may deter customers from moving their business to an Internet-based broker. The investor will need to engage in some administration to set up a new account, and if the investor wishes to move his/her existing portfolio, it may be costly to move share holdings which are held electronically from one broker to another. However, a recent survey showed that UK online investors have an average of 2.7 accounts each (Gomez, 2001), showing that investors can be motivated to try new services.

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Bargaining Power of Suppliers Within the share-trading environment there are a number of retail service providers (RSPs) and market makers that supply and buy shares at slightly differing prices to the brokers, thus creating a share market. These supplier organizations may pose a threat to existing brokers if they integrate into the brokering business. With the advent of online trading, it becomes easy to perceive a system where investors connect directly with the suppliers, cutting out the stockbroker middleman and thus challenging the traditional stockbroker-customer relationship.

Bargaining Power of Investors Cost comparison between online brokers can be difficult because of the wide variety of charging structures in existence. Some brokers charge flat fees, others percentages, and there may also be sliding scales and administration charges. The Internet is a powerful tool which investors can use to search for brokers offering the best price structures. It is quick and easy to search for substitute products using the Web. Intermediaries on the Internet have emerged who act as trading posts and actively search for “best buys” in terms of commission paid to stockbrokers for a given share transaction. Investors may also demand access to multiple exchanges and multiple products (such as derivatives). Price transparency and demand for new products will lead to greater competition within the stockbroking industry, leading to the need for stockbroking organizations to develop ways in which to add value to the customer experience in order to differentiate themselves.

Rivalry between Competitors Internet-based share dealing services will deliver increased capacity to the market place; this new capacity in the market will increase competition. Web based share dealing will also attract new entrants to the marketplace and open up local markets to global competition. These factors are likely to increase rivalry between competitors and have a profound impact on the stockbroking industry.

GAINING AND SUSTAINING COMPETITIVE ADVANTAGE In the changing global marketplace, stockbroking organizations need to consider when and how to move into Internet-based trading to gain and maintain a competitive advantage. Initially the fact that a company is providing Internet-based share trading is enough to differentiate it from its competitors who do not offer this service and give it a competitive advantage. As rivals respond by also delivering Internet-based trading services, first movers will need to carefully consider how to preserve their competitive edge. To be effective, a company must be able to both gain and sustain competitive advantage. Keeping one step ahead of rivals is important, and an organization needs to continually improve itself to keep ahead of the game (Porter, 1990). Information technology will make it feasible for stockbrokers to look beyond national boundaries, compete internationally in the global marketplace, and offer new products. If a company can successfully adopt a “global strategy” and compete in the new international

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marketplace, it can gain significant competitive advantage (Porter, 1986). To compete internationally, stockbrokers may need to form alliances with new business partners. Information technology will make it possible for organizations to develop sophisticated value-added information and portfolio management services, which will serve to differentiate the organization from the competition. Increasing globalization will intensify competition, as all suppliers can, by utilizing the Internet, and gaining access to global markets. Geographic proximity will no longer be a barrier to entry. The challenge of survival within the global marketplace will mean that brokers will need to apply information technology in innovative ways to differentiate themselves to the customer and to maintain a market share. As technology is changing rapidly, the technology itself will provide the opportunity for firms to innovate rapidly and so maintain a competitive edge (Porter and Millar, 1985). Global competition will mean that companies who do not choose to expand their operations beyond national boundaries will have to compete with those who have expanded in this way. This is already evident in the United Kingdom where a number of United Statesbased stockbrokers have established a presence in the UK market. Porter (1996) discusses the problems facing managers when developing a strategy in a business undergoing revolutionary technological change. Managers face uncertainty about customer attitudes, customer needs, services most desired by customers, and how to deliver the services with the new technology. However, early innovators gain from obtaining an earlier and clearer view of what the emerging buyer needs.

BARRIERS TO ELECTRONIC TRADING There are a number of issues that concern both investors and organizations when embracing the new technology and will influence the development and take-up of new initiatives.

Security and Privacy Issues Investors may be unwilling to participate in global Internet-based share dealing because of security concerns. In the new digital era of global paperless transactions, with large sums of money flowing across international boundaries, security in terms of the confidentiality and integrity of the information flowing across the Internet and within the receiving systems which handle the transactions is of paramount importance. Encryption techniques can effectively be used to encode the data and make it secure, but lack of an international standard for encryption poses an obstacle to electronic trade across international boundaries (Edouard and White, 1999). Security fears about electronic payment systems are frequently cited as one of the major reasons the Internet has been slow to expand commercially (Loh and Ong, 1998).

Trust and Relationships In the new Internet world, investors will be faced with unfamiliar companies without a physical presence offering share dealing facilities. Internet dealing is also characterized by paperless trading methods. This means that online trading investors will no longer hold share certificates, as shares ownership records will be stored electronically. Investors therefore need to have confidence that the “virtual brokers” will execute and hold the shares for them.

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It is important that the investor can verify independently certain information about the company with which they are dealing, inorder to check the company registration, location, and regulatory framework in which it operates. Regulatory bodies (such as the Securities and Futures Commission in Hong Kong and the Financial Services Agency in the UK) can be used to check out companies who provide Internet-based share dealing.

Availability of Service The share trading market can be very volatile: share prices may fall sharply over a short time frame. When shares are held in a nominee account with an online broker, the investor has to deal through that broker. Therefore, brokers need to ensure that their systems are reliable and can deal with large peaks. From the customer’s point of view, the provision of an alternative telephone-based service to access their account is desirable if net access has failed. However, many Web-based stockbrokers are able to cut staff and transaction costs (which are then reflected in a lower commission) by electronically dealing with the transaction. This subsequently means they do not have the staffing to provide an alternative telephonebased service in times of difficulty.

Tax and Regulations The international nature of transactions means that the tax laws, consumer laws, and regulations which an investor is familiar with in his/her own country will not apply in other countries. These international legal, tax, and regulatory problems have yet to be dealt with by governments to ensure the customer is both protected and understands the laws covering Internet transactions. Effective regulation and enforcement of this regulation is difficult in an environment which is both global and rapidly changing. The OECD is instrumental in providing a forum for countries to get together to exchange views and develop frameworks and policies which will support this new way of trading (OECD, 1997). Also, the International Organization of Securities Commissions, through its 135-member agencies tries, to ensure that the national regulatory bodies work together to improve international regulation of the financial markets. Regulations and tax issues will influence both an investor’s willingness to participate in global trading and also the willingness of firms to provide access into new markets. Due to the regulations, and tax and legal issues, the way in which shares are bought and sold may differ significantly across country boundaries. For example, share purchases of UK equities incur a 0.5% stamp duty. The Internet gives rise to the possibility of a new type of “virtual” organization, which is established in cyberspace and therefore outside of existing legislative, tax and regulatory frameworks.

CONCLUSION Looking to the future, the Internet provides a route for individuals to expand their investment horizons and for brokers to reach out to new global markets. Internet technology demolishes the geographical boundaries of local markets, and geographical proximity to customers or markets will no longer restrict trading. Internet-based share trading is more than simply automating today’s telephone-based execution services. Investors are looking to the

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Internet to enable them to have easy access to multiple exchanges and multiple instruments transacting through one broker using one currency (Flenner, 2001). In addition to this, investors expect added value in the form of company information related to their personal portfolios and access to the same tools as the professional traders. Internet-based share dealing has the potential to change the dynamics of the stockbroking industry, due to the ease in which global markets can now be reached. Initially brokers will gain competitive advantage simply through providing Web-based dealing services; however as more Internet-based dealing services emerge, brokers will have to carefully assess how to maintain their competitive position. Companies which anticipate the power of information technology will be in control of events. Companies that do not respond will be forced to accept changes that others initiate and will find themselves at a competitive disadvantage. (Porter and Millar, 1985, p. 160). Global Internet-based share trading raises a number of issues that are of concern to both investors and stockbroking organizations. Investors will need to trust Web-based share dealing and have confidence in the new “virtual brokers” operating in the Web-based world. Existing legislation, taxation, and regulations were not designed to cope with the new challenges Internetbased share trading brings and have yet to be addressed by governments.

REFERENCES Carr, R. (1999). Ready to make your fortune as an E-trader ? Investors Chronicle, (128)1626, 14-15. Eckett, S. (1997). Investing Online. Pitman. Edouard, N. and White, W. (1999). The Development of the Internet and the Growth of ECommerce. London: Management Consultancies Association. Flenner, I. (2001). Survey online investing–Access all areas using new technology. Investors Chronicle, 136(1737), 86-88. Available from: http://globalarchive.ft.com. Accessed August 8, 2001. Gomez. (2001). The State of Online Investing in the UK, Gomez Consulting. Available from: http://www.uk.gomez.com. Accessed August 8, 2001. Investors Chronicle. (2001). Survey: Day trading–The difference a day makes, 136(1731), 8486. Available from: http://globalarchive.ft.com. Accessed August 8, 2001. Loh and Ong. (1998). The adoption of internet based stock trading: a conceptual framework and empirical results. Journal of Information Technology, 13, 81-94. Nath, R., Akmanligil, M., Hjelm, K., Sakaguchi, T. and Schultz, M. (1998). Electronic commerce and the Internet: Issues, problems and perspectives. International Journal of Information Systems, 18(2), 91-101. Ng, H., Pan, Y. and Wilson, T. (1998). Business use of the World Wide Web: A report on further investigations. International Journal of Information Management, 18(5), 291-314. OECD. (1997). OECD policy brief. Electronic Commerce, (1). Porter, M. (1979). How competitive forces shape strategy. Harvard Business Review, 137-145. Porter, M. and Millar, V. (1985). How information gives you competitive advantage. Harvard Business Review, 149-160. Porter, M. (1986). Changing patterns of international competition. California Management Review, 28(2), 9-40.

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Porter, M. (1990). The competitive advantage of nations. Harvard Business Review, 73-93. Porter, M. (1996) What is strategy? Harvard Business Review, November-December, 61-78. Temple, P. (1998). Instant execution. Investors Chronicle, 124(1579), 80.

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Chapter VI

The Impact of Culture on the Development of Information Systems: A Case Study Trevor T. Moores University of Nevada Las Vegas, USA Frank H. Gregory Independent Consultant, Thailand

The development of an information system typically requires debate between interested parties. In particular, debate between users is meant to define a common set of functional requirements. The applicability of this approach depends, however, on the willingness of participants to enter into such an open discussion. However, while holding differing, perhaps conflicting views, is seen as acceptable in Western cultures, in Eastern cultures more importance is placed on social consensus and aligning one’s views with that of the group. This paper reports on a case study that highlights the problems of using debate as an analysis tool in an Eastern culture, namely, Hong Kong. The case study involves the use of Soft Systems Methodology to guide a feasibility study for a marketing system within Hongkong Telecom. Three main problems were identified: 1) Group discussions were avoided; 2) Interviews were conducted in multiple languages; and, 3) High staff turnover made it difficult to develop and maintain mature stakeholder views. The study suggests that culturally sensitive development methods are needed to ensure culturally appropriate ways of developing an information system.

INTRODUCTION Culture is often defined as a pattern of basic beliefs, assumptions, and values held by the people concerned (Deal & Kennedy, 1982; Hall, 1973; Hofstede, 1980, 1997; Parsons, 1951). In an organizational context, culture is also taken to include the control and exchange mechanisms inherent in the organization (Jones, 1983; Wilkins & Ouchi, 1983), that is, the “way things are done around here.” Following Hofstede (1980, 1997), it is generally Copyright © 2002, Idea Group Publishing.

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accepted that Western cultures are more individualistic, tolerant of different behavior and opinions, and have a lower regard for status differences than Eastern cultures. Eastern cultures, on the other hand, tend to be more collectivist, have higher uncertainty avoidance, and have an acute regard for status levels. These cultural differences are now being seen to affect the way people participate in the design, development, and use of information systems. At one level, software developers have been described as having their own intrinsic culture, where community is an important aspect of a successful team and debate is an integral part of the development process (Dube & Robey, 1999; Mackey, 1999; Sharp et al., 2000). Since information systems are developed with expectations of how end-users are meant to interact and work with the system, there are also potential conflicts when the values embodied within the system conflict with the actual culture of the end-users (Nissenbaum, 2001). The furore caused by Intel’s Pentium III chip with its embedded personal serial number is one example. At the national level, cultural differences in perceptions of information technology by end-users have led to a need to be culturally sensitive in the design of user interfaces (Evers & Day, 1997; Gando & Nielsen, 1996). The page layout, navigation, and information content of Websites have also been found to have a strong cultural dimension (Becker & Mottay, 2001). Culture has also been related to the relative effectiveness of Group Support Systems (Watson et al., 1994), and in the adoption of new technologies (Png et al., 2001). Hong Kong is perhaps a unique place to investigate these cultural issues, since it had been Western-governed for more than 150 years but has remained an essentially Chinese culture. Although Chinese management is more group oriented (Lockett, 1988), where collective ideals are emphasized, Hong Kong comes relatively low in terms of uncertainty avoidance in Hofstede’s model (Hofstede, 1980, 1997; Leung & Bond, 1989), suggesting they are willing to take risks. This suggests that Hong Kong, while having a basically Chinese group-oriented culture, has also adopted an entrepreneurial spirit, where business is as dynamic and high risk as in any other Western country. The question, therefore, is whether the culture defined for Hong Kong by other studies also includes the willingness to carry out an open debate, as required by most system development methodologies. Furthermore, would there be any other features of Hong Kong culture that might create problems when attempting to develop an information system. A case study will be presented based on a Master’s thesis (Lau, 1996) supervised by one of the authors. The project attempted to apply Soft Systems Methodology (SSM) in order to assess the feasibility of developing an Executive Information System (EIS) for a marketing unit in Hongkong Telecom. SSM is a general problem structuring method devised by Checkland (1981) that requires the building of rich pictures, root definitions, and conceptual models of the human activity under study. With the importance placed on identifying stakeholder viewpoints, Soft Systems Methodology (SSM) is a general problem structuring method that is capable of recognizing the cultural values that may be central to an organization. These cultural values would include the beliefs, assumptions, and values shared by members of the organization. The stakeholders are meant to build the root definitions and conceptual models themselves in an iterative debate organized by a facilitator. Therefore, it would seem that SSM would be an ideal tool to use for IS development since it can take account of the complexity of any given situation. However, SSM also indicates that negotiation and debate are essential ingredients when discussing the feasibility of developing an information system and for the capture of information system requirements. The need for debate, and the expected conflict between

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different stakeholder views, relies on the fact that the participants are willing to enter into such an open discussion, putting forward their personal views of whether the system is needed, and if so, what the system should do. But this, in itself, rests on the Western cultural assumption that debate is constructive and the most effective means of eliciting the information required. The problems of applying any such method in Hong Kong quickly became apparent, however. In particular, three main problems were observed. Firstly, these interviews were typically conducted in Cantonese but written in English. A feature of Hong Kong is that three languages are in common use: Cantonese, Putongua, and English. As such, interviews could be conducted in different cultural modes, depending on the language used. Secondly, no group debate took place between the stakeholders. The student, being Chinese, avoided the confrontation inherent in this approach and conducted interviews on a one-to-one basis. Thirdly, another feature of Hong Kong is the relatively high rate of staff movement among executives and professionals. Before the study had been completed all of the original stakeholders had been transferred. This clearly has a drastic effect on the ability of mature, experienced stakeholder views to be developed or captured. The next section will outline the use of SSM in the development of information systems and the Logico-Linguistic Modeling (LLM) enhancement used to determine the information sources required. Section 3 will then describe the case study, while Section 4 will identify the key issues that prevented a “normal” implementation of the debate and exploration process expected.

SSM AND ITS LLM EXTENSION Soft Systems Methodology (SSM) is often used as an information system design method. Developing the SSM models requires an analyst to determine the principal components of the activity or system under study. These principal components are guided by CATWOE analysis. CATWOE involves the identification of • the Customer, who is the victim or beneficiary of the system; • the Actors who carry out the transformation; • a Transformation that underpins the system; • the Worldview (Weltanschauung) that makes the root definition meaningful; • the Owner, who can stop the system; and • the Environmental constraints that subsume the activity. For instance, analyzing a university may identify the transformation as the process of transforming ungraded students to graded students. In this case, the customers might be the future employers, the actors might be the lecturers; the worldview may be that grades are necessary to identify the best employable people; the owner might be the fee-paying students or the funding government; and the environment might be the job market. Wilson (1990) extended the method by showing how it could be used to support the detailed restructuring of an organization (organizational mapping), and how the use of Information Categories and the Maltese Cross could support the conversion of a SSM model into a detailed information system design. Information categories show the required information inputs and outputs from the activities in an expanded conceptual model, while the Maltese Cross is a matrix of these categories that shows where the new information processing procedures are required. The systems devised are meant to be culturally feasible and systematically feasible.

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Shortcomings of the method include the fact that Wilson’s method is restricted to the design of transaction processing systems and provides no facility for building other types of information system, such as decision support or knowledge-based system. The method also assumes that the people in the organization know what information is needed to support their activities. This is particularly striking, since the method often calls for new activities to be included in the model. These shortcomings are also found in other methods linking SSM with information systems design. Logico-Linguistic Modeling (LLM)(Gregory, 1993, 1995) attempts to add a strong logical foundation to the SSM method by making a distinction between information that is empirically true and information that is true by definition. When this is done, the logically enhanced LLM-SSM models can be developed into a knowledge-based system that has learning capability.

THE CASE STUDY The study described here centers on the application of LLM-SSM to derive the requirements for an Executive Information System (EIS). The analyst involved in the project, Lau Siu Pong, was undertaking a part-time Master’s degree in the Information Systems Department at the City University of Hong Kong. He was a market analyst within Hongkong Telecom, which had been the sole provider of telecommunications services in Hong Kong, until the franchise was opened up with the granting of two other licenses in July, 1995. The market for communication technology and services is particularly lucrative in Hong Kong, with mobile phones and pagers being carried by most sectors of the community, from university students to sales and company executives. In the face of increased competition, Lau was interested in developing an EIS to support the activities of the Business Market Business Unit (BMBU). The BMBU is charged with planning the marketing of new business products. It was not envisaged that the project would immediately result in a fully computerized EIS. Rather, it was intended to undertake an analysis to determine if an EIS would be suitable, and if so, to broadly define its configuration. The project proceeded in a manner very close to the conventional seven-stage model of SSM (Checkland & Scholes, 1990). Stages 1 and 2 (situation entry and problem expression) normally require an outside consultant to act as an analyst/facilitator. This is meant to bring an independent, and possibly fresh, perspective to the problem situation. In this case, however, Lau acted as both the analyst and as one of the stakeholders of the system. While this ensured access to the people concerned, Lau’s own views about what should be done had the potential to cloud his judgement about the nature of the system required. For this reason, the role of facilitator was taken by one of the authors, Frank Gregory. The debate between the analyst (Lau) and the facilitator (Gregory) often required the analyst’s assumptions and his evaluation of the system to be constantly challenged and criticized. Stage 3 involves the formulation of root definitions of relevant systems of purposeful activity. Stage 4 involves building conceptual models of the systems named in the root definitions. The situation was slightly unusual in that the analyst was himself one of the “actors” defined in the CATWOE analysis. The root definitions and conceptual models produced by the analyst were discussed with Gregory, colleagues, and managers within Hongkong Telecom.

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Stage 5 involves comparing the model to the real world in order to determine the extent to which actions suggested by the model actually occur. Based on differences between the model and the real world, Stages 6 and 7 involve identifying changes that are needed that are also acceptable to the stakeholders. In this case, a number of actions were proposed, including setting up a news clippings database, establishing feedback channels from sales staff, and increasing the flow of marketing information between departments. It was during Stages 3 and 4, where discussion and debate were required between stakeholders, that the cultural features inherent in applying the method in Hong Kong became apparent.

THE CULTURAL ISSUES While an IS project can often encounter problems simply because of the technical nature of the development project, there were three issues that were clearly rooted in the way things are done in Hong Kong.

Avoidance of Group Debates In a context that involves Western and Chinese elements, a “debate” can involve a head-on clash of values. For a Westerner, a debate can be seen as constructive and beneficial. When people have adversarial positions, a debate may help the truth to emerge and so be considered as beneficial to all parties, even for those that “lost” the debate. For Chinese, however, the display of adversarial positions depends very much on the social standing of the two adversaries. An argument between peers is acceptable, while a junior arguing with a senior is seen as unacceptable. In SSM, the building of root definitions and conceptual models proceeds by means of an iterative debate involving the stakeholders and a facilitator. It is assumed that much of this work will take place in a series of group meetings in which the stakeholders will express their individual viewpoints. In these circumstances, it can be expected that the viewpoints of two or more stakeholders will be antagonistic. The role of the facilitator, therefore, is to mediate and produce a model that accommodates as many viewpoints as possible. In this case, however, it was clear to both analyst and facilitator that the confrontational debate approach needed to be avoided if colleagues and managers were to be persuaded to participate in the project. The result was that the analyst avoided the group debate approach and conducted one-on-one interviews in order to build the SSM models. While this diverged from the principle of stakeholder debate required by SSM, the one-on-one interviews were seen as a more culturally-sensitive means of eliciting opposing views. The “debate,” in other words, was carried out on paper where status levels could be more easily respected. The implication here for other IS development methods is that any technique used to elicit user requirements that involves debate between non-peers would be doomed to failure in an Eastern culture. This would suggest that techniques such as Joint Application Design (JAD) and the Nominal Group Technique (NGT) could not be successfully implemented in Hong Kong, since both approaches require debate. The JAD approach is specifically designed to use group meetings between users, stakeholders, and IS professionals, in order to debate the form and function of a proposed information system. It is exactly this phase that was avoided during the SSM project. The NGT approach requires participants in a group meeting to write down ideas and suggestions anonymously, before a facilitator summarizes and presents the ideas for debate. The purpose

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is to prevent the meeting from being hijacked by one or more dominant individuals, and to allow all views and opinions to be heard. However, it is entirely possible that sub-ordinates would resist criticizing an idea in the subsequent debate just in case the idea originated from one of their superiors. In short, while it is not possible to say whether the paper-based debate strategy used was entirely successful, it is clear that the uncertainty avoidance and power distance dimensions of Chinese culture make formal debates an unacceptable approach to eliciting system requirements.

The Use of Multiple Languages The analyst reported that the SSM models, written in English, would be discussed with his colleagues in Cantonese, although the discussion itself would be written down in English. It is not uncommon for two Cantonese speakers to intersperse English words into their conversation if the speaker is familiar with the fact that the English word requires less effort than the Cantonese alternative. The ‘effort’ here is the number of syllables required to pronounce the word or phrase. This sprinkling of English is only made, however, when the speaker believes the listener is sufficiently familiar with English words that the basic meaning will still be communicated. Because of the recent history of Hong Kong, such linguistic acrobatics are quite common. In particular, while the local Chinese dialect is Cantonese, university teaching is conducted in English, although the recent transition in sovereignty has meant Putongua (i.e., Mandarin) is now being taught in Cantonese secondary schools. If philosophers of language and thought are correct, however, the language one uses will determine the breadth and depth of ideas that can be communicated. For instance, Whorf (1956) suggests that what one can think of is constrained by the language that one has to express these thoughts. The often quoted myth attributed to Whorf is the suggestion that North American Eskimos have a richer picture of frozen or freezing water because they have over 70 words for concepts such as snow, ice, slush, etc. The intimate connection between language and thought is also central to the philosophy of Wittgenstein (1953). On this basis, Cantonese has a richer linguistic set than Putongua. Cantonese has nine tonal levels, while Putongua has four. A simple mistake in tone can change the Cantonese phrase “cigarette lighter” to the more sinister “kill the waiter!” In common with Putonguaspeakers in Taiwan, Cantonese uses the older Chinese script, while the Mainland uses a more modern, simplified character set. In terms of tonal levels and complexity of script, therefore, Cantonese is perhaps unrivalled in its Whorfian ability to express thoughts, with subtle differences in tone or pen stroke communicating radically different ideas. Because of the added linguistic complexity in Hong Kong, however, it is not even clear what language is being used to express the beliefs, assumptions, and values of the stakeholders. Where there is a choice, the language adopted by the discussants (e.g., Cantonese or English) is likely to be a strong indication to both parties which underlying culture is being assumed. When the analyst (Lau) discussed the SSM diagrams with Cantonese colleagues the Chinese culture could be expected to dominate. Since the analyst and stakeholder share a common language, the view of the stakeholder is likely to have been communicated effectively. Given that something is always lost in translation, however, the fact that the models were then developed in English suggests the stakeholders’ views must then be transformed into an English concept before it could be represented in the SSM diagrams. Even if the analyst understood the viewpoint of the stakeholder, it is unlikely there would always be an English word to match the idea expressed in Cantonese.

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To compound this problem, when the analyst discussed the same diagrams with the English facilitator, one would have to assume the shared culture is Western, since the facilitator (Gregory) does not speak Cantonese. One of the likely consequences of this shift is that the facilitator would bring to bear a more precise understanding of the English words used. In this case, there is the possibility that some of the ideas inadequately expressed in English by the analyst were misinterpreted by the facilitator in subsequent discussions. In reviewing the models, some of the words may have been changed to express an idea closer to the analysts’ English description of what the stakeholder said, although the subsequent rewording shifted the SSM model further from the original viewpoint. In turn, when discussing the revised models with the stakeholders, the analyst would then be faced with translating the new words into Cantonese. Given this continual shift from Cantonese to English (and back again), it is unlikely that the models developed could ever fully represent the (Cantonese) views of the stakeholders. While most IS projects struggle to derive models that faithfully reflect the views of those concerned, it would seem to be an extra twist of the knife to require a further transformation from one language to another. Formal methods, such as Z, that use mathematical notation rather than free text, would not be a solution here, since there is still a transformation from free text to the Z notation. Furthermore, it would not be acceptable to suggest that an information system should only be developed in one linguistic context, since the development of the World Wide Web and electronic commerce has opened up the boundaries of business. As information systems stretch across the globe, it would seem sensible to at the very least include aspects of Hofstede’s work in the curriculum of IS management courses. Information system projects of the next millennium would seem to demand more training in issues of culture shock, ethnocentrism, stereotyping, and the differences in language and humor. This suggests that IS development projects that tap more than culture should include a cultural feasibility study to determine the extent to which any cross-cultural issues could jeopardize the project.

Rapid Turnover of Stakeholders While the problems outlined above can be overcome to some extent, there was one problem that neither the analyst nor the facilitator could do much about. By the time the feasibility study had been completed, Hongkong Telecom had transferred all of the stakeholders involved in the model building project. Indeed, Hong Kong’s high growth and relatively low unemployment has helped to produce an environment in which staff movements between companies is relatively high. Recent government figures indicate that staff movements among executives and professionals is nearly 5% per year (CSD, 1997), and it is generally accepted that junior staff will change jobs every 18-24 months. In this case, the Head of the BMBU was transferred a few weeks before the project was finished, and within three months the analyst and all other members of the unit had been transferred. While the project was successful in determining the scope of the EIS required, it has to be admitted that the SSM project itself was a failure. The key issue here is that SSM is intended to work because the stakeholders produce and “own” the solution. With their viewpoints inherent in the models, the stakeholders are meant to recognize the solution as being of benefit to them, and thus to support the implementation of the solution. If the original stakeholders have moved on, then the new staff will not be the owners of the solution, and thus, nobody can be expected to implement the solution. The SSM project would have to be started again.

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The time scales involved in staff movements suggests that, perhaps, no SSM project will be successful in Hong Kong. Although there are no published figures on the duration of SSM projects, six months elapsed time is an appropriate benchmark. SSM evolved through a learning cycle using Master’s students at the University of Lancaster. Most of the Masters students completed an action learning project lasting approximately six months. Much of the development of SSM was based on what was learned during these projects. Of the six SSM projects conducted at City University (all of six months duration), four were badly affected by the movement of major stakeholders within the organizations concerned. It would appear, therefore, that for SSM to be applied in Hong Kong, the project time would need to be significantly reduced to cope with staff movements, or significantly increased, to include a second iteration that includes the new stakeholders.

CONCLUSIONS The paper has presented the results of a case study that applied LLM-SSM in the design of an Executive Information System (EIS) for the newly demonopolized Hongkong Telecom. The EIS was to support the Business Market Unit, a unit that plans the marketing of new products. The project aimed at determining the feasibility of the development of an EIS, and if so, determine its configuration. The cultural problems inherent in the project were focused on using a debate approach to elicit views of the problem area. In particular, Eastern cultures are more strongly group-oriented rather than individualistic. The debate between users expected in the building of root definitions and conceptual models are not easily applied in such cultures. It was found that group discussions were avoided, with interviews being conducted in a more discreet one-on-one situation. Although the project itself was a success in terms of identifying the basic system requirements, further problems were identified; in particular, by the time the system requirements were determined, the unit that was to have used the system was effectively disbanded. This case study has highlighted some of the features and problems inherent in using SSM to develop information systems in Hong Kong. The uncertainty avoidance and power distance dimensions of Chinese culture make stakeholder debates an unacceptable approach to building the required conceptual models, while the multi-language and high staff movement that is a feature of Hong Kong presents further difficulties. While SSM and its LLM extension showed promise in allowing system requirements to be identified, the method still has a number of practical problems that require further analysis. The cultural problems of implementing a given IS development methodology is clearly an area that needs further research.

REFEFENCES Checkland, P. B. (1981). Systems Thinking, Systems Practice. New York: John Wiley. Checkland, P. B. and Scholes, J. (1990). Soft Systems Methodology in Action. New York: John Wiley. Deal, T. and Kennedy, A. (1982). Corporate Cultures. Reading, MA: Addison-Wesley. Dube, L. and Robey, D. (1999) Software stories: Three cultural perspectives on the organizational context of software development practices. Accounting, Management, and Information Technologies, 9(4), 223-259.

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Evers, V. and Day, D. (1997) The role of culture in interface acceptance. In Proceedings of the 6th IFIP International Conference on Human-Computer Interaction, 260-267. Gando, E. M. and Nielsen, J. (1996) International User Interfaces. New York: John Wiley. Gregory, F. H. (1993). Cause, effect, efficiency and soft system models. Journal of the Operational Research Society, 44(4), 333-344. Gregory, F. H. (1995). Soft system models for knowledge elicitation and representation, Journal of the Operational Research Society, 46(5), 562-578. Hall, E. T. (1973) The Silent Language. Garden City: Anchor Press/Doubleday. Hofstede, G. (1980). Culture’s Consequences: International Differences in Work-Related Values. Beverly Hills, CA: Sage. Hofstede, G. (1997). Cultures and Organizations: Software of the Mind. New York: McGraw-Hill. Jones, G. R. (1983). Transaction costs, property rights and organizational culture: An exchange perspective. Administrative Science Quarterly, 28, 454-467. Lau, S. P. (1996). Logical soft system models for information requirement analysis/ elicitation. MA Thesis, Department of Information Systems: City University of Hong Kong. Leung, K. and Bond, M. H. (1989). On the empirical identification of dimensions for crosscultural comparisons. Journal of Cross-Cultural Psychology, 20(2), 133-151. Lockett, M. (1988). Culture and the problems of Chinese management. Organization Studies, 9(4), 475-496. Mackey, K. (1999). Conscious conflict. IEEE Software, 16(5), 112-113. Nissenbaum, H. (2001). How computer systems embody values. IEEE Computer, 34(3), 118-120. Parsons, T. (1951). The Social System. New York: Free Press. Png, I. P. L., Tan, B. C. Y. and Wee, K. L. (2001). Dimensions of national culture and corporate adoption of IT infrastructure. IEEE Transactions on Engineering Management, 48(1), 36-45. Sharp, H., Robinson, H. and Woodman, M. (2000). Software engineering: Community and culture. IEEE Software, 17(1), 40-47. Watson, R. T., Ho, T. H. and Raman, K. S. (1994). Culture: A fourth dimension of group support systems. Communications of the ACM, 37(10), 44-55. Whorf, B. L. (1956). Language, Thought and Reality. London & New York. Wilkins, A. L. and Ouchi, W. G. (1983). Efficiency cultures: Exploring the relationship between culture and organizational performance. Administrative Science Quarterly, 28, 468-481. Wilson, B. (1990). Systems: Concepts, Methodologies and Applications. New York: John Wiley & Sons. Wittgenstein, L. (1953). Philosophical Investigations. Oxford: Blackwell.

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Chapter VII

Dysfunctional Development Pathways of Information and Communication Technology: Cultural Conflicts G. Roland Kaye and Stephen Little Open University Business School, UK

This paper argues that there are three factors that counter the inevitable movement towards globalization. Firstly the incremental force of technology as illustrated by the growth stage model of the development of Information and Communication Technology (ICT) is flawed. This model implies a linearity of development and an inevitability of stage following stage. While this stage model may provide historic explanation for the development in the developed world and amongst the mature users, the model fails when used predictively for the developing nations or for the late adopters. Secondly the imperialism of technology overcoming all barriers fails to reconcile the cultural dimensions of both the developing context or the application domain. Technology is not culturally neutral but is developed in a cultural context and in the case of information rich applications carries that cultural context within its design. Applications of culturally developed systems, such as office and management systems, assume the user’s compliance with the design culture, but this inevitably leads to cultural clashes as we apply outside the design context. Thirdly, the assumption of universality of economic access and development is incompatible with both the reality and development paths in both developed and developing countries. This inevitably will lead to a divided society split between the internationally mobile, technology-supported communities and those communities disadvantaged economically and technologically but culturally rich. The failure to bridge this gap may leave society as a whole weakened through lack of access to “variety.” The paper discusses these perspectives and illustrates the case with evidence from NE Asia and the United Kingdom. In particular, it focuses on software development and information-rich contexts. Appeared in Journal of Global Information Management, vol. 8, no. 1, 2000. Reprinted by permission.

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TECHNOLOGICAL INEVITABILITY–GROWTH STAGE MODEL Gibson and Nolan (1974) provide a growth stage model (GSM) of the development of Information and Communication Technology (ICT). The initial model had four stages: Initiation, Expansion, Formalization, and Maturity. Nolan (1979) extended this model to a six-stage model reflecting recognition that there were more sub-stages reflecting the growth of knowledge and technology from the implementations. The model reflected not only a shift in the objectives being sought (explanation of budgetary expenditure on ICT) but the involvement of management and the control and orientation of the evaluation. The revised model (Figure 1) demonstrates a balance between slack permitting growth and innovation and phases of control ensuring cost effectiveness and integration. The rate of growth inferred in the graph below is quite gentle, but for many the actual rate is explosive, causing problems of control. The stages reflected distinct categories of evolution from batch processing through time-share data processing to PCs and networks of communicating processors. With hindsight, that may have been the experience of the larger U.S. companies who had been involved with computers from the early days. This could not be described as the experience of the later entrants often small and medium enterprises (SMEs), whose first foray into the arena came with turnkey and proprietary software, or the more recent entrants with commodity based PCs and software. Freidman (1994) suggests that GSM is not purely a description but rather reflects a dynamic process embracing all of the stages and dictating their order of appearance. It is the “likely crises in the organization’s experience of computers” and management reactions to large scale and poorly understood technical events and organizational change. Freidman suggests that the underlying emotional characteristics are • Caution when dealing with unfamiliar subsidiary issues, • Optimism that follows success, • Pessimism that follows disappointment, and • Balance that follows experience of variations. GSM inevitably suggests a product life cycle S-curve, but perhaps the difficulty encountered with the model rests with the lack of separation of the life cycles of individual component technologies from the long-run product life cycle. If we select any phase within the model, we find that this incorporates several technologies; some of which are in maturity, others that are only emergent, and some which are expanding. This overlapping of life cycles confuses the long-term trend, as some technologies superseded stepwise changes, and other technologies were additional (Figure 2). In the early phases, certainly many hardware Figure 1: Nolan’s six-stage model

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Figure 2: Product life cycle S-curves

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Figure 3 Freidman’s four-phase model

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developments led to straightforward replacement, but later complex networks developed, involving several generations of hardware and likewise software. One area where the proliferation of technologies may be found inter-working is the office in which office automation has not replaced but rather led to increasing varieties of technologies used to perform overlapping tasks. Only recently have we seen attempts at reducing the redundancy and integration of the technologies of printers, faxes, copiers, and scanners. This represents the micro-level of the problem represented by the “information archipelago” of MacFarlan and McKenney (1982) in their extension of Nolan’s model to office automation in general. The GSM model purports to provide identifiable stages and identifiable categories. However, the empirical evidence to this position is lacking, and the underlying time dimension, as expressed in age of IS function, does not correlate. Despite the evidence from Drury (1979, 1980, 1983) and Benbaset et al. (1984), the model continues to be used either explicitly or similarly: Galliers and Sunderland (1991), Jayasuriya (1993), and Wastell and Sewards (1995) to project and suggest development pathways for ICT. Freidman suggests the continued usage reflects 1) The only explicit model of time pattern of IS function development, 2) Clear and testable hypothesis, 3) Prescriptive content, and 4) The model does summarize some experiences of organizations.

ALTERNATE MODELS Earl (1996) accepts the prescriptive nature of the GSM model and argues for its use to judge the balance between user focus and specialist focus as a measure of technological maturity. Mature use should by now be common, yet the “productivity paradox” arising from

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the lack of correlation between performance measures and IT expenditure suggests that the mature phase itself is either elusive or extremely varied in outcome. Brynjolfsson and Hitt (1993) and Brynjolfsson et al. (1994) offer evidence that productivity gains are achievable ultimately, reflecting a tendency towards smaller IT-driven organizations. Freidman with Cornford (1989) divided the history of Information Systems (IS) into a series of phases reflecting the domination of a particular problem that was seen as a constraint on computerization. They separated the phases into hardware capacity constraints– until mid 1960s; software productivity constraints–mid 1960s to early 1980s; user relations–early 1980s to 1990s; and, organization environment constraints–1990s and on. Freidman (1994) suggests these phases may be seen as overlapping but with increasing stretch, resulting in the shift in the location of IS control. He argued that at the boundary between the phases there was mediation between the respective environments. This shift in control demonstrates how IS reaches out to seek to control and influence its boundaries, as each problem or constraint is overcome. All these models assume a linearity of development that is incompatible with the opportunities faced by later entrants into the technology. Not only does a late entrant have access to the development path of others, but also to their experiences. The lessons from experience are available to both the new entrant and old. Thus the new entrant may gain access to the current technologies and applications without recourse to working through the development path. Okot-Uma (1988) presents a matrix to represent the varying levels of capability in information technology that exists between developing countries within the British Commonwealth. Such a model demonstrates the need for suppliers to address the capabilities of users. Later entrants are able to “leap-frog” the early development stages and gain access to the more mature technology, but they still must assimilate the learning from the early stages. This learning may be facilitated with experience of neither the associated organizational structure and task changes nor the primitive technology. The possibility of “leap-frogging” (i.e., missing out the early stages and going straight to the latest technologies) suggests that access to technology as it develops should increase. However, evidence from Northeast Asia suggests that late entrants to the technology have not assimilated; instead, dysfunctional divisions are appearing between the “have’s and have nots.” Okot-Uma also introduces the concept of “back-frogging” where technologies are prematurely deployed and either negative experience occurs or there are problems in assimilation. In those circumstances, not only can the technology fail but barriers to other new technologies may be created. A choice of “back-frogging,” (i.e., backward steps in development) related to concepts of “appropriate technology” is presented as an equally necessary strategy to leapfrogging the competition. Perrin (1982) shows in an intriguing study that the Japanese were familiar with gunpowder and guns and had in fact developed them in the 16th century. However, when the American traders forced them to open their harbors in the 19th century, they had none. The Samurai had banned firearms as “un-chivalrous,” since they prevented the personal confrontation implied in warriors engaged in battle. This example further reinforces the view that linear technology development is not a forgone conclusion. The concept of inevitable technological development along a linear growth path may explain some developments, but is not universal. Opportunities to enter later stages or to retrace earlier stages are possible.

DIFFUSION AND LOCALIZATION Institutional and technical aspects of diffusion of innovations in technology have been subsumed in the S-Curve representation discussed by Rogers (1983). Strang and Meyer

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(1994) distinguish between diffusion, “flows among formally autonomous units” and implementation, “flows among hierarchically placed units.” Organizations seeking to diffuse centrally developed systems must either accommodate intra-organizational cultural differences or demand that the end user groups adapt to the technology. This raises interesting questions for the movement of technology developed in one cultural context and transferred to another cultural context where the hierarchical controls may not exist to force the acceptance of the new technology. Software systems may be carriers of implicit values and styles that may be alien or even subversive to other cultures. “Localization” may be a response to this perception, but this fails to recognize that the software assumes a cultural context at the design stage, and this deep-seated cultural value cannot be overcome by cosmetic redesign of interfaces. Keniston (1997) discusses the software localization process whereby software is localized through a process of initially retro-fitting appropriate user interfaces to more current practice of joint modular development of software with appropriate user interfaces. For Keniston the translation of software to allow for different character sets and right, left, or vertical scrolling reflects the industries’ valid response, given the importance of software to the U.S. economy. However, cultural dimensions reach far beyond the character sets of the user interface. It is also important to separate software into the socially influencing and the technically dominant. The former are those systems and applications for which the assumptions of organization structure and process, as well as individual user interfaces, are culturally sensitive (e.g., accounting and information systems, groupware, etc.). These contrast with the technical systems, such as CAD-CAM, where the cultural aspects of the interface are cosmetic, and the underlying structure and processes are technically dependent and culturally neutral. Further, communications differ reflecting the cultural attributes of the respective languages. Hall (1976) provides a clear split between High Context Cultures Much of the information being transmitted is in the physical and social context of the conversation; relatively little information is in the explicit message. Communication is indirect; there is room for ambiguity and interpretation. People expect others to know what they mean—associated with collectivist cultures. Low Context Cultures Most of the information is conveyed explicitly, directness is valued and there is little ambiguity—clear and to the point information—associated with individualistic cultures. Kaye and Little (1996) illustrate the problems of diffusion through two case studies and demonstrate how diffusion, from the developer and adoption in context, leads to adaptation and redevelopment, leading to version drift and eventual incompatibility. Figure 4 presents two dynamics of diffusion. An initial adopter, Organization A, undertakes a technical development on the basis of the needs of the organization at time Tl. This technology is deployed in the organization at time T2, at which point the organization itself has developed institutionally through interaction with its environment. In order for the technology, based on a snapshot of the organization at T1, to be usefully employed, the organization must enter into a period of adjustment between the delivered system and the changed needs. Organization A reaches the beginning of its payback period on the innovation at T3. Organization B, having observed A’s process of deployment, initiates its own development

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of the new technology at T3. In order to adapt the technology to its own needs it pursues a process of redevelopment followed by its own process of adjustment, so that payback for Organization B begins at T5. Organization C may follow the same development path as B but in this case it would trail technologically. Alternatively, it may seek to mimic and develop at the same time as B. If this latter strategy is adopted, then it will not be able to draw on B’s experiences and must instead attempt to reverse engineer, which may achieve the earlier payback but entails a higher risk. This example demonstrates that linearity of diffusion may not always occur and localization can be problematic. Localization has problems of cultural barriers of which the most obvious is language that restricts access. Making the software culturally accessible places an additional translation cost in the system that may further raise barriers to acquisition of the system. These problems of localization place a limit on the globalization and universality of ICTs.

PROBLEMS OF UNIVERSALITY Sachs et al. (1997) suggests there are limits to convergence. Transportation costs associated with distance and physical barriers create economic limits and inequalities of income. Physical geography, government policy and demographic changes have been shown to influence economic growth in the period 1965-90. While specific policies, such as openness of markets combined with regulation, may overcome some deficiencies, the longterm aspects of physical geography may limit growth. Under free trade, each country should specialize in those products in which it has relative advantage; however, Matsuyama (1992) suggests that those endowed with good arable lands and natural resources might encourage agricultural growth at the expense of industrialization. Evidence from the growth of Latin American countries suggests that economic growth can be achieved from both agriculture and industry by ensuring that not only does productivity rise in the factory, but also on the farm. Such increases in productivity can be achieved by increasing the value added by, for example, moving from production of fruit to production of wine. However, “Engels’ law” suggests that as incomes increase the proportion spent on food will decrease, setting a limit on agricultural growth. This limit has a consequence for the distribution of incomes and may ultimately limit industrial growth if redistribution is not facilitated to avoid economic migration. Rodrik (1997) suggests that those favoring globalization underestimate the effect of free trade and capital flows, which allow organizations to relocate production to low-wage economies. The very threat of this causes insecurity and weakens established capital-labor relationships. Further, the quality of working conditions are more than a protectionist cry but reflect genuine concern for minimum standards of decency and reflect the lack of social insurance and the increasing burden on the state. Rapid growth in favored areas creates regional imbalances, while localized growth may cause instabilities. Ohmae (1990) argues for regional synergies to maximize development regardless of pre-existing national boundaries. However, the sustainability of such development is dependent on a balanced economy, and any unevenness may result in internal, international, or regional migration on such a massive scale as to create instability. In the UK imbalances may be found between the forecast GDP for 1997 of 4% for the whole UK with regional variations of 1% in Wales and 5% in Greater London (Economist, 1997a).

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Figure 4: Diffusion under the S-Curve from Kaye, R.. & Little, S. E. (1996). Global business and cross-cultural information systems: Technical and institutional issues of diffusion. Information Technology & People, 9(3), 30-54

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EMPIRICAL EVIDENCE FROM NE ASIA AND THE UK Japanese factories have achieved worldwide acclaim for their productivity and quality, their automation and technology, and for innovation and market awareness. The high technology factories are in stark contrast to the office and administration systems. The factories use the latest technology of CAD/CAM, FMS, etc. to achieve worldclass manufacturing of the technologies that the West then utilizes in their offices and administrative systems. Meanwhile, the eastern offices and administrative systems are reminiscent of an earlier generation of Western practices with large generally open plan offices, long rows of uniform desks and a proliferation of calculators, telephones and faxes but few workstations or personal computers. Computers are shared and as such cannot easily be used for networking with e-mail and groupware products, which now form the backbone of many Western systems. Graven (1994) describes attempts by Shiseido, Japan’s oldest and largest cosmetic company, to achieve office automation. In 1957 it introduced its first IBM computer to track orders, plan production, and handle logistics. In the 1970’s it computerised its distribution system. However, it still faces the challenge of office automation as it moves from this centralized information and data processing systems to distributed end-user computing where the individual user must interact through the technology. Facsimile transfer, developed in Europe in 1890’s, led to the modern-day electronic fax, which was jointly developed by Xerox and Magnavox in 1965. The adoption of this technology was most rapid in Japan (by 1985 an installed base of 850,000). Where the telegraphic systems of communication had required either the adoption of English language or the development of a separate Japanese code to represent Kanji characters, the fax allowed

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the direct transmission of traditional Japanese characters thus overcoming the language barriers within the technology. The acceptance of fax technology in the U.S. and Europe was much slower, and the comparable figures for 1985 are 550,000 and 120,000, respectively. While many fax machines sold carried Western brand names, the bulk were manufactured in Japan. During the same period, 1981 to 1984, the sales of Word processing packages in the U.S. increased more than tenfold to approximately 2 million; and by 1987, two of the more popular versions were selling in excess of 600,000 copies per annum. In a similar period the sales of faxes rose from 50,000 in 1983 to 295,000 by 1987. Word processing was not only compatible with Western culture, but also with Western business practices. The ability to send text through teleprinters had been available from 1897; and, while sending digital messages across networks was common practice, there was some delay before wide-scale usage of electronic mail emerged. In the meantime, the fax could be used. This apparently retrograde step was a surprise to many technology forecasters, who had expected the next step to be e-mail. However, while the technology was available, there were few wide-area networks with the necessary capability to allow e-mail. The large scale development of the Internet provided that facility internationally but was in use predominantly within a closed technical community for a considerable time. A recent report (Economist, 1997b) suggests that corporate Japan is now commencing the wiring of offices, which the U.S. undertook a decade earlier. Sales of PCs have risen in the last five years, from 2.2m units in 1992 to 8.3m in 1996, of which 5.6m were corporate purchases. Suddenly Japanese office workers have access to computing with 20% of desks sporting a PC. Most of these PCs have been used for Japanese word processing, reflecting the long-awaited access to kanji and kana character sets. In recent months, sales of fileservers to support network systems and UNIX machines have increased by 89% in Japan (IDC Japan reported in Economist, 1997b), which implies about one third of all PCs are networked. However, the bulk of these appear to be for e-mail and some access to the Internet (replacing the fax and copier). The dearth of groupware products, such as Lotus Notes or other application-sharing and workflow systems available in Japanese, are not the only delay. The hierarchical corporate culture of Japan discourages the flatter organizational style assumed in these technologies. A further limit is the lack of information managers and technologists whose specialist development is not possible, given the job rotation approach of Japanese management. Nonaka, Ray and Umemoto (1998) analyze the contrast between knowledge creation and management in Japanese and Anglo-American environments, setting these in the context of Japan’s “three sacred treasures” of lifetime employment, age-based promotion, and company unions. These support a milieu in which the explicit mechanisms promoted in the West are unnecessary. Davenport’s observations of the rise and fall of business process re-engineering as a fad indicate a growing Western appreciation of the role of implicit knowledge and undocumented procedures in delivering performance (Davenport & Short, 1990; Davenport, 1993; Davenport, 1996). Whether Japanese and Anglo-American office environments are converging, or perhaps exchanging, their traditional characteristics remains to be seen. Until recently, the most common language on the Web after English was German. However, a recent survey by the Internet Society (1996) of a global sample of the 30m computers with Internet addresses found that 82% were English; 4% German; 1.6% Japanese; 1.5% French; 1% Spanish. Given the population distribution of the world and the languages and character sets, the data indicates a very uneven distribution between the alphabet-based cultures and those

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using ideograms. However, the rapid growth of networked PCs in Japan is rapidly moving Japan into second place. This reflects a move by the Japanese Ministry of Posts and Telecommunications to counter the American domination of this new technology. Switching between Japanese and English is problematic, as English requires only one byte to define the character, while Japanese needs two bytes (Chinese uses a subset, which can be accommodated within the two-byte character set). While the solution has been to run two machines with different operating systems, new product launches of Twinbridge, KanjiKit, and Japanese Language Kit for Macintoshes enable some coworking (see endnote). The Motorola Report (1996) draws on a survey undertaken on its behalf by MORI of households and leading industrialists in the UK. The report characterizes the nation as “IT haves and have-nots.” The division exists on the basis of sex, age, employment, and social class. Not only were the younger (16-44) administrative and managerial groups more likely to have access to computers in their workplace but these same social classes were likely to provide access to computers in their homes, facilitating educational access for the next generation. In contrast the lower social classes (C2DE) were more likely to be employed in roles where ITC had less impact on their daily activity, and as they were part-time working or unemployment further placed barriers in their development of IT skills, “caught in an IT void.” This survey concludes that barriers continue to the adoption of ITC across the whole of society. An IMF working paper by Slaughter and Swagel (1997) indicates a widening gap between the high skilled (graduate and above) and the low skilled (secondary educated and below) in the USA and Britain, but less marked in other Western economies. This gap has been explained in various ways. First, “low-wage economies” drives down the unskilled rates. Secondly, technological development had boosted the productivity and wages of skilled workers. At the same time, these economies have experienced recession with high levels of unemployment and increased part-time work, leaving workers less able to negotiate a fairer allocation of funds between capital and labor providers. While the explanation for the gap may be disputed, all agree that technology can only increase the gap.

GLOBALIZATION AND CITY-STATES The forces of globalization and universality lead to two divergent models. In the first case, globalization encourages the city-state to emerge. This produces stronger cultural links to the international standards of exchange and trade with the reference group being similar trading groups elsewhere. Hence, the universal language of business is English and the software classically American. In contrast, the national identity is at odds with international trading, as evidenced by the survival of distinctive national cinemas and their stalwart defence by national governments in the face of the World Trade Organization. This disharmony reflects the cultural proximity (or distance) of the emergent global standards. The indigenous culture has strong roots and has evolved to complement the structure and processes of society. In contrast, the exogenous culture may be distant both at the surface or deeper. In the case of Western organizations, delayering and technological supports have enabled flatter organizations to emerge with short chains of command. In contrast, China and Japan have long chains of command and strong hierarchies which permeate deep into society and behavior. This places these cultures as distant, which when applied to the context of, say, China, leads to significant gaps between Shanghai’s development and the average province of China–thus, tension between the rural supportive infrastructure and the urban

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internationally referent city-state. This divergence was not present in the first industrial revolution as developments took place subsequent to an agricultural revolution within a consistent cultural tradition and context. Today, we have two divergent reference groups. Robertson (1992) uses the concept of relativization to represent the increasing challenge to particular perspectives on, and individual participation in, the overall globalization process. His model draws attention to the increasingly interrelated thematization of societies, individual selves, international relations, and humankind. He goes on to identify a temporalhistorical path to the current circumstances: Germinal phase nationalism; Incipient phase homogeneous unitary state, formalized international relations; The take-off phase - emergence of a single international society, increasing global communication; Hegemony phase - international wars and emergence of United Nations and recognition of national interdependence; Uncertainty phase - concept of global consciousness further amplified by space travel, technological acceleration, and multicultural societies. Hampden-Turner and Trompenaars (1993) surveyed 1500 “upper-middle” managers who had some international responsibilities. They found that while managers from Britain, Holland, Sweden, and the U.S. concentrated on individual self-interest, which, when congruent with the organizational goals, meant they would automatically serve their customers and society better. In contrast, Japanese, French and German managers concentrated on serving customers and society, relying on the organization to reward them for pursuing the organizational goals. The relationships of the individual self interest, the organizations and customers or societies they saw as interdependent, but fundamentally the value systems of the cultures were significantly different. However, this oversimplification fails to portray how the cultures vary subtly and therefore cannot be easily classified. The Hampden-Turner and Trompenaars’ study led them to identify seven cultural values which underpin the alternative wealth creation systems (p. 10). They characterize these values in the form of dilemmas where choices have to be made between the extremes: Universalism vs. Particularism Analyzing vs. Integrating Individualism vs. Communitarianism Inner-directed vs. Outer-Directed Time As Sequence vs. Time as Synchronization Achieved Status vs. Ascribed Status Equality vs. Hierarchy To quote, “To say that the cultures of various nations differ on the relative importance of those values necessary to wealth creation is an understatement. Typically, these issues are loaded with ideological fervor” (p. 11). For all its limitations, Hofstede’s pioneering study of the employees of a single global corporation confirms the durability of national cultural differences in the face of the hegemonic socialization employed by the company (Hofstede, 1980).

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CONCLUSION This paper has argued that the assumptions of universality and common linear pathways of development are flawed. It has argued that the opportunity to enter the development are multiple and lessons from prior users can be drawn up on. Further development paths may be nonlinear as accelerated learning and technology innovation allows “leap-frogging,” or deferment. Given the global development of organizations and the dependence such developments have on ICT, it is important that we have both descriptive and predictive models of the development of ICT. Nolan’s GSM has been a useful historical description of developments in large Western organizations. It has failed to be proven, and other models have provided explanations of the complex development paths available. Other models have contributed further explanations: Freidman’s phase model recognizes the constraints that limit growth and development, while Okot-Uma provides the possibility of both forward and backward stepwise developments reflecting both the opportunities faced by late adopters and the potential for both positive and negative experiences with innovation. The diffusion model also provides an explanation for adoption at varying rates and potential of discontinuous development of versions. These descriptive models collectively suggest a complex Web of development which is unlikely to be linear or functional. Globalization encourages the belief or aspiration in software developers to universality; and while certainly some evidence of “Macdonaldization” is perceivable at the superficial level, the underlying characteristic is of localization. However, this localization is frequently no more than the user interface and ignores the cultural assumptions embodied in the technical design. Kirlidog (1996) reveals the extent to which the assumptions embedded in a management information system were in conflict with the established working patterns of the overseas subsidiaries of the transnational corporation seeking to deploy it. Not only does superficial “localization” and underlying universality cause dysfunctional divisions between the host culture and the imperialistic, but also this dysfunctional division can go deep into society and the economical framework of the society. The assumption of the neutrality of technology is flawed as it fails to recognize that technology develops in a cultural setting and consequently embodies that culture within its design. The developments in ICT are based on a Western alphabet-oriented culture that contrasts with the ideogram of the North Eastern Asian cultures, (Shepard, 1993; Haywood, 1995). The development of the Qwerty keyboard and the encoding of the characters of the West (predominantly English) in the design of 8-bit and ASCII characters within 101 keyboard do not easily support the Chinese characters nor their embodiment of the ideas and culture of that society. This dysfunctional division suggests a limitation on growth and a nonlinear development path. Such a restriction suggests serious economical as well as cultural consequences. Current predictions of growth based on ICT suggest no limits, but the reality is that society is already dividing and the migration pathway between the two communities is increasingly difficult due to access barriers and cultural differences. The access barriers are primarily economic, reflecting the divide in economic benefit of development rather than the technical access issues as it is the same territories that have become the primary home of manufacturers of the technology. The juxtaposition of production of ICT resources in factories for which the office is still primarily manual with limited access to ICT emphasizes the divide (Graven, 1994). The East Asian reality of the urban technology worker and the peasant economy of

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much of this region heightens the divide. In the former, the access to technology may be exploited as the community adopts the Western culture, hence joining the global development pathway. In contrast, the rural community may increasingly be disadvantaged through lack of access and increasing cultural and economical barriers to entry. These conditions may be reminiscent of the industrial revolution, but in the west agrarian developments were more harmonious with industrial. Today the rate of technological development in ICT is such that a dramatic gap may exist well within a generation. Also contributing to the nonlinear development path are the uneven economic access and cultural barriers which advantage some groups and disadvantage others. Consequently, globalization and universality are not achievable; rather a divided society is likely to emerge with the “haves and have-nots.” This may further exacerbate the problems of development.

ENDNOTES 1 The following Websites contain details of these applications: www.twinbridge.com/ www.pspinc.com/lsg www.macos.apple.com/multilingual

REFERENCES Attewell, P. and Rule, J. (1984). Computing and organizations: What we know and what we don’t know. Communications of the ACM, 27(12), 1184-1191. Benbaset, I., Dexter, A. S., Drury, D. H. and Goldstein, R. C. (1984). A critique of the stage hypothesis: theory and empirical evidence. Communications of the ACM, 27, 476-85. Brynjolfsson, E. and Hitt, L. (1993). New Evidence on the Returns to Information Systems. Cambridge, MA: MIT Press. Brynjolfsson, E., Malone, T. W., Gurbaxani, V. and Kambil, A. (1994). Does information technology lead to smaller firms? Management Science, 40(12), 1628-1644. Davenport, T. H. and Short, J. E. (1990). The new industrial engineering: information technology and business process redesign. Sloan Management Review, 31, 11-27. Davenport, T. H. (1993). Process Innovation. Boston, MA: Harvard Business Press. Davenport, T. H. (1996). Why reengineering failed: The fad that forgot people. Fast Company, Premier Issue, 70-74. Drury, D. H. and Bates, I. E. (1979). Data Processing Charge-Back Systems: Theory and Practice. Hamilton, ON: Society of Management Accountants of Canada. Drury, D. H. (1980). A survey of Data Processing charge-back practices. INFOR, 18(4), 342-53. Drury, D. H. (1983). An empirical assessment of the stages of DP growth. MIS Quarterly, 7(3), 59-70. Earl, M. J. (Ed.). (1996). Information Management: The Organizational Dimension. Oxford: Oxford University Press. Economist (1997a). A divided nation (again). The Economist, October, 80-83 Economist (1997b). Wiring corporate Japan, The Economist, April, 80-83 Freidman, A. L. (1994). The stages model and the phases of the IS field. Journal of Information Technology, 9, 137-148.

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Freidman, A. L. and Cornford, D. S. (1989). Computer Systems Development: History, Organization and Implementation. London: John Wiley. Galliers, R. D. (1991). Strategic information systems planning: Myths, Reality and Guidelines for Successful Implementation. European Journal of Information Systems, 1, 55-64. Galliers, R. D. and Sunderland, A. R. (1991). Information systems management and strategy formulation: the ‘stages of growth’ model revisited. Journal of Information Systems, 1, 89-114. Gibson, C. F. and Nolan, R. (1974). Managing the four stages of the EDP growth. Harvard Business Review, 52, 76-88. Granet, M. (1934). Le Pensee Chinoise. Paris as cited in Goody, J. and Watt, I. (1975). The consequences of literacy. In Goody, J. (Ed.), Literacy in Traditional Societies. Cambridge: Cambridge University Press. Graven, K., (1994). The Eastern front, CIO, October 1. Reported in Gupta, U. G., Management Information Systems: A Managerial Perspective. Minneapolis St Paul: West Publishing Co. Hall, E. T. (1976). Beyond Culture. New York: Anchor Books/Doubleday. Hall, R.K., (1949). Education for a New Japan. Newhaven: Yale University Press. Hampden-Turner, C. and Trompenaars, F. (1993). The Seven Cultures of Capitalism. NewYork: Doubleday. Haywood, T. (1995). Info-Rich Info-Poor: Access and Exchange in the Global Information Society. London: Bowker-Saur. Hofstede. G. (1980). Culture’s Consequences: International Differences in Work-Related Values. London: Sage. Jayasriya, R. (1993). Stage of growth in end-user computing: applications in the health sector of developing countries in Asia Pacific. Journal of Information Technology, 8, 151-159. Kaye, G. R. and Little S. (1996). Setting standards: Strategies for building global business systems. Information Technology & People, 9(3), 30-54. Keniston, K. (1997). Software localization: Technology transfer and or cultural imperialism. IRMA 97, Vancouver, Canada. Kirlidog. M. (1996). Information technology transfer to a developing country: Executive information systems in Turkey. Information Technology & People, 9(3), 55-84. MacFarlan, F. W. and McKenney, J. L. (1982). The information archipelago: Maps and bridges. Harvard Business Review, 60, 413-25. Matsuyama, K. (1992). Agricultural productivity, comparative advantage and economic growth, Journal of Economic Theory, 58. Motorola. (1996). Making Use of Technology: A Motorola Report. http://www.mot.com/ General/Reports/British-Tech/. Nolan, R. (1979). Managing the crisis in data processing. Harvard Business Review, 115-126. Nonaka, I., Ray, T. and Umemoto, K., (1998). Japanese organizational knowledge creation in Anglo-American environments. Prometheus, 16(4), 421-438. Ohmae, K. (1990). The Borderless World. London: Collins. Okot-Uma, R. W. O. (1988). A synthesis perspective of information technology capability of commonwealth countries. Science & Technology News - Special Issue on I.T. & The Commonwealth. Perrin, N. (1982). Keine Feuerwaffen mehr–Japans Ruckkehr zum Schwert 1543-1879. Frankfurt. Roach, S. (1985). The New Technology Cycle. New York: Morgan Stanley Economic Perspectives.

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Roach, S. (1992). Technology Imperatives. New York: Morgan Stanley. Robertson, R. (1992). Globalization: Social Theory and Global Culture. London: Sage. Rodrik, D., (1997). Has Globalisation Gone Too Far? Washington DC: Institute for International Economics. Rogers, E. M. (1983). Diffusion of Innovations, (3rd edition). New York: Free Press. Sachs, J., Bloom, D., Panayotou, T., Radlet, S. and Williamson, J. (1997). Emerging Asia. Asian development bank report as reported in Economist, 14 June, 21-24. Shepard, J. (1993). Islands in the (data) stream: Language, character codes, and electronic isolation in Japan. In Harasim, L.M. Global Networks: Computers and International Communication. Cambridge MA: MIT Press. Slaughter, M. and Swagel. P. (1997). The effect of globalization on wages in the advanced economies. IMF working paper, April. Strang, D. and Meyer, J. W. (1994). Institutional conditions for diffusion. In Scott, W. R. and Meyer, J. W. (Eds.), Institutional Environments and Organizations: Structural Complexity and Individualism. Thousand Oaks, CA: Sage. Unger, J. M. (1996). Literacy and Script Reform in Occupied Japan. Oxford: Oxford University Press. Wastell, D. G. and Sewards, A. (1995). An information systems profile of the UK manufacturing sector. Journal of Information Technology, 10, 179-189.

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Chapter VIII

Ten Lessons That Internet Auction Markets Can Learn from Securities Market Automation J. Christopher Westland Hong Kong University of Science and Technology, Hong Kong

Internet auction markets offer customers a compelling new model for price discovery. This model places much more power in the hands of the consumer than a retail model that assumes price taking, while giving consumers choice of vendor and product. Models of auction market automation has been evolving for some time. Securities markets in most countries over the past decade have invested significantly in automating various components with database and communications technologies. This paper explores the automation of three emerging market exchanges (The Commercial Exchange of Santiago, The Moscow Central Stock Exchange, and Shanghai’s Stock Exchange) with the intention of drawing parallels between new Internet models of retailing and the older proprietary networked markets for financial securities.

INTRODUCTION Internet auction markets, such as those offered by Amazon, eBay, Priceline, OnSale, and CNET’s Shopper.com, are earning increased business and investment by offering customers a new model for price discovery. This model places much more power in the hands of the consumer than a retail model that assumes price taking, while given consumers choice of vendor and product. The monetary impact on retailing is currently small (Internet E-commerce in the U.S. in 1998 totaled $7.8 billion. Compare this to Wal-Mart’s retail sales in 1998 of $130 billion, or total U.S. retail sales in 1998 of $1.7 trillion. But Internet sales are growing faster than traditional retailing, reflecting the appearance of auction-based price discovery that has been made possible by Internet automation of many retailing outlets. Appeared in Journal of Global Information Management, vol. 8, no. 1, 2000. Reprinted by permission.

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Models of auction market automation have been evolving for some time. For example, securities markets in most countries over the past decade have invested significantly in automating various components with database and communications technologies. Various other technologies have a mechanized securities markets for over a century; for example, stock tickers have provided automated real-time reporting of securities prices for nearly a century. Without automation, markets are constrained to operate at the speed of their human facilitators—frequently too slow and localized for complex or high volume market services. This paper explores the automation of three emerging market exchanges (The Commercial Exchange of Santiago, The Moscow Central Stock Exchange, and Shanghai’s Stock Exchange) with the intention of drawing parallels between new Internet models of retailing and the established proprietary networked markets for financial securities. Emerging market innovations can elucidate more clearly specific issues arising in automation, because the projects are not hampered by tradition, volumes may be smaller, trading more localized, and offerings more homogeneous. It may thus be easier to discern the rationale behind a particular technology choice. Each of these three exchanges has, over the past decade, experimented with information technology appropriate for its market. Each discovered unique issues and pitfalls in automating its particular exchange operations. This article summarizes what was learned from market automation. The implications for automation of retail markets in general (what has come to be called electronic commerce, or e-commerce are drawn from the lessons learned in automating these securities markets.

CASE STUDY IN THE AUTOMATION OF SHANGHAI’S STOCK EXCHANGE Deng Xiaoping initiated the “responsibility system” in 1979–a capitalist innovation which abolished central quotas and allowed farmers and some township enterprises to sell their goods on the open market. Many became rich in the ensuing decade. Savings grew with the growing wealth of the populace, endowing China with one of the highest savings rates in the world—between 35% and 40% of GDP over the past decade. With the introduction of economic reforms in the 1980’s, average annual growth was pushed to nearly 10%. This modernization required substantial amounts of investment capital, which was the main role of the Shanghai Stock Exchange, China’s main securities market. Most trading takes place in what are called “A” shares, which may be traded on the floor, but more often, trading bypasses the floor completely and is handled through automated systems. The Shanghai Stock Exchange issues a security card that identifies an individual as being authorized to trade in listed securities. The security card allows traders to bypass brokerage firms (and reduce brokers’ commissions). This provides a more efficient use of the floor, by channeling routine trades directly to computer matching. Trades are captured at a brokerage room when traders post an order with the clerk. The order is posted in the Exchange’s system through computer-to-computer communication. Matching takes place automatically. Security card holders still have to go through a brokerage firm to buy or sell securities and to settle and clear the transaction. Security cards make the job of brokerage firm easier by identifying the client to the brokerage and allowing automated management of the client’s account balance. In

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Table 1: Market Capitalisation of Selected Markets in 1997 Exchange New York Tokyo London Hong Kong China (Shanghai-Shenzhen) Russia 1 2

Capitalisation Billions of U.S.$1 7600 2685 1500 440 140 100

Stockmarket Turnover % of Market Capitalisation2 84 47 42 46 225 10

Asiaweek, 28 Feb. 1997, p. 62 Economist, 14 June 1997, p. 124

contrast, “B” shares (which are designed for trading by overseas investors) are only traded through brokers and on the floor. Liquidity is quite good in “A” shares, where there is widespread participation by China’s populace through approximately 3000 brokerage rooms around China. Turnover is around five times per year. “B” shares are less liquid, and there has been considerable interest in engaging more overseas investors in their purchase. Much of the current trading in “B” shares is done by Chinese within China, though they must pay for these shares with dollars in accounts outside China. “A” shares can be traded by any trader with a Shanghai Stock Exchange issued security card. These traders can trade directly with the exchange’s computer system. Thus orders may come directly from trading counters—where there is a transaction-by-transaction cash settlement and exchange of securities—or through member brokers—where the exchange provides net settlement of brokers accounts. Settlement is completed in the same day as the trade (T+0). Exchange commissions are approximately 0.65% of trades. As in many emerging markets, price volatility can be more strongly influenced by the money coming into the market than by the business fundamentals of the traded firm. Volatility in the Shanghai market is very high by the standards of most developed economies, a situation that poses difficulties to orderly trading. This tends to compound the exchange’s challenges in the face of problems inherent in securities laws that are still evolving and in the difficulties faced by the China Securities Regulatory Commission in policing insider trading, misuse of funds, and false disclosure. Volatility is tightly monitored—important in a market where there is a rapidly expanding group of investors of varying levels of sophistication. The exchange will not allow prices for a given security to vary more than 10% from the prior day’s closing price. When the 10% mark is reached, trading is not halted. Rather the settlement prices simply are not allowed to exceed 10% of the prior day’s price. This limit does not apply to initial public offerings (IPOs) on the first day; it only takes effect on the second day after issue. The Shanghai Stock Exchange (and its sister exchange in Shenzhen) use a continuous double auction, order-driven trading system, assisted by a computer network to transfer order information from brokers to the floor and back again. During opening hours, information on trade prices and volumes is continuously disseminated to traders, and buy and sell orders

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are continuously received. Both have supporting clearing houses for transaction completion and settlement. The exchange floor opens Monday through Friday from 9:30am until 11:30am (at which time prices are frozen) and re-opens after lunch from 1:00pm to 3:00pm. Opening prices are generally set to clear the maximum number of outstanding bid and ask orders on hand at 9:15am. They may be set differently if there are substantial imbalances between buying and selling, and it is felt that a different price is appropriate to clear the market. The opening prices for thinly traded stocks will be set at their closing prices from the last business day. The trading system runs on a Hewlett-Packard HP9000-T500 computer, with peak processing of 5000 transactions per second. This is sufficient to handle peak exchange volume of two million transactions per day, with peak periods at the beginning and end of the trading day. The HP9000 is, with the addition of processing boards, scalable to 20 million transactions per day. Cisco routers regulate traffic on the local and wide area networks controlling traffic to and from brokerage rooms throughout China. These rely on a fault tolerant combination of direct digital network, satellite and analog transmission. The exchange has been clever in applying a cost conscious set of components for exchange automation that make effective use of both microcomputer and state-of-the-art computer and communications technology. Trading on the Shanghai Stock Exchange is dominated by small investors–99.4% of the Shanghai Stock Exchange’s clients are individuals; another 0.6% are institutions with only a vestige of direct participation by securities houses. The Shanghai Exchange has implemented a number of innovations to bring online trading to the small investor. China’s limited telecommunications capacity requires several levels of support to reach its desired customer base. Brokerage rooms provide the equivalent of Internet cafés for those who do not have a telephone, modem, and computer at home. In addition, real-time stock transaction quotations are provided online, free to subscribers of Shanghai’s cable television service. A computer card can provide the same cable TV quotation service, but on a computer screen; over 50,000 were sold in their first year. Traders with a modem and computer can open a trading account with one of the local banks. The exchange then provides them free connectivity software and free real-time quotations, allowing trading in and out of that bank account. The StockStar electronic trading Internet site provides services similar to E*Trade in the U.S., though the level of support provided to traders directly from the exchange has provided it little latitude for profit. Information dissemination on exchange transactions is a significant problem because of China’s size. China is a continent-sized country which needs sophisticated communications systems to allow access to its exchanges. Shanghai’s Stock Exchange has invested in two networks: STAQ, a national-wide system for broadcasting transaction prices; and NET, an automatic security trading system for stocks as well as government bonds. Sixteen networked securities trading centers with broadcast and screen facilities have been established around China. In 1993, these received new fiber optics and satellite communication systems which replaced dedicated telephone lines. Communications are now supported by an optical fiber network throughout the city of Shanghai. A combination of local fiber loops, dedicated satellite communication systems (using the AsiaOne satellite for communications linkage), and telephone lines offers two-way communication with 3000 trading counters in over 300 cities around China. There are roughly five million investors around China, and around half of the monetary trading volume originates outside Shanghai.

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The exchange floor has gone through substantial changes in its first decade. It has supported as many as 6000 seats (i.e., booths with microcomputers and telephones) spread over eight trading halls, representing the 500+ authorized financial institutions who are members of the exchange. Firms must have registered capital of more than RMB 5 million to be members. The new 27-floor exchange building in the PuDong (literally Shanghai East) area of Shanghai will dedicate all space from the ground up to the ninth floor to exchange operations. The exchange floor in PuDong holds 1700 traders on a floor double the size of Tokyo’s and triple the size of Hong Kong’s floor. Most business, though, is conducted off the floor, through terminals and automated matching and floor brokers spend a disproportionate time reading their newspapers. The floor provides no formal trading or market-making functions. It provides a focal point for market management and supervision and for market sentiment. Li Quian, an exchange official, explains that “It is also a symbol of Shanghai’s success.” To facilitate transparency of market activities, the communications network automatically disseminates trading information: 1. to the exchange’s trading room display (a large digital screen on the trading floor), 2. to a telephone inquiry network for people not on the trading floor, 3. to over 20 news organizations, TV and radio stations, 4. to Reuters, Telerate, and other global financial services, and 5. to the public by publishing a newspaper, Shanghai Security, with a circulation of several hundred thousand. There are 1000 minor satellite downlink stations and one major uplink station in PuDong. In brokerage rooms in Shanghai and other major cities in China, satellite systems typically provide backup order placement functionality in case telephone lines are not operable. In remote parts of China, such satellite systems are the sole communication channel allowing investors to participate in the trading of securities listed on the Shanghai Stock Exchange. Since 1993, the state has encouraged individuals and institutions outside Shanghai to participate in securities listed on the Shanghai Stock Exchange, which it would like to truly be a national exchange. There are currently more transactions posted by traders outside than inside Shanghai. The exchange actually engages two systems vendors to provide software and services for the collection and dissemination of trading information. They provide basically the same service. Since customers can choose either one, this provides considerable incentive for both vendors to maintain their quality of service and sophistication of software. China’s Securities and Exchange Commission worked to insure reliability of disseminated information. It has installed stringent controls over the information reported by companies and has prohibited the accounting profession from certifying forecasts of corporate performance. Information on all transactions is also transferred to the exchange’s market monitoring group which attempts to control insider trading, rumors, and collective efforts to control prices. First priority in automation of exchange functions has gone to the “A” shares. “B” shares are purchased in dollars, though denominated in renminbi (RMB), and information on those shares is broadcast in both English and Putonghau. Thus, additional systems development is required in supporting “B” shares. Customer participation in any auction market requires that customers have confidence that orders will be priced fairly and not subject to manipulations which would put them at a disadvantage. Chinese securities laws impose some order on the off-floor brokerage function.

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Brokers are required to comply with customers’ explicit terms for transactions conducted on their behalf, including: (1) type of security, (2) volume of trade, (3) bidding conditions and margin level, and (4) time of authorization. To prevent “insider” trading, employees of securities authorities, managers of the securities exchanges, employees of the broker handling the transaction, and employees of the governmental agency regulating or controlling the issuing company are prohibited from trading in its shares (Zhao and Li, 1992). Compliance with these guidelines is enforced by a Monitoring Department and a Compliance Department (i.e., investigation) in the exchange organization. Seats in the Shanghai Stock Exchange are classified as “real” and “virtual.” Virtual seats are either remote terminals or handsets that are connected to the matching software through DDN, satellite uplink, or analog telephone link. There exist 1000 low bandwidth satellite uplinks for posting orders remotely, and one broadband satellite uplink (in Pudong at the Shanghai Stock Exchange) to disseminate bid, ask and settled trade prices, and volumes. Order placement security is enabled by either a touch tone or a magnetic card verification system. The touch tone system requires the cashier/broker to enter trader identification, security code, password, limit price, and quantity of the buy or sell order. The magnetic card system (i.e., a standard-sized credit card for stock transactions) enters trader identification and security code automatically requiring keying only of password, limit price, and quantity of the buy or sell order. Magnetic card system is provided by the Shanghai Stock Exchange and provides an additional level of security over trading. Individuals wishing to trade in the Shanghai Stock Exchange need to procure a magnetic security card from the exchange. This card uniquely identifies the trader’s account with the exchange. Since the market is a cash market, every share is owned by someone, and this is recorded in the exchange’s databases. The exchange handles its own transfer/clearing accounting. Through this account identification, traders can obtain information about their account position from the exchange. Banks and brokerage houses issue separate debit cards which allow traders to buy and sell without exchanging cash. These reflect account balances with the bank. Traders who do not have a security card can trade, with the broker acting on their behalf. Some banks incorporate the security card number and information into the debit card. Not all brokers have a direct connection to the exchange. Particularly in remote areas of China, brokers need to dial into their seat on the floor (or through satellite uplink) to place orders. Even in Shanghai, some brokerage firms insist on their own staff dialing for traders, even if the traders can directly place orders with the exchange. This provides an additional layer of security and control over trading. Clearing and settlement are the responsibilities of a wholly-owned subsidiary of the Shanghai Stock Exchange—the Shanghai Securities Central Clearing and Registration Corporation. Central depository, trades, and clearing are all paperless. There is no need to print a physical copy of the security, as a database is maintained of ownership of all shares. A particularly exciting innovation in Chinese securities trading in recent years has been the introduction of neighborhood brokerage rooms to encourage the investment of funds by China’s people, who have one of the highest savings rates in the world. The immense popularity of trading counters and brokerage rooms in China has done much to abate liquidity shortages that dogged the market until recently. Before the widespread installation of trading rooms, China’s securities markets suffered from a lack of capacity to absorb large buying or selling pressure without causing severe adverse price movements.

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China’s investment banks rely on a clever mix of appropriate technologies, cost effectively delivered, to bring their services to the people. Brokerage rooms provide just the right amount of technology for a country with straggling telecommunications infrastructure and few PCs. Electronic investment technology is brought close to every home, but not into it. Investors meet in a pleasant and convivial neighborhood atmosphere. In China, as elsewhere, more is not always better. Appropriate technology is intelligently embraced which fits the customer and the tasks at hand. Small investors are served in a large hall crowned with an electronic bulletin board broadcasting the latest securities prices. In the front of the hall are windows through which clerks can process, buy, or sell orders for listed securities. The bank also provides software for technical analysis of securities prices on computers at the front counter. Over 50 algorithms for technical analysis may be called up in the software; moving averages and other cycle analysis can be customized by the user. Major investors–those with over RMB 500,000 in the market–are treated to their own desks and computers (complete with technical analysis software) in one of several rooms cloistered within the maze of halls leading from the main brokerage room. Despite the greater stakes, the unique and convivial atmosphere of investing still permeates these rooms. Though orders could be posted directly to the Stock Exchange’s electronic matching system directly by these computers, the China Commercial Bank chooses to act as an intermediary. A secretary is provided for each of the VIP rooms and actually places buy or sell orders at the request of the investors. Besides providing a professional touch for the customerinvestor, this also provides the bank with an additional modicum of control.

CASE STUDY IN THE AUTOMATION OF MOSCOW’S CENTRAL STOCK EXCHANGE Russian president Boris Yeltsin’s government has rapidly moved to open markets since its economic reform program was launched in January 1992—by freeing prices, cutting defense spending, eliminating the old centralized distribution system, completing an ambitious voucher privatization program in 1994, establishing private financial institutions, and decentralizing foreign trade. The Soviet economy was founded on heavy industry–on large-scale factories, smelters, refineries, extraction and processing of raw materials and natural resources. Much of Soviet budgetary allocation through the 1950’s and 1960’s was directed toward infrastructure development. The country formed a national electricity grid (now a joint stock company known as “Unified Energy Systems”), a gas exploration, drilling, and refining behemoth (now joint stock company “Gazprom”), a nationwide telecommunications system (“Svyazinvest” and “Rostelecom”), oil exploration and distribution corporations (“Lukoil” and “Surgutneftegaz,” inter alia), car and truck manufacturers (“Logovaz,” “Zil,” and “Kamaz”), diamond and gold processing organizations. These industries provided the securities marketed on the Moscow Central Stock Exchange. The establishment of modern financial markets and the modernization of banking helped the non-state sector to contribute approximately 75% of official GDP by 1997, up from 62% in 1994. This contribution may understate the true contributions from privatization. By some estimates, the official GDP figure of around US$700 billion (at purchasing power parity, with a bit over 10% contributed by exports) is only 50% of the actual GDP. The underreporting

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of economic activity to avoid an inequitable tax system obscures actual income. Russians save 32% of their income (slightly short of the Chinese savings rate) while the Russian government consumes only 15% of the official GDP (compared to 30% of GDP in the U.S.). These amounts are comparable to state sector consumption in China, where official figures understate GDP and faulty tax collection is again to blame. To privatize these firms, the Russian government issued vouchers, worth ten thousand rubles each, to every Russian citizen (children included). These could be picked up at local offices of the state bank for a nominal transaction fee; eventually some 144 million out of 147 million Russians received their vouchers. They could be exchanged for shares in companies through the mechanism of auctions (essentially they were currency but could only be used to bid for shares. Markets grew for buying and selling vouchers; they were even sold from farmers kiosks just like carrots or cabbages. Voucher funds’ ability to influence enterprise performance depended on a number of factors, including management compliance with new policy, management disclosure practice, and support by local and regional government officials. With the absence of access to enterprises’ financial information, however, voucher funds were severely restricted in their evaluative capacity–a significant liability for an instrument which was initially motivated by a need to value enterprise assets. Given voucher funds’ relatively small ownership stakes, the funds also often required the cooperation of other shareholders in order to put forward new policies. The Moscow Central Stock Exchange (MSE) opened in 1992 as the first over-thecounter marketplace in Russia. It became the focus of the fledgling equities trading market at the first stage of privatization. Russia’s first standardised futures contract was designed by Moscow Stock Exchange’s Clearing House in March 1994 to facilitate trading on USD/ RUR exchange rate. In November 1995 a government bond (GKO) market evolved, and the MSE offered futures contracts on GKOs (index-linked, yield curve, when issued series, physically deliverable, etc.) with American-style options on futures as underlying. Later, contracts on Federal floating rate Notes (OFZs) were added to the list, making the Russian Bond futures market as an MSE franchise. Since then, the GKO and OFZ futures contracts have become increasingly important additions to the domestic treasury bond cash market. In June 1997, the exchange’s daily traded volume was between 30-40% of GKO and OFZ overall spot market turnover. These figures were considered proof of the growing need of large institutions to counterbalance their volatile GKO/OFZ holdings (borne out in the collapse of the debt market in August 1998). The exchange operates a screen-based multifunctional trading system. Trading is order driven, in a continuous double-price auction, where orders may be placed by interactive remote access. The exchange has implemented online clearing which has added liquidity and traded volume. The exchange has engaged IBM to migrate from existing PC-based network to IBM RS/6000 servers. The IBM Global Network (IGN), utilized by the exchange, makes viable the full-scale remote access and order routing for overseas brokers. During the early days of equity trading, Russia’s market consisted of brokers and dealers with stock shares, vouchers, and other privatization certificates. Price search was conducted over the telephone and fax (reminiscent of the over-the-counter market that preceded the US’s National Association of Securities Dealers Automated Quotations system) and by traveling to distant regions by plane, train, and sometimes even on foot. In 1994 and 1995, a broker’s trip to a distant region where shares of Lukoil or Rostelecom were being sold at below-market prices by local residents (and, occasionally, by company officials) could net a 100% return on purchased shares merely from transporting them to

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Moscow. This may mark one of history’s extreme cases in a liquidity-driven market. Improved market efficiency from automation dropped that geographic-liquidity-induced return to around 20% by 1997. As equity trading became more regulated, and information spread to the regions through paper and Internet information bulletins from 1995 on, brokers and traders moved to computerized trading systems such as the Russian Trading System and AK&M (similar to the NASDAQ). Despite the large size of Russia’s economy, total capitalisation of shares listed on the Moscow Stock Exchange still amounted to only around US$100 billion in 1997 (up from around $20 million two years earlier). Though Russia’s market capitalisation is roughly that of China’s stock markets, turnover was less than one-twentieth of China’s (Table 1) at the time. However, the August 17th 1998 moratorium on repayment of Russian government debt threw the stockmarket into turmoil. By the end of September 1998, trades are less than $10 million per day (down from 10 times that amount only six month’s earlier), and liquidity is almost nonexistent as reflected in bid-ask spreads running from several 10s to several 100s of percent. By 1997, a host of computerized systems existed in Russia’s investment houses to actively and effectively process trades. While no singular system dominated the Russian market, larger investment houses were focusing on system implementation as trading volumes doubled and tripled. At Renaissance Capital, Russia’s premier investment bank (headed by former CSFB Russia Director, Boris Jordan), for example, ten Sun Microsystems servers running proprietary software processed trades and analyzed positions for the company. Dealer boards—electronic devices that allowed equity traders to hold several telephone conversations at once—were installed in early 1997. Renaissance had a telephone system of 450 lines for its equity traders, with a Western-style trading floor with raised steel floors overlying high-bandwidth communications lines. Most Western brokerage and trading houses import their own systems and procedures from the U.S. or Europe. In contrast, Russian banks prefer to keep their proprietary information technology closed to outsiders. Russia has a well-educated workforce that excels in technology products such as software. By keeping systems and data feeds proprietary, banks can keep outsiders from knowing secrets that they believe provide them with a competitive edge. Financial statements of listed firms typically are stated under both Russian Accounting Standards and International Accounting Standards (similar to U.S. Generally Accepted Accounting Principles). Russian Accounting Standards provide more accurate accounting under inflation, or when asset valuation is ambiguous, as it is in an economy that still settles 40% of its industrial purchases through barter. Both Russian and Western banks use Russian accounting software packages, the two major packages provided by Diasoft and Program Bank. As the market matures, information technology providers should see considerable growth in business volume. In contrast to more developed markets where settlement and clearing are instantaneous processes linked to price search, Russian back-office software “has to deal with a market in which completing a trade [often requires] sending a courier to Surgut to get the trade recorded in the company register.” Furthermore, equity traders require at least one other employee in the back office to register trades, obtain stamps and seals, and comply with mountains of government regulations. Russia’s market regulating authorities fully understand and acknowledge the difficulties trading and brokerage houses face in a market dominated by telephone trade. According to Skate Press and several Moscow brokerages, at least 60% of trades are completed over

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the telephone and not registered with regulatory bodies. Furthermore, much of this trade takes place “offshore,” making trade tracking all the more difficult. This creates a major problem for both market makers and investors, as actual trading (market) prices often differ significantly from published (recorded) prices. As an example, for most of early August 1997, recorded trade volume for Gazprom averaged 100,000 shares traded per day. Actual trade volume, according to several Moscow-based brokers, was at least twenty times that amount. Because settlement of trades (a paper-based system) takes place independently of price negotiation and discovery (automated on the computers of the stock exchanges), prices can be manipulated and published on the exchange, without actual trades ever taking place. Unfortunately, because of poor liquidity and policing, broker abuses are common in Russia. Insider trading is rampant. Laws exist but are seldom enforced. And other widespread practices have proved even more damaging. In one example, written up in Russia Review, Johnny Manglani, an Indian tailor and amateur investor, claimed his Russian broker cheated him out of more than $100,000 on the Russian market. According to Manglani, Charles Shearer of the Moscow investment house Rinaco Plus called one night with bad news: Sberbank preferred stock, which Manglani had bought the previous year at $4.80 per share, was down to $1.70 and would shortly fall to $0.30. Manglani wanted to hold on but claims that Shearer, who had not previously taken much interest in his trades, kept calling until he agreed to sell. Soon after, Sberbank preferred jumped to $2.15. This is an example of an investor not getting the best price. Other common abuses include: Price manipulation. Because the Moscow Stock Exchange does not handle settlement, 80% of trade in Russian shares happens outside exchange, and investors are often left at the mercy of their broker to tell them how much a given stock really costs on a given day. Favoring the house. Many of Russia’s biggest houses do a lot of trading on their own account, known as the “proprietary book.” When the traders want to get out of something, they tell their clients that it is a great buy. Front-running. In a market as illiquid as Russia’s, one big traCan send a stock’s price soaring. A broker can first buy a little for the proprietary book, or for himself, then profit when the price rises on the client’s purchase order. Brokers can also front-run on research reports. Research flogging. In an up market, brokerages come out with glowing reports on companies in which they already have stakes. For example, the brokerage house Aton issued a report in September 1997 recommending the previously obscure Kazan Helicopter Factory. Aton analyst Nadeshda Golubeva noted that Aton took a “big stake” in the factory before even beginning research. Soon after Aton’s report came out, the stock plunged, and by March 1998 was removed from the Russian Trading System. Drawing the line between ethical and unethical behavior can be difficult in an emerging market such as Russia’s. In a mature market, when a bank’s research department issues a buy recommendation on a formerly obscure company, clients can immediately purchase the shares through their brokers. In Russia, acquiring shares for such second-tier companies usually requires that someone physically travel to the company and buy the shares in cash from workers and other small shareholders, a process which can take weeks. Procurement can require brokers to drive long distances over dilapidated country roads, carrying millions of rubles along with a bodyguard or two. Moscow brokers need to start buying shares in advance so they will be available when the research report is published. In the U.S. this would be called front-running, but in Moscow, many fund managers are willing to pay a premium for this service.

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On August 17th 1998, the Russian government defaulted on its own debt, ordered private borrowers to default on foreign loans, and abandoned its support for the ruble. The stock market, never liquid in the best of times, literally ground to a halt. From 1994 to 1998 the Russian government raised around $45 billion from selling securities, while the Russian firms issuing these securities ran up debts of another $20 billion. During the same period, an estimated $60 billion left Russia as “flight capital,” finding new homes in offshore accounts in the Grand Caymans and Bermuda. (The Economist, 19 December, 1998) Many of the weaknesses in Moscow’s Central Stock Exchange were symptoms of deeper faults that exposed Russia’s worst inclinations. In the aftermath of the Russian privatization debacle, governments throughout Europe and Asia reconsidered the wisdom of open capital markets. Yet in Russia, it was not the concept of open capital markets that was to blame–(it was their implementation through incomplete and flawed electronic trading systems. Three specific failings destroyed Russia’s financial credibility: 1. De facto limitation of participation to a small circle of traders with inside information. 2. Separation of price discovery and settlement operations, which allowed brokers wide latitude in manipulating posted market prices. 3. Failure of listed firms to provide transparent information about the quality and profitability of their operations. Had Moscow’s Central Stock Exchange designed these problems out of their system prior to operation, the denouement might have been much different.

CASE STUDY IN THE AUTOMATION OF SANTIAGO’S COMMERCIAL STOCK EXCHANGE Chilean privatisation and economic reforms were initiated under the régime of Generallissimo Augusto Pinochet. Over the 1980’s these reforms steadily improved the statecontrolled economy inherited from Salvador Allende’s Marxist régime. By the time that Pinochet resigned in 1990, Chile had the strongest economy in Latin America. Shares of Chilean firms were traditionally traded in the Bolsa Comercio de Santiago (Santiago’s Commercial Stock Exchange), which was Chile’s largest and oldest stock exchange. Trading volume exploded in the 1980’s with the initiation of a national pension plan that allowed workers to choose their own investments. During that period, Chile’s economy grew in excess of 10% annually. An urgently needed update to the automated systems of the exchange took place from 1992 to 1994. The exchange automated in the face of stiff competition from rival Bolsa Electrónica, a completely electronic exchange started in 1989. The Bolsa Electrónica used a computer trading system very similar to the new electronic system developed for the Bolsa Comercio, but without a trading floor or the accompanying expenses of a floor. In just three years it had captured 30% of transactions in securities of listed companies, where virtually all of the companies listed on the Bolsa Electrónica were also listed on the Bolsa Comercio. The Bolsa Electrónica was cannibalizing transaction volume directly from the Bolsa Comercio! Success fomented new demands by brokers. Many brokers resided in the exchange building, which possessed Ethernet network links providing much faster communications than existing 9600 Baud lines. They were willing to pay the Bolsa considerably more for access to Ethernet links. But linking some brokers to fast communications lines, while leaving other brokers to trade on slower 9600 Baud lines, could create a caste system which would rob

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otherwise qualified brokers of business simply because of their location. Even more divisive was the demand by brokers for the ability to “program trade”—to trade automatically relying on decisions made by software programs, using information gleaned from the Bolsa’s electronic information feeds. Both problems presented significant challenges to the Bolsa’s fairness policy, by allowing brokers who invested in information technology to place orders faster through precedence in information processing speed. Fairness, in the sense that no trader could systematically gain an advantage over another trader by exploiting idiosyncrasies of the exchange mechanism, was particularly important in Chilean trading. Many of the traders traded on their own account, with family, rather than institutional capital. Family traders would be less inclined to invest in information technology than institutions and brokers, and without the Bolsa’s commitment to fairness, would be at a disadvantage. The Bolsa was legitimately concerned that this, in turn, might drive away their business. So important was fairness to the Bolsa that they insisted on owning the PC terminals used by brokers and tightly controlling the software residing on those PCs, assuring that no program trading was spirited onto the PC platforms. They recently sold their new computer trading system to the Cali exchange in Columbia, which supported trading in both Cali and Bogota. In order to assure fairness, trading in Cali was purposely delayed by a fraction of a second to equalize order posting delay originating from telephone switching delays from Bogota 200 miles away. In 1992 the Bolsa Comercio supported the following three market mechanisms for trading: 1. Open outcry. Open outcry is the traditional method for market trading in a “pit.” This market is opened from 9:00am to 11:45am Monday through Friday. Here, for example, a trader enters the “stock” pit, shouts out a particular price to buy a number of shares, another trader shouts back acceptance of the price, constituting the consummation of a contract. 2. Bulletin board. This auction system is used primarily for thinly traded stocks, where it may take several days for bids and asks to match. This was traditionally a chalk board on which any listed company could post securities. 3. Direct order. This exchange allows person A to request to buy or sell directly from or to person B but broadcasts the offer to see if there are others who would like to try to outbid either party. The stock exchange was concerned about maintaining transparency of market activities. To this end, it supported a series of information dissemination activities to distribute information on a timely and accurate basis. The Bolsa published a series of informative brochures on various aspects of investing in the market and on industries and firms represented in the market, including their Revista Tendencias Bursátiles (Market Trends Magazine). They issued a daily Boletín Bursátil, listing opening, closing prices, transaction volumes and so forth, along with trimester and annual reports. This information was the basis for postings in daily newspapers. As an integral part of their system to assure market transparency, the Bolsa provided a system of computers, microcomputer terminals (in brokers and Bolsa administrative offices), and television monitors which provide up-to-the-second information for investment decisions, drawing on the Bolsa’s central databases. This terminal network provided information on price movements, price indices, income, historical and trend information on individual stocks, financial records, international price indices, interest and exchange rates, futures contracts, news, and other important information.

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Information from the Bolsa’s central databases is communicated throughout the Bolsa and to banks, brokers, and governmental officials through a secure PBX (private branch exchange, a proprietary telephone system). In addition, the Fono Bolsa and Data Bolsa systems make price records from the Bolsa available through commercial telephone lines (through dial-up to a 700 number, which is the equivalent of a U.S. 900 number). Through this service, the Chilean telephone exchanges allowed the general populace access to the Bolsa’s videotex services on televisions at home or the workplace, provided an automated voice query service for specific securities, and provided a “what if” capability through either voice or videotex to compute the value of an investor’s specific portfolio. They also provided their Centro de Informatión Bursátil to handle voice queries on questions which investors could not answer through the other services. Until 1991, electronic trading at the Bolsa Comercio de Santiago was handled on a Wang computer, which was responsible for reporting from and, through intermediaries, posting transactions to the open outcry system. The new system was operational in January 1994, after 18 months of programming and testing by a team of four programmer/ analysts under the direction of Dr. Carlos Lauterbach. Software was tested for six months prior to going online, by running simulations involving two to three days of actual transactions. These simulations compressed or expanded time to assure that the systems processing capacity was adequate to reliably handle worst case scenarios. The Bolsa Electrónica and the Bolsa Comercio provided very similar capabilities to traders. To maintain its image of fairness, the Bolsa Comercio rents out hardware and software services on the electronic exchange, forcing all transactions to be input through keyboards and to be output through computer screens. The exchange mechanism is systematically leveled at the bottom—all clients have the same equipment and software, as well as the same communications line delays. This disallows “program trading” (i.e., the following of stock prices through electronic feeds, with posting of transactions by computer programs, expert systems, or artificial intelligence software which automatically looks for arbitrage or investment opportunities). Communications line delays are also tightly monitored, so that terminals (e.g., in the same building as the Bolsa), are not able to post their transactions more quickly than those further removed. The electronic system captures trading that previously would have been handled through open outcry. By default, the open outcry system is fair—it is essentially selfregulating in this regard (though perhaps not efficient). It is the goal of the electronic exchange to capture that same image of “fairness” through sophisticated sets of trading policy implementations. The goal is to make the exchange systematically fair to all traders and to avoid any features that would make the exchange systematically unfair (i.e., reward some classes of traders at the expense of other classes of traders). For example, in the U.S. issues of fairness have arisen concerning the National Association of Securities Dealers dealerquote driven NASDAQ system, which has traditionally exhibited wider bid-ask spreads than the competing order-driven New York Stock Exchange. The Bolsa maintains a network for broadcast of market transactions and indicators through several services: 1. continuous updates to Reuters news services through dedicated communications lines owned by Reuters; 2. dial-up modem services to personal computers; 3. videotex services to televisions at home or the workplace, provided by the Chilean telephone exchanges;

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4. 5.

an automated voice query service for specific securities; and a “what if” capability through either voice or videotex to compute the value of a given portfolio. In both open outcry and electronic trading, the market provides a nexus for all offers and queries brought to the market. This presents the traders with a potential bottleneck. The electronic system relies on extremely fast online transaction processing (OLTP) by a Tandem Cyclone computer. In data servers (i.e., computers dedicated to “serving up” data records for update or reporting) such as the Tandem Cyclone, typically several CPUs (central processing units=the computing part of the computer, of which a desktop PC computer has only one) are required to achieve the desired processing performance. The Bolsa Comercio de Santiago set as a benchmark that 95% of matchable transactions (i.e., where the bid and ask prices cross) could be completed on the Tandem within one second. In order to do this, the Tandem computer needed to be run at 40% of its peak load capabilities (a statistic established by the manufacture Tandem Computers, Inc.). This required a Tandem computer with six CPUs to support 30,000 transactions per day (an average of 10 transactions per second) from 600 dedicated terminals in the offices of agents and brokers. In addition, the system needed to support the broadcast of stockmarket information (essentially a full-screen electronic ticker tape) through dial-up modem connections, and voice announcing provided through the equivalent of U.S. 900 numbers available through the telephone companies. Tandem processing was estimated to be linearly scalable to about 300% of this performance, at a maximum configuration of 16 CPUs. In traditional markets (including the open outcry market at the Bolsa Comercio) the matching bottleneck is handled by breaking out trading by specific assets—i.e., certain stocks are traded only in one pit. This was tried in the electronic exchange. It failed to yield improvements in matching speed due to time clustering of trades in any given security or industry during the day, usually around the time of release of critical information such as financial reports. 1992 transaction growth of 20 to 30% annually threatened to outstrip the Tandem’s processing capacity in around five years. Yet they knew that the New York Stock Exchange, using Tandem computers, was able to maintain similar performance standards, applying a more complex trading policy, for transaction volumes in the 1 million to 10 million transactions per day—30 to 350 times the current volume on the Bolsa Comercio. One of the most critical decisions in systems development for software spanning several machines is the scheme for splitting the workload between computers. The Bolsa had chosen to dedicate matching activities to the Tandem, broadcast activities (to Reuters, the Fono Bolsa, and other news reporting services) to the Sun, and transaction acquisition and real-time reporting to the PCs located in brokers’ offices. Several factors are important in the Bolsa Comercio system: 1. The constrained machine resource is the Tandem Computer, which is the nexus for transaction matching. The Tandem should not be responsible for broadcasting information on trades, volumes, and so forth. Broadcasts are required by the dial-up services offered over the telephone lines, as well as continuous updates to Reuters and other news services. 2. The constrained resource for systems development are the programmers, who are skilled in COBOL programming but know little of event triggering (e.g., posting an offer), or of software development for Intel PC client terminals. 3. The performance and reliability of the Intel PC client terminals may be uncertain, since they are in users’ hands. Thus their responsibilities need to be limited to reporting status of offers and trades and to input of transactions (offers or queries).

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4.

Cost issues were important. The six CPU Tandem cost US$1 million, depreciable over four years (mainly technological obsolescence). The client terminals were i286 or i386 PCs, costing around $1,000 per terminal. These constraints suggest that broadcast of information—such as required by Reuters or the telephone voice and data broadcasts of market information—can be handled by neither the Tandem nor the terminals. For this reason, an intermediate tier of Sun workstations ($5,000 per terminal) were installed to handle two tasks: (1) format updates to the market for broadcast to the telephone companies and to news services such as Reuters, and (2) reliably format transactions coming from the client terminals for forwarding to the Tandem. The Sun workstations were wired to both the Tandem and to the client terminals in pairs to assure that if one Sun went down, another “hot standby” was ready to complete the transaction in less than one second (i.e., in “real time”). Each Sun workstation could handle transactions from around 100 terminals. All of this technology was employed in the achievement of three computational performance targets: 1. 95% of matching transactions (on Tandem) completed in less than 1 second 2. Sun batching and reporting introduced 200 milliseconds (.2 second) delay 3. No PC software module greater than 10Kbytes in size (which translates into less than 3 seconds download to update a PC terminal’s software, done at time of logon) The Tandem is mainly used as a data server, though some of the server programs (coded in COBOL) provide information search and formatting services. Since reliability, accuracy, security and integrity are paramount to this function, the Tandem implements software and data mirroring. Software and data mirroring are services that Tandem is famous for and one of the reasons that they are the primary supplier of computers for stock exchanges and other mission critical applications where any downtime is unacceptable. The majority of software and processing in the client terminals supports the graphical user interface, running under Windows. This is programmed in the ECU language, which is compiled (i.e., translated) into a very compact intermediate language (which can be quickly downloaded across 9600 baud communications lines if needed), and is interpreted (i.e., run) by the kernel. The Sun workstations contain no custom code. They use packaged software for information broadcasting, for managing the client terminals, for performing transactions for posting to the electronic exchange (on the Tandem), and for managing the multiple sessions running simultaneously. By not using custom code on the Sun workstations, and by performing only rudimentary services, well suited to a Tandem server on the Tandem, the job of updates, maintenance, extensions, and revisions to the system are kept mainly on the client terminals. And the client code is loaded to the Tandem, where it is automatically downloaded to each client whenever it logs on. The Sun workstations: 1. display amounts on the bulletin board in the sala de ruedas used for displaying transactions; 2. handle routing of transactions; storing and forwarding of transactions for integrity; 3. randomize the order of transactions in the queue to be forwarded to the Tandem for matching, and randomize the order of transactions in the similar queue to be broadcast to traders. This function is provided by the stock exchange to insure fairness in trading, and to thwart attempts at front-running. The Sun workstations add a 200 millisecond-per-transaction delay (i.e., 20% of total one second target time for processing a transaction) due to storing and forwarding, but this is

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considered worthwhile, since during peak loading, the Tandem is freed for search and matching functions.

TEN LESSONS THAT INTERNET AUCTION MARKETS CAN LEARN In all three cases of stock market automation presented in this paper, the move towards automation and linkage into a wide-area order gathering and information dissemination network improved liquidity, extending the reach and participation in the market. Each of the exchanges used information technology to rewrite its trading geography, making off-floor transactions more appealing than on-floor transactions. Yet none of the moves off-floor was without costs and problems. These provide valuable insights for e-Commerce’s automation of retailing. This section summarizes ten lessons from securities exchange automation, with examples from Santiago, Moscow, and Shanghai stock markets.

ELECTRONIC AUCTION MARKET ADVANTAGES (LESSONS 1 THROUGH 5) Lesson 1: Customers are attracted to electronic auction markets because they provide greater liquidity than traditional markets; ceteris paribus this greater liquidity results directly from greater geographical reach provided to commercial transactions by electronic networks. A liquid market is one in which traders can quickly satisfy their demand to buy or sell specific commodities. Traders (i.e., the customers of securities markets) fall into two broad groups: those who participate in order to buy the product (usually called value-motivated traders) and those who hope to resell the product in the same market, taking advantage of supply-demand imbalances (usually called speculators). Speculators can be valuable liquidity providers but can also undermine efficiency and orderly trading by distorting the reflection of underlying value of a product in the market. The importance of a liquid market was not lost on Shanghai Stock Exchange officials when they automated their exchange. In their case, raising capital was of secondary importance, since the Chinese save 40% of their earnings, which was the basis for much of the lending to state enterprises. Rather, they wanted their exchange to attract foreign capital to these state enterprises, while assuring that any savings transferred to investments from the Bank of China (the major lender to the state sector) were still invested in the state sector. They accomplished this by listing State-Owned Enterprises (SOE) on the exchange, and insuring that trading was easy, attractive, and accessible to all Chinese people. This insured liquidity, by attracting a large base of active traders in listed securities by applications of computer and communications technologies appropriate to China’s populace. In contrast, the Moscow Central Stock Exchange kept trading in the brokerage houses as a result of its inability to provide network connections to the people. Further unsatisfactory outcomes may be attributed to this failure to provide widespread “geographical reach.” The problem was even more pronounced in the Russian voucher market, which offered no automation whatsoever.

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Liquidity becomes important in product markets with large trading volumes (e.g., for raw materials and intermediate production factors). These products happen to currently provide the most lucrative electronic commerce markets. The liquidity required in any particular market depends heavily on the lead time required for its use. In financial markets, this can be extremely short. In tangible goods, it may be much longer (e.g., concrete and steel contracted for a highway which will be constructed over the next decade need not be traded more than once every few months for buyers to consider the market sufficiently liquid). It is important to note that the traders who can potentially offer the most liquidity to a given market are not necessarily those traders who are either able to or are willing to be continuously present in a given market. This last premise is particularly important in assessing the impact of automation on markets, since advances in computer and telecommunications technology have obviated the need for physical presence at a trading location. This latter aspect of automation, along with the possibility of maintaining a quasi-continuous presence using the vehicles of automated (intelligent) agent software to continuously monitor and transact in an automated market, is perhaps the greatest source of impact of automated markets. Lesson 2: Electronic auction markets can more efficiently discover the best price at which to trade in a product. Buyers and sellers prefer—and will choose to trade in—a market that insures that the best price is discovered which can maximize buyers’ and sellers’ preferences. One reason to trade in an auction market, rather than simply search for a product in a retail market, is the potential to discard the “price-taking” assumption of the retail market. This forces the seller to give up the producer surplus—the amount received in excess of a particular buyer’s valuation of the good—to the advantage of the buyer. Such a market will attract more sellers, because it can ensure them a better deal. It will attract more buyers, because of the greater liquidity arising from there being more buyers. Best price discovery should be improved with increasing liquidity. The greater the liquidity of trading, the lower will be the producer and consumer surplus, because trading can potentially occur at more points along the supply and demand curves. All three cases show how modern computer and communications technologies can expand the number of customers’ (traders’) participation in the market, by greatly reducing the need for customers to be at a specific location at a specific time to trade. Where such limitations on auction location and time were imposed (as in the case of Russian industry vouchers), customers were greatly disadvantaged. Lesson 3: Electronic auction markets can, at low cost, provide exceptional levels of transparency of both market operations and of products quality. Transparency of a market implies that there exists some public source of information about products traded, and the activities of the market itself. This information must be current, must address product quality, and must be credible. In financial markets, audited financial statements and continuous news reporting provide a reliable source of information. Transparency of trading is another way of describing the demand functions of participants in the market. Three broad levels of transparency of trading on any single security are possible (with finer distinctions within each one of these levels): 1. Only the quotes of market makers may be broadcast to the trading public at large—This corresponds to the closing prices posted in newspapers;

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2.

The price and volume on the last trade may be posted—This corresponds to the ticker information broadcast throughout the day; or 3. The price and volume on each order can be posted—This corresponds to a market maker’s or broker’s order book. Of the three markets described in this article, only the Santiago Exchange provides transparency of both fundamental business information in the firms whose securities are traded and market trading. All three exchanges provide trading transparency at level (1); the Santiago and Shanghai exchanges provide transparency at level (2) as well. It is rare for brokers or market makers to reveal their order books, though. Moscow’s stock market, because it processed only about 20% of trades in listed securities, lost the confidence of investors in part because market prices did not adequately reflect supply and demand. Lesson 4: Electronic auction markets are more efficient than traditional markets. This efficiency allows them to better provide information required to correctly price assets traded in the market. Efficiently is related to transparency in the sense that it has to do with the dissemination of information. Efficient market prices will accurately reflect underlying value, supply, and demand for a product. In efficient markets, the price will be quickly influenced by new information. The Moscow Exchange again provides an example of problems arising from failure to rapidly incorporate new information into prices. In the Moscow Exchange’s case, this arises because the majority of trades (around 80%) take place off the floor at transaction prices which are not posted. As a result, posted market prices tend to be ignored by traders. They also tend to be lower than the estimated book value of the shares. This illiquidity is reflected in bid/ ask spreads that are often an order of magnitude apart, whereas in most exchanges, it is a fraction of the smallest currency unit. Lesson 5: Electronic auctions can provide a market that, ceteris paribus, offers services at a lower transaction cost. Markets provide a specific bundle of services. Where consumers have a choice of two otherwise equivalent bundles, they will do business where transaction costs are lowest. Traditional securities markets did not need to be significantly concerned about transaction costs because an exchange’s dominant position in trading a listed security, the tendency of liquidity to draw in more transactions, and regional loyalties combined to limit the choice of venue offered traders. With the drop in price of hardware and software for creation of an exchange, more and more markets can enter the competition for order flow in the same securities, competing on convenience and transaction cost. Thus Bernard Madoff began an electronic exchange in securities over a decade ago that now does over 10% of the volume of the New York Stock Exchange on listed securities. More recently, E*Trade has opened its own exchange, competing for similar stocks but offering its own online order capture. The situation highlighted in the Bolsa Comercio de Santiago case involves the challenge to its dominance over Chilean market trades by the Bolsa Electrónica, a completely electronic exchange started three years earlier. The Bolsa Electrónica used a computer trading system very similar to the electronic system developed for the Bolsa Comercio, and in just three years it had captured 30% of transactions in securities of listed companies (that figure had risen to nearly 60% by the late 1990’s). The Bolsa Electrónica

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was cannibalizing transaction volume directly from the Bolsa Comercio and was able to process transactions less expensively, because it was able to do away with the trading floor and its associated maintenance and rental expense, displays, labor, and so forth. Not being able to compete on cost, the Bosa Comercio chose to improve service in order to attract business. The case focuses on the trade-offs between policy (e.g., fairness and transparency) of the market and the technology offerings required to make the market attractive (e.g., Ethernet communications lines and program trading). Its operations emphasized fault tolerance and online transaction processing and effective information dissemination systems to provide real-time transaction and summary data.

ELECTRONIC AUCTION MARKET CAVEATS (LESSONS 6 THROUGH 10) Lesson 6: Customers will abandon a market that is not perceived as fair, even though they may initially profit from “unfair” transactions in that market. By distancing customers from the traders in a market, they can provide a false sense of legitimacy to a market that allows unfair and opaque trading practices. Trading is fair if one trader cannot systematically profit from another trader. Fairness is related to information efficiency of a market in that it requires that information about the security, as well as information about offers, sales, and the trading environment, be available to all traders in the market. Even so, fairness may be difficult to define in general. Most traders assume that they can outperform the market and thus assume that they can systematically profit from less informed (and presumably less clever ) traders. Markets need to insure fairness in order to attract trading (otherwise the disadvantaged traders would not trade in the market, leaving the remaining traders without traders from which to systematically profit). The resulting loss of liquidity is likely to drive out even traders who have initially benefited from “unfair” transactions. Grossman and Stiglitz (1982) showed that, in fact, markets could not be efficient and fair in the sense that all traders are equally informed (otherwise trading would stop). What is needed is the perception of fairness, in that any differences in success in market trading are presumed to be due to trader risk preferences, luck, and competing philosophies about what drives performance in a particular industry or stock. Markets need to adapt them to the business environment around them, and fairness must be interpreted in a local context. Russia’s markets provide an example of the difficulties in defining fairness in any universal sense. Broker abuses, insider trading, and market failures are common in Russia. Some abuses (e.g., broadcasting prices via the exchange system but completing the transactions at a different price in a private transaction) could be avoided by greater integration of the brokerage community into the market making system. But some problems arise from the inefficiency and illiquidity of the market. Brokers may receive little information on firm assets or operations in Russia, and thus are at greater risk of misrepresenting the investment potential of a product. Illiquid markets make it difficult to assure that the next transaction takes place at a price close to the prior transaction, or to know whether the difference is due to manipulation. The Russian markets provide a telling example that your markets must monitor, enforce, and insure fairness in trading Lesson 7: Electronic auction systems must manage all aspects of trading activity, from

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initiation to settlement and delivery. Markets that fail to integrate both price discovery and order completion (settlement) into their operations can encourage unfair trading behavior and opaque trading practices. This lesson is drawn from abuses at the Moscow Exchange where credibility of prices suffers significantly from failure to accurately record traded prices. In the Moscow Exchange’s case, this arises because the majority of trades (around 80%) take place off the floor at transaction prices which are not posted. As a result, posted market prices tend to be ignored by traders. They also tend to be lower than the estimated book value of the shares. Bid/ask spreads (the difference between the price at which a share can be sold on the exchange and that at which it can be purchased) may be an order of magnitude, whereas in most exchanges, it is a fraction of the smallest currency unit. Market prices may be set through two classes of mechanisms—(1) dealer quotes, and (2) price matching of bid and ask offers. The former are called quote-driven markets, and the latter order-driven markets. In an order-driven market, the stated price that a market sells or buys a particular commodity is typically the price at which the last trade took place. In a quotedriven market, quotations simply indicate that a particular market maker is willing to trade at specific bid or ask prices. Quote driven markets are similar to retail stores in that traders coming to the market must take the prices quoted. Retail stores typically serve only buyers, whereas quote-driven markets serve both buyers and sellers. Lesson 8: Because the delay in price response may have significantly faster completion and posting times, there is greater potential for feedback loops and instabilities that are a threat to orderly trading, and to fair and efficient pricing of assets traded in the market. Traders derive considerable information from price movements in markets. Thus, prices should not be overly influenced by imbalances in supply and demand (prevention of shortages and price fluctuations is one of the main reasons for using a market to trade). The last price at which a security was traded is close to the price at which they can trade. Where trading is not continuous, e.g., when a stock exchange closes at the end of the day, orderly trading may be insured by artificially setting the opening price of the stock to clear the outstanding buy and sell orders. All three of the exchanges in this article set opening prices to clear outstanding orders. In the case of the Shanghai exchange, this may often be considerably different from the last trade price of the prior day. Market operations must assure that prices do not vary greatly unless this truly reflects an ongoing trend or change in fundamental value. Specialized market-making functions and trading rules such as circuit breakers (which stop trading if an excessive drop in prices is detected) promote orderly trading on the underlying value of securities. Lesson 9: Electronic auctions may foment unfair trading practices through different relative speed of service through different parts of its network linking trading to customers. The issue of speed is a subtle one but is intrinsically tied to fairness and transparency. It appears in three places in trading: (1) order placement, (2) information dissemination, and (3) matching. Absolute speed will change continually, as new technologies are introduced. It is important that the speed offered by a market be competitive with competing markets on these three dimensions. An example of the importance of speed in order placement is provided in software of the Commercial Stock Exchange of Santiago when it was installed in Cali and Bogata, Columbia. To insure fairness of trading, the Bogata communications line actually had to be

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slowed down so that Cali traders couldn’t trade in advance of Bogata traders on the same information. A similar situation arose inside and outside the exchange building in Santiago, where the local network access was considerably faster than city-wide access. Santiago’s market was sensitive to speed of information dissemination as well. The market operators recognized this and provided several innovative ways of accessing realtime quote information, including a telephone dial-up system. At the opposite end of the spectrum was the Moscow exchange, where many stocks traded once or twice a week. In this case, daily newspapers were more than adequate for reporting. Matching proved to be the major bottleneck in the Bolsa transaction processing. With the increase in velocity and sophistication of trading—particularly the technology for program trading—comes increasing sensitivity to matching delays. Program trading and exceptional variability of volumes could significantly degrade matching speed at peak times, thus degrading market performance on other parameters, such as best price discover and orderly trading. Lesson 10: Order-driven electronic auction markets demand that the market clearly define when a sale has been made. In an order-driven market, customers place buy and sell orders in the market, in hopes of their being matched with other customers’ orders at the best price. At the point the orders enter the market, the traders lose control over the price negotiation process. Naturally, they will be concerned with the system that the market uses to complete their transactions. The algorithms used by the marketplace need to be clearly defined to the market’s customers in order to attract trading. In order-driven securities markets, order management can become very complex. In a survey of 50 electronic trading systems in 16 countries, Domowitz [1992] found 11 trade priority rules (e.g., best price has highest priority, time priority is first-in first-out); 7 levels of price discovery rules for information search and matching (e.g., manual exposure of orders to a market maker for price improvement; anonymous, direct negotiation); and 12 classes of information which define the transparency, type, and amount of information which is disseminated to traders (e.g., high and low price, best bid and offer, and quantities available at these prices). Markets can give customers some choice over the determination of the time of sale (and thus sale price, quantity, and so forth) by allowing a variety of orders (limit, stop limit, market, margin, and so forth).

ENDNOTES 1 2 3 4

Asiaweek, 28 February 1997, p. 62. Economist, 14 June 1997, p. 124. Economist. Capitals of Capital, Survey–Economist, 9 May, 1998 Delays are not just introduced by the length of wire (or fiber), which given the speed of light would be negligible. Rather, switching delays and error correction (which may require resending information and transmitting signals in two directions for confirmation) introduce the most significant delays. Indeed, the modified version of Bolsa Comercio’s electronic trading system that was sold to the Cali exchange in Columbia had to support a large number of transactions from both Cali and from Bogota 200 miles to the northeast. To accommodate this, signals at Cali were artificially delayed to allow the Bogota signals to “catch up,” insuring fairness in trading and diminishing the possibility of “front-running.”

118 Westland 5 6

“Linearly scalable” means, roughly, that if the Bolsa buys three Tandem CPUs, it will have a machine that processes roughly three times as many transactions in the same time interval. “Mirroring” means that copies of the same data or program code are maintained in two places, managed by the same system. This is necessary for mission critical systems, where information services cannot afford to be lost, as in the case of market transactions. It is a critical feature in providing “fault-tolerant” systems—i.e., systems which can recover quickly from faults, whether they be system or user induced.

REFERENCES Asiaweek. (1997). 28 February 1997, 62. Domowitz. (1992). Liquidity and Trading Rules. Northwestern University Working Paper. Economist. (1997). 14 June, 124. Economist. (1998). Capitals of capital, survey, 9 May. Economist. (1998). The cash don’t work, 19 December, 120-112. EDI Forum: Voucher Privatization Funds in the Russian Federation. http://www.tomco.net/ ~edinp/fsu/funds.html. Euromoney. (1994) Bulls go wild in a China shop, October, 56. Euromoney. (1996). Varying fortunes of China chips, March, 15. Euromoney, (1996). Varying fortunes of China chips, March. Federal Commission for the Securities Market. (1997). Report at the all Russian conference of professional capital markets participants, October 1996; and FSC to create regional self-regulatory network. Moscow Times, 26 July, 14. Frydman, R., Pistor, K. and Rapaczynski, A. (1995). Investing in insider-dominated firms: A study of voucher privatization funds in Russia. Oesterreichische Nationalbank Working Paper 21. Grossman, S. and Stiglitz, J. (1982). On the impossibility of informationally efficient markets. American Economic Review, 72(4). Harris, L. E. (1991). Trading rules, and electronic trading systems. Monograph Series in Finance and Economics. New York University Salomon Center. Kommersant. (1994). Better to buy gazprom, (10), 22 March, 32-34. Kommersant. (1994). Duma debates on privatization, (15), 26 April, 37-38. Kommersant. (1994). Voucher privatization is not likely to impact the gas industry, 3(1), 33-35. Kommersant. (1994). Privatization of voucher investment funds in reflection: Most important is not victory, but participation, (5), 15 February, 43-51. Moscow Times. (1997). VegaTech seeks market serving market-makers, 17 June, III. Moscow Times. (1997). VegaTech seeks market serving market-makers, 17 June, III. Potter, P. B. (1992). Securities markets opening to foreign participation. East Asian Executive Reports, April, 7-9. Rinaco Plus Brokerage House Web Site. (1999). Equity Index Methodology. http:// feast.fe.msk.ru/infomarket/rinacoplus/. Shama, A. (1997). Notes from underground as Russia’s economy booms. Asian Wall Street Journal, 30 December. National income statistics are reported in Asiaweek, 16 January 1998, 51.

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Thomas, W. A. (1993). Emerging securities markets: The case of China. Journal of Asian Business, 9(4), 90-109 Whitehouse, M. (1998). Shortchanged on the stock exchange. Russia Review, 8 May. Yergin, D. and Stanislav, J. (1998). The Commanding Heights, 282. New York: Random House

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Chapter IX

Transnational Information Systems: Development and Management Issues Paul Mantelaers and Wander van den Berg Delft University of Technology, The Netherlands

An increasing number of transnational information systems (TIS) is being developed and is operational. This paper describes a study that attempted to gather information from an empirical setting as a basis for theory building. The authors have studied three cases in an attempt to take some early steps towards guidelines for the development and management of TIS. General conclusions based on the analysis of the three cases are drawn.

INTRODUCTION The Problem Transnational information systems (TIS) are systems that cross national as well as company borders. Development and management of TIS are not straightforward. The interorganizational and international nature of these systems may introduce various organizational and technical problems. One major reason for this may be that the participants are independent in most aspects and autonomous with regard to their own proprietary information systems. Another potential cause of difficulties is the international context, which introduces cultural, legal, and language difficulties among participants. However, the globalization of the economy gives rise to an increasing demand for information systems that transcend national boundaries. Developments in information and communication technology now make it possible to support many processes and tasks that cross company and national boundaries. Alternatively, economic and political developments create demand for TIS. This demand is clearly evident within the European Union in the context of a European market for persons, goods, capital, and services. Similar developments can be seen on a global scale due to increased internationalization. Appeared in Journal of Global Information Management, vol. 8, no. 1, 2000. Reprinted by permission.

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As to their international and interorganizational dimension, most individual TIS are being developed up to now on an ad hoc basis. Currently there are no known general techniques, tools, or guidelines to help develop and manage TIS. Practical experience and empirical research, however, show that many problems and solutions at first glance appear to be specific to a particular development effort, but often they are not unique at all. As the needs and opportunities for TIS become more prevalent, the call for generalized knowledge and guidelines increases. Organizations want to know how to avoid difficulties and, if problems should occur, how to address them. Organizations that consider to use, develop, manage, or participate in TIS may benefit from the availability of structured “dos and don’ts.”

The Literature Studies addressing the combined transorganizational and transnational IS setting are lacking. There is, however, a stream of literature concerning the development of information systems linking parts of multinationals located in different countries (Deans and Kane, 1992; Palvia and Palvia, 1994). Apart from research about global systems, there is also a substantial body of writing about systems crossing company boundaries. Much of the early discussion about interorganizational systems (IOS) focused on competitive benefits of developing IOS (Porter and Millar, 1985) and on facilitating and inhibiting factors in the development process (Reich and Benbasat, 1990). More recently research has taken on a more realistic approach, pointing out that not all IOS provide benefits to all participants (Webster, 1995), that IOS may involve risks and conflict (Kumar and van Dissel, 1996), and that IOS involve management of relationships among participants (Meier, 1995). The general impression is that findings from literature on IOS and global systems are relevant for TIS. The combination of systems crossing organizational as well as national boundaries has hardly been mentioned in the literature. The use of IT in TIS is a fairly recent phenomenon, and this may explain the dearth of research in this area.

Outline of the Paper This paper describes a multidisciplinary case study as three cases regarding TIS development and management. It is an attempt to take some early steps towards guidelines for the development and management of TIS. In view of the fact that very little existing research is available about TIS, this study focused on gathering information from an empirical setting as a basis for theory building. The paper proceeds as follows. First, the research approach is lined out and the three cases are discussed briefly. Then, the main TIS issues and other issues that emerged during the research are summarized. In the last paragraph, a few concluding remarks are added.

RESEARCH APPROACH Within the public sector in the European Union alone, about 30 TIS are operational or under development (Kroon, 1997). Experience and knowledge based on these systems tend to remain within the organizations involved unless an attempt is made to collate and generalize the lessons learned by individual organizations. For this reason it was decided to conduct an empirical study addressing a wide range of TIS issues in order to present this accumulated experience and knowledge to other interested parties, as well, using inductive case research methods and employing a multidisciplinary research team.

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Issues to Be Addressed in an Empirical Study One way of studying TIS issues is to distinguish issues in the informational, organizational, and institutional domains. Parsons (1960) first discussed these distinct but complementary areas of responsibility and control; he argues that they are three quite separate domains within an organization. We adopted this concept to categorize difficulties and potential solutions during the process of development and management of TIS. Parsons used the term “technical domain” to denote the technical suborganization; we have changed the term to “informational domain” to underline the fact that this area of attention concerns data, procedures, and people as well as the technical aspects of hardware, software, and communications. Organizational issues refer to TIS-induced adaptations of organizational structures, business processes, regulations, skills, standards, and ways of working. Institutional issues concern policy identification, political or competitive power struggles, role models, as well as the formulation and development of decision-making arrangements among participating organizations to ensure that the new order is accepted, is adhered to, and continues to operate effectively. A second dimension for studying TIS issues concerns the various phases of the systems development process—from identification of the need for a TIS through to the management of an operational TIS. Various authors (Turner, 1988; Martin, 1989) provide different names for separate development phases, divide the system development process into different numbers of phases, and describe the development process with or without iteration and feedback loops. However, authors generally agree that (1) the need for a system should be identified and requirements drawn up; (2) logical and physical design and building of the system has to take place; (3) the system has to be implemented; and (4) the operational system has to be managed, updated, and adapted over time. We used these four phases to categorize difficulties according to stages of TIS development. A third way of looking at the TIS area is to determine whether TIS issues lie in the interorganizational domain or the international one. A question was whether the same or similar difficulties would arise if the system would be developed on a national basis (inside a particular country), that is, without any complications as results from the international setting of the relevant information systems. It was important to determine whether TIS problems are caused primarily by the international dimension or by the fact that TIS require cooperation among and coordination of multiple autonomous organizations.

Case Studies As Research Method Case research was selected as the appropriate research method. Carrying out a number of case studies would provide rich data, which is important in the process of theory building (Yin, 1994). Observation of phenomena and relationships in a variety of settings forms the basis for conceptualization and generalization. Hence, studying the development processes of existing TIS—being guided by existing constructs, keeping an open mind to uncovering new relationships, and subsequently conceptualizing from finding—is a sound method for formulating guidelines for TIS development and management. Selection of cases was based on several criteria. Cases had to concern TIS but had to be sufficiently dissimilar to provide a rich picture of the problem area. Hence, cases were included from the private sector (TAPS), the public sector (TRANSIT) as well as a mixed sector case (EUCARIS). The focus in these three cases was on computerized transnational systems. TIS in the cases had to support a primary process in the organizations and cases had to involve systems that were operational even if only in an early version. Cases need

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not be highly successful; in fact we preferred to have cases which had encountered or were facing difficulties. An additional criterion was the requirement that organizations had to be willing and able to participate in the study. The researchers had no relation with the developing organizations.

A Multidisciplinary Research Team Since this was an exploratory study, it was decided to use a multidisciplinary research team for carrying out the study. Using researchers with different backgrounds would strengthen the study by having a wider range of expertise in the team. In that way we hoped to avoid a onetracked study which would report on certain aspects in detail but would overlook other important points. The team that was brought together consisted of researchers from three different departments spread over two universities; backgrounds of the researchers were computer science, information systems, and management. The multidisciplinary nature of the project created its own challenges. It transpired that the different disciplines which were meant to strengthen the research also presented difficulties: each discipline had its own frame of reference and definitions, even for simple concepts like “information” and “system.” Similar difficulties with a multidisciplinary research team have been reported by Kaplan and Duchon (1988). Much time was spent discussing seemingly irrelevant details, but it was important to obtain a common sense of the concepts we wanted to study. After much discussion a list of “notions and terms” was drawn up, and this helped the team considerably. The participation of multiple researchers necessitated the writing of a detailed general proposal, a list of questions to be addressed in every case study, and a general framework for single-case analysis. For each case the available system’s documentation had to be studied carefully and indepth interviews were scheduled with various stakeholders. It was important that the different researchers would ask similar questions, address similar issues in the various cases, and analyze their data in a similar way (Miles and Huberman, 1984). Meticulous preparation and frequent meetings were necessary to enable analysis of data across the cases.

THE THREE CASES As mentioned, three (EUCARIS, TRANSIT and TAPS) cases were studied by the research team. In this section the three cases will be described in detail. They also will be compared along several dimensions.

Transit1 Several times, a TIS was under development to speed up and facilitate custom administration concerning goods that are imported into the European Union; such a system should also lead to more effective fraud detection and prevention. First, the transit procedure is lined out. Then the problems that triggered the systems development project are summarized. The New Computerised Transit System (NCTS) will be described, as well as the major specific problems that occurred during TIS development.

The Transit Procedure Goods from outside the EU that enter the EU must go through customs. Taxes and duties have to be paid and foreign trade requirements have to be complied with before these goods

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can enter the market. However, it is possible to apply a suspense regime to the goods. The community’s common transit arrangement is such a customs suspense regime. It facilitates the movement of goods within the European Union and EFTA countries without the relevant duty and tax having been paid. Since payment is not necessarily required at the point of entry, European customs officials must keep track of goods moving within Europe and, in particular, must be able to trace what duties and how much taxes have been paid. When goods from outside the EU are transported within the EU, a Single Administrative Document (SAD) has to be completed by a principal at the departure office. This SAD contains all kinds of numerical and textual data regarding the imported goods. The departure office is responsible both for departure formalities and for transit operation clearance. By law and regulations, the SAD consists of several copies. One remains with the departure office, and three copies go together with the goods to the office of destination. One of these three is for the destination office, the second is for the national bureau of statistics, and the third has to be sent back to the departure office through a central office. After that copy is received, clearance will take place for each article.

Triggers for Systems Development The main problems that are encountered by those involved in transit operations are the following: • The volume of transit operations handled by customs authorities is creating problems for them. Substantial resources are needed to handle around 17 million declarations in Europe each year and to process about one million inquiries within the context of search procedures. • Traders have to spend quite some time to produce and administer the various forms. • There are frequent problems as to the data quality of the documents supplied to customs and the language barrier between EU states makes problems worse. • The traditional mail system is used by the destination office to send the SAD copy to the departure office. This takes quite long, which makes it impossible to react adequately when there is something wrong. • The clearance at the departure office is done by hand; this is very labor intensive. • The office of destination does not know what goods to expect; they are not very well prepared to inspect the goods upon arrival. • The whole procedure is very fraud sensitive. Fraud has increased due to the disappearance of the borders between countries within the EU and due to the disappearance of the iron curtain (more trade with East European countries). • Guarantee certificates are difficult to check between countries. There is no overview of the total amount for which a principal is held responsible.

Towards a New Computerised Transit System Building a TIS to computerise this international customs process was first considered by the European customs organizations in the early 1980’s. A properly working TIS would facilitate tracking and tracing of goods; it would enable immediate comparison of goods and duties paid, speeding up the clearance process; it would produce readable, accurate, and upto-date information at any customs office. The private sector would also benefit because of faster clearance procedures. Disagreements among different EU partners kept the TIS from moving beyond the “nice idea” phase.

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The current EU project to build a TIS, called TRANSIT, is the third attempt at developing computerised procedures. This time a serious effort has been put into TIS development: fraud problems have reached alarming proportions with fraud concerning goods in transit within the EU adding up to billions of U.S. dollars. Computerization of the transit procedures has now been placed high on the list of priorities of the EU. EDI messages have been designed, and national gateways are being set up. To account for diversity in local systems and to respect autonomy of individual customs agencies, no attempt has been made to integrate the various systems. Integration would have increased the complexity of the development process. Instead, for each country, one customs application host is built, which connects the central TIS system with local systems in various countries. In this way local systems and procedures need not be adapted to a single European-wide system; similarly, the diversity in local systems and procedures needs not affect the central TIS. At the end of 1997, the TRANSIT project was in its pilot phase; customs authorities aimed to have the system fully operational as soon as possible. By developing NCTS, the EU is trying to make the transit procedures more effective and efficient and to make provisions for more effective fraud detection and prevention by the authorities. A third objective is to provide traders with more rapid facilities for carrying out transit transactions.

Development Problems The present attempt to develop a system is the third one. According to the interviewees, the two previous attempts failed due to technical problems and problems regarding the autonomy of the participating countries. Due to technical limitations, IT professionals proposed to create one central database in Brussels containing all relevant data. The participating countries did not accept this proposal. It turned out to be very difficult to reach consensus between the countries about alternative architectures. Other reasons for failures in the past were the lack of political pressure (the amount of fraud was much smaller at that time) and the lack of user involvement in the systems development process. During the most recent development process, several problems had to be overcome. The first one was the difference between countries as to the degree of penetration of IT. Not every local customs office in every country has the necessary equipment at its disposal. In the Netherlands, for instance, all offices are connected through a LAN, but in Belgium, Germany, and France (let alone other EU countries) this is not the case. This problem forces the development team to lower the level of ambition: in the short run, only part of the problem can be solved. Next to that, there was a lot of discussion between countries about the fact that the benefits boil down in other countries than the costs. The investment a country is prepared to make depends on the benefits it expects to gain from it. A third problem was that there are many organizations involved; not only the central and local offices in the countries, but also the traders that play a role and have to be negotiated with. Last but not least are the cultural and language difficulties between countries that make a project, such as the development of NCTS, difficult to manage.

EUCARIS2 The incidence of car theft has increased alarmingly during the past 10 years. Often stolen cars are taken across European borders to be re-registered (and thus whitewashed) in another country. Registration authorities are obliged to register a car unless they can prove

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within a short period of time that the car is registered elsewhere and therefore is a stolen car. When in doubt about the legality of a car that is being offered for registration, authorities traditionally write, phone, or fax to foreign registration authorities. This process is inadequate, as it is time consuming and difficult to manage. Computerized access to registration databases in other countries would facilitate the process of checking for legal registrations. It would be much faster, more accurate, and more likely to combat re-registration of stolen cars. The Dutch car registration authority conceived the idea for building a TIS to enable instantaneous, electronic searching and checking of car registration data across Europe; the system was called EUCARIS (European Car Registration Information System). Very early on it became clear that it would not be possible or necessary to integrate the registration systems of various countries into one large system. There is, at present, no single European car numbering system to identify individual cars Europe-wide. Also, current registration systems each use different data definitions, which complicates the possible development of a single system. In addition, individual registration authorities value their autonomy and a central registration system would threaten that autonomy. Hence, it was decided to develop a relatively simple system: a common shell to provide a query interface to the separate systems of participating countries. EUCARIS has been operational since 1995. Currently six countries are online (the Netherlands, Belgium, Luxemburg, UK, Hungary and Poland); 14 other countries are preparing to go online; another 10 have enquired about participation.

Taps 3 “Cashless ambulatory payments” with checks or card-based (plastic) money comprise four systems, for payments and for collecting cash, that will be described in the next paragraphs.

Eurocheque (with identification by signature comparison) Eurocheques were introduced in 1974 as uniform and internationally guaranteed means of payment and gave rise to the establishment of a national clearinghouse and Eurocheque International for cross-border clearing. This policy represents a sound systems engineering approach by dividing Europe into subsystems (countries), or, when needed for historical reasons, into subsystems inside one country. A drawback in the Netherlands is having two different payment circuits, complicating transfers between accounts in these parallel circuits. The acceptor should verify signatures. An advantage is that national borders do not give problems, no electronic equipment is needed at the shops, and operations are cheaper than before. Disadvantages are still relatively high handling costs and fraud risk. Although an improvement at its introduction, the system will be abolished due to cost and fraud risk shortly after the year 2000. New payment systems reduce the use of the Eurocheque now with 25% per year. In 1996 Rabobank alone still processed about 12 million cheques.

The Europas (bank pass card with a magnetic strip and PIN identification) The Europas introduction, halfway into the 1980’s, aimed at lower transaction cost, better fraud prevention, and faster information transfer. These magnetic identification cards, using online identification by PIN, serve a dual purpose: cash dispensing at Automated Teller Machines and cashless payments at Point-Of-Sale terminals for Electronic Funds Transfer (EFT POS).

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lower cost (“electronic purse”) and in less time. A striking feature is the possibility of extra nonpayment functions, like loyalty programs. Other features are secure transactions via Internet or phone, due to enhanced fraud control. Safety and security of chip-based card operations (using card authentication, cardholder verification, and encrypting) can be guaranteed by executing all operations under control of the on-card microprocessor. Online PIN is used for larger payments and abroad as a magnetic strip card, because standardization of the chipcards for banking purposes could not yet be achieved across European borders. Interpay was tasked with planning, development, and operations of the Chipknip system. Again a dual system situation in the Netherlands developed. For both payer and payee this is an unsatisfactory situation, even while the terminals for chipcard payments accept both types of cards. No final conclusions can be given yet, because the actual use is still to come. Public acceptance of the system(s) and, as important, acceptance of the system(s) by retailers will bring more clarity. Interesting, as well, are chipcard security and safety issues.

Comparing the Cases In Table 1 the three cases are compared according to several characteristics. Keep in mind that the TAPS-case consists of four cases; that explains the number of columns.

MAIN TIS ISSUES The cases were compared along the three dimensions mentioned earlier: the informational, organizational, and institutional domains; issues according various phases of development; and issues categorized according to the interorganizational and international domain.

Informational, Organizational and Institutional Issues Table 2 presents a summary of the problems faced by the three TIS, categorized according to the informational, organizational and institutional nature of the problem. The table also shows which cases encountered which difficulties. Table 2 shows that development and management of TIS concerns difficulties in all three categories of problems: there are informational as well as organizational and institutional problems. Some of the problems are clearly created by and because of the TIS; other problems exist regardless of the TIS. The TAPS systems stand out as having encountered very few difficulties, especially in the informational and organizational domains. The information intensive and the cooperative nature of the banking sector can explain this. The banking industry is highly experienced in IT use and employs advanced IT systems in all its processes; hence adding new TIS or new functionality to TIS is not likely to be a problem for banks. In addition, payment systems have a tradition of cooperation among banks of different countries, as many banking products and services involve processes which cross company or national boundaries; hence, organizationally there is little resistance or difficulty when adding a TIS service. The other cases, having far less experience with IT and with interorganizational and international cooperation, encountered many more problems. Informational issues need not be permanent bottlenecks. Difficulties, such as lack of sophistication in data collection abilities or lack of IT infrastructure, tend to be dissolved over time as individual organizations or countries develop their systems. Similarly, technological

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Table 1: Some key parameters of cases Number of countries Service provider Users

EUCARIS 14

TRANSIT ≅ 20

Eurocheque ≅ 20

Debit card ≅ 50

Credit card ≅ 80

Chip-card Chip: 1 Debit: ≅ 50

public public

private private

private private

private private

private private

private

private

private

private

≅ 100000 but decreasing ≅ 10000 but decreasing ≅ 10000, decreasing

millions

millions world wide millions world wide

millions in the Netherlands @ 10000 but increasing (Netherlands) @ 100000 (Netherlands) Increasing To millions (Netherlands) Netherlands

Beneficiaries

private

Number of users (persons) Number of users (organizations) Number of users (offices) Transactions or messages per day Region Transnational development organization Transnational operational organization

>1000

public public and private public and private >10000

2-5 per country needed for development

1 per country ≅ 500 per country

thousands

hundred thousands Europe European Customs Associations European Union

millions millions

millions world wide

millions Europe not available needed

hundred thousands Europe 1 per country, 1 transnat. 1 per country, 1 transnat

World 1 per country, 1 transnat. 1 per country, 1 transnat.

millions world wide World 1 per country, 1 transnat. 1 per country, 1 transnat

2 in Netherlands 2 in Netherlands

Table 2: Informational, organizational and institutional TIS problems

Institutional

Organizational

Informational

Category

Problem Technological limitations Data collection ability Insufficient local infrastructure System integration Diversity of systems to be connected Unequal cost/ Benefit sharing Transational organization Low priority fore some parties Responsibility issue Centralization disagreement Fear for autonomy loss National legal procedures Cross-border differences

EUCARIS

TRANSIT development capacity

Eurocheque

Debit card

Chip-card

number of EFT-POS terminals

ICT infrastructure technical complexity transorganizational and crossborder

Credit card

Number of POS terminals at national level

Between countries Between countries

at national level

separate chipcard architectures

small firms

small firms

needed for deployment ICT inexperience local power issue supranational level

national level

national level

national level

public bodies privacy issues

privacy issues cultural aspects

spoken language

spoken language

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limitations tend to be overcome as time passes and new developments become commercially available. Diversity of systems among partners is also overcome by increasing standardization of products. Although technical problems are real and occurred in three of the cases, they are not necessarily long-term difficulties. Next to that, solutions for informational issues are not necessarily only informational but can also be organizational or institutional. This also holds for organizational and institutional issues. Organizational issues are of a different kind. Inequality in costs and benefits of TIS and the lack of transnational bodies to develop and manage TIS are coordination and cooperation issues. Cooperation of individual organizations is necessary for the concept of a meaningful TIS to evolve, and coordination is necessary for the development and management of the actual TIS itself. In order to gain cooperation of individual organizations, it is important to ensure benefits are shared or, at least, costs are borne by those that stand to gain most of the TIS. The absence of transnational organizations inhibits fast or easy TIS development; a transnational body is particularly valuable for coordinating day-to-day TIS affairs. Institutional problems may have been latent prior to TIS development and are highlighted during the discussions about development and management of the TIS. Such problems are not necessarily directly concerned with the TIS and may affect TIS indirectly. Clearly, existing problems have to be addressed if the TIS is to be successful. An example of an existing problem that affects TIS indirectly is “disagreement among various local organizations.” Potential participants of the TIS can have disagreements about data, technical matters, or policy with parties outside the TIS, and such disagreements can affect the ability of the participants to participate fully. Political struggles or business competition between TIS participants or with outsiders are important determining factors for the success of the TIS. A system that is sound from a technical point of view may turn out to be not feasible due to institutional issues.

Issues During the Various Phases of the System Development Every system moves through a number of recognizable phases during the development process; each of the phases may cause, and may have to address, different problems. The problems (and the solutions) that were found in the cases are summarized in Table 3 according to the various system life-cycle phases. System identification. Difficulties in the identification phase appear to be inversely related to the apparent urgency of the problem that is to be addressed by the TIS. When the issue is considered important and urgent, identification of and agreement about the concept of a TIS is reached relatively easily. However, when the problem that TIS addresses is not considered a high priority, difficulties seem to mount up–and the TIS does not get beyond the “nice idea” phase. Designing and building of the TIS. The difficulties at this phase of development are primarily technical in nature. The technical issues are made more complicated because of the great number of participants and their different objectives. The difficulties are addressed by finding a technical solution or by improved organization of the development process. Although the problems in this development phase might seem difficult, finding solutions to the problems did not seem to be a major issue in any of the cases. Implementation. When the TIS has been properly identified and has been agreed upon by participants, implementation is a feasible matter, be it laborious and costly in the TAPS

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case. In the TRANSIT case there is large diversity among the participants when it comes to informational and technical sophistication and facilities. This clearly inhibits implementation of the full TIS. Management and ongoing maintenance. Management issues include ensuring that participants observe their local systems so that they interface correctly with the TIS, enforcing standards and continuing use of the TIS, and developing new functionality and increasing the scope of the TIS. EUCARIS, for example, is a TIS that has reached this phase and faces the new challenge of keeping the earlier momentum going. For the TAPS case, this implies further integration inside each bank and at the national and transnational operational body level.

Issues Derived from Interorganizational or International Setting Difficulties encountered during TIS development or management can be caused by the interorganizational nature of the TIS or by the international component of the TIS. Table 4 lists and categorizes TIS problems from Table 2 according to interorganizational or international causes. International context. The usual difficulties of operating across national boundaries were evident in all cases. Although there are international differences and potential difficulties when collaborating internationally, many organizations and the people within them accept the differences and are willing to work towards overcoming such barriers. In the EUCARIS case where legal difficulties inhibited Germany from participating fully, the German car registration authority took steps to ensure the law was adjusted and the EUCARIS Table 3: Issues during system life cycle phases Life cycle phase Identification

Designing and building

Problems Need for a TIS identified, but not possible to translate into TIS (T RANSIT first and second attempt) Possible TIS identified but too many organizational problems to begin actual development (TRANSIT second attempt) Need for TIS acknowledged, but fear for loss of autonomy (EUCARIS) Need for TIS acknowledged, but not seen as high priority (T RANSIT) TIS will lead to uneven sharing of costs and benefits (T RANSIT) TIS is turning into a technically complex system (T RANSIT ) Diversity of systems that need to be linked (EUCARIS, T APS)

Implementation Ongoing management and maintenance

Time/manpower for TIS development difficult to find among participants (EUCARIS) Different abilities of participants (in terms of IT) do not allow implementation of full system (TRANSIT) Difficulty of ensuring that standards are enforced and TIS is used properly Time/manpower for coordination (EUCARIS) Long-term integration into existing systems is necessary for long-term success of TIS (EUCARIS, TAPS) Expanding the system to include more tasks/actors (EUCARIS, T APS)

Solutions delay plans for development indefinitely delay indefinitely opt for technical solution that is highly decentralized - delay indefinitely (T RANSIT ); (political) pressure to accept anyway - superior project management - discussion with various parties - participative development - opt for common interface and local gateway configuration - experimental development method - iterative development outsourcing of development - different entry levels - phased implementation (TRANSIT) - third party management of TIS itself; - monitoring committee from T IS general management body outsourcing of day-to-day management of TIS institutionalization of new processes by local organizations is required - discussion - prototyping - consensus building

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organization accepted Germany as a partner that would join as soon as legally possible. In the TRANSIT case, documents were translated into various languages to ensure that all partners would have access to documents in their own or in a very familiar language. In some cases there was no transnational organization, but the need for and importance of such an organization was recognized in all cases, and an organization for dealing with transnational issues was established. In all, the international context does present difficulties for TIS development and management, but those difficulties are recognized, can usually be overcome, and are addressed directly. Interorganizational context. Table 4 suggests that there are many more problems due to the interorganizational context than to the international nature of TIS. Some of these are technical and systems issues, which might be overcome fairly easy; other issues concern autonomy and responsibility of organizations and equality among organizations. Interorganizational information exchange requires common decisions, consensus, and commitment. If individual organizations feel their autonomy is threatened or they are not gaining benefits on par with other organizations, then they can withdraw participation or can become a difficult partner in the TIS. In each of the cases, difficulties of this kind were found, and each of these problems proved to be difficult to address.

OTHER ISSUES WHICH EMERGED DURING THE STUDY Apart from issues, which we had anticipated and had specifically looked for in the cases, issues emerged during the course of the study as empirical evidence was collated. A major issue which emerged was the level of ambition of the TIS. Under rational norms we would expect organizations to aim at maximizing the opportunity offered by a TIS, building a system to optimize efficiency and shared benefits. In practice, though, successful TIS organizations show satisfying behavior—adopting a TIS which is acceptable or “good enough.” TIS development involves difficulties, and TIS participants address difficulties during the development stages by lowering the level of aspiration of the TIS, be it in time constraints, in functionality, or in the cost/benefit ratio. Table 4: Interorganizational vs. international issues Proble m Insufficient local sophistication in terms of IT infrastructure or applicat ions Technical co mplexity of integrated system Diversity of systems to be connected Unequal sharing of costs and benefits Disagree ment among various local organizations about responsibility fo r information (local power issue) Lac k of consensus about degree of centralization Fear fo r loss of autonomy Insufficient local sophistication in terms of ability to collect data Lac k of t ransnational organization to develop the TIS Lac k of t ransnational organization to manage TIS Legal procedure in various countries concerning data and privacy Cultural/language differences between countries

Interorganizat ional International X X X X X X X X X X X X

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From a systems development perspective, an “optimum” TIS requires high levels of cooperation among partners and involves consensus on many aspects of the system. In the context of cooperation among independent partners, it is neither always feasible nor desirable to achieve high levels of consensus and commitment. There are many potential disagreements and mismatches, which may mean that the “optimum” TIS is never built and that a TIS at a lower level of aspiration is developed and implemented instead. A sound systems engineering approach in the development stages implies dividing a large system into more manageable subsystems (mostly on a national scale) with welldefined interfaces between them. Subsystems may have different architectures and/or realizations, for which the overall system acts as a unifying “linking pin.” Over time, applied system extensions, whether serial or parallel, tend to yield a complicated overall structure, and a major architectural redesign becomes a good solution. Practical barriers to a TIS with a high level of aspiration include the number of participants, diversity among participants, and disagreement among participants. Such difficulties and problems are intrinsic to the development and management of systems that cross organizational and national boundaries. Evidence from the three cases showed that such difficulties are avoided by lowering the level of aspiration of the TIS. It appears that for many organizations it may be more important to get a TIS of some kind in place than to build the best possible TIS. The level of aspiration can be adjusted in two ways: by reducing the need for consensus (for instance, by involving fewer participants or allowing participation at different levels of functionality) and by reducing the potential for conflict (for instance, by selecting enthusiastic participants only or by agreeing to a lower level of functionality). Each of the cases studied during this project showed evidence of one or more of these adjustments to the level of aspiration of the TIS. Participants may have agreed to a diminished level of aspiration for the TIS, but the initial problems resurface at a later stage. When the “simplified” system is operational, attempts are made to improve and enhance the system by adding functionality, adding further partners, and increasing the scope of the TIS (e.g., in the case of EUCARIS). At that moment the problems, which led to a reduced level of aspiration in the first place, can surface again. It would seem that reducing the level of aspiration at early stages of development may postpone the moment of facing difficulties with the TIS, but it does not eliminate the problems. But facing them head-on would lead to the failure, or at least serious delay, of the TIS. Two other issues emerged from all cases. The first is the fact that the introduction of a TIS also involves the adaptation of national systems and organizations. The second is that development and management of TIS requires the wisdom to make the right tradeoff between desirability and feasibility of solutions. This means that the right balance has to be found between issues like technical possibilities, costs, organizational competencies, power, etc. In an earlier section of the paper we described the main TIS issues and highlighted the difficulties in various domains and in different phases of development. Many of these difficulties are initially addressed by lowering the level of aspiration of the TIS, thus circumventing or avoiding the problems. This is clearly a successful strategy to help get a TIS beyond its early development stages. However, in the long run the difficulties of working together with many different partners of varying ability and background must be addressed head-on. In this respect development and management of a TIS is hardly different from cooperating with partners in any other sphere, and specifically from development and management of a non-cross-border information system.

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CONCLUDING REMARKS This study highlighted TIS development in an empirical setting. The three TIS cases showed many similar traits during the development of the system. Many of the issues were identified on the basis of the experiences of more than one case. However, there were also issues which were found in one case only, but which highlighted the importance of certain notions. This study was exploratory in nature. We hope that continued research will support these preliminary results. By organizing surveys in various countries it would be possible to better compare TIS with identical or similar functions from different countries, and also IS from different business perspectives but in the same country. Findings from such extended studies should enable formulating guidelines and concepts in support of planning and management of TIS development and management. A specific goal would be to compile a list of failure and success factors for TIS-type projects, taking into account the degree of stakeholder agreement and commitment, the availability of financial, human, informational and technical resources, the willingness to use common standards and methodologies, and the feasibility of creating new organizations and institutions when needed.

ENDNOTES 1 Details of this case can be found in Mantelaers (1996). 2 Details of this case can be found in Zuurmond (1996). 3 Details of this case can be found in van den Berg & Zuurmond (1997).

REFERENCES Deans, P. C. and Kane, M. J. (1992). International Dimensions of Information Systems and Technology. PWS: Kent. Kaplan, B and Duchon, D. (1988). Combining qualitative methods in information systems research: A case study. MIS Quarterly, 12(4), 570-586. Kroon, N. (1997). Europese informatiesystemen: grensverleggend? Ph.D. thesis, Erasmus University Rotterdam, The Netherlands. Kumar, K. and van Dissel, H. (1996). Sustainable collaboration: managing conflict and cooperation in interorganizational systems. MIS Quarterly, 20(3), 279-300. Mantelaers, P. (1996). The TRANSIT project. Working Paper, Department of Mathematics and Information Systems, Delft University of Technology (in Dutch). Mantelaers, P. A. H. M., van den Berg, W. G. and van der Zee, H. T. M. (1998). Developing transnational systems: The transit-case. In Banerjee, P., Hackney, R., Dhillon, G. and Jain, R.. Business Information Technology Management: Closing the International Divide, 463-476. New Delhi: Har-Anand. Martin, J. (1989). Information Engineering, Book I: Introduction. Englewood Cliffs, NJ: Prentice Hall. Meier, J. (1995). The importance of relationship management in establishing successful interorganisational systems. Journal of Strategic Information Systems, 4(2), 135-148. Miles, M. B. and A.M. Huberman (1984). Analysing Qualitative Data: A Source Book for New Methods. Beverly Hills, CA: Sage.

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Palvia, S. and Palvia, P. (1994). Global Issues of Information Technology Management. Hershey, PA: Idea Group Publishing. Parsons, T. (1960). Structure and Process in Modern Societies. New York: Free Press of Glencoe. Porter, M. and Millar, V. E. (1985). How information gives you competitive advantage. Harvard Business Review, July-August, 149-160. Reich, B. H. and Benbasat, L. (1990). An empirical investigation of factors influencing the success of customer oriented information systems. Information Systems Research, 1(3), 325-347. Turner, W. S., Langerhorst, R. P., Hice, G. F., Eilers, H. B. and Uijttenbroek, A. A. (1988). SDM. Pandata BV, Rijswijk (in Dutch). van den Berg, W. G. and Zuurmond, A. (1997). International transfer of cashless ambulatory payments. Working Paper, Department of Systems Engineering, Policy Analysis and Management, Delft University of Technology, The Netherlands. van den Berg, W. G. and Mantelaers, P. (1998). International cashless ambulatory payments. Proceedings of the 4th International Conference on Information Systems, Analysis and Synthesis, ISAS ’98, 3, 486-493. Webster, J. (1995). Networks of collaboration or conflict? Electronic data interchange and power in the supply chain. Journal of Strategic Information Systems, 4(1), 31-43. Yin, R. K. (1994). Case Study Research: Design and Methods. (Second edition). London: Sage. Zuurmond, A. (1996). EUCARIS–The European car and driving licence information system. Working Paper, Department of Policy Analysis, Erasmus University Rotterdam (in Dutch).

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Chapter X

The Place of ICT in Global Planning Abel Usoro University of Paisley, UK There is a general agreement in the literature that social, technological, political, cultural, and economic factors encourage a greater number of businesses to globalize their operations and markets. To operate in more than one market or country involves complexity on a larger scale than to operate locally. The complexity is combined with increasing risks, a faster pace of change, and the difficulties of managing an organization in more than one country. Information and communication technologies (ICT) act not only as an imperative to globalize but also as a potential tool to help global managers to plan, and yet there is no conclusive study that these technologies are adequately providing assistance. Indeed, existing studies suggest that there is much room for improvement. At the same time, there is no coherent and well-tested theory to explain or predict the use of information and communication technologies for global planning. To bridge the knowledge gap, this paper presents a causal model that groups predictor variables of the use of ICT in global planning under organizational, ICT, personal, and infrastructural factors. It also reports on a pilot study in which one hundred questionnaires were distributed to multinational companies in the United Kingdom (UK) and in South Africa (SA) to collect information to examine the role of ICT in global planning using the model. The result suggested among others that the Internet forms the most popular platform for building global planning tools. Factors most important to managers include the provision of timely information, provision of report and presentation facilities, and support for group working and alternative (highly summarized and detailed) views of information. On the other hand, managers appear not to be very satisfied with the provision of technology for global planning, partly because it does not adequately provide for creativity needed in global planning. Recommendations are made based on the findings, and areas for further research to enhance the validity of the model are highlighted.

INTRODUCTION The increasingly general trend for business activities to cross national borders in order to gain competitive advantage is well documented in the literature (cf. Hull, 1987; Hax, 1989; Ohmae, 1989; Ietto-Gillies, 1997; Business Week, 2000, p. 113; Harvey et al., 2000; Groose, 2000, Copyright © 2002, Idea Group Publishing.

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p. vii). The crossing of national borders, which is termed “internationalization” (Taggart & McDermott, 1993, p. 4), can take different forms of business involvement. At the lower end of the spectrum is indirect export whereby a company distributes its products abroad by using third parties (Toyne & Walters, 1993, p. 114). At the highest level is globalization whereby there is no distinction between domestic and foreign operations but there is freedom to source or allocate resources or operations to, and choose markets from, any strategically advantageous location (cf. Humes, 1993; Ball & McCullock, 1996). All international businesses irrespective of their cross-border involvement must constantly evaluate their positions to decide, firstly, whether to maintain their positions or to move up or down the spectrum. Secondly, they have to decide how to maintain or change their positions. In these two respects, we can conclude that all international firms perform some form of global planning in as much as nonglobal international companies have to constantly evaluate whether or not to globalize. Strong global, social, political and economic pressures provide drives for nonglobal international companies to develop global strategies (cf. Humes, 1993, p. 25; Govindarajan & Gupta, 1999, p. 5-10). Alongside these developments are advances in information and communication technologies (ICT) to bridge the geographical, time, and knowledge distances experienced in global operations1 (cf. Uenohara, 1992, p. 402; Cambell et al., 1999; Currie, 2000). This paper will (a) explain briefly what is involved in global planning; (b) discuss the role of ICT in global planning; (c) identify problems and justify the need for investigation; (d) propose a hypothetical model; (e) state the method of study; (f) present and discuss the findings of a pilot study, including its major conclusions and recommendations; and (e) highlight areas for further research.

WHAT GLOBAL PLANNING IS Searching for “global planning” in research databases would produce very little result. Most writers in this area assume that readers already know what the concept is about. The concept can be used in various contexts, for example, health care and the provision of public utilities (cf. Ryan, 1990, pp. 61-3; Yehia et al., 1995, p. 10). In the context of this paper it means strategic planning, the managerial act of setting long-term goals and objectives based on the strengths and weaknesses of the organization, on the one hand, and the threats posed and opportunities offered by the environment, on the other (cf. Ansoff, 1979; Johnson & Scholes, 1993; Wheelen, 2000). Much has been written on the subject of strategic planning for business since the 1920’s when Harvard Business School developed the Harvard Policy Model (Carter, 1999, p. 1). Strategic planning became very popular with organizations until the 1980’s, when it fell out of favor because of the increased pace of environmental changes that made obsolete and irrelevant most of the long-term planning done over a long period of time by a few organizational members at the top. Consequently, new concepts such as TQM (Total Quality Management), BPR (Business Process Reengineering), and Value Chain Analyses emerged as short-term planning techniques to match the changing environments and capture customer preference. Besides, in flatter2 organizations, the idea of central planning and its top-down process became unpopular with middle managers, who are increasingly exposed to the environment and need to respond rapidly without being tied to handed-down plans. Academics reasoned that rather than strategic planning, organizational learning, employee empowerment, and agility are what contribute to competitive advantage. Feurer and Chaharbaghi (1995) give a comprehensive review of the history of strategy development, with

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the main theme that “the dynamic environments of today require a more dynamic approach to strategy development” (p. 11). It is interesting to note that recently strategic planning has re-emerged as the unifying organizational process that directs its different members towards optimal achievements (cf. Carter, 1999; Desai, 2000; Quazi, 2001). New research proves that strategic planning does contribute to competitive advantage. For example, Desai (2000) confirmed that the explicit statement of companies about their strategic planning focus, function, or orientation has an immediate positive effect on their share values. Instead of being viewed as a discouraging factor to strategic planning, the increasing uncertainty of the environment provides the impetus for managers to use the tools to cope with the complex, changing environments and to shape organizational responses (Morgan and Piercy, 1993; Quazi, 2001). Global planning is strategic planning but emphasizes the need to take a worldview of the changing environments and the pooling together of organizational knowledge that may be spread across the globe. Global planning is affected more by environmental diversity and changes and requires simplification, speed and flexibility. Taking the current view of strategic planning, emphasis has to be placed on the process (the learning process) instead of the products (plans) themselves, which are snapshots and quickly become history (Carter, 1999, p. 48). A large amount of information has to be easily and rapidly pulled together, analyzed, and critical success factors quickly identified. Involvement of a greater number of organizational members is important to modern strategic planning and is therefore vital in global planning. Planning has to be integrated with action,3 and there has to be readiness to change course, when necessary (Feurer & Chaharbaghi, 1995, p. 5; Chakravarthy & Lorange, 1991). To establish global “strategic intent” and set major objectives, an organization needs to define and clarify its mission and philosophy. An organization’s philosophy should include its global stance (i.e., ethnocentric, polycentric, regiocentric, geocentric, or some mixture of these viewpoints) (cf. Holt, 1998, p. 236; Rugman & Hodgetts, 1995, p. 215; Buckley, 1998, p. 13). An ethnocentric stance places emphasis on the country of origin, for example, in personnel issues (Hill, 1997, pp. 448-453). A polycentric view localizes business in each global location, while a regiocentric position does the same for trade regions (e.g., EU). The geocentric philosophy emphasizes total globalization or standardization of goods, services, and practices with little or no adaptation to local needs. A host of global, national, and company factors should be taken into consideration to decide on and constantly review the philosophy in the light of rapidly changing global economic, political and cultural situations. Managers face a difficult balancing act between meeting the demands of the increasing global converged economy and the need to support national policies that provide distinctive competitive advantage (Doremus et al., 1999, p. 165). Recent developments in information and communication technologies present the potentials for performing these tasks easier and faster (Alkhafaji, 1991).

HOW ICT COULD HELP ICT is not a replacement for human judgement and imagination but can assist global planning in • quickly identifying internal strengths and weaknesses, • performing environmental scanning, • bridging the geographical distance between planners, and • simplifying the planning process.

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Competitive advantage has been strongly linked to internal resources and capabilities (cf. Kay, 1993, pp. 17-37; Penrose, 1963). These resources and capabilities are discovered by organizational audit which, is part of the first stages of planning. The required information is typically distributed throughout the organization. If this information is in electronic form and the information systems are compatible, the information can be pooled together regardless of distance. The Internet technology along with developments in enterprise information systems (e.g., SAP) present the potential for achieving these aims. Without going into detail, it is worth mentioning that the recent developments in the Internet communication language, termed XML, promise to make possible the exchange of more meaningful information. Thus, information can be classified, analyzed, and presented at greater speed. This capability can also be of use when scanning the environment. Environmental (e.g., economic), changes tend to be the most disruptive to global planning efforts (Chae & Hill, 1996, pp. 880-891). It is therefore important that environmental scanning is constantly performed to monitor political, social, technological, economic, and market changes. Not every change is relevant to every organization. The relevant ones need to be quickly identified and acted upon. There are a number of Internet-based technologies and applications developed to perform these tasks. Apart from XML already mentioned, Fletcher and Donaghy (1994, pp. 4-18), for instance, write about computer systems for monitoring competitors’ moves. Groupware technologies make possible the linking of planners distributed around the globe. It provides electronic conferencing and enables users to share the same source of information and exchange ideas. It is interesting that Fulmer and Sashkin (1995, pp. 26-31) considered groupware also as an essential tool for global learning organizations. Sokol (1992) discovered that simplifying the strategic planning process yielded benefits. These benefits include saving time in developing a plan and shortening the lead time to implement it, making the plan easier to understand, focusing better on only the most relevant business issues, and assembling a more consistent strategy for the whole company. It is implicit in the foregoing that ICT should simplify the planning process. Moreover, business and planning models such as the SWOT, PEST, and Porter’s Value Chain, and 5point models can be built into ICT, thereby simplifying and quickening the processing of information (Rugman and Hodgetts, 1995, pp. 218, 221-222). The presentation facilities of ICT should make possible the display of information from different perspectives and the ability to easily jump between a highly summarized view and detailed information. ICT should facilitate the capturing and management of organizational knowledge needed for global planning. With the simplification of the global planning process, a relatively small business should be able to enter the global market with ease (Tetteh and Burn, 2001).

PROBLEM Reid (1989) reported on a face-to-face study of 100 chief and senior executives in Scotland. His report indicated that companies were failing to utilize effectively the creative talents of key people in the harnessing of information. As a consequence they are failing to win valuable insights and omitting to obtain essential collective interpretations of critical issues and events that affect their strategic planning process. Apparently, the situation has not completely changed, especially in global planning, despite the potentials that ICT offers to the planning process (cf. Hagmann & McCohon, 1993, pp. 183-192; Houben et al., 1999; Usoro, 2001, pp. 17-24).

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Besides, there is no theoretical framework to examine the use of ICT for global planning. The development of a framework will help in explaining the current use of ICT for global planning and also provide guidance on how to improve the use of ICT in this area. Along similar lines, Ho (1996) stated that “the connection between strategy and IT has not been clearly articulated with respect to a finite set of concepts, analytical framework, and normative prescriptions” (p. 77).

A HYPOTHETICAL MODEL: FACTORS THAT INFLUENCE THE USE OF ICT FOR GLOBAL PLANNING There is no existing and well-researched theory that explains the use of ICT for global planning. Usoro (2001, pp. 17-23) made an initial attempt at designing a model to explain and predict the use of ICT for global planning. From a literature review and an experience survey, he hypothesized that factors could be grouped under organizational, information technology, personal and infrastructural elements to form a relationship as follows: Use of ICT for global planning = f(organizational, ICT, personal, and infrastructural factors) Organizational factors refer to an organization’s profile and include items such as size, years in business, and the stance along the ethnocentric and geocentric continuum (cf. Özsomer, Calantone & Bonetto, 1997). Jeannet (1999, p. 28) has described this as a “global mindset” that will determine how successful global managers plan. The study takes a step further by examining the effect of the mindset on the use of ICT in planning. The closer an organization is to the ethnocentric end, the less the level of globalization; the closer it is to the geocentric end, the higher would be the level of globalization. Does the level of globalization co-relate positively with the use of global planning technologies? Another factor closely related to the level of globalization is involvement in global planning. Do companies that are more involved in global planning tend to use information technology more? Other organizational factors of interest are years in business and number of countries in which a company operates. Do these make any difference with regards to the use of information technology for global planning? ICT factors refer to the attributes of ICT itself. ICT should not only exist in the organizations but also be relevant and supportive of the needs of global planners. It should support group working as well as possess the following attributes of executive support systems (ESS) (Usoro, 1998)4 : • easy user interface for learning and using the system • ability to easily switch between highly summarized and detailed views of information • on-demand link to internal information for indication of strengths and weaknesses • statistical analysis tool • ad hoc query and sensitivity analysis handling • access to external data pools–non-company data • flexibility to solve diverse problems • constant review of decisions, before and after implementation • report and presentation facilities

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• •

support for optimization, satisficing, and heuristic approaches use and provision of accurate, understandable, complete, and timely information Ives et al. (1993) have also pointed out the need for compatibility of systems when they state that “few multinational firms can boast of … globally integrated information processing environment” (p. 114). Incompatible ICT systems present a barrier instead of helping global planning, and it is one of the aims of emerging technologies such as the Internet to overcome this barrier. This study examines the effect of these factors on the use of specific technologies such as the Internet, video conferencing, and Groupware. Personal factors are the users’ attributes, for example, their acceptance of change and attitude towards new technology. Holt (1998, p. 69) has discussed how human factors can hinder the use of available information technology. Attitude to information technology is a likely personal factor that could influence the use of global planning technologies. Many psychologists have theorized attitude as a significant personal attribute that tends to predict behavior. For instance, Ajzen and Fishbein (1980) concluded in their study that, provided they are appropriately measured, attitudes are sufficient to predict intentions (behavior). Moghaddam (1998) presents both sides of research and arguments as to whether attitude predicts behavior. He tends to conclude that we can use attitude to measure behavior provided (a) we are relatively specific in our measure; and (b) we measure all the components to provide a better chance of capturing all the facets of the attribute. The components of attitude, which makes operationalization possible, are cognitive, affective, and behavioral. This study measures knowledge of ICT use for global planning (cognitive), feelings5 about them (affection), and compares these with actual use (behavior). The development of questions to measure these components is based on attitude scales developed by Kay (1989), who later used it to predict commitment to use computers (Kay, 1990). Infrastructural factors refer to basic facilities such as electricity and telephone systems which may be inadequately provided in less developed economies; this inadequacy could therefore hinder the use of global planning technologies (Holt, 1998; Barker, 1993, pp. 57-59). While availability of supportive telephone systems including some technologies as ISDN (integrated services digital networks) may present no problem in developed economies, it may not be adequate in developing ones such as SA (South Africa). And that may present significant problems for the networking aspect of information technology needed for global planning. Big multinationals such as the Mobil Oil Company provide for these facilities including electricity and internet backbone.6 Can all multinationals provide for themselves where the government cannot? The availability of infrastructure and the ability of companies to provide infrastructure for themselves when these are inadequate is examined to investigate their effect on the use of ICT for global planning.

METHODS The factors expressed in the theoretical model (see Section 5) were used to develop a questionnaire, copies of which were distributed to a sample of multinational companies in the UK (United Kingdom) and SA (South Africa). The sample size was 50 for each country. Only 16 companies responded at the time of writing. Three of the companies apologized that it is against their policy to answer to survey questions. One left large areas of the questionnaire uncompleted because, according to the respondent, “I don’t believe we use IT as a global planning tool.” This questionnaire was consequently excluded in the analysis to avoid undue

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bias. It will, however, be very interesting to follow up this respondent with an interview to discover how they carry out international trade in approximately 8 countries without using ICT to plan. The analysis performed in this paper is based on the remaining 12 returned questionnaire (12% response rate), and therefore it is best to consider the results as derived from a pilot study. Very interesting observations can be deduced from the returned questionnaires. Correlation analysis and averages (arithmetic means) are used to analyze data collected largely by Likert scale type of questionnaire. In the presentation of findings, correlation coefficients7 are widely used.

FINDINGS AND DISCUSSIONS The discussion of findings is organized around the major factors that the questionnaire sought to measure. However, use of specific planning technologies are considered first. These technologies are Internet, intranet, extranet, groupware, enterprising planning tools, video conferencing, data warehousing/mining, and others.

Use of ICT in Global Planning As shown in Figure 1, all the respondents use the Internet for strategic planning; and nearly all use video-conferencing facilities. Four of the respondents use systems other than those listed on the questionnaire. These, reflected under the “other” category in Figure 2, are external databases (e.g., Reuters) and others that are not available on the Internet; data collection and analysis applications (e.g., Holos; Hyperion; Market Modeler; Epic); and spreadsheet applications (e.g., Excel and Lotus, p. 123). Although all respondents use the Internet, for those who own groupware systems, groupware systems are most frequently (daily) used (see Figure 2). The Internet and intranet is the next most frequently used system for global planning. This suggests a great need for collaborative working and external information sourcing in global planning. The factors that influence the use of global planning8 tools are now examined.

Figure 1: Use of information technology 100% 90% 80% 70% 60%

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Figure 2: Frequency of ICT use 100% 90% 80% 70%

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Organizational Factors Strategic stance or level of globalization was operationalized in terms of (a) standardization of products, services, and practices irrespective of country of operation; (b) not exporting “home” standards to foreign countries; and (c) number of countries operated in. These three strands of globalization level as well as involvement in global planning and years in business are discussed below.

Standardization of Products, Services, and Practices Standardization of products, services, and practices correlate positively (0.31)9 with the use of ICT for global planning. Since standardization attenuates variety, it is expected that use of ICT would be facilitated. However, this does not imply that much original planning or exploration of new opportunities worldwide is taking place, hence the zero correlation between standardization and involvement in global planning (which was defined as identification of business opportunities irrespective of country). This indicates that ICT for global planning has need to give more support to creativity.

Not Exporting “Home” Standards to Foreign Countries A correlation coefficient of (-0.18)10 indicated that the more companies use original country standards as de facto abroad, the more they use ICT for global planning. Again, this situation suggests less originality and variety to deal within the planning process. Some companies in relatively stable industries and markets may be satisfied with that; but the picture would be different with companies in relatively turbulent industries. The problem might be that present ICT planning tools are not adequate for such situations.

Number of Countries Operated in Surprisingly, there is a negative relationship (-0.038) between number of countries operated in and the use of ICT for global planning. It also appears that the more the countries operated in, the less do the companies adopt a global standard (-0.45) and the more do they use original home country standards (0.19). It therefore appears that the greater the number

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of countries operated in, the more planning is delegated to individual countries or regions, therefore causing a reduction in overall global planning and use of information technology for that purpose. Also, this result may indicate that very large companies with a presence in large number of countries are not having adequate help to plan globally.

Years in Business There is a very high positive relationship (0.7) between the years in business and the use of ICT in global planning. This may be due to accumulated experience and financial backing, which enables acquisition and use of the systems.

Involvement in Global Planning Though not very large, there is a positive relationship (0.008) between involvement in global planning and the use of information technology. It appears the fewer the number of countries operated it, the more the involvement in global planning (-0.05). This may reflect the aim of smaller companies to explore more new opportunities, which was depicted in the definition of involvement in global planning. It is interesting also that companies which tended to be involved in global planning were also keen on not exporting “home” standards abroad (0.31). The small correlation, though positive, between involvement in global planning and use of ICT probably indicates that inadequate use is made of information technology in global planning.

ICT Factors ICT attributes (see Section 5) were measured. On average, the highest four ICT attributes that were found to be important to users are (a) provision of timely information (b) provision of report and presentation facilities (c) support for group working within the same site (d) support for group working in more than one site within a country These attributes weighted the least: on-demand link to internal information for indication of company strengths and weaknesses (b) access to external data pools–non-company data (c) adequate support given for use of systems (d) alternative views of information with highly summarized and detailed views It is paradoxical that systems that are weak on linking with internal and external data sources are described as providing timely information. This suggests that the timely information is less complete than would be desired, hence the absence of “provision of complete information” among the top four attributes. It is interesting to observe that when each of the factors is correlated with the use of information technology, almost all correlate positively. The two exceptions are (a) report and presentation facilities (0.11); and (b) adequate support given for use of systems (0.04). The four top correlated factors, in their order of priority, are (a) alternative views of information with highly summarized and detailed views (b) on-demand link to internal information for indication of company strengths and weaknesses (a)

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(c) (d)

flexibility to solve diverse problems access to external data pools–non-company data

Personal Factors Cognitive and affective components of attitude were measured and compared to the behavioral component. There is a high positive relationship (0.46) between cognition and affection. This means that the more managers know the capabilities of global planning technologies, the more they feel positive about using them. Satisfaction with the use of global planning technologies was measured as part of affection. Correlating satisfaction with use results in a positive relationship of 0.18, which suggests that we can increase the level of use by increasing level of satisfaction with the systems. The fact that the positive relationship is not very high indicates that managers are not necessarily very happy with the systems they are using. This suggests the need to investigate how to provide more satisfactory systems. There is surprisingly a negative correlation (-0.34), though not large, between the behavioral component of attitude (use) on the one hand and cognition and affection on the other. This finding is at variance with findings of other studies, such as McGuire et al. (1999, pp. 54-55), that propose that cognition (knowledge) should be positively related to behavior. The smallness of the sample perhaps explains for this unexpected result. Otherwise, it may be another case of proof that attitude does not always predict behavior (Moghaddam, 1998). Other personal factors that were examined are age, gender, education and experience. Experience exhibits the highest positive relationship (0.41) with use. This result agrees with studies by Walters and Necessary (1996, pp 623-11) and Igbaria and Chakrabarti (1990, pp. 229-241). Age is the next in the value of positive relationship (0.25). This may be because with age comes experience generally, which is shown in the 0.37 relationship between the two factors. On the other hand, education co-relates negatively (-0.33) with use. This result is in contrast with earlier studies by McGuire and Hillan11 (1999, pp. 54-55) and Igbaria and Chakrabarti12 (1990, pp. 229-241); and this contrast might be because the question referred to the level of education rather than its content. It might also mean that the higher the level of education, the less information technology content. It made no sense to relate gender with the use of information technology because all the respondents were male, tending to confirm that top companies’ jobs are still dominated by males. A future study can verify the use by females of global planning tools by the use of quota sampling of respondents.

Infrastructural Factors As expected (see section 3.4), there is a positive correlation (0.2) between the use of ICT for global planning and the provision of infrastructural facilities. The correlation is more pronounced with provision of electricity (0.36) than telephone systems (0.012). The respondents were offered the opportunity to indicate other aspects of infrastructural facilities that may be relevant, but none was indicated.

Other Findings Of interest to this research was the difference between South African and non-South African companies. On average, use of ICT in global planning by South African companies is 2.5 (arithmetic mean), whereas non-South African multinationals score 3.8, indicating greater use. This outcome suggests that ICT planning tools are used more by UK-based

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companies than SA companies. The reason for this difference needs further exploration. However, this result is not conclusive given the small number of respondents upon which the calculations are based.

MAJOR CONCLUSIONS AND RECOMMENDATIONS The pilot study aimed at examining the use of global planning tools by multinational companies. The results indicate that Internet, groupware, enterprise planning, and video conferencing tools are very popular. What managers claim most important are the provision of timely information, report and presentation facilities, and support for group working. When level of use of global planning tools is compared to view of ICT attributes, other important ICT factors (attributes) emerged, for example, alternative (highly summarized and detailed) views of information. Another major finding is that managers are not very satisfied with the provision of technology for global planning. This tends to agree with the finding that the information technology they use for global planning does not provide adequate creativity needed in global planning. It is a major recommendation of this paper, therefore, that investigation be made on how to use ICT more creatively in global planning. Also, other ICT attributes that count highest to managers should be incorporated in any development of computerised global planning tools.

FURTHER RESEARCH Further research should examine how to use ICT more creatively in global planning. Moreover, while the major predictor variables of the theoretical model have been derived from secondary research, it is necessary to reconsider and possibly expand the subfactors. For instance, leadership style could be included within personal factors. It has been studied in relation to its effect on the use of strategic tools and models (Drago and Clements, 1999, pp. 11-18). Also, organizational factors should incorporate the control and regulation of planning process and the structure of the organization. Jarvenpaa and Ives (1993, p. 547) discovered a poor fit between organizational structure and global information technologies. This reworking of the theoretical model has to be performed before further primary data could be collected to validate its explanatory and predictive ability.

ENDNOTES 1

2 3

The International Monetary Fund (1997) defines “globalization” as “the growing economic interdependencies of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services and of international capital flows, and also through the rapid and widespread diffusion of technology” (p. 45). In structure. Hertzberg (1995) stated that “every failure of implementation is, by definition, also a failure of formulation. The real blame [of unsuccessfully planned strategies] has to be laid, neither on formulation or on implementation, but on the very separation of the two.

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4 5 6 7

8 9 10 11 12

…. It is the disassociation of thinking from acting that lies closer to the root of the problem” (p. 285). Similar lists have been compiled by Stair and Reynolds (1998, p. 459-460) and Clare and Stuteley (1995, pp. 55-59). Feelings include level of satisfaction. A major Internet infrastructure. Correlation coefficients represent relationships of two sets of data at a time. Their values range from –1 (perfect negative correlation) to + 1 (perfect positive correlation). The nearer the coefficients are to these two values, the stronger the relationship. The more the coefficients are close to 0, the less the relationship; at 0, there is no relationship (Carlson & Thorne, 1997). In many cases “use of global planning technologies” will simply be referred to as “use.” A positive correlation coefficient. The negative correlation coefficient is between the use of ICT and globalization as expressed by not exporting home standards abroad. McGuire and Hillan found out that although the midwives they studied had a positive attitude (feeling) about computers, they considered the lack of the necessary skills as a hindrance to using computers. Igbaria and Chakrabarti found computer training to be contributing strongly to decrease in computer anxiety.

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Feurer, R. and Charharbaghi, K. (1995). Strategy development: Past, present and future. Management Decision, 33(6), 11-21. Fletcher, K. and Donaghy, K. (1994). The role of competitor information systems In Information Management & Computer Security, 2(3), 4-18. Fulmer, R. M. and Sashkin, M. (1995). Tools for the global learning organization. In American Journal of Management Development, 1(3), 26-31. Govindarajan, V. and Gupta, A. (2000). Analysis of the emerging global arena. In European Management Journal, June, 18(3), 274-284. Grosse, E. (Ed). (2000). Thunderbird on Global Business Strategy. Toronto: John Wiley & Sons, Inc. Hagmann, C. and McCahon, C. S. (1993). Strategic information systems and competitiveness: Are firms ready for an IST-driven competitive challenge? In Information and Management, 25, 183-192. Harvey, M., Griffith, D. and Novicevic, M. (2000). Development of timescopes to effectively manage global inter organizational relational communications. In European Management Journal, December, 18(6), 646-662. Hax, A. C. (1989). Building the firm of the future. In Sloan Management Review, Spring, 75-82. Hertzberg, H. (1995). The Rise and Fall of Strategic Planning. Upper Saddle River, NJ: Prentice Hall. Hill, C. W. L. (1996). Global Business Today. New York: McGraw Hill. Ho, C. (1996). Information technology implementation strategies for manufacturing organizations: A strategic alignment approach. In International Journal of Operations and Production Management, 16(7), 77-100. Holt, D. H. (1998). International Management: Text and Cases. London: The Dryden Press. Houben, G., Lenie, K. and Vanhoof, K. (1999). A knowledge-based SWOT-analysis system as an instrument for strategic planning in small and medium sized enterprises. In Decision Support Systems, August, 26(2), 125-135. Hull, C. W. (1987). Business in a global economy. In Hydrocarbon Processing, December, 61-66. Humes, S. (1993). Managing the Multinational: Confronting the Global-Local Dilemma. London: Prentice Hall. Ietto-Gillies, G. (1997). Internationalization trends. In Global Business Strategy. London: International Thomson Business Press, 73-90. Igbaria, M. and Chakrabarti, A. (1990). Computer anxiety and attitudes towards microcomputer use. In Behavior and Information Technology, 9(90), 229-241. The International Monetary Fund. (1997). World Economic Outlook, 45. Ives, B., Jarvenpaa, S. L. and Mason, R. O. (1993). Global business driver: Aligning information technology to global business strategy. In IBM Systems Journal, 32(1), 143-161. Jackson, T. (1999). Master of his art. In Financial Times Mastering Management Review, July, (25), 10-13. Jarvenpaa, S. L. and Blake, I. (1993). Organizing for global competition: The fit of information technology. In Decision Sciences, May-June, 24(3), 547-581. Jeannet, J. (1999). Strategies in the spider’s Web. In Mastering Global Business, 28-32. London: Pitman. Johnson, G. and Scholes, K. (1997). Exploring Corporate Strategy. London: Prentice Hall.

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Kay, J. (1993). The structure of strategy. In Business Strategy Review, 4(2), 17-37. Kay, R. H. (1989). A practical and theoretical approach to assessing computer attitudes: The computer attitude measure (CAM). In Journal of Research on Computing in Education, Summer, 456-463. Kay, R. H. (1990). Predicting student teacher commitment to use of computers. In Journal of Educational Computing Research, 6(3), 299-309. McGuire, M. and Hillan, E. (1999). Obstacles to using a database in midwifery. In Nursing Times, January, 95(3), 54-55. Moghaddam, F. M. (1998). Social Psychology: Exploring Universals Across Cultures, 99129. New York: W. H. Freeman and Company. Morgan, N. A. and Piercy, N. F. (1993). Increasing planning effectiveness. In Management Decision, 31(4). Ohmae, K (1989). Managing in a borderless world. In Harvard Business Review, May-June, 67, May-June, 152-161. Özsomer, A., Calantone, R. J. and Bonetto, A. D. (1997). What makes firms more innovative? A look at organizational and environmental factors. Journal of Business & Industrial Marketing, 12(6), 400-416. Penrose, E. T. (1963). The Theory and the Growth of the Firm. Oxford: Blackwell. Reid, D. M. (1989). Data access and issue analysis in strategic planning. In Marketing Intelligence & Planning, 7(1). Rugman, A. M. and Hodgetts, R. M. (1995). International Business and Strategic Management Approach. New York: McGraw-Hill. Rugman, A. M. and Hodgetts, R. M. (1995). International Business and Strategic Management Approach. New York: McGraw-Hill. Ryan T. (1990). Dermatology–Global planning in relation to leprosy management. In Leprosy Review, September, 61(3), 209-212. Sokol, R. (1992). Simplifying strategic planning In Management Decision, 30(7). Taggart, J. H. and McDermott. (1993). International Business. London: Prentice Hall. Tetteh, E. and Burn, J. (2001). Global strategies for SMe-business: Applying the SMALL framework. In Logistics Information Management, 14(1), 171-180. Toyne, B. and Walters, P. G. P. (1993). Global Marketing Management: A Strategic Perspective (Second edition). London: Allyn & Bacon. Uenohara, M. (1992). Innovation on a global scale. In Chemtech, July, 22(7), 402-405. Usoro, A. (1998). A tool for strategic planning to support managers. 8th Annual BIT (Business Information Technology) Conference, 4-5 November. Usoro, A. (2001). Can information technology help managers plan globally? In Journal of Global Information Management, 9(1), 17-24. Walters, J. E. and Necessary, J. R. (1996). An attitudinal comparison towards computers between underclassmen and graduating seniors. In Education, Summer, 116(4), 623711. Wheelen, T. L. (2000). Strategic Management and Business Policy: Entering 21st Century Global Society (Seventh edition). Upper Saddle River, NJ: Prentice Hall. Yehia, M., Chedid, R., Ilic, M., Zobian, A., Tabors, R. and Lacallemelero, J. (1995). Global planning methodology for uncertain environments–Application to the Lebanese power-system. In IEEE Transactions on Power Systems, February, 10(1), 332-338.

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Chapter XI

The Cultural Construction of Information Technology Vanessa Dirksen Universiteit van Amsterdam, The Netherlands

In this paper, I propose a research framework called the ‘“cultural construction of information technology.” It extends the more widely known concept of the social construction of technology (SCOT) and defines the concept of a cultural infrastructure for the application of information technology in other contexts than the one in which it is developed. Whether or not today’s economy is characterized best by the term globalization,1, the interweaving of economic processes and the growing number of internationally operating organizations in the world are matters of fact. The shaping of such a “global economy” is facilitated, among others, by information technology (IT) as it enables the crossing of both organizational as well as national borders. However, as in the case of so-called cultural universals, the universal applicability of IT is a myth also. It is therefore my contention that notwithstanding the blurring of borders, acknowledging the specificity of national cultures remains important, maybe even more than before, and should not be overlooked in the international application of IT. This is what we call the glocalization paradox2 of information technology. The paradox consists of both a global, border-crossing dimension of IT, as well as a local/national context dimension of IT thrust. Resolving this paradox is an important issue regarding the global application of IT. Thus, the application of IT across national boundaries stresses the growing awareness of cultural diversity, and ultimately, the need for the development of IT taking into account heterogeneous “target environments.” Apart from the fact that the target environment, or “host culture,” should not be conceived of as a cultural homogeneous environment, technology itself should not be conceived of as a culturally neutral phenomenon (Pacey, 1993). Rather, information technology is value-loaded; it reflects the values of the culture in which it is developed (Kumar and Bjorn-Anderson, 1990, in Jarvenpaa and Tractinsksy, 1995). Consequently, information systems can be conceived of as “carrying and communicating a worldview packed with assumptions, marked by the interests and ideologies that conceive them” (Depres, 1996, p. 17). The application of IT in another context than the one in which it emerged, that is, the country in which it is designed and developed, often causes problematic implementation and Appeared in Journal of Global Information Management, vol. 9, no. 1, 2001. Reprinted by permission.

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ultimately a low appropriation of IT. The reason for this is found in the fact that the values of its home country disagree with the norms and values of the target environment. Because culture significantly impacts the different effects of the introduction of the same information technology within different cultural contexts, we will address this cultural dimension of IT by introducing a research framework called “the cultural construction of information technology” (CCOIT). The cultural construction of IT extends the more widely known concept of the social construction of technology (SCOT) (Mackenzie and Wajcman, 1985). In the SCOT approach, “technology is treated as part of a system of different but interlocking elements–physical artifacts, institutions, and their environments” (Sahay et al., 1994, p. 249). The social constructionist approach to technology is drawn from the sociology of knowledge, i.e., “[t]he study of how styles of expression and the character of ideas or systems of thought are related to different social contexts” (Bullock et al., 1988, p. 457). It expresses the resistance to the existence of cultural universals and verges on the theories of cultural relativism.3 Thus, the social construction of knowledge argues that “knowledge is a social construction rather than a (more or less flawed) mirror held up to nature” (Bijker & Law, 1992, p. 13). In the same line of reasoning, the SCOT approach holds that “technologies and technological practices are built in a process of social construction and negotiation, a process often seen as driven by the social interests of participants” (Bijker and Law, 1992, p. 13). The CCOIT, then, not only views technology as an outcome of the working of society, but holds that viewing technology as part and parcel of a society entails investigating information technology in interaction with “culture.” Questions arising in the field of CCOIT concern, for one, the way that culture influences technology. Apart from this Weberian tradition, which questions how values constrain or enable technological practices and development, we extend the notion of SCOT in that it does not dismiss the deterministic properties of (information) technology (Orlikowski, 1992). This calls for a Marxist examination of the way that information technology also influences cultural values. In this tradition one could investigate, for instance, how cultural boundaries and conflicts arise under the influence of technological developments. A third area of research that CCOIT covers concerns the introspection of the technological community. Investigated in this area are the ways in which the internal working of the technological community and the norms and values of its members affect the technological outcome (cf. Alexandrov, 1994). It should be said that we limit ourselves to the introduction, implementation, deployment and maintenance phases4 of information technology infrastructures in “alien” target environments as divorced from their preceding processes of design taking place in the home country. This centers our focus on the ways culture influences the application of IT and how culture actually transforms the technology in use. This focus is based on the Duality of Structure as advocated by Gidden’s structuration theory which states that “the structural properties of social systems are both medium and outcome of the practices they recursively organize” (Giddens 1984, p. 25). The duality of technology consequently comprises the idea that technology is both created and changed by human action as well as used by humans to accomplish some action (Orlikowski, 1992). Furthermore, we posit the practice of IT as a Geertzian form of “cultural interpretation,” This acknowledges the role of the actor and stresses the need to study culture from within, reconstructing the native’s point of view as much as possible by trying to distill the meaning of the world as given by the people themselves who live in it. The “interpretative flexibility” of (information) technology is derived from the conviction that people in different contexts interpret the meaning of technology in different ways (Winner, 1993). These interpretations

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of the technology are often referred to as ‘technological frames of meaning.’5 “The term ‘technological frame’ refers to the concepts, techniques, and resources adopted by technologists and others.6 It is a way of talking of the set of theories, expertise, values, methods of testing, and physical tools and devices available to communities as they negotiate about the putative character of innovation” (Bijker & Law, 1992, p. 19).7 In short, the explication of the different technological frames of meaning is of vital importance to the application of IT as they influence the actual interaction between people and the technology. One could say that they determine the interaction between culture and IT and, ultimately, the transformation of both.

INCORPORATING THE NOTION OF CULTURAL INFRASTRUCTURE An information technology infrastructure comprises a physical infrastructure made up of technological components, as well as a social and cultural infrastructure. The notion of cultural infrastructure is comparable to what Ciborra and Lanzara call “formative context,” “i.e., the set of the preexisting institutional arrangements, cognitive frames and imageries that actors bring and routinely enact in a situation of action” (Ciborra & Lanzara, 1994, p. 70). In order to comprehend the notion of cultural infrastructure, we must first outline its components. Firstly, our understanding of the rather vague and complex concept of culture is characterized best in terms of tradition, i.e., “a background within which we interpret and act; the historicity of our way of thinking–the fact that we always exist within a pre-understanding determined by the history of our interactions with others who share the tradition” (Winograd & Flores, 1986, p. 7). Culture in this respect is well represented by the Russian word byt, “… signifying “a way of life,” an aggregate of customs, habits, mores, and so forth, characterizing a particular people, social stratum, or group (Alexandrov 1994, p. 65).8 The majority of the information systems’ research publications refers to the concept of culture in terms of organizational or corporate culture only. We, however, explicitly stress the importance of studying IT in a context not confined merely to the boundaries of the organization. Although the area of research will be confined to IT application on an organizational level, the technological practice should be analyzed within the broader context of the national culture. This because “tools transferred from one country to a specific enterprise abroad suffer a ‘double-layered acculturation’: The technology is confronted with a foreign national and alien corporate culture” (Barkema et al., 1996, in Recht & Wilderom 1998, p. 8). The organizational culture is thus but one aspect of the cultural infrastructure. According to Schein’s definition of the term, organizational culture9 develops as a result of surviving in and adapting to the external environment and the gearing of internal processes to one another (Schein, 1992). The result is a shared frame of reference from which that same environment is defined (Van Muijen, 1994). Although we tend to agree with such a vision of organizational culture, we dispute its rather one-sided perspective in representing the management/leadership point of view only. In accordance with the Geertzian tradition as introduced in the preceding paragraph, we suggest that organizational culture be approached from the bottom-up perspective as well, since this will reveal not what “ought to be” but “what actually is.” Moreover, we disagree with the apprehension of corporate culture prevalent in the majority of information systems’ research publications, being used as an arbitrary classification. Pinpointing culture in general terms only implies it to be a static and uniform

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phenomenon. Rather, culture should be defined from a socio-historical development perspective, acknowledging it to be a context-dependent phenomenon. It should be said however, that we are not propagating any form of sterile relativism. That is to say, we do not rule out the possibility of systematic comparison with comparable phenomena. One of the rare studies assessing the broader context of IT in terms of “softer factors” influencing its apllication is a research concerning the implementation of GIS in India conducted by Sahay and Walsham (1996). In this study, apart from recognizing the organizational structure, Sahay and Walsham also consider the scientific tradition to be an important feature of the context responsible for contributing to the generation of homogeneous technological frames of meaning. The scientific tradition, or the scientific byt “relates to the prevailing beliefs about how science and technology is viewed in [a country], and the norms and values underlying these beliefs” (Sahay & Walsham, 1994, p. 394, cf. Alexandrov, 1994).10 The tradition, or the shared frames of reference of the various disciplines, the design, implementation, use, and management of IT, generates specific attitudes toward information technology in terms of, for instance, functions, possibilities, and goals.11 The different groups of people working with the technology, such as designers, users, and managers, may have different frames of meaning, depending on their individual backgrounds and interests (Barley, 1990 in Sahay et al., 1994, p. 248). The scientific tradition is thus another component of the cultural infrastructure. Taking the granulation of culture further adds yet another dimension to the cultural infrastructure of IT. One could also investigate the degree of “sharedness in meaning” according to the “historical positioning” of the people interacting with the technology, that is, a person’s place within contemporary society as an outcome of its specific historic tradition. Since “individual careers and collective developments are interwoven” (Hagendijk, 1996, p. 152) this could manifest itself, for instance, as a “generational phenomenon.” The notion of generation, in this respect, refers to personal courses of life related to the parallel development–life cycle12–of technical artifacts. This historical positioning of the people who interact with technology induces their specific conceptualization of this technology. Assessing the “personal histories”13 of these people against the life cycle of IT might thus reveal shared meanings that could be ascribed to a certain generation. The cultural infrastructure of information technology is thus composed of structures of accumulated historical and individual experiences that give rise to specific information technology practices characteristic of particular groups of people divided by nation, organization, scientific tradition, professional community, and/or generation. The investigation of the cultural infrastructure should therefore incorporate the analysis of several closely interrelated dimensions of national dominant values, organizational culture, expertise or professional culture, and individual histories, as they influence the practice of information technology. In order to study the interaction or interrelationship of IT and culture, the cultural infrastructure should also be specified in terms of the actual characteristics and attributes of the information technology. But also, the varied understandings of the role of information in an organization or a society underlie the social processes of acceptance or resistance to IT innovations and are inherent to the application and transformation process. For instance, “[i]n some countries the basic assumption that information is good and that all people should have access to public information is not as widely shared” (Mansell and Wehn, 1998, p. 145). This conviction will most probably constrain a positive attitude toward the use of IT (Mansell & Wehn, 1998). Focusing on “how people approach and handle information” (Davenport,

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1997, p. 83)–information behavior–could thus also be insightful to the understanding of the interrelationship between IT’s physical and cultural infrastructure. Encapsulated, information culture is “… the pattern of behaviors and attitudes that express and organization’s [and society’s] orientation toward information” (Davenport, 1997, p. 84). To sum up, technological frames of meaning are prompted by the various cultural histories, those of the organization, professional/expertise community, and of generations, as related to the technological, economic, and ideological development of a country in general, and as related to the state of the “informational society” 14 in particular. The explication of the technological frames of meaning requires the compilation of dialectical histories, i.e., linking personal, corporate, and national histories to the lifecycle of information technology. And so, ideally, “the historical specificity or tradition of people and organizations converge with the socio-technical logic of the informational paradigm” (Castells, 1996, p. 21).

THE CULTURAL CONSTRUCTION OF IT IN RUSSIA The significance of relating technological frames of meaning to cultural histories within the big picture of the ruling ideological and economic situation and technological development of a country is illustrated by some rather stereotypical or superficial insights in Russian information technological culture.15 With the “opening up” of the Soviet Union to the West, new market forces and the information technology revolution make their way into Russia. Consequently, new and sophisticated technologies from the West are increasingly introduced in Russian firms to upgrade or replace the Soviet machinery. However, the application of IT originating from the West can be expected to be problematic for various reasons. The problems that can be anticipated are those resulting from a deviant or insufficient technological infrastructure and most likely also those resulting from variations in organizational structure (Palvia et al., 1992).16 The problematic application of IT as a result of the “cultural infrastructure,” however, is considerably less predictable. As an outgrowth of Russia’s rather turbulent history, we expect the “cultural framing” of IT in Russia to be subjected to a high degree of controversy due to the nature of contemporary Russian society. It follows that the acceptance or rejection of IT could depend on (the perseverance or disappearance of) certain controversies, persisting as logical outcomes of Russia’s ideological, economic, and social history. These “struggles” could become apparent conform to the division by generation, manifested as a cleavage between Russians born, raised, and educated during communist times and the younger generation who grew up after the ideological, economic, and discursive turn. Firstly, the older generation may, for example, be inclined to be more influenced by the tradition of Soviet thought in their perception of technology, still applying to some extent the norms and values of Soviet culture [sovyetskaya kultura]. For instance, the notion of the purpose of IT could be influenced by the Soviet dogma that “production, technology and innovations, and science have meaning and are justified only insofar as they promote military might, the expansion of territory, and the strengthening of the state” (Rakitov, 1993, p. 80). Secondly, the old-time distinction between “ours” and “not ours” [nashi–ne nashi] might become apparent in the Russian framing of information technology. This distinction

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reflects the idea of technological progression in which Russian tools, or Soviet for that matter, are preferred over Western tools in fear of technological and cultural dependence on the West (cf. Cats-Baril & Jelassi, 1994).17 A third factor in the interpretative scheme of the “Soviet generation” may be the association of information systems with control. “[E]nterprises that played by the rules in the Soviet economy risked cutting their own throats; computerized management information systems are designed to help enterprises play by the rules” (McHenry & Goodman, 1986, 1040). A fourth example of a generation-stereotypical attitude toward IT may stem from the rather specific Soviet reluctance to information sharing, that is, “the voluntary act of making information available to others” (Davenport, 1997, p. 87).18 The perseverance of this tradition could generate an averse attitude in terms of information transparency and therefore also toward the use of the computer as an informatory device.

CONCLUSION I reject the idea of truly universally applicable IT on the same grounds as I reject the existence of cultural universals. It is my contention that “global IT” should also recognize the importance of the relevant aspects of the national contexts of IT which create heterogeneous target environments for its application. Hence, I propose a construction of IT with emphasis placed on the concept of culture, that is, in terms of the history and tradition of a particular country. The interpretation of information technology in contemporary society should then be understood against the historical background of the country in which the technology is implemented, and also, against the history of computing. In short, I hold that the different meanings attributed to technology are generated by people’s specific cultural and “historical positioning” within this wider context. I therefore emphasize the need to study the cultural histories that shape local IT practices. The global adoption of IT could, for example, be enhanced by considering the “generational” effects in the national sub-field of information technology and the personal contexts of agents interacting with IT during application of so-called global IT. For example, information analysis for global IT should not be restricted to functional requirements but must also acknowledge the existence of different technological frames of meaning and therefore incorporate cultural requirements. A socio-cultural-historical analysis during information analysis could be imperative. The question of how to incorporate these dimensions in the development of global IT remains unanswered, however, and forms a subject for future research. With respect to the cultural constructivism of science, Hagendijk (1996) also discusses the discourse coalitions in scientific and social change, and public controversies regarding science. Interesting future research in the cultural constructivism of IT could be directed toward demonstrating the relevance of discourse coalitions in and public controversies about IT. Furthermore, as IT reflects the values of its culture of origin, it should be productive to question to what extent IT can be said to be an ethnocentric device to begin with, that is, a device in which Western rationality is the criterion by which other cultural bodies of knowledge are being evaluated.19 Then it rather becomes a question of technological displacement.

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ENDNOTES 1 2 3

4 5 6 7 8 9 10 11 12 13 14

15 16 17 18 19

In general, the term “globalization” refers to the free transfer of goods, capital and information across a growing number of accessible continents, assuming eventually the abolishing of national borders. “Globalization in this context involves not the leavening impact of universal processes but, on the contrary, the calculated synthesis of cultural diversity” (Gordon, 1994 in Castells, 1996, p. 393). “The social constructionist view originated as a reaction to the early misuse of Darwinism: Using biology, the analogy of natural selection, to explain and justify everything from class stratification to the domination of White Europeans. Boas and his students [Margaret Mead and Ruth Benedict] argued that differences between human groups could be ascribed to culture and not to nature” (Fukuyama, 1998, p. 28). Deployment is the phase “in which the resulting system is installed in its target environment” and maintenance is the phase “in which the system is continually modified, upgraded and debugged” (Goguen, 1994, p. 176). A term of Collins and Pinch (1982). Comparable to Heidegger’s “Gestell” or “enframing”; “it is that attitude to the world that is the foundation for, yet wholly present in, technological activity” (Durbin, p. 320). “Bijker presses the view that both social groups and technologies are generated in the contingent arrangements of the concepts, techniques, and resources brought together in the relevant technological frames” (Bijker & Law, 1992, p. 19). The term byt is comparable to Pierre Bourdieu’s understanding of “habitus.” The concept of culture represented in the first wave of the corporate culture literature, “a move away from the hard aspects of technology and structure” (Van Muijen, 1994). Alexandrov studied “how the evolution of a discipline was linked to the byt, the culture of the scientific tradition” (Alexandrov, 1994, p. 80). One could, for example, see a computer primarily as an automating or an informating device (Zuboff, 1988). The notion of lifecycle refers to the progression of technology as a consequence of new technologies competing with old ones (Rip, 1995). The trend of micro-histories was initiated as a reaction against the search for “hard structures” and is characterized by localizing the subject and encouraging more existential studies of society. Informational society refers to “a specific form of social organization in which information generation, processing, and transmission become the fundamental sources of productivity and power, because of new technological conditions emerging in this historical period” (Castells 1996, p. 21). Drawn from an unpublished preliminary study conducted by the author concerning the explication of the Russian understanding of the term “culture” as related to the idea of technological progression. The decentralized information systems from the West will most likely be inappropriate for use in most Russian organizations (Palvia et al., 1992). This introduces the notion of IT as an ethnocentric and colonizing device. Information sharing is, according to Davenport (1997), apart from handling overload and dealing with multiple meanings, one of the three critical types of information behavior. This perspective would entail viewing information technology as a potential colonizing device, subjugating the traditional way of life.

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REFERENCES American Anthropological Association/ Computing Research Association. (1995). Culture, Society and Advanced Information Technology, AAA/CRA, June 1-2. Alexandrov, D. A. (1994). The historical anthropology of science in Russia. Russian Studies in History, Fall, 62-91. Bijker, W. E. and Law, J. (Eds.). (1992). Shaping Technology/ Building Society: Studies in Sociotechnical Change. Cambridge, MA: MIT Press. Bullock, A., Stallybrass, O. and Trombley. S. (Eds.). (1988). The Fontana Dictionary of Modern Thought. London: Fontana Press. Castells, M. (1996). The Information Age: Economy, Society and Culture, Volume I. The Rise of the Network Society. Oxford: Blackwell Publishers. Cats-Baril, W. L. and Jelassi, T. (1994). The French videotext system minitel: A successful implementation of a national information technology infrastructure. Management Information Systems Quarterly, March, 1-19. Ciborra, C. U. (1999). Hospitality and IT. PrimaVera Working Paper 99-02, Universiteit van Amsterdam. Ciborra, C. U. and Hanseth, O. (1998). From tool to Gestell: Agendas for managing the information infrastructure. PrimaVera Working Paper, 98-03, Universiteit van Amsterdam. Ciborra, C. U. and Lanzara, G. F. (1994). Formative contexts and information technology: Understanding the dynamics of innovation in organizations. Accounting, Management & Information Technology, 4 (2), 61-86. Davenport, T. D. (1997). Information Ecology: Mastering the Information and Knowledge Environment. Oxford: Oxford University Press. Depres, C. D. (1996). Information, technology and culture: An ethnography of information technology and modernist business organization. Technovation, 16(1), 1-20. Durbin, P. T. (1980). A Guide to the Culture of Science, Technology, and Medicine. New York: the Free Press. Giddens, A. (1984). The Constitution of Society. Cambridge: Polity Press. Gobbin, R. (1998). The role of cultural fitness in user resistance to information technology tools. Interacting with Computers, 9, 275-285. Fukuyama, F. (1998) Women and the evolution of world politics. Foreign Affairs, September/ October, 24-40. Hagendijk, R. P. (1996). Wetenschap, Constructivisme en Cultuur. Amsterdam. Hirschheim, R., Klein, H. K. and Lyytinen, K. (1996). Exploring the intellectual structures of information systems development: A social action theoretic analysis. Accounting Management & Information Technology, 6 (1-2), 1-64. Ives, B. and Jarvenpaa, S. L. (1991). Applications of global information technology: Key issues for management. Management Information Systems Quarterly, March, 33-49. Jarvenpaa, S. L. and Tractinsky, N. (1995). Information systems design decisions in a global versus domestic context. Management Information Systems Quarterly, December, 507-534. Kumar K., van Dissel, H. and Bielli, P. ( 1998). The merchant of prato -revisited: Toward a third rationality of information systems. Management Information Systems Quarterly, June, 199-226. Mansell, R. and Wehn, U. (1998). Knowledge Societies: Information Technology for Sustainable Development. New York: Oxford University Press.

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McHenry, W. K. and Goodman, S. E. (1986). MIS in Soviet industrial enterprises: The limits of reform from above. Communication of the ACM, 29(11), 1034-1043. Montealegre, R. ( 1998). Managing information technology in modernizing “against the odds”: Lessons from an organization in a less developed country. Information and Management, 34, 103-116. Orlikowski, W. J. (1992). The duality of technology: Rethinking the concept of technology in organizations. Organization Science, 3(3), 398-427. Pacey, A. (1983). The Culture of Technology. Oxford: Basil Blackwell. Palvia, S., Palvia, P. and Zigli, R (1992). The Global Issues of Information Technology Management. Hershey, PA: Idea Group Publishing. Rakitov, A. I. (1993). Civilization, culture, technology, and the market. Russian Social Science Review, July/August, 73-84. Recht, R. and Wilderom, C. (1998). Kaizen and culture: On the transferability of Japanese suggestion systems. International Business Review, 7, 7-22. Rip, A., Misa, T. J. and Schot, J. (1995). Managing Technology in Society: The Approach of Constructive Technology Assessment. London/ New York: Pinter Publishers. Sahay, S., Palit, M. and Robey, D. (1994). A relativist approach to studying the social construction of information technology. European Journal of Information Systems, 4(3), 248-258. Sahay, S. and Walsham, G. (1996). Implementation of GIS in India: Organizational issues and implications. International Journal of Geographical Information Systems, 10(4), 385404. Schein, E. H. (1992) Organizational Culture and Leadership. San Franciso, CA: JosseyBass. van Muijen, J. J. (1994). Organisatiecultuur en Organisatieklimaat: De Ontwikkeling van een Meetinstrument op Basis van het ‘“Competing values” Model. Amsterdam. Winner, L. (1993). Upon opening the black box and finding it empty: Social constructivism and the philosophy of technology. Science, Technology & Human Values, 18(3), 362374. Winograd, T. and Flores, F. (1987). Understanding Computers and Cognition: a New Foundation for Design. Reading, MA: Addison-Wesley. Zuboff, S. (1988). In the Age of the Smart Machine: the Future of Work and Power. New York: Basic Books.

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Section II Regional Perspectives

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Chapter XII

Survey of IT Outstanding Experiences in US and UK Organizations Mary Cecelia Lacity University of Missouri–St. Louis, USA Leslie P. Willcocks Oxford University, UK

The global IT outsourcing market is estimated to exceed $121 billion by the year 2001. To assess current market practices and experiences, a survey was distributed to 600 US and UK CIOs. The 101 US and UK respondents are generally pleased with information technology (IT) outsourcing. In particular, respondents rated overall supplier performance as “good,” respondents mostly realized the benefits they expected from IT outsourcing, and respondents characterized the majority of problems/issues as only “minor” in nature. The healthy IT outsourcing report card is likely explained by the scope and type of IT outsourcing practiced by responding organizations. The vast majority of respondents pursue selective outsourcing which is less risky than total outsourcing. Most respondents also use multiple suppliers rather than a single supplier, which allows for best-of-breed supplier selection. The healthy report card may also be explained by the types of IT activities selected for outsourcing. Respondents generally targeted IT infrastructure activities—such as disaster recovery, mainframe operations, network management, midrange operations, PC support, and help desk operations—rather than IT development or IT strategy. UK and US practices and outcomes were very similar, although a few exceptions are noteworthy. On average, UK organizations (30%) totally insourced IT more frequently than US organizations (8%). US organizations (29%) more frequently used a single supplier than UK organizations (9%). UK organizations (50%) use only one stakeholder to negotiate/define contracts compared to US organizations (9%). Differences may be explained by a more matured approach to outsourcing in the USA together with the higher preponderance of larger deals and organizations studied. Findings are compared to prior survey and case study research. Ever since Kodak’s landmark decision to outsource the bulk of their IT functions in 1989, IT outsourcing has been a widely publicized practice. Most of us are familiar with a Appeared in Journal of Global Information Management, vol. 8, no. 2, 2000. Reprinted by permission.

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number of other high-profile IT outsourcing mega-deals besides Kodak. Companies that have outsourced significant portions of their IT functions by transferring their IT assets, leases, licenses, and staff to outsourcing vendors include British Aerospace, British Petroleum, Chase Manhattan Bank, Continental Airlines, Continental Bank, DuPont, Enron, First City, General Dynamics, McDonnell Douglas (now Boeing), and Xerox. Mega-deals have also been signed in the public sector, including a £1 billion contract between the United Kingdom’s Inland Revenue and EDS and a $600 million contract between the South Australia Government and EDS. Overall, global market revenues have grown from $US 9 billion in 1990 to a projected $US 121 billion by year 2001. The underlying compound annual growth rate has been 15-20 percent in the 1992-98 period, with the leading markets in the US and UK. Other countries are also showing market increases. The Australian market, for example, has grown from $AUS 2.2 billion in 1998 to an estimated $AUS 3.87 billion in 2002 with a 24 percent annual growth rate from 1998-2002. A recent conference with Japanese CIOs sponsored by DEC also indicates that Japan is interested in IT outsourcing as a turnaround practice in response to the Asian monetary crisis (Lacity and Willcocks, 1999). Clearly, IT outsourcing has outlived the fiveyear period typical of a management fad. But is the rapid growth of the IT outsourcing market primarily attributable to the wellpublicized and studied mega-deals? Are high-profile, immense contracts indicative of the sourcing practices of most organizations? Are customers satisfied with their IT outsourcing practices and outcomes? These questions prompted a recent survey of IT outsourcing experiences to supplement the ever-growing number of mega-deal case studies. The survey was targeted at the two countries which have the largest and most established IT outsourcing markets—the US and UK. The survey was distributed to 600 US and UK Chief Information Officers (CIOs). This paper presents the findings of this survey and compares findings—where relevant—to previous surveys. The vast majority of the 101 respondents pursue selective outsourcing of IT services rather than total outsourcing. Overall, the respondents are generally pleased with selective outsourcing. In particular, respondents rated overall supplier performance as “good,” respondents mostly realized the benefits they expected from IT outsourcing, and respondents characterized the majority of problems/issues as only “minor” in nature. Overall, US and UK outsourcing practices and outcomes are similar, but notable differences are discussed.

RESEARCH METHODOLOGY In 1994, Willcocks and Fitzgerald (1994) developed an IT outsourcing survey for distribution in the UK. In 1996/97, Currie and Willcocks (1997) replicated the survey in the UK to assess how the practices and outcomes have evolved over the three-year period. For this paper, the survey was replicated, with amendments, for the first time in the US and for a third time in UK. By using the same survey instrument, the long-term research goal is to track IT outsourcing practices over time and to compare practices over time across countries.1 Respondents were asked to identify the percentage of IT budget outsourced, the types of IT activities outsourced, the anticipated benefits of outsourcing, people and processes used to evaluate IT outsourcing, contract details, contract duration, and outcomes in terms of actual benefits received, supplier performance, and extent of problems encountered. In particular, the questions targeted at outcomes were deemed important because few prior

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surveys assessed outcomes—most merely assessed practices (Collins & Millen, 1995 and Grover et al.,1996 are notable exceptions). While most of the thirty-plus questions were closed-ended, respondents were also asked to cite the most important lessons they have learned. The open-ended questions provided an opportunity for respondents to express views not identified in the close-ended questions. To replicate the survey in the US, the UK version was shortened because US CIOs— the target audience—would not likely complete an eight-page questionnaire. The US version is six pages long and differs from the UK version only in minor ways, such as adapting the survey for differences in language. For example, the UK survey uses the terms “turnover,” “redundancy,” and “federal structure.” Corresponding US terms are “revenue,” “attrition,” and “mixed/matrix structure.” For the US survey, a list of 1,000 of the largest US organizations across various manufacturing and service sectors was purchased from Dun & Bradstreet Information Services. This list included the names, addresses and phone numbers of the organizations, but not the names or exact titles of the Chief Information Officers. Every organization was called on this list to obtain the name and correct title of the head of the information systems department, in hopes that personally labeling envelopes and cover letters would increase the response rate. In the spring of 1997, surveys were mailed to the top 500 names on the US list. The UK sample was based on the Financial Times Top 100 list and a list provided by the research sponsors, British Intelligence, and the Oxford Institute of Information Management (OXIIM). Because the Financial Times list focuses on private sector organizations, a subset of the sponsors’ list was added to include public sector organizations. The 100 UK surveys were mailed in early 1998 to a contact person responsible for IT within the organization, usually an IT director but sometimes a senior business manager with IT responsibilities. A total of 101 usable surveys were returned, providing an overall response rate of 17%. The response rate compares favorably with similar surveys of this nature, especially given the number of questions and the detailed nature of the requested responses. Thirty-eight surveys were returned from the US and 63 surveys were returned from the UK.

SURVEY RESPONDENTS Job Titles of Survey Respondents. CIOs or senior executives were the target response group because respondents needed to have enough stature to answer strategic and IT management-related questions. To ensure the target person responded to the survey, the people filling out the surveys were asked to give their names, titles, and addresses. Respondents were motivated to complete this information so they could receive survey results. Indeed, the job titles of respondents indicates a high level of authority. Respondents are Directors (33%) of Computers and Computer Systems, Computing and Communication Services, Corporate Information Technology, Information and Information Services, IT Enterprises, IT Services, or Technical Services; Managers (24%) of Information Resources, IS Administration, IT Services or MIS, Chief Information Officers (21%) or Head of IS; and Vice Presidents (11%) of Division, Computers and Information Systems, Information Systems, or MIS (See chart “Job Titles of Survey Respondents”). Industries Represented. The 101 respondents represent a number of manufacturing and service industries (see table “Industries Represented”). Three industries—consumer products, financial services, and industrial products—represent nearly half of the sample.

Survey of IT Outstanding Experiences 163

Figure 1: Job titles of 101 US and UK survey respondents Did not indicate title 11.9% Vice President 10.9%

IT Director 32.7%

12 11

33

21 24 CIO/Head of IT 20.8% IT Manager 23.8%

Table 1: Industries represented Industries Represented Consumer Products Financial Services (Insurance, Investment, Banking) Industrial Products Energy (Petroleum, Chemicals) Public Services (Government, Hospitals, Police) Leisure Services (Restaurant Chains, Hotel Chains, Travel Agencies) Transportation (Rail, Air) Healthcare Utility Other Total

US

UK

Total Number of Respondents

7 5 7 7 0

9 11 7 1 7

16 16 14 8 7

4 3 0 1 4 38

2 3 5 3 15 63

6 6 5 4 19 101

Industries which only have one respondent represented are grouped in the category “other.” There is a greater diversity of industries represented in the United Kingdom (15 UK companies categorized as “other”) compared to the United States (4 US companies categorized as “other”). Average Revenues. Respondents reported annual revenues for private sector companies, total annual operating budgets for public sector organizations, or total assets for banks and insurance. Seventy-eight people answered this question. To compare US and UK size of firms, UK dollars were converted to US dollars using the exchange rate .5998. The average US annual revenue is nearly $11 billion compared to the average UK revenue of $1.3 billion (See table “Annual Revenues”). Despite the large difference in means, one-tailed ttest assuming heteroscedasticity (p = .03) indicates that the US and UK revenues are only marginally different. This finding is explained by the large standard deviation. Annual IT Budget. Respondents were asked to indicate their annual IT budget for the organization they are representing. Ninety-eight people answered this question. To compare US and UK size of firms, UK dollars were converted to US dollars using the exchange rate .5998. The average US IT budget is $200 million compared to the average UK IT budget of $6.9 million (see table “Average IT Budget”). A one-tailed t-test assuming heteroscedasticity

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Table 2: Annual revenues Minimum Maximum Average Standard Deviation Number of Respondents

United States Revenues $30 million $168,800 million $10,995 million $29,158 million 32

UK Revenues converted to US$ $1 million $12,000 million $1,311 million $2,728 million 46

Table 3: Size of annual IT budget Minimum Maximum Average Standard Deviation Number of Respondents

United States IT Budget $3 million $4,000 million $200 million $657 million 36

UK IT Budget converted to US$ $.1 million $111.0 million $6.9 million $16.0 million 62

Table 4: Scope of sourcing decisions Total Outsourcing Selective Outsourcing Total Insourcing Total

US 3 (8%) 32 (84%) 3 (8%) 38 (100%)

UK 3 (5%) 41 (65%) 19 (30%) 63 (100%)

Total US & UK 6 (6%) 73 (73%) 22 (22%) 101 (100%)

(p = .04) indicates that US and UK IT budgets are only marginally statistically different. Again, this finding is explained by the large standard deviation.

SCOPE OF SOURCING DECISIONS Finding: 73% of respondents pursue selective outsourcing The 101 respondents reported a wide spectrum of sourcing decisions, ranging from exclusive use of internal IT functions to large-scale IT outsourcing. For the purposes of the analysis of this survey, we adopted the sourcing definitions used in Lacity and Willcocks (1996): Total Outsourcing: the decision to transfer IT assets, leases, staff, and management responsibility for delivery of IT services from an internal IT function to an external IT provider which represents more than 80% of the IT budget. Selective Outsourcing: the decision to source selected IT functions from external provider(s) while still providing between 20% and 80% of the IT budget internally. This strategy may include single or multiple suppliers. Total Insourcing: the decision to retain the management and provision of more than 80% of the IT budget internally. Using these definitions, six organizations engage in total outsourcing. On the opposite end of the spectrum, 22% of organizations exclusively use internal IT functions to provide IT services. Seventy-three assume a “middle-of-the-road” approach by contracting for only select subsets of IT activities (see table “Scope of Sourcing Decisions”).

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Total outsourcing is pursued by the following six organizations: A US airline entirely outsources IT to a subsidiary company. This subsidiary company operates a world-famous reservation system that is used by many other airlines and travel agencies. • A US automotive manufacturer has a 12-year contract with two large suppliers. One of these IT suppliers used to be a wholly-owned IT subsidiary until it became an independent company. • A US $1.6 billion manufacturing company outsources all of IT to multiple suppliers for five years. • A UK export company has a five-year contract with one supplier for all IT infrastructure and applications. It also has a three-year contract with another supplier for support services, such as the helpdesk. • A UK life insurance company has a three-year total outsourcing contract with one supplier for mainframes, networks, applications development, and applications support. This company insources midrange computers and desktops. • A UK insurance company that is currently insolvent has a one-year, total outsourcing contract for 100% of IT services. Concerning total insourcing, there is a difference across countries: only 8% of US respondents claim to totally insource, compared to 30% in the United Kingdom. The greater propensity of US organizations to outsource might be explained by a greater maturity of the market on the supply side—many of the largest vendors developed from a US base, and by the proportionately greater number of larger organizations in our sample. Of the 22 total insourcing cases in both countries, all but two organizations have never even considered outsourcing IT. Thus continued IT insourcing may be based on precedent rather than a rational evaluation of market options. By far, the most common practice is selective outsourcing, as indicated by 84% of US and 65% of UK respondents pursuing this sourcing strategy. This finding is important because the majority of press releases focus on mega-contracts associated with total outsourcing. The news-worthiness of multimillion and multi-billion dollar deals may skew perceptions of the frequency of the practice (Lacity and Hirschheim,1995). Our finding is similar to many other sample surveys: • In a survey of 300 IT managers in the US, on average less than 10% of the IT budget was outsourced (Caldwell, 1996). • A survey of 110 Fortune 500 companies found that 76% spent less than 20% of the IT budget on outsourcing, and 96% spent less than 40% (Collins and Millen, 1995). • A survey of 365 US companies found that 65% outsourced one or more IT activities, but only 12 outsourced IT completely (Dekleva, 1994). • A survey by IDC found that “in the United States, outsourcing takes around 17 percent share of the IT services market” (Foley, 1993). • A survey of 48 US companies identified domestic and global IT sourcing practices of America’s most effective IT users, as determined by Computerworld’s Premier 100 list (Apte et al., 1997). Seventy-seven percent of the respondents outsourced at least one domestic IT function, but outsourcing was generally targeted at select activities such as support operations, training and education, disaster recovery, etc. Thus, although the large multimillion/billion dollar, long-term deals make headlines, past surveys have systematically unveiled that selective IT outsourcing is the more common practice. With selective outsourcing, discrete IT activities, representing a much smaller portion of the IT operating budget, are outsourced. •

166 Lacity & Willcocks

IT ACTIVITIES OUTSOURCED Finding: The most commonly outsourced functions involve IT infrastructure. Prompted by a list of 13 IT activities, respondents were asked to indicate whether they currently outsource part or all of the IT activities. Thirty-five US and 44 UK respondents answered this question. (See table “IT Activities Outsourced” for the most and least commonly outsourced IT activities). The patterns of IT activities outsourced are generally similar across US and UK organizations. In general, infrastructure operations are the most commonly outsourced activities, including disaster recovery (68%), clients servers and personal computer operations (67%), mainframe operations (61%), networks (57%), and mid-range computing (54%). The least commonly outsourced IT activities involve IT management and applications. Only 5% of respondents outsource IT strategy, 10% outsource procurement, and 28% outsource systems architecture. These activities are often considered strategic in nature, and even in the few instances of outsourcing, the activity is usually only partially outsourced. Another interesting finding is that 27 (34%) respondents outsource IT project management, but only three UK respondents totally outsource project management—the other 24 organizations only partially outsource. Several differences in US and UK IT outsourcing are apparent. Overall, UK organizations that selectively outsource outsource IT activities more frequently than the US organizations for nine of the 13 areas. In particular, there is a large difference in mid-range computer outsourcing—31% in US compared to 73% in UK. In the four areas that US figures are higher than UK figures (end-user support, help desk, project management and IT strategy), closer scrutiny reveals that US organizations primarily only partially outsource these activities. Compared with other surveys, we see much overlap in results as far as the most commonly outsourced and insourced IT activities. In the US, surveys indicate that the types of services most commonly outsourced are contract programming, education and training, PC maintenance, disaster recovery, applications development, and data entry (see table “Global Surveys on IT Outsourcing”). Thus US and UK organizations are tending to outsource or keep in-house similar activities, suggesting that similar principles for making IT sourcing decisions are being applied in both countries. Although surveys rank-order the most commonly outsourced IT activities differently, these same activities surface again and again. And like our survey, no surveys found that companies systematically outsource strategic planning or customer liaisons. And surveys generally indicate that 60% of applications are still developed in-house.

SINGLE VERSES MULTIPLE SUPPLIERS Finding: 82% of respondents use multiple suppliers Respondents were asked whether they use a single supplier or multiple suppliers. Of the 79 organizations that engage in IT outsourcing, 65 (82%) use multiple suppliers (see table, “Single verses Multiple Suppliers”). US organizations have less propensity to use multiple suppliers. Explanations may lie with organizations having a less fragmented, more mature approach to outsourcing, and/or their larger size attracting larger vendors able to accomplish a wider portfolio of activities. There are several advantages to using multiple suppliers, in fact. First, customers can select “best-of-breed” suppliers for each outsourced IT activity (Chapman and Andrade, 1997). For example, a customer may choose one supplier to manage the networks while choosing another supplier to man the help desk.

Survey of IT Outstanding Experiences 167

Second, customers mediate risk because no one supplier has sole monopoly power. Third, customers can motivate supplier performance through an environment of competition (Lacity et al., 1995; 1996). However, there are also two disadvantages with a multiple supplier strategy. Companies incur higher transaction costs because they conduct multiple evaluations and negotiate multiple contracts. During post contract management, the administration overhead is higher when dealing with multiple suppliers, particularly if supplier activities are integrated and thus require additional coordination. Two respondents cited the need to integrate services among multiple suppliers as a major lesson learned: “Develop better framework for lead vendors to service integrate” — UK Head of IT, Chemicals Company “Define multiple vendor relationships” — UK Service Manager, Insurance Company

DECISION SPONSOR Finding: IT managers are the sole sponsors of 47% of outsourcing decisions. Respondents were asked which stakeholder group(s) in their organizations initiate/ sponsor major IT outsourcing evaluations—steering committees, board members, senior business managers, and/or IT managers/directors. Thirty-five US and 44 UK people responded to this question. In 58% of the cases, only 1 stakeholder sponsors the decision, typically the IT Director (47%). In 35% of the cases, two stakeholders sponsor the decision, and again IT Directors are almost always one of the two participants. In only 6% of the cases are three or more stakeholders involved. (see table “Decision Sponsor”). Three prior studies found similar results. Apte et al. (1997) found that in the US, MIS executives initiate 95% of outsourcing decisions, top management participates 20% of the time, and departmental executives participate 15%. Willcocks and Fitzgerald (1994), in a survey of 162 UK organizations, found that in 47% of the companies, IT managers initiate outsourcing alone. Lacity and Willcocks (1998) in a multiple case study of 61 decisions found that 41% of decisions were sponsored by IT managers alone and 29.5% of decisions were jointly sponsored by senior executives and IT managers. Despite survey findings, several respondents indicated on the open-ended question that more stakeholders should have been involved in the decision: Table 5: IT activities outsourced IT Activity

Disaster Recovery Client/Server & PCs M ainframe Networks M id-Range End-User/PC Support Help Desk Project M anagement Systems Analysis Systems Design Systems Architecture Procurement IT Strategy

US Partial

US All

15 16 1 8 1 17 16 13 10 8 8 3 2

6 7 20 8 10 2 6 0 0 0 1 0 0

US Partial and All 21 23 21 16 11 19 22 13 10 8 9 3 2

US Partial/ All% 60% 66% 60% 46% 31% 54% 63% 37% 29% 23% 26% 9% 6%

UK Partial

UK All

13 22 19 18 21 15 5 11 10 12 10 4 1

20 8 8 11 11 5 9 3 4 3 3 1 1

UK Partial and All 33 30 27 29 32 20 14 14 14 15 13 5 2

UK Partial All% 75% 68% 61% 66% 73% 45% 32% 32% 32% 34% 30% 11% 5%

Total Partial and All 54 53 48 45 43 39 36 27 24 23 22 8 4

Total Partial/ All% 68% 67% 61% 57% 54% 49% 46% 34% 30% 29% 28% 10% 5%

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“More detailed request for proposal by consulting more of the people who do the work.”—US Senior Financial Analyst “Make sure everyone is involved that needs to be involved. Make sure all parties understand the agreement.”—US Director of Corporate Information Technology “In-house staff should be fully involved in the decision process.”—UK IT Director, Travel Company

STAKEHOLDERS RESPONSIBLE FOR DEFINING OUTSOURCING CONTRACTS Finding: In 32% of the cases, only one stakeholder defines and negotiates outsourcing contracts. Once the decision has been made to outsource, how many stakeholders actually negotiate and define the contract? Contract negotiations typically require highly specialized knowledge about contract law and IT technical specifications for service levels to ensure delivery (Halvey and Melby, 1996). Thus, we would expect that more stakeholders are involved in contract negotiations than in making the initial sourcing decision. Thirty-four US and 44 UK people responded to this question. Overall, 32% of outsourcing contracts are only negotiated by one stakeholder group. However, this finding is attributable to the large preponderance of UK cases involving only one stakeholder in Table 6: Global surveys on IT outsourcing Author(s) Arnett and Jones (1994)

Survey Survey of 40 US Cios

Collins and Millen (1995)

Survey of 10 US companies

Dekleva (1994)

Survey of 365 CIOs and CFOs

Grover, Cheon and Teng (1994; 1996)

Survey of 63 US companies Survey of 188 companies

Willcocks and Fitzgerald (1994)

Survey of 162 UK CIOs

Sobeland Apte (1995); Apte, U., Sobol, M., Hanaoka, S., Shimada, T., Saarinen, T., Samela, T. and Vepsalainen, A. (1997)

Survey of 48 US companies, 86 Japanese companies and 141 Finnish companies

The most commonly outsourced IT functions were: Contract programming (67%) Mini/Mainframe maintenance (67%) Software support and training (56%) Workstation/PC maintenance (39%) Systems integration (28%) Education and training (50%) PC support (49%) Network services (33%) Applications development (33%) Application maintenance (26%) Data centers (24%) Software maintenance (39%) User training (37%) Applications development (35%) Microcomputer support (35%) Disaster recovery (22%) Data centers (7%) % growth over 3 years: Systems operations (36%) Applications development and maintenance (30%) Telecommunications management (17%) End user support (16%) UK Outsourcing: Hardware maintenance (68%) User training and education (42%) Data centers (38%) PC Support (34%) US Outsourcing: Finnish Outsourcing: Support operations (48%) Software development (48%) Training & education (48%) Support operations (46%) Disaster recovery (40%) Software maintenance (42%) Software development (33%) Data network (39%) Data entry (22.9%) Training & education (38%) Japanese Outsourcing: Software development (61.6%) Data center operations (44.2%) Software maintenance (38.4%) Support operations (33.7%)

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Table 7: Single vs. multiple supplier Single Supplier Multiple Supplier Total

US 10 25 35

US % 29% 71% 100%

UK 4 40 44

UK % 9% 91% 100%

Total 14 65 79

Total % 18% 82% 100%

US % 46% 3% 3% 0% 51% 23% 6% 9% 6% 43%

UK % 48% 7% 7% 2% 64% 7% 14% 7% 0% 29%

Total % 47% 5% 5% 1% 58% 14% 10% 8% 3% 35%

3% 0% 3% 3%

2% 5% 7% 0%

3% 3% 5% 1%

Table 8: Decision sponsor Stakeholder: IT Director Only Board Only Senior Executive Only Steering Committee Only Only 1 Stakeholder Senior Executive and IT Director Board and IT Director Steering Committee & IT Director Steering Committee & Senior Executive 2 Stakeholders Steering Committee, Senior Executive, IT Director Board, Senior Executive, IT Director 3 Stakeholders All 4 stakeholders

contract negotiations (50% of UK cases). In the US, we see that more stakeholders are involved in negotiating and defining contracts, probably because the outsourcing deals are relatively bigger in terms of effort and price (see table “Number of Stakeholders Involved in Defining Contracts”). Once again, several respondents indicated on the open-ended questions that more stakeholders should have been involved in negotiations: “More experienced personnel involved in contract negotiations.”—UK IT Director, Travel Company “Use more time of a more experienced manager to negotiate contract.”—UK IS Director, Public Library “More IT involvement in contract.”—UK IT Director, Rental Car Agency “Negotiate aggressively, competitively, through seasoned heavyweight business negotiators.”—UK Head of IT, Chemicals Company Finding: IT managers (82%) and internal lawyers (64%) are the most common stakeholders involved in defining/negotiating IT outsourcing contracts. Respondents were asked to indicate all the stakeholders typically involved in detailing their outsourcing contracts, such as external lawyers, internal lawyers, consultants, suppliers, board members, senior business managers, and IT managers. Thirty-four US and 44 UK people responded to this question.

170 Lacity & Willcocks

In all of the US cases and in 68% of the UK cases, the IT director is involved. Internal lawyers are the next most commonly involved stakeholder, participating in 64% of negotiations (see table “Percentage of Negotiations Involving Stakeholder”). The board, outside consultants, and the suppliers are the least common participants. Outside experts are brought in more frequently in the US than in the UK. US organizations hire external lawyers in 38% of the responding organizations as compared to 20% in the UK. US organizations also hire outside consultants (35%) more frequently than UK organizations (5%). Country differences may be due to the more litigious nature of US society and the availability of such experts in the US. It may also be because, again, many contracts being dealt with in the US part of the sample are relatively bigger and attract more attention and concern. Like our current survey, Willcocks and Fitzgerald (1994) found in a survey of 162 European companies that 53% of companies use multiple stakeholders to define the contract. Unlike our current survey, however, Willcocks and Fitzgerald (1994) found that the most commonly involved stakeholder was internal lawyers, not IT managers. They noted from their case research, however, that “internal lawyers may have little experience of IT outsourcing contracts, as opposed to contracts generally” (p. 294). Perhaps we are witnessing an organizational learning effect. Early customers may have learned not to rely solely on internal lawyers to negotiate IT outsourcing contracts.

CONTRACT COMPLETENESS Finding: In 34% of the cases, respondents have complete contracts by including all important contractual clauses. We asked participants to indicate the types of clauses they include in their IT outsourcing contracts. Our list was generated from prior research on 61 case studies which found that the contract was one of the most important determinants to outsourcing success (Lacity and Willcocks, 1996). People who negotiate outsourcing deals are not necessarily the ones who manage the contract. Thus, it is vital to document the terms of the relationship. Participants were asked which of the following 10 types of contract clauses are typically included in their IT outsourcing contracts: 1. Service level agreements to precisely define the service delivery and quality. 2. Penalty clauses for supplier nonperformance. These clauses do not typically compensate for a customer’s loses, but rather are designed to ensure supplier attention to critical services. 3. Confidentiality clauses to protect customer’s data and information. In the case of public sector outsourcing, citizens are guaranteed that their privacy will not be invaded. 4. Named contract managers to ensure approved supplier staffing of key roles. 5. Intellectual property right clauses to protect the customer’s intellectual property. 6. Warranty clauses on hardware and software to protect assets. 7. Liability and indemnity clauses to hold the supplier accountable in cases of breach of contract or negligence. 8. A force major clause to protect customers in the case of natural disasters, civil wars, strikes, or other causes of work stoppages. 9. Specified arrangements for adapting the contract in the future to help parties adjust to changes in volumes, business requirements, or technology. 10. Early termination provisions to ensure the supplier will help the customer transition to another sourcing option upon contract termination.

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Table 9: Number of stakeholders involved in defining contracts One Stakeholder Group Two Stakeholder Groups Three Stakeholder Groups Four Stakeholder Groups Five Stakeholder Groups Six Stakeholder Groups All 7 Total

US 3 11 5 9 3 3 0 34

US% 9% 32% 15% 26% 9% 9% 0% 100%

UK 22 11 5 4 1 1 0 44

UK% 50% 25% 11% 9% 2% 2% 0% 100%

Total 25 22 10 13 4 4 0 78

Total % 32% 28% 13% 17% 5% 5% 0% 100%

Table 10: Percentage of negotiations involving stakeholders US 34 26 13 13 12 10 1

IT Director Internal Lawyers External Lawyers Senior Executive Consultant Supplier Board

US% 100% 76% 38% 38% 35% 29% 3%

UK 30 24 9 12 2 6 3

UK% 68% 55% 20% 27% 5% 14% 7%

Total 64 50 22 25 14 16 4

Total % 82% 64% 28% 32% 18% 21% 5%

Table 11: Contract completeness 1-2 Clauses Defined 3-4 Clauses Defined 5-6 Clauses Defined 7-8 Clauses Defined 9-10 Clauses Defined Total

US 1 4 14 6 9 34

US% 3% 12% 41% 18% 26% 100%

UK 1 5 4 14 16 40

UK% 3% 13% 10% 35% 40% 100%

Total 2 9 18 20 25 74

Total% 3% 12% 24% 27% 34% 100%

Thirty-four US and 40 UK people responded. To assess contract completeness, we counted the number of clauses typically included in IT outsourcing contracts (see table and chart “Contract Completeness”). In general, UK contracts are more complete than US contracts, which is surprising given the previous finding that the US involves more stakeholders, particularly outside experts, to help define contracts. However, the number of clauses may still not translate into comprehensiveness within each clause, which is where use of a wider group of experts, as in more US organizations, may be making a difference. Nevertheless, the fact that so many US and UK organizations are not focusing on some important contractual clauses must be a common matter for concern.

CONTRACT CLAUSES Finding: The most common contractual clauses are confidentiality clauses (95%) and service level agreements (88%). Most participants have very detailed contracts with confidentiality clauses (95%), specific service level agreements (88%), early termination provisions (84%), and liability

172 Lacity & Willcocks

Table 12: Percentage of contracts with contract provisions Confidentiality Clauses Service Level Agreements Early Termination Clauses Liability and Indemnity Clauses A Force Major Clause Adapting to Change Clauses Intellectual Property Right Clauses Non-performance Penalty Clauses Named Contract Managers Warranty Clauses

US 30 29 29 25 15 24 23 21 15 16

US% 88% 85% 85% 74% 44% 71% 68% 62% 44% 47%

UK 40 36 33 36 34 24 24 25 28 23

UK% 100% 90% 83% 90% 85% 60% 60% 63% 70% 58%

Total 70 65 62 61 49 48 47 46 43 39

Total% 95% 88% 84% 82% 66% 65% 64% 62% 58% 53%

and indemnity clauses (82%) (see table “Percentage of Contracts with Contract Provisions”). We do note some systematic weaknesses, however. Forty-two percent do not name the representatives who will serve as account managers on the supplier side. These key roles must be filled by dynamic individuals with strong leadership, business, negotiating, and problem-solving skills. In a previous study, naming representatives in the contract was cited as a key success factor to the relationship (Lacity and Hirschheim, 1993). Thirty-eight percent of respondents do not include penalty clauses for supplier non-performance. Thus, there are no contractual remedies sought if suppliers fail to deliver on the service levels. Onethird of respondents generally do not include a force major clause to cover disasters such as civil wars, earthquakes, or strikes. Although the odds of a force major are small, the consequences are potentially devastating.

CONTRACT DURATION For each activity outsourced, we asked respondents to indicate the number of years of the contract. Again, the length of a contract is deemed important because prior research has found that customers cannot typically define IT requirements past a three-year time horizon. Contracts longer than three years in duration may become obsolete. If the relationship has power asymmetries, the weaker partner may suffer financial consequences of change (Lacity and Willcocks, 1998). The average US contract is nearly four years long, and the average UK contract is 4.7 years (see table “Contract Duration”). This is a year longer than recommended in the US, and nearly two years longer than recommended in the UK. A two-tailed t-test assuming homoscedasticity (p=.273) and heteroscedasticity (p=.266) indicates there is not a significant difference in sample means. The longest contract signed was a 20-year contract for mainframe operations at a UK public library. The respondent rated the supplier’s performance a “3” (very poor) on a scale of 1 to 10. The respondent cited deteriorating service, lack of supplier responsiveness to client needs, poor supplier staffing of the contract, and unforeseen additional costs not specified in the contract as serious problems. Clearly, the customer’s expectation that a 20year contract could articulate requirements in the long run was unrealistic. The shortest contract duration was six months, used by three customers. These three respondents rate supplier performance an “8-9,” “8,” and a “6.” Overall, short time horizons can generally realize expected benefits more frequently than long-time horizons and may thus lead to higher supplier performance ratings.

Survey of IT Outstanding Experiences 173

Table 13: Contract duration US 3.968 3.190 0.5 15 47

Mean Stand Dev. Minimum Maximum Number of Contracts

UK 4.6779 3.483 0.5 20 68

Overall 4.388 3.384 0.5 20 115

Figure 2: Contract duration in US and UK Contract Duration in US and UK

Number of contracts

25

19%

18%

20

15% 13%

15

8%

7%

10

6%

6%

3%

5

2% 1% 0%

0 .5-1

2

3

4

5

6

7

8

9

10

11

12

0%

0%

13

14

1%

15

1%

20

Number of Years

BENEFITS VERSUS ACTUAL BENEFITS Respondents were asked to check all anticipated benefits and actual benefits of outsourcing from a list of 13 possible benefits. Thirty-five US organizations and 44 UK organizations responded to this question. Expected Benefits. The number one expected benefit was cost reduction (67%). Of the respondents expecting cost savings, two-thirds expected only some cost savings, while onethird expected significant cost savings (see table “Expected Benefits” and chart “Percentage of Respondents Expecting Benefits from IT Outsourcing”). Other commonly expected benefits included better quality service (61%), access to scarce IT skills (56%), and improved flexibility of IT (51%) . It is also interesting to note that very few respondents expected that outsourcing would provide access to new IT (24%). This generally indicates that IT suppliers take over the customer’s in-house functions rather than develop/infuse new IT. And only 15% expected outsourcing to help their cash flow problems. This reason was commonly found in total outsourcing cases (Lacity and Hirschheim 1993), but selective outsourcing lacks the critical mass to significantly affect income statements.

174 Lacity & Willcocks

Other research has also identified cost savings as the major reason companies outsource. Collins and Millen (1995) received 110 questionnaires from CIOs of the top Fortune 500 companies and found that the number one stated reason for outsourcing was headcount cost savings. Willcocks and Fitzgerald (1994) found that “some cost reduction” was the number one ranked anticipated benefit of outsourcing. Although outsourcing is often cited as a tool for focusing on core competencies, it is clear that cost considerations supersede a focus strategy for most organizations. Actual Benefits. What benefits did customers actually receive from outsourcing? In total, over half of respondents achieved cost savings (see table “Actual Benefits”). But of those who achieved cost savings, 69% achieved some cost savings rather than significant cost savings. The second most commonly cited benefit was the refocusing of in-house IT staff on more value-added IT work. Given that most respondents outsource infrastructure and operations, perhaps the IT staff was able to focus more on business applications. The third most commonly realized benefit was improved IT flexibility (41%). This often occurs because IT costs become more variable with outsourcing, thus contract prices adapt to volume fluctuations more easily than insourcing, in which most costs are fixed. Better quality service was the forth most commonly realized benefit, occurring in 39% of responding organizations. It is noticeable that more US organizations are getting benefits on the more specifically IT targets, while more UK organizations are getting relatively better benefits on financial and business dimensions. It is not clear why this is the case, though it may reflect where client effort was actually placed during post-contract management. Expected versus Actual Benefits. There is a noticeable gap between “Expected Benefits” and “Actual Benefits.” Specifically, among the list of all 13 benefits, expected benefits always exceed the actual benefits. Previous research has also generally indicated a gap in expectations (Chapman and Andrade, 1997). Prior to the signing of a contract, both parties are typically enthusiastic and optimistic. Suppliers have often noted how difficult it is to foster realistic expectations among customers (See November 1998 edition of Infoserver: The Journal for Strategic Outsourcing Information on http://www.infoserver.com). One current IT outsourcing customer notes: Table 14: Expected benefits EXPECTED BENEFITS Cost Reduction Some Cost Reduction Significant Cost Reduction Better Quality Service Access to Scarce IT Skills Improved IT Flexibility Refocus In-house IT Staff Improved Use of IT Resource Focus on Core Business Improved Business Flexibility Better Management Control Access to New IT Balanced Processing Loads Assist Cash Flow Problems

US 23 17 6 20 18 17 17 16 13 11 9 6 7 4

US% 66% 49% 17% 57% 51% 49% 49% 46% 37% 31% 26% 17% 20% 11%

UK 30 18 12 28 26 23 23 20 21 19 19 13 5 8

UK% 68% 41% 27% 64% 59% 52% 52% 45% 48% 43% 43% 30% 11% 18%

US & UK 53 35 18 48 44 40 40 36 34 30 28 19 12 12

UK & UK % 67% 44% 23% 61% 56% 51% 51% 46% 43% 38% 35% 24% 15% 15%

Survey of IT Outstanding Experiences 175

“I’ve actually been an outsourcer before. I’ve been on a bidding side. I understand the challenges a supplier faces. There is generally an expectation of management on the user side that here is this knight in shining armor, I’ll get three times better service at half the price. And also what happens, that expectation grows as you get closer to contract, so you have this large gap in expectations from the start.” — Contract Administrator, Public Sector Organization However, despite the gap in expected and actual benefits, the next finding shows that customers gave their suppliers good performance ratings overall.

CUSTOMER RATING OF SUPPLIER PERFORMANCE Finding: Overall, customers’ mean rating on 113 contracts indicates a “good” performance by suppliers. UK respondents were asked to rate the supplier performance of their largest IT outsourcing contract, and US respondents were asked to rate the performance of their three largest contracts. A Likert scale from 0 to 10 was used, with 0 and 1 indicating poor performance, 2 to 4 indicating satisfactory performance, 5 to 7 indicating good performance, and 8 to 10 indicating excellent performance. Seventy-six respondents rated 113 contracts. The overall mean response is 6.47, indicating that respondents are generally pleased with the performance of their outsourcing suppliers (See table and chart, “Customer Rating of Supplier Performance”). Five respondents rate the performance of their suppliers as a perfect 10. Only 7 respondents give suppliers a “0” performance rating. T-tests assuming Figure 3: Percentage of respondents expecting benefits from IT outsourcing 60 67%

50

61% 56% 51%

40

51% 46%

43% 38%

30

36%

15%

15%

Balanced processing loads

Assist cash flow problems

24%

20 10

Access to new IT

Better management control

Improved business flexibility

Focus on core business

Improved use of IT resource

Refocus in-house IT staff

Improved IT flexibility

Access to scarce IT skills

Better quality service

Cost reduction

0

176 Lacity & Willcocks

Table 15: Actual benefits Actual Benefit Cost Reduction Some Cost Reduction Significant Cost Reduction Refocus In-house IT Staff Improved IT Flexibility Better Quality Service Improved Use of IT Resource Access to Scarce IT Skills Improved Business Flexibility Focus on Core Business Better Management Control Access to New IT Balanced Processing Loads Assist Cash Flow Problems

US 14 12 2 13 16 14 15 15 9 10 6 9 4 2

US% 40% 34% 6% 37% 46% 40% 43% 43% 26% 29% 17% 26% 11% 6%

UK 28 17 11 22 16 17 16 16 16 15 11 7 4 6

UK% 64% 39% 25% 50% 36% 39% 36% 36% 36% 34% 25% 16% 9% 14%

Total 42 29 13 35 32 31 31 31 25 25 17 16 8 8

Total% 53% 37% 16% 44% 41% 39% 39% 39% 32% 32% 22% 20% 10% 10%

both homoscedasticity (p=.17) and heteroscedasticity (p=.16) indicate no significant differences between US and UK respondents. How do we reconcile the findings that show customers do not receive the level of anticipated benefits, yet report an overall good supplier report card? One plausible explanation is that managing information technology is a significant challenge regardless of the sourcing strategy. While customers may initially hope for radical improvement under a supplier’s management regime, customers may not be surprised when the supplier encounters the same obstacles, such as a scarcity of IT skills, pressures to provide excellent service with a limited budget, changing user specifications, etc. Indeed, one CIO for a US Petroleum company noted, “They bitched about IT before [outsourcing], they bitch now—but at least it’s costing me less.”

EXTENT OF PROBLEMS/ISSUES ENCOUNTERED WITH OUTSOURCING Finding: Overall, 76% percent of responses indicated no problems or only minor problems with outsourcing. In addition to assessing overall supplier performance, participants were asked to indicate whether they had experienced any strategic, cost, managerial, operational, contractual, or technical difficulties with IT outsourcing. In total, respondents were asked to comment on 24 potential problem areas. For each of these potential problems, respondents were asked to indicate whether it was a “continuing serious problem,” a “problem that was difficult to resolve,” a “minor problem,” or “no problem/not a difficulty.” Thirty-two US and 44 UK people responded (See table “Extent of Problems/Issues Encountered with Outsourcing”). In total, 76 respondents commented on 24 potential problem areas, yielding a total of 1,824 check-marks. Overall, only 8% of check-marks indicated “continuing serious problems,” 17% indicated “problems that were difficult to resolve,” 33% indicated “minor problems” and 44% indicated “no problems/not a difficulty.” Below we discuss some of the more serious

Survey of IT Outstanding Experiences 177

problems encountered with outsourcing. It is important to keep in mind that overall, 76% percent of responses indicated no problems or only minor problems with IT outsourcing. At the same time, it is clear that sizeable minorities of organizations really do have serious issues in certain areas. Strategic Issues. Considering all five potential strategic problem areas, the vast majority of responses (79%) indicate no strategic problems or only minor strategic problems. Of the few respondents that do experience serious strategic problems, 11 complain that the supplier does not understand their business, 7 complain that the corporate strategy is no longer aligned with the IT strategy, and 4 complain of poor strategic planning for IT. Cost Issues. Considering three possible cost problems, 36% of responses indicate no cost problems and 39% of responses indicate only minor cost problems. However, 23 (31%) Figure 4: Percentage of respondents actualy ahcieving benefits from IT outsourcing

50 53%

40

44% 41% 39%

30

39%

39% 32%

32% 22%

20

20%

10

10%

10%

Table 16: Customer rating of supplier performance Mean Standard Deviation Number of Contracts Rated

US 6.72 2.57 68

UK 6.09 2.11 45

Overall 6.47 2.42 113

Assist cash flow problems

Balanced processing loads

Access to new IT

Better management control

Improved business flexibility

Focus on core business

Improved use of IT resource

Access to scarce IT skills

Better quality service

Improved IT flexibility

Refocus in-house IT staff

Cost reduction

0

178 Lacity & Willcocks

responses indicate severe/difficult problems with services beyond the contract. And 20 (26%) responses characterize “cost escalation due to contract loopholes,” as serious or difficult problems, indicating a weakness in cost implications of contracts. For example, several organizations did not realize they were accountable for software license fees, which can eat away hundreds of thousands of dollars—even millions—in expected savings. Sixteen (22%) respondents experience “difficulties in monitoring/controlling costs” as severe/difficult to resolve. Thus, some respondents may not be able to track whether cost savings are realized or not. These cost findings may provide insight into why 67% expected cost savings but only 53% achieved cost savings. Perhaps expected cost savings are not always realized because customers fail to fully define/understand requirements in the contract. Any additional service not defined in the contract will typically trigger excess fees, thus deteriorating cost savings. Managerial Issues. Once again, most managerial problems are only of a minor nature. Seventy-two percent of responses indicate no managerial troubles or only minor managerial troubles. However, 32 (42%) responses indicate that the supplier does not properly staff the contract, causing serious or difficult problems. Other serious or difficult problems are attributed to the customer, such as 21 responses (28%) complaining that the in-house staff was resistant to outsourcing and that in-house managerial skills to manage the contract are inadequate (21 responses; 28%). Operational Issues. Overall, most respondents experience no operational problems (34%) or only minor problems (40%). Twenty-nine responses (38%) indicate serious or difficult problems attributable to service level definitions. This is surprising, given that 88% have service level agreements defined in the contract. However, Chapman and Archade (1997) found that “today’s metrics don’t provide the information needed to identify and resolve problems” (p. 47). Contractual/Legal Problems. Due to differences in the US and UK surveys, we analyzed the only contractual issue addressed in both surveys—defining the contract. The majority of respondents cite only minor (33%) or no difficulties (42%) with defining the contract. In the lessons learned section, many respondents cited a well-defined contract as critical to the success of the relationship: “Get fixed pricing and thoroughly define deliverables.” —Director of Computing and Communication Services “[Have] specific service levels.”—Manager of IT Services “[Have] specific service levels, define the baseline, and have an out clause.”—CIO “Clearly define objectives and detailed contractual arrangements.”—Corporate Manager of Corporate Systems “Ensure performance measures are clear and calculable.”—Manager of IS Administration “Get good detailed help—legal, metrics, and consultants. Keep senior management out of all but the final negotiations.” — Project Manager “You need measurable milestones, performance incentives and penalties, and a good contract manager.—Project Manager

Survey of IT Outstanding Experiences 179

“Contract performance specs.”—VP of Information Services “Contracts must be customer focused with rewards and penalties linked to customer satisfaction.”—Director of IT Services “Understand what you want to accomplish with the contract. Move slowly to start with—pilot first before you give away the keys.”—CIO And one dissenting comment: “Flexibility is the key to success.”—CIO Technical Issues. Most respondents have minor (24%) or no technical troubles (54%). But 24 (32%) complain of a shortage of supplier’s IT skills. On the open-ended questions, several respondents reiterated their complaints of poor supplier skills and staffing of the contract: “The vendor lacked technical knowledge.”—UK Head of IS, Financial Services Company “Should have ascertained staffing commitment from the vendor.”—UK Manager of IT, Financial Services Company “The vendor did not understand our business.”—UK Head of IS, Financial Services Company “Watch out for poor talent assigned to your project.”—US Director of Information Services “Beware of high turnover of vendor staff.”—US Manager of Information Resources “Suppliers gave us IT expertise, but they are too driven to make [a] profit.”—no title provided Twenty-three percent complain outsourcing led to duplicate systems. Only 17% complain that the supplier recruits inexperienced staff. Overall, we would expect any IT activity—whether it was insourced or outsourced— to have at least some problems. When problems do occur, they stem from both the customer and supplier side. Although most problems are only of a minor nature, this question provides opportunities for improving the success of IT relationships (see section Managerial Implications of Findings).

REDUCTION IN IT STAFF Finding: 63% of companies reduced IT headcount as a consequence of IT outsourcing. We asked respondents whether outsourcing led to reduced IT staff, and if yes, what percentage among several methods of staff reduction tactics was used. Of the 75 respondents that have outsourced and answered this question, 47 (63%) resulted in a reduction of IT staff. US and UK results are nearly identical (see table “Percentage of Organizations in Which IT

180 Lacity & Willcocks

Figure 5: Customer rating of vendor performance Customer Rating of Vendor Performance 113 Contracts Rated Mean Response = 6.47 30

Number of contracts

25%

25 19%

20 14%

15

14%

10 5%

5

4% 2%

6% 4%

4%

2%

0 0 1 Poor

2

3 4 5 Satisfactory

6

7 Good

8

9 10 Excellent

Outsourcing Reduced Staff”). Given that IT salaries are the largest portion of IT budgets, one would expect staff reductions were required to realize expected cost savings. Nearly a tie for the most common method of IT staff reduction were transferring staff to the supplier (32%) and natural attrition/termination (i.e., redundancy) (31%). Internal staff transfer was the least commonly used method (17%) (see table “Percentage of Organizations Using Each Method to Reduced IT Staff”). Most respondents (70%) report no problems with transferring staff to the supplier. Thirty percent, however, reported difficulties. For example, a UK Assistant Group Director for a transportation company transferred 11% of his in-house staff when he outsourced almost all of the IT infrastructure. He cited the following problems: “Not all the staff wanted to go. Pension rights were not equal. Employees did not want to change locations.” One UK IT Director for a large record company wrote that “outsourcing is generally bad for morale. That hurt us because our current systems are too people-specific because we have poor in-house documentation.”

REASONS FOR REJECTING OUTSOURCING Finding: The most common reason for rejecting outsourcing is expense (23%). Respondents were asked whether their organizations had ever considered outsourcing, but rejected the option. Twenty-two US organizations and 44 UK organizations responded to this question. Respondents reported on 125 instances of rejecting outsourcing. We also asked respondents to indicate the reason(s) they rejected outsourcing. (See table “Reasons for Rejecting Outsourcing”).

Survey of IT Outstanding Experiences 181

Table 17: Extent of problems/issues encoutered with outsourcing S trategic Issues: 1. Supplier’s lack of understanding of your business 2. Failure to align corporate strategy with IT strategy 3. Poor strategic planning of IT 4. Defining intellectual property rights 5. Defining data protection procedures Total # of Strategic Issues Cost Issues: 6. Cost escalation as a result of contract loopholes 7. Difficulties in controlling/monitoring costs 8. Costs for additional services beyond contract Total # of Cost Issues Managerial Issues: 9. Loss of control over IT operations 10. In-house staff resistance to outsourcing 11. Poor supplier staffing of contract 12. M anagerial skills shortage 13. Lack of supplier training for staff Total # of M anagerial Issues Operational Issues: 14. Getting different contract suppliers to work together 15. Defining service levels 16. Coordinating IT work with supplier 17. Communication with supplier 18. Lack of supplier responsiveness to client needs 19. Deteriorating service Total # of Operational Issues Contractual Issues: 20. Defining the outsourcing contract Technical Issues: 21. Supplier failure to upgrade IT 22. Duplication of systems 23. Policy to recruit inexperienced IT staff 24. IT skills shortage affecting supplier’s service Total # of Technical Issues Overall Total Overall Percentage

Serious Problem

Difficult Problem

Minor Problem

Not a Problem

11 7 4 0 2 24 6%

14 12 15 8 5 54 14%

30 18 16 23 27 114 30%

21 39 41 45 42 188 49%

76 76 76 76 76 380

10 8 8 26 11%

10 8 15 33 14%

31 34 23 88 39%

25 26 30 81 36%

76 76 76 228

3 8 9 5 5 30 8%

8 13 23 16 10 70 18%

24 22 21 29 19 115 30%

41 33 23 26 42 165 42%

76 76 76 76 76 380

9 6 2 2 8 7 34 7%

14 23 14 10 18 6 85 19%

27 33 39 33 23 28 183 40%

26 14 21 31 27 35 154 34%

76 76 76 76 76 76 456

7 9%

12 16%

25 33%

32 42%

76

3 5 3 6 17 6% 138 8%

9 13 10 18 50 16% 304 17%

20 16 16 20 72 24% 597 33%

44 42 47 32 165 54% 785 43%

76 76 76 76 304

Total

1824

The top reason for rejecting outsourcing is that the outsourcing option was deemed more expensive than insourcing (23%). This finding makes sense because respondents cite cost savings as the number one expected IT outsourcing benefit. Thus, if cost savings can not be expected, outsourcing is likely to be rejected. The next most common reason for rejecting outsourcing is that a supplier appeared to provide no additional benefits over insourcing (19%). Presumably, such benefits would not be limited to costs, but to service as well. Few respondents (6%) reject outsourcing because they could not find a suitable supplier. The outsourcing market has clearly matured over the last decade, with many small niche suppliers as well as mega-suppliers offering services. And only 1 respondent indicates that his organization has a policy against outsourcing.

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Respondents were also invited to provide additional reasons/comments not listed on our survey. Only two respondents wrote comments: “The supplier was unable to convince us that they could meet our service standard.”—US Director, IT Enterprises “Potential of IT department to provide strategic capability.”—US Senior Financial Analyst for IT Financing

CANCELED CONTRACTS Respondents were asked whether they canceled any IT outsourcing contracts in the past five years. If they did, we asked about the outcome of the cancellation. Of the 79 people who responded to this question, 32% of organizations have canceled one or more IT contracts. Across countries, the United Kingdom has a higher percentage (41%) of organizations that have canceled contracts compared to the United States (20%) (see table “Number of Organizations That Have Canceled Contracts”.) The seven US organizations canceled a total of 15 contracts and the 18 UK organizations canceled a total of 20 contracts. The most common outcomes were to change suppliers (51%) and bring the activity back in-house (34%). The least common outcomes were litigation (3%) and renegotiation (11%). These results are somewhat contrary to other findings. The Gartner Group, based on a survey of 250 CIOs, estimates that 75% of all IT outsourcing customers will renegotiate their deals rather than bring the activity back in-house. Of this 75%, Gartner expects 10% of customers to terminate their contracts early and 20% to switch suppliers (Caldwell and Table 18: Percentage of organizations in which IT outsourcing reduced staff Number of Organizations That Reduced IT Staff as a Consequence of Outsourcing Number of Organizations That Did Not Reduce IT Staff as a Consequence of Outsourcing Total Number of Respondents

US

US%

UK

UK%

Overall

Overall %

21

62%

26

63%

47

63%

13 34

38% 100%

15 41

37% 100%

28 75

37% 100%

Table 19: Percentage of organizations using each method to reduce IT staff Method of Reducing Staff Transfer to Supplier Redundancy (Attrition and Termination) Replace In-house Staff with Supplier Staff Internal Staff Transfer Total

US 13

US% 29%

UK 14

UK% 36%

Overall 27

Overall % 32%

17

38%

9

23%

26

31%

8 7 45

18% 16% 100%

9 7 39

23% 18% 100%

17 14 84

20% 17% 100%

Survey of IT Outstanding Experiences 183

Table 20: Extent of problems with transfer of IT staff No problems transferring staff Yes, problems transferring staff Total number of respondents

US 9 4 13

US% 69% 31% 100%

UK 7 3 10

UK% 70% 30% 100%

Overall 16 7 23

Overall % 70% 30% 100%

McGee, 1997; McGee, 1997). Experts argue that renegotiation is preferred over switching suppliers or terminating the contract: “When the contract no longer fits the users’ needs, both sides will sit down and renegotiate the contract. Very few users exercise the termination of the contract; they’re too dependent on the outsourcer.”—Harry Glasspiegal, partner at Shaw, Pittman, Potts, and Trowbridge

DISCUSSION Overall, US and UK respondents are pleased with IT outsourcing: • Respondents rated overall supplier performance as “good” • Respondents mostly realized the benefits they expected • Respondents characterized the majority of problems as “minor” in nature. The healthy IT outsourcing report card is likely explained by the scope and type of IT outsourcing practiced by responding organizations. The vast majority of respondents in both countries pursue selective outsourcing rather than total outsourcing. Prior research has found that most companies are successful with their selective outsourcing strategies: • In a survey of 110 Fortune 500 companies, Collins and Millen (1995) found that 95% realized increased flexibility, 95% focused in-house staff on IT core competencies, 86% realized personnel cost savings, and 88% improved service. • Lacity and Willcocks (1998) studied 61 sourcing decisions, including total outsourcing, total insourcing, and selective outsourcing. That study found that 85% of selective outsourcing decisions were successful, whereas only 29% of total outsourcing decisions and 67% of total insourcing decisions were successful. The healthy report card may also be explained by the types of IT activities selected for outsourcing. Respondents in both countries generally targeted IT infrastructure activities— such as disaster recovery, mainframe operations, network management, midrange operations, PC support, and help desk operations—rather than IT development or IT strategy. Our findings are consistent with prior research. Chapman and Andrade (1997) found that the three most successful IT outsourcing activities are data processing operations, network management, and help desk functions. Grover et al. (1996) conducted two surveys (n=68 and n=188) and correlated the types of IT functions outsourced with perceived success. They found a high rate of perceived success associated with outsourcing systems operations and telecommunications, but outsourcing applications development and systems management “did not lead to increased satisfaction” (p. 103). Willcocks and Fitzgerald (1994) found that it was easier for participants to outsource “technically mature” activities. Customers understood how to cost and evaluate such activities and therefore could negotiate a sound contract. IT infrastructure, such as mainframe operations, networks, and telecommunications are often technically mature and may be successfully outsourced.

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Table 21: Reasons for rejecting outsourcing

Outsourcing Deemed Too Expensive In-house IT Able To Achieve Same Benefits Lack of Identifiable Benefits Concern About Loss of Operational Control I.T. Activity Deemed As Too Strategic No Suitable Supplier Was Found Company Policy Not To Outsource Total

US 14

US% 24%

UK 15

UK% 22%

Total 29

Total % 23%

13 11

22% 19%

11 12

16% 18%

24 23

19% 18%

10 7 3 0 58

17% 12% 5% 0% 100%

12 12 4 1 67

18% 18% 6% 1% 100%

22 19 7 1 125

18% 15% 6% 1% 100%

Table 22: Number of organizations that have canceled contracts US Number of Organizations That Have Canceled at Least 1 Contract 7 Number of Organizations That Have Never Canceled a Contract 28 Total Number of Respondents 35

US%

UK

UK%

Overall

Overall %

20%

18

41%

25

32%

80% 100%

26 44

59% 100%

54 79

68% 100%

Table 23: Outcome of canceled contracts Change of Supplier Brought Activity In-house Renegotiation Litigation Total Number of Canceled Contracts

US 5 8 2 0

US% 33% 53% 13% 0%

UK 13 4 2 1

UK% 65% 20% 10% 5%

Overall 18 12 4 1

Overall % 51% 34% 11% 3%

15

100%

20

100%

35

100%

Overall, the survey findings across the US and UK are similar. In addition to the similar supplier report cards and types of IT activities outsourced mentioned above, similar US and UK practices include: • Decision sponsors (typically IT director) • Contract negotiators (IT directors and internal lawyers) • Contract provisions (Confidentiality clauses, service level agreements, and early termination clauses) • Contract duration (4.388-year average) • Expected benefits (cost reduction, better quality service, access to scarce IT skills) • Supplier ratings (6.47 on a 10-point scale) • Extent of problems encountered (mostly minor or no problems reported)

Survey of IT Outstanding Experiences 185

• • • •

Percentages of IT outsourcing resulting in staff reduction (63% overall) Methods to reduce IT staff (transfer to supplier and redundancy) Percentage experiencing problems with transferring staff (30% overall) Reasons for rejecting outsourcing (too expensive; in-house staff can achieve same benefits) Because the US and UK samples showed only marginal statistical differences in terms of annual revenues and IT operating budgets, similar results may be based on the sample spreads selected for each country. But more likely, similar practices and outcomes may be a result of a shared Anglo-Saxon culture. Prior studies have found other IT-enabled management practices such as business process reengineering (Willcocks & Currie, 1997), client server implementations (Subramanian & Lacity, 1997), and system development practices (Taylor-Cummings & Feeny, 1997) to be similar in the US and UK. One explanation for the similarities in US and UK findings is an institutional isomorphic effect where outside experts seed client organizations with similar standards and methods. In the IT outsourcing arena, for example, Technology Partners (a Houston-based outsourcing consulting firm), Shaw & Pittman, or Millbank & Tweed (US-based IT outsourcing legal firms) participated in 3 out of 4 US and UK billion dollar contracts studied. Furthermore, the Gartner Group and Compass were commonly used as the benchmarking firms to help assess IT performance (Lacity and Willcocks, 1999). In addition, three out of four US and UK organizations studied by Lacity and Willcocks (1999) belong to the International Information Technology Users Group (IITUG), which provides many opportunities for information exchange. In this way, organizational learning is transferred across organizations, and practices are quickly disseminated among US and UK organizations. However, some US and UK differences were noted and explained throughout the paper: • US respondents (8%) totally insourced less frequently than UK respondents (30%). • US respondents (31%) outsource midrange computing less frequently than UK respondents (73%). • US respondents (63%) outsource help desks more frequently than UK respondents (32%). • US respondents (29%) use a single supplier more frequently than UK respondents (9%). • US respondents (9%) use only 1 stakeholder to define contracts less frequently than UK respondents (50%). • US respondents (44%) include 7 to 10 important contract clauses less frequently than UK respondents (75%). • US respondents (20%) have cancelled IT outsourcing less frequently than UK respondents (41%). • US respondents (33%) changed suppliers less frequently than UK respondents (65%). Many of these differences may well be due to one or combination of factors, the main ones being–a more matured approach to outsourcing in the USA, larger outsourcing deals, and relatively larger organizations represented in the sample. As we plan to replicate this survey every three years, we will be able to track how IT outsourcing practices and outcomes evolve over time and across countries.

MANAGERIAL IMPLICATIONS OF FINDINGS Despite the overall good report card on IT outsourcing, there are opportunities for improvement. Several respondents pointed to key areas they would improve in the future. Below are lessons for customers and suppliers.

186 Lacity & Willcocks

Lessons for Customers: What Needs to Be Improved? 1. Should more people be involved in evaluation? In 58% of organizations, only 1 stakeholder makes sourcing decisions. Case study research has found that successful sourcing decisions require a mix of political power and technical skills. Political power helps to enforce the larger business perspective—such as the need for organization-wide cost cuts—as well as the “muscle” to implement such business initiatives (Lacity and Willcocks, 1998). Technical expertise on IT services, service levels, measures of performance, rates of technical obsolescence, rates of service growth, price/performance improvements, and a host of other technical insights are needed to develop requests-for-proposals and to evaluate supplier bids. The question is, how many stakeholders are needed to cover these skillsets? The survey found that IT managers are the sole sponsors of 47% of outsourcing decisions. Because most respondents in this survey pursue selective outsourcing on a piecemeal basis, IT managers may have enough power, authority, and knowledge to initiate and sponsor sourcing decisions without involving other stakeholders. In 11% of responding organizations, only the board, senior executive, or steering committee makes the decision. Most research agrees that these stakeholders should not be the sole evaluators. Lacity and Willcocks (1998) found that senior executives realized their expected benefits only 40% of the time when they outsourced IT without IT’s input. Chapman and Andrade (1997) note: “Several major outsourcers make a point of marketing their services only to executive management. They are introduced to the MIS organization only after upper management has decided to do the outsourcing. When they get to MIS, the outsourcers are not offering a service; they are implementing a fiat. How can an outsourcer know more about a client’s business needs than the internal MIS organization? They can’t.” (p. 134) 2. Better communications with in-house IT staff during evaluation. A common problem was in-house staff resistance to outsourcing (43%). Outsourcing evaluations almost always affect IT staff moral. When senior managers are evaluating IT outsourcing, they often debate whether they should inform the IT staff. Lacity and Hirschheim (1995) found that IT staff always found out, anyway. Lack of formal communication bred distrust and often premature departure of the most talented staff. What can be done? Lacity and Hirschheim (1995) have shown that inviting the IT staff to submit an internal bid was an effective way to prevent staff resistance. Internal bids can be a catalyst for creativity and a galvanizing force among employees. The staff focuses on the task of improving IT to compete with external supplier bids rather than on opposing management’s evaluation. And often times, internal bids proved superior to external bids. 3. Better defined contracts. The survey indicates that 25% of customers experienced trouble defining contracts. And certainly the barrage of open-ended responses indicates a need for better contracts, particularly better service level agreements. Perhaps organizations might benefit from the use of more external consultants and lawyers to help define contracts, given that only 28% of respondents hire external lawyers and only 18% use external consultants (see also Willcocks and Kern, 1998). 4. Be careful of outsourcing too many key people. One of the most common customer complaints is poor supplier staffing of the contract (42% experiencing severe or difficult problems). Customers must realize that when they outsource, they lose control over human

Survey of IT Outstanding Experiences 187

resources. Transferred employees now work for the supplier, and the supplier has a right to assign employees as they see fit. To protect themselves, customers can demand clauses that focus on outputs, such as productivity and quality measures, or inputs, such as requiring a certain skillset, a specified number of years experience, and specified training for different job categories. 5. Better post-contract management infrastructure. The survey also indicates that customers may not create a proper management infrastructure to support the supplier relationship. Customers claimed they had severe or difficult trouble coordinating work among multiple suppliers (30%) and lack of in-house managerial skills (28%). Organizations must plan to retrain or recruit people to properly manage contracts, coordinate user demand and supplier supply, resolve conflicts, monitor supplier performance, etc. (See Willcocks and Feeny [1997] and Feeny and Willcocks [1998] for nine core IT capabilities that cannot be outsourced.)

Lessons for Suppliers: What Needs to Be Improved? 1. The key lesson for suppliers is to help their customers set realistic expectations. The survey found that customers expected more benefits from IT outsourcing than were achieved. Although suppliers focus on the advantages of outsourcing to win contracts, suppliers need to help customers be realistic. Suppliers typically cannot reduce their customer’s IT costs while radically improving their service, although customers apparently expect this. When customers ask suppliers, “Can you do X?” suppliers need to do more than say yes—suppliers need to explain what doing X would require in terms of costs and other resources. 2. Explain staffing policies to the customer. Forty-two percent of respondents complained about poor supplier staffing. Many customers may have unrealistic expectations because they assume suppliers can obtain scarce IT skills for less money. But if the supplier pays an SAP expert $120,000 per year, they must certainly charge the customer a proportional amount for the expert’s time. Suppliers need to explain who will staff what functions on the account. Will new hires work on the account? What training will be given to transferred employees? How many years of experience are required to fill each job category? Will industry experts or technical experts be moved from other accounts to this account? Does an infusion of scarce IT skills or emergency IT skills trigger customer excess fees? 3. To help ensure the success of the contract, suppliers should help make sure the customer has a proper infrastructure to manage and coordinate the contract. Suppliers need to help the customers create an environment for success. This includes agreeing on how to monitor supplier performance, explaining how customers are charged for services, and showing customers what reports they will receive. Suppliers and customers must work together to define how users will communicate with supplier employees—do they call them directly? Do they use a liaison? Customer contract managers must understand how user requests will affect volumes and subsequently affect costs.

CONCLUSION The sourcing market for information technology continues to grow and evolve. The more pervasive (but less audible or visible) trend continues to be the selective outsourcing of information technology to multiple suppliers for a specified subset of IT activities. This

188 Lacity & Willcocks

survey found that selective outsourcing, particularly of IT infrastructure activities, is generally successful. The benefits of selective sourcing included: • cost reduction (53%) • refocus of in-house staff (44%) • improved IT flexibility (41%) • better quality service (39%) • access to scarce IT resources (39%) Why is selective outsourcing successful? Information technology spans a variety of activities in terms of business contribution, integration with existing processes, and level of technical maturity. Such diversity often demands tailored solutions. Typically, no one supplier or internal IT department possesses the experience and economies of scale to perform all IT activities most effectively. While some activities, especially stable IT activities with known requirements, may be easily outsourced, other IT activities often require much management attention, protection, and nurturing to ensure business success. However, selective sourcing does have some downsides, which include: 1) increased transaction costs associated with multiple evaluations, multiple contract management; and 2) potential lack of integration, cooperation, and coordination among multiple sources. The findings on selective outsourcing are consistent with prior studies. Despite the media attention on mega-deals and new multi-billion dollar contracting options such as “value-added” deals, cosourcing, and equity exchange-deals, surveys continue to show that IT sourcing decisions are targeted in scope and are driven by cost considerations. These practices—while warranting less press coverage—have certainly fueled the ever expanding market for global IT services.

ENDNOTE 1

Readers interested in the survey instrument are asked to contact the authors directly.

REFERENCES Apte, U., Sobol, M., Hanaoka, S., Shimada, T., Saarinen, T., Salmela, T. and Vepsalainen, A. (1997). IS outsourcing practices in the USA, Japan, and Finland: A comparative study. Journal of Information Technology,12(4), 289-304. Arnett, K. and Jones, M. (1994). Firms that choose outsourcing: A profile. Information & Management, 26, 179-188. Caldwell, B. (1996). The new outsourcing partnership. InformationWeek, 24 June, 585, 50-64. Caldwell, B. and McGee, M.(1997). No big savings—Too many outsourcing deals don’t pay off as expected. InformationWeek, 10 March, Issue 621, TechWeb News. Chapman, R. and Andrade, K. (1997). Insourcing After Outsourcing. New York: Amacom. Collins, J. and Millen, R. (1995). Information systems outsourcing by large American industrial firms: Choices and impacts. Information Resources Management Journal, 8(1), 5-13. Currie, W. and Willcocks, L. (1997). New strategies in IToOutsourcing. Business Intelligence. London. Dekleva, S. (1994). CFOs, CIOs, and outsourcing. Computerworld, 28(20), 96.

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Feeny, D. and Willcocks, L. (1998). Core IS capabilities for exploiting information technology. Sloan Management Review, 39(3), 9-21. Foley, A. (1993). Hong Kong busks Asia services trend. ComputerWorld, May, 13(1), 56. Hong Kong. Grover, V., Cheon, M. and Teng, J. (1994).A descriptive study on the outsourcing of information systems functions. Information & Management, 27, 33-44. Grover, V., Cheon, M. and Teng, J.(1996). The effect of service quality and partnership on the outsourcing of information systems functions. Journal of Management Information Systems, 12(4), 89-116. Halvey, J. and Melby, B.(1996). Information Technology Outsourcing Transactions: Processes, Strategies, and Contracts. New York: John Wiley & Sons. Lacity, M. and Hirschheim, R. (1993). The information systems outsourcing bandwagon. Sloan Management Review, 35(1), 73-86. Lacity, M. and Hirschheim, R. (1995). Beyond the Information Systems Outsourcing Bandwagon: The Insourcing Response. Chicester: John Wiley & Sons. Lacity, M. and Willcocks, L. (1996). Best practices in information technology outsourcing. Oxford University Executive Briefing, Templeton College, Oxford University. Lacity, M. and Willcocks, L. (1998). An empirical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, September, 22(3), 363-408. Lacity, M., Willcocks, L. and Feeny, D.(1995).IT outsourcing: Maximizing flexibility and control. Harvard Business Review, May-June, 84-93. Lacity, M., Willcocks, L. and Feeny, D. (1996). The value of selective IT sourcing. Sloan Management Review, Spring, 37(3), 13-25. Lacity, M. and Willcocks, L. (1999). Global Information Technology Outsourcing: In Search of Business Advantage, Unpublished Manuscript. McGee, M. (1997). Measuring outsourcing’s ROI. InformationWeek, Issue 641, 28 July, TechWeb News. Menagh, M. (1995). Driving a hard bargain. Computerworld, 29(32), 69-76. Sobel, M., and Apte, U. (1995). Domestic and global outsourcing practices of America’s most effective IS users. The Journal of Information Technology, 10(4), 269-280. Subramanian, A. and Lacity, M. (1997). Managing client server implementations: Today’s technology, yesterday’s lessons. Journal of Information Technology, 12(3), 169-186. Taylor-Cummings, A. and Feeny, D. (1997). The development and implementation of systems: Bridging the user-IS gap. In Managing IT as a Strategic Resource, 169-198. New York: McGraw Hill. Willcocks, L. and Currie, W. (1997). Does radical re-engineering really work? Emerging issues in strategic projects. In Managing IT as a Strategic Resource, 238-270. New York: McGraw Hill. Willcocks, L. and Feeny, D. (1997). Core capabilities in IT. Oxford Institute of Information Management Working Paper, Templeton College Oxford University, England. Willcocks, L. and Fitzgerald, G. (1994). A Business Guide to Outsourcing Information Technology: A Study of European Best Practice in the Selection, Management and Use of External IT Services. Business Intelligence, London. Willcocks, L. and Kern, T. (1998). IT outsourcing as strategic partnering: The case of the UK inland revenue. European Journal Of Information Systems, 7, 29-45. Willcocks, L. and Lacity, M. (Eds.). (1998). Strategic Sourcing Of Information Systems. Chichester: John Wiley & Sons.

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Chapter XIII

Management Integration Through Software Applications: Japanese Manufacturing Firms in the UK Exert Control John Kidd and Tessa Yuk Lan Yau Aston Business School, Birmingham, UK

Through the 1970’s to the present time the governance of the Japanese firm overseas has changed, moving towards a more international form of operation rather than operating as a peripheral organization based solidly on the Japanese headquarters office. Notwithstanding the evolution of their formal and informal management structures this research questions in detail the nature of computer software that may have been imported from Japan to the UK to control imported production systems and/or to control management data flows. These research questions stem from evidence noted in the 1980’s that imported Japanese production machines contained Japanese language instructions beneath their cover plates: so when maintenance was to take place, the UK engineers became baffled and then frustrated at their inability to translate the “instructions.” In the research reported here, we are essentially asking if the computer programs used to control this imported machinery carry embedded Japanese documentation which may prove difficult to interpret by software engineers in the UK? As an adjunct to this question, we note the origin of their control software (and other software used by the Japanese production subsidiaries in the UK), its modification in the UK (by whom), and the natural language used to communicate with the HQs in Japan. As an emergent finding, we report on the tensions arising at that time from the data-integration of the Japanese firms’ operations in Europe through the use of Enterprise Resource Planning software.

Copyright © 2002, Idea Group Publishing.

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INTRODUCTION Japanese firms have been represented in Europe since the mid-19th century following the Meji revolution. However, the Japanese did not manufacture any goods in Europe until 1966 when YKK and Pentel opened their factories in the UK and France respectively. Since that time there has been a regular investment in their European productive capacity, slowing only as the global recession became an internal factor in Japan: as a consequence there are approximately 850 Japanese production subsidiaries in Europe at the present time. During early surveys of the Japanese production subsidiaries in the UK through the 1980’s, it was noted that their imported production machinery had embedded instructions for the first-line maintenance crews written in Japanese (see Kidd [1994], Kidd & Teramoto [1995b]). It is not surprising that this is so, as the machinery in the UK was derived from a KND (knockdown and reassemble) program which brought viable machinery systems from Japan to be the bedrock of their production in the UK. However, the embedded Japanese instructions for first-line maintenance hindered the development of harmonious relations between the UK work force and their managers who, in turn, were often controlled by an expatriate Japanese chief executive officer. Through the 1970’s to the present time we have seen the nature of the Japanese firm change as it moved towards a more international form of operation rather than seeming to run a peripheral organization based solidly on the Japanese headquarters office. Notwithstanding the evolution of their formal and informal management structures, we wished in the research to question in detail the nature of any computer software that may have been imported from Japan to control their imported production systems and their local managerial control systems. Did they have embedded Japanese documentation which might prove difficult to interpret by software engineers in the UK? Thus, our primary questions were upon the origin and subsequent modification of the control software, and where such modification took place. Subsequently, we explored the origin of all software in use and, during interview, found many firms were considering using Enterprise Resource Planning (ERP) software to integrate their systems. We report on the use of computer software in the Japanese production subsidiaries (JPS) only in the UK from research conducted through 1998-99. This sample restriction arose from pragmatic reasoning–there were about 250 Japanese production subsidiaries in the UK, and nearly 900 across Europe. We restricted the search to the UK, avoiding the expense of a pan-Europe postal survey, so as to obtain a response to our UK postal survey in a reasonable time frame, and so we could undertake interviews and/or telephone discussions in our natural language, English, with our sample firms. It was found that there was little software that was still substantially the same as that in use in Japan: most was modified in the UK though outsourcing contracts, and much of the other operational software was purchased from UK or US sources. Overall, managers said they were looking for their software to be able to be able to be integrated– and thus they were also looking to use Enterprise Resource Planning applications (like SAP, Baan, PeopleSoft, etc).

The Japanese Investment in Europe In recent years, as the world recession deepened, there has been a deceleration in the investment by the Japanese in productive capacity in Europe, although investment in R&D centres continues unabated. However, leading up to our research deadline, there were 825 Japanese manufacturing firms in Western Europe, of which 331 firms indicated they were

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involved in some form of R&D; and there were 78 independent R&D establishments (JETRO, 1998). Figure 1 indicates the current numbers of Japanese manufacturing firms across Europe based on data published by the Japan External Trade Organization (JETRO, 2000). We note that the investment in three countries (the UK, Germany, and France) tends to have absorbed about 55-60 % [in numeric terms] of the overall European Inwards-FDI from Japan–a figure that has held reasonably constant from 1983. We note also that many Japanese firms operate in more than one European country either as a major manufacturer (e.g., Sony), or as a keiretsu-like supplier to major manufacturing firms, following an organizational norm developed though their evolutionary history in Japan. Overall in 1998, the average capital per Japanese company across Europe was US$ 22.3m, with 182 firms having less than US$ 5m (i.e., 42% of the total firms); and were on average 1.2 factories per company that yield sales of US$ 92m. These data should be viewed against the fact that the European Union saw US$ 129 billion inwards foreign direct investment in 1997 (UNCTAD, 1998). The current data is not much different–the average capital per firm was US$ 21.26m (JETRO, 2000), but the FDI inflows to the European Union are now US$ 305 billion (UNCTAD, 2000). With respect to the UK we now find: • English-speaking countries account for 73% of all FDI in the UK • The USA and Canada account for 69% of all FDI in the UK • The EU accounts for 20% of all FDI in the UK • Japan accounts for under 1% of all FDI in the UK Given Japanese firms had invested earlier and more extensively in the US than in Europe many early academic studies upon these “foreign” firms were based on US apocrypha and observations. It is not pertinent to report these finding here, but the interested reader may Figure 1: Numbers of Japanese production subsidiaries in Europe (Source : 16th Annual Survey of Production in Europe, JETRO, 2000) 1

Manufacturing firms firms with with at at least least 10% 10% Japanese Japanese ownership ownership Manufacturing Long-term investment in European Union 10

1

14

3 29

235

43

58 115

12

3 125

Recently more investments in Central Europe

10

10

7

4 21 3

57 20

65

Total Firms = 800 (West), 50 (Central)

JETRO 2000

4

12

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be referred to the American Association of Japanese Business Studies (http://www.ajbs.org) for detail. Inevitably, the growth in European investment by the Japanese through the 1980’s led to more home-based European studies upon the Japanese personnel management methods, their managerial methods, and their quality improvement programs. These studies sometimes questioned if there were regional differences between the management practices in the US or in Japan, compared to those observed in Europe: see, for instance, Oliver & Wilkinson (1992). The studies generally yielded interesting conclusions, especially when noting the detailed involvement of senior Japanese managers in the minutia of their firms’ operations. However, and pertinent to this research, we found there was a lack of detailed research on the use of computer-based support for management and control in the Japanese manufacturing sites in Europe. Of course, the use of CAD/CAM systems had been noted under the general consideration of inward technology transfer, but not to the depth of reviewing the code of the programs themselves. This paper addresses this issue: we considered, as an initial “hypothesis,” that many computer systems would have migrated from Japan to help control the machinery that was imported into the Japanese production subsidiaries in the UK. Further, we wondered if these computer systems may have had difficult-to-interpret Japanese documentation embedded within their code.

METHODOLOGY Sample Frames A two-stage approach was to used for the study. First, a postal questionnaire was addressed in person to the Chief Executive Officers of the Japanese production subsidiaries in the UK. Then, following an initial analysis of the returned data, interviews were requested to ascertain finer detail and to elicit “softer” information that respondents were unwilling to commit to paper while presenting their answers in the questionnaire. The population of Japanese production subsidiaries in the UK was not too large - some 203 questionnaires were sent out to all the firms listed by JETRO in their annual surveys. Certain standard data were obtained from the Directory of Japanese-affiliated Companies in the European Union (1996-97)–also published by JETRO. The “Japanese” firms have different ownership modes–they may be fully Japanese owned or owned through a majority share-holding; or there may only be a Japanese minority capitalization (down to, but not below 10%). It was noted at the time that the UK Government Department of Trade and Industry (DTI) listed 273 Japanese production subsidiaries in the UK–perhaps the JETRO list did not count firms having multiple sites. It was decided to concentrate on manufacturing firms, rather than service firms (or others), since the Japanese manufacturing firms and the management systems therein are well known and well studied–again note Oliver & Wilkinson (1992)–but they omit to mention the software used by the Japanese firms. Further, the manufacturing sector in general has shown good evidence of integrated and coordinated approaches to manufacturing on a world wide base: see many papers on the use of Just-in-Time systems or other “Japanese” management systems as portrayed in tomes on Technology Management (for instance, Khalil et al, 1999). Even so, any mention of “software” is directed to algorithms, not the importation of potentially difficult-to-read ‘management control’ software from one country to another: as in our case, from Japan to the UK.

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Questionnaire Framing We were to collect from the production firms a mix of general qualitative and quantitative data as well as focused data relating to their computer-based hardware and software. In part, this was to help us judge the worth of requesting an interview with a given respondent. Even so, the questionnaire was kept simple and easy to complete. It was sent to the CEO or President allowing him to delegate the task of completion. Iit asked for responses on • The company’s general trading information • The company’s IT strategy • The company’s manufacturing-related computer-based programs • The company’s general hardware and software • The company’s communication network The questionnaires asked if the firm would be willing to engage in follow-up interviews. These were eventually arranged with several firms–but due to time and cost constraints (given these firms could be scattered across the UK), some interviews were conducted by telephone or by e-mail.

A Caveat There is always a concern raised when using the “survey method”– there are questions raised about bias and validity; and further difficulties arise with respect to the response rate. In our survey the response rate is fairly low at 26%: Kidd earlier had quoted a survey conducted by himself and Teramoto of the Japanese manufacturers in the UK which had a 23% rate (Kidd, 1994; Kidd & Teramoto, 1995b). Furthermore, he noted other surveys on this target group of firms (Oliver & Wilkinson, 1992) who stated their response rates were 28% (a 1984 survey) and 34% (a 1991 survey). Kidd suggested that this rate of response over this particular target group would be “usual” given these firms are over exposed to questionnaires and requests for interviews. Indeed, McCormick (1997) stated that 8% of his total responses were explicit refusals from firms stating they were inundated by this form of survey or interview request. In one sense, it is rather nice they took time to reply to him so positively; however, the general anxiety remains. We note the annual publication of the “best and biggest firms,” such as the Times 500 in the UK or the Fortune 500 in the US, simply adds names to the databases of a vast army of business students searching for data. Their continued demands harden the attitudes of responsive managers against responding. In other words, we have no solution to raise the low(ish) response rate for this form of survey analysis. The target CEO was directed to complete and return the document or to delegate the document to a competent subordinate. The questions were quite simple and elicited factual information relating to the broad sectors noted above. In so far as this was exploratory Table 1: Response rates of the postal survey

Replies from Manufacturing Firms Returned useable questionnaires Returned with no answer Returned by the Post Office–“gone away” Total issued

Number 53 5 3 203

% 26 2 1

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research, we did not take a strongly positivist stance–to name hypotheses, and subhypotheses in order to undertake detailed statistical analyses. Frankly, we were looking to answer a simple question–was Japanese language embedded in the documentation of software applications code imported from Japan which might prove difficult to “maintain” by UK software engineers. We saw this problem as being analogous to the maintenance engineers in the UK factories in the 1980’s when faced with instruction panels written in Japanese located within the imported machinery.

RESULTS Company Size and IT Strategy It would be reasonable to imagine that it is only large firms that would be able to formulate and implement a company-wide IT strategy based on the surmise that they would have several IT staff, general knowledge about IT, and so on. In the questionnaire we asked bluntly if the firm had an Information Technology strategy (or not) and accepted their answer without further questioning of their perception of “strategy.” Similarly we accepted their perception and thus response when asking if they had a “major IT system.” Our lack of further questioning is based upon our knowledge of the many initiatives from the European Commission to support the SMEs (the Small and Medium Enterprises). These SMEs have been targeted by the EU and by the UK Department of Trade & Industry, as they constitute the bulk of feeder firms that service major enterprises, probably delivering goods on a Justin-Time (JIT) basis. Currently the DTI notes that in the UK, of the entire business population of 3.7 million enterprises, only 24,000 were “medium” sized (50 to 249 employees), and less than 7,000 were “large” having 250 or more employees (Source: DTI Statistical News Release, 7 August 2000). In the small SMEs (being about 99.1% of the UK population of enterprises) we see little absorptive capacity, that is, they have an innate inability to investigate and absorb innovation (Cohen & Leventhal, 1990; COST, 1998). In our sample we received responses from small through to large firms (see Table 2). It is clear in this respondent group that even small SMEs say they have IT strategies; and herein we noted that the 14 firms without a formal IT strategy reported they operated at least one major IT system. We thus looked to the origin of the IT systems in use (see Table 3). After, we note the sourcing of these IT systems in Table 4. One of our prior “hypotheses” was now confounded: of 43 companies which either had an IT strategy and/or used at least one major IT system, there were only 8 firms which had systems that migrated from Japan. Moreover, only four of these systems were reported to be basically identical to the systems in their Japanese headquarters. Thus, while one might observe the massive inward transfer of production machinery from Japan to the UK, 81% of the firm’s IT software systems do not originate in Japan. It would seem that outsourcing of IT systems (in the 43 respondent companies which stated they had IT systems) is popular–as popular in these Japanese production subsidiaries in the UK as in general studies of outsourcing (see, for instance, Lacity & Hirshheim, 1995). We also noted within the respondent firms (using major IT systems) that more than half had their systems outsourced from British suppliers, and the rest originate in firms based in the US, Japan, Germany, or The Netherlands. It would appear that the Japanese production subsidiaries in the UK have moved strongly towards localization strategies for IT software supply–perhaps this is to cope better with localized requirements of legislation (for instance, trade laws or taxation).

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Table 2: Respondent company size and IT strategy presence

Size of firm: employees Less than 50 50 - 100 101 - 200 201 - 250 251 - 500 501 - 1000 1001 - 2000 Over 2001 Total Numbers

% with IT strategy 18 6 26 3 3 21 10 13 39 (100%)

% without IT strategy 50 7 14 14 7 7 14 (100%)

Table 3: The origin of major IT systems

Of 43 companies with a major IT system: Systems from Japan Systems not from Japan 8 (19%)

35 (81%)

Table 4: The sourcing of IT systems IT systems developed though outsourcing From services suppliers From consultancies 29 (62%) 2 (4%)

Number of companies without a major IT system 10

IT systems developed internally 16 (34%)

Note: The apparent total is 47 firms, not 43, since 4 firms quoted joint internal/external development of software and so became double counted.

Manufacturing Control Systems Localization is also seen in the development and use of software specifically to control the manufacturing systems. 30 firms had such systems, running programs such as MRP, MRPII, MAPICS, CAD, CAM and so on. Yet, only 3 firms had transferred these programs from Japan–each of these systems needed some modification.

Communications Systems Through the 1970’s and the 1980’s many non-Japanese managers in the JPS of the UK expressed their concern at the prevalence of “Japanese-style” communication within their firms–that is informal, face-to-face, verbal discussion, often in Japanese, between the Japanese expatriates. These managers also reported the frequent use of the Japanese language over the telephone or in faxes between their Japanese HQ and the firm (Kidd & Teramoto, 1995b). In this research program we wished to see if digital communications systems (e-mails, the Internet, etc.) were the prevailing inter- and intra-firm mode of communication. We also asked if natural language was a barrier to communication. First we looked to the availability of computer-based communications networks (see Table 5).

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Table 5: The availability of a computer-based network

Communications net with the Japan head office Yes No 36 17

Communications net internally in the firm Yes No 41 12

Communications net with the suppliers Yes No 12 41

Table 6: Natural language in use (in firms with a link to their Japanese HQ)

Dominant language English & Japanese English Japanese No answer Firms with a communications net to Japan

Number of firms 14 9 4 9 36

% of firms 39 25 11 25 100

The links back to their HQ were based essentially on Internet technology and so were not restricted to the Japanese language (in fact, at the time, these messages had to be in English). The links with suppliers were invariably for EDI (Electronic Data Interchange) in pursuit of order and supply chain management within a JIT system. Most respondents said there were no serious problems now with their EDI systems, but they had experienced teething troubles. The firms without an obvious communications network readily used facsimile and the telephone for direct [synchronous] conversation, and thus the Japanese managers might have had a greater tendency to use their natural language when communicating with a fellow Japanese. We found the firms used an eclectic mix of computer hardware and controlling software: mainframe (12 firms), Unix (15), client/server (27), PCs (38), and Macintosh (2). They had a mix of networks, of which Internet dominated (38 firms), and Intranet followed in popularity (23 firms). In one firm we noted that the communications network “point of presence,” as it were, terminated in the laptop PC of the CEO–hardly a public service. We noted, with respect to natural language communications, most firms used the bilanguage of English and Japanese (see Table 6). Generally there were few reservations expressed, even in interview, with respect to the need to communicate in Japanese. Often this need was met by the senior expatriates using Japanese word processing software, or using direct speech via telephone, or even by handwriting via a fax–but they readily communicated with their UK staff in English.

Software Type and Origin As well as software being needed for the control of their production systems, firms have many other functions that could benefit from the application of information technology and its software. We questioned our firms on these aspects (see Table 7). With respect to the criteria for their choice of software (Table 8).

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Table 7: The country of origin and functional use of software (numbers of respondents) Country of origin UK US Internal development Japan Germany Holland A bureau Other

Sales & accounting 42 6 1

Payroll 43 1 1

Customer database 33 4 1

Word processing 25 26 6

Manufacturing control 28 7 6

0 0 0 0 0

1 0 0 2 3

1 1 1 0 0

12 0 0 0 0

1 2 2 0 0

Table 8: Criteria for software selection (number of firms responding)

Efficient 34

User friendly 29

Cost 29

Integration 23

Language 7

The selection criteria seem hardly surprising. The low score on the language criterion further emphasizes the ease by which the staff in the Japanese production subsidiaries in the UK manage to communicate internally and externally without strict reliance on the Japanese language. In Table 7 we have noted the Japanese sourcing of word processing software, which suggests there is a specific, but not overwhelming, need for Japanese language text. We suggest that the 26 respondents who nominated the US origin of word processing software may simply reflect the acceptance of Microsoft as a vendor, and they are known to be US-based.

DISCUSSION Localization Almost all of our respondents have a free choice of their hardware and software, and thus their IT systems as a whole–such purchases are not now controlled by their HQ in Japan. Only 8 firms (15% of our sample) have transhipped their IT from Japan, and no system is absolutely like the one “back home.” According to Porter (1986), Bartlett & Ghoshal (1989), Dunning (1986), and Kidd (1994), a localization policy can yield better flexibility and better customer orientation in overseas markets. Herein we should consider the UK to be the overseas market with respect to inwards investment from Japan in terms of the technology transfer. Furthermore, this localization policy should also yield cost effectiveness through purchasing locally, by reducing system delivery time, and by shortening the technical support chain. For many Japanese expatriates this is a fearful solution, since they are breaking new ground in splitting from their known and trusted suppliers in Japan, their traditional keiretsu. They are, however, being courageous and looking to European solutions for their local IT needs.

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Cross-Language and Cross-Culture In the early days of “Japanization” in the UK and in Europe, there were many mistakes made due to misperceptions of language and the nonrecognition of cultural modes and inclinations: see Kidd and Teramoto (1995a), Bartlett and Ghoshal (1989), Hunt and Targett (1995). Many of these differences can be understood by reference to the research of Hofstede (1980, 1991), Trompenaars (1993), and others. It is understood that through more frequent exposure to people from different nationalities, and through the media and television, we in the West have come to understand better some of the Oriental attitudes. Yet Hampten-Turner and Trompenaars (1998) have suggested we should absorb more of the ways of the Oriental into our Occidental management routines. Herein we wish to say that, in our sample of managers (in the interviews), they claimed to suffer little, since each side of the cultural divide seems now to be well educated about the other. We would say now they have become “culturally literate” (Merry, 2001). Both sides seem more tolerant by 1998-99 than during the early years of the Japanese production subsidiaries in the UK. Many of the managers in interview suggested that a good way of easing cross-language and cross-culture differences was to initiate better coordination and better integration of database systems based on open and fully accessible data. Formerly it was noted that data, being the bedrock of knowledge, tended to be gathered by the Japanese and shipped back home. While it was not held exclusively in the domain of the expatriates, it was nevertheless not easily assessed by local managers–in part because it may have been encoded in Japanese in formal Japanese-style reporting documents like a ringi. Opening the database to all should reduce ambiguity. It is a cultural norm across Asia to utter ambiguous statements, and the Japanese are no exception to this: but Westerners (UK persons, northern Europeans, and US persons) don’t like ambiguity–there are large differences in the Hofstede indices of Uncertainty Avoidance, for instance. If one is an “insider,” then access to data will be open, but to outsiders the access is resisted. This is a natural effect in all cultures, but it is made more difficult if languages and organizational practices differ greatly, as between the UK and Japanese firms, hence the need expressed by local managers for open database access in the Japanese production subsidiaries in the UK.

Coordination and Integration The research showed the Japanese production subsidiaries in the UK were using their own IT and software systems that were said to be not well integrated one with the other, or integrated with their HQ systems. The basic coordination is done by the HQ after collecting global data and collating it for their own purposes–it was the Japanese tradition to employ a mass of middle managers to make sense of their global data. Nowadays it is easy to purchase or pay-on-demand for a high bandwidth communication system; further, in-house IT systems may fairly easily be integrated, thus enabling enhanced data flow. As Gupta & Govindarajan (1991) note, “more intense communications patterns create higher information processing capacity, and these patterns become especially desirable in contexts where such capacities are needed” (p. 779). High data flow requirements are noted by Hedlund (1986), Bartlett & Ghoshal (1989), and earlier by Galbraith (1973) in order to reduce uncertainty in complex contexts and to sustain the flexibility of response to changes in the environment. Such data flows are a fundamental requirement in the support of the “Law of Requisite Variety” (Ashby, 1958). At one time, say in the 1970’s and 1980’s, it was sufficient for the Japanese CEOs in Europe to fly to Japan once per month to embed themselves in their HQ nemawashi processes and thus integrate, in a sense, their data flows from Europe into the

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centre in Japan. But now, under the more intense pressures of globalization and the general acceptance of global supply chain integration, there is a need for faster and more formal data exchange. These aspects were noted in 1998 by 23 firms who said it was important to consider “integration” when assessing software acquisition. We noted from our questionnaire data that the sampled firms said their software (other than their WP software) was often sourced from the UK (see Table 7). This seems to be another misinterpretation. More realistically, in interview, the respondents correctly identified some software as being “sold” from a UK site, while it might have originated in Germany (as for SAP, for instance), or the US (e.g., Microsoft products). What was salient was that several of our sample firms said in interview they were progressing to full integration of their data systems–to use integrated applications developed by firms like SAP, Baan, PeopleSoft, or Oracle. The acceptance of Enterprise Resource Planning systems (ERPs) for these firms was more than an academic concept–it was a contemporary response to integrate their pan-European data flows. Maybe it was their reaction to the increasing one ness of Europe; yet, it was more likely that these managers see data and administration integration as a way of making their pan-European operations more efficient and effective: incorporating the Euro currency into their accounting systems is just one aspect. Their newly integrated systems offer empirical evidence for the “differentiated network” proposed by Nohria & Eccles (1997), which “allows MNCs simultaneously to achieve decentralized authority and initiatives, lateral coordination and sharing, central control, and overall organizational cohesiveness” (p. 129). This is a big claim, but we thought we were observing such a sea-change from a multinational strategy with decentralized organizational structures to a transnational strategy with globally integrated networks of operation (Karimi & Konsynski, 1991). However, there are at least two issues opposing the generality of this scenario. The first is that the SMEs who are in the [European] supply chains simply can’t afford the high costs of total organizational systems integration, even if they acknowledge its academic benefit. They haven’t the spare resource capacity or capability in terms of people skills or cash flows. Secondly, for the major players there is some resistance expressed by their associate firms outside Europe–in the US, and in Japan. This last factor has two aspects: the first is the “not invented here” syndrome which can be overcome by discussion and reeducation. The second is simple, and again a reeducation issue. There was limited knowledge, and especially experience, about the benefit of SAP-like applications in the US, and almost zero knowledge in Japan, as quoted by our sampled firms. This may be due to the slow and natural diffusion process of the knowledge of the ERP vendor’s success and their sales drive. The market leaders, SAP and Baan, commenced in Europe. For example, Baan was incorporated in The Netherlands in 1978, its first programs were ready in 1982, and slowly as it became successful, it moved its sales effort to the rest of Europe and by 1990 was selling to 35 countries through intermediate sales offices. It was only in 1994 that they opened a US office in California (http:// www.baan.com). This is not to say there was not knowledge that resided outside Europe. We were saying simply that knowledge diffusion processes are slow–and, through being in Europe, the European branches of the Japanese production subsidiaries became aware of the benefits of SAP-like applications systems (i.e., those of SAP [the market leader], Baan, PeopleSoft, or Oracle). Thus, some firms in our sample were implementing ERPs, which perturbed their US associates and the senior Japanese HQ managers in Japan.

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Reverse Technology Transfer Bartlet & Ghoshal (1989) state one of the three most important capabilities of a successful international firm is its ability to transfer knowledge and competence. This is vital for R&D continuance, but it is also vital in IT systems diffusion to maintain the continued vitality of an enterprise (Kay, 1993). Here, stemming from the UK, and from Europe, we see a force being expressed on the Japanese subsidiaries in the US, and upon the HQ in Japan, to join in the pan-European implementation of enterprise resource planning using SAP-like applications. As it is the continuance of innovation that ensures the vitality of a firm, we suggest both the Japanese HQ and the US affiliates needed to embrace the European initiatives in ERP to achieve greater global strength. This would inevitably cause cultural conflicts to be created in Japan where for a long time the senior managers in Japan have considered that innovation originating outside Japan is worthless, or almost so: the Japanese call this ringeisho (Peters et al., 1997).

Further Remarks Even without pressure to implement ERP systems, there is a need to integrate and harmonize accounting methods in multinational enterprises (MNEs) so that the calculation of profits, losses, and transfer prices become more transparent. This is not only for internal accountability in an MNE, to compare between subsidiaries, but for the government agencies which are demanding transparency to ensure compliance with agreements on tariffs and fair trading within the global World Trade Organization (WTO). In a similar vein, there is a need also to be able to exchange data within the MNE-based on GAAP (Generally Agreed Accounting Principles), to which many countries say they will accede, including China and Japan. Yet it is prudent to consider the meaning of “generally acceptable,” as it may apply in Asian countries. It has been shown that accounting disclosure, at least historically, is strongly correlated with cultural measures (cf. with those measures of Hofstede) and that Oriental cultures are biased towards secrecy (non-transparency) (Gray, 1988; Gray & Radebaugh, 1993; Gray & Vint, 1995; Salter & Niswander, 1995; Gray, 1996; Zarzeski, 1996). Thus one may now ask if different regularity practices and the development of more open financial markets in these regions will force firms to be more transparent (in a GAAP sense)? In fairness, we should note that opacity is not a unique East/ West issue, since the Channel Islands, Belgium, Spain, and Switzerland all practice low levels of financial disclosure (Gray, 1996). The ERP systems being implemented by some of our sampled firms will reduce the tendency to calculate the “profit” as though it was a percentage used to commence calculations rather than being the outcome of the accounting calculations. Following the implementation of GAAP and/or SAP-like applications, Japanese firms might be seen to incline more to the probity, transparency, and honesty demanded by Western bankers and investors. This is not to say that Occidental practice is completely without doubt, ambiguity, and needing interpretation–it isn’t. Yet there are observably many problems to be solved in the financial governance of Japanese MNEs that SAP-like applications may attenuate.

CONCLUSION We have seen from the data derived from our sample of the Japanese production subsidiaries in the UK that these firms were not dependant on inwards transfer of IT systems from Japan. Being managerially independent of their Japanese HQ, they have developed or

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acquired over the years of their operation their own systems, though perhaps in a rather piecemeal fashion. Now they were seen to be revising their systems, incorporating panEuropean data collection, and looking towards aggregation and comparability. This allows them to be, in a sense, stronger than their Japanese HQ, where traditionally it was only the HQ staff who would aggregate data. The transition to enterprise resource planning (ERP) applications offered by firms like SAP, Baan, PeopleSoft, or Oracle has indicated both to the US subsidiaries of our sample firms, and more especially to the Japanese HQ staff, that they may have to absorb reverse technology transfer (as it were). This would be to incorporate SAP-like programs into their US subsidiaries and into the Japanese HQ. Subsequently they would be fully integrated with their Japanese production subsidiaries in the UK, and thus all would become globally integrated. This will cause some angst in Japan and the US. However the Japanese production subsidiaries’ managers in the UK, perhaps through the advent of the common market of Europe, have had some years to acclimatize to the need for pan-European IT systems, and so they may have spear-headed a global integration of the Japanese firms. Happily, our data suggests conflicts due to cross-language and cross-culture issues which were apparent in the 1970’s and 1980’s were now largely dissipated in the Japanese production subsidiaries in the UK. These firms can progress towards the use of more open yet strongly integrated data systems.

POSTSCRIPT: IN MID-2001 Much has occurred round the world since this research was initiated, analyzed, and reported: the Asian financial meltdown, for instance. However, only three aspects will be considered in any detail–the continuing role of the Euro currency; the fall and rise of the fortunes of the ERP vendors; and the “hollowing out” of the workforce in Japan and now, generally speaking, globally.

The Euro (•) Currency Many of our respondents quoted their need to absorb the Euro currency into their IT systems–to modify their internal accounting systems obviously, but also to align their systems linked to their suppliers and to their customers. This was because they traded heavily with firms in continental Europe, and many of the Japanese manufacturers in the UK had subsidiaries scattered across this region. They were also well aware the European Union had agreed that the ‘electronic’ • would be traded by 1 January 1999, with paper-notes and coinage coming into circulation by 1 January 2002. The old •-zone currencies will cease to be legal tender by 1 March, 2002. Furthermore many firms, including our Japanese targets, were worried about the effects of the “Year 2000 (Y2K) bug” and brought forward their systems modifications to ameliorate the effects of both these problems: reasonably, they also considered implementing ERPs. There are frequent discussions about the •-changeover problems, and not least amongst these are the issues facing SMEs. Once more they have to face up to their lack of absorptive capacity and their lack of financial resources to make the change. The Association of German Banks says it will cost each of their branches US$ 63,000 in direct costs for the transportation of new coinage, insurance, customer information, and staff overtime. Crédit Lyonnaise says the French banks will have to absorb US$ 15 billion to make all the changes–on top of the US$ 3 billion they have spent on software and hardware

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(Business Week, 2 July 2001, pp. 42-47). The same article notes that SMEs are in a mess, and as we noted above, some 99% of the business world is composed of SMEs. It is not surprising that our target firms were in 1998 “seriously considering implementing ERPs” to help themselves and ostensibly to help their SME suppliers.

The ERP Marketplace Perhaps we might state without too much fear that most firms have legacy hardware and legacy software (COST, 1998). It is therefore not surprising to find that major firms were targeted by ERP vendors to initiate change and allow the ERP systems to fully integrate their legacy databases. At the same time, these firms were advised that they would “suffer” some form of business process re-engineering program to create synergies and efficiencies otherwise unobtainable. That optimism was tarnished not long ago when the technological stock markets tumbled, taking with them the ERP firms themselves. Even so, we see that “a tidal wave of enterprise resource planning implementations is sweeping US companies despite costs of $2 million and as much as fours years’ time to completion” (Krumwiede & Jordan, 2001, p. 49). Notwithstanding stock market “glitches,” many firms have continued to invest in ERPs whose vendors repositioned themselves to accept firms with lower annual turnovers in order to maintain their own business impetus. The ERPs capture organizational data, some say organizational knowledge also, by coherently mapping the firm’s business processes. Stijn & Wensley (2001) warn against the cognitive dissonance (Festinger, 1958) that may arise between the outputs from the new database structures and the memories from other media, such as human memory. Which is the more correct? The clarity of properly aggregated data from once disparate sources, or the fractured tacit models of a person who may believe in the ‘truth’ of legacy memories? As Wheatley (2001, abstract) says in referring to the need for better training in the use of ERP systems, “it is emerging that the [ERP] training that matters is not technical. What is called for, it seems, is an ability to figure out the underlying flow of information through the business itself.” This raises the issues of knowledge management (KM) and organizational learning (OL).

Hollowing Out of the Workforce Our original research coincided with the UK rising out of a mini-recession and continental Europe moving into a mild form of recession (note: the business cycles of each economy still remain out of synchronization). Thus, for the Japanese CEOs in the UK looking to make their businesses more efficient, the reduction in workforce hinted at by the implementation of ERPs was indeed enticing. And in Japan, even to this day, we find that more and more businesses have to greatly reduce their workforce to achieve economies that may just keep them viable. Notwithstanding this pressure to “downsize,” there are many Japanese firms that still employ “window workers” (madogiwa zoku), and the in-company unemployed remain on their payroll: or they create “leanness” by transferring their excess staff to subsidiaries (shukko). There is, however, a price to pay. One severs company with those staff who possible know most, being those who have worked in the firm for a long period. It is these people, in the main, who carry the important tacit knowledge of many aspects of the business practices (Kidd & Richter, 2001).

Finally… We wish to suggest from the dateline of mid-2001 that the major goal of an enterprise should be to utilize its data effectively. This is a broad issue encompassing ERPs as well as

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people issues. Inevitably, the latter become embroiled in knowledge management (KM) and organizational learning (OL) initiatives. Performed well, the ERP should be in accord with a KM initiative promoted top-down by a CEO; and the human resources management (HRM) function should be able to integrate the ERP into its promotion of OL in the workforce. Even better, the OL issues and the potential to extend the influence of the ERP to the SMEs of the supply chain could be more easily promoted by the HRM team if all have better access to pertinent data. To procure peer-to-peer OL is not too difficult within one’s own firm, but to cross organizational or cultural boundaries is more problematic. We suggest the integration of ones SMEs in the value and product chain should now be a dominant Boardroom topic, both from an economic and performance aspect and from the environmental aspect. In pursing this aim we have to pursue an additional program to enhance learning and trust in and between organizations (Kidd, Stumm & Richter, 2002).

REFERENCES Ashby, W. R. (1958). Requisite variety and its implications for the control of complex systems. Cybernetica, 1, 83-96. Bartlett, C. A. and Ghoshal, S. (1989). Managing Across Borders: The Transnational Solution. Boston, MA: The Harvard Business School Press. Cohen, W. M. and Leventhal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35, 128-152. COST 330 Action. (1998). Trends in Information Systems and Communications in European Ports. Luxembourg: Office for Official Publications of the European Communities. Dunning, J. H. (1986). Japanese Participation in British Industry. Kent: Croome Helm Ltd. Festinger, L. (1958). A Theory of Cognitive Dissonance. Evanson,Il, Row, Peterson. Galbraith, J. R. (1973). Designing Complex Organizations. Reading, MA: Addison-Wesley. Gray, S. and Radebaugh, L. H. (1993). International Accounting and Multinational Enterprises. New York: John Wiley & Sons. Gray, S. (1988). Towards a theory of cultural influence on the development of accounting systems internationally. Abacus, 24(11), 1-15. Gray, S. J. and Vint, H. M. (1995). The impact of culture on accounting disclosures: Some international evidence. Asia-Pacific Journal of Accounting, 2, 33-43. Gray, S. J. (1996). International comparisons of business performance: Measurement and disclosure issues. International Review of Business, 1(1), 1-15. Gupta, A. K. and Govindarajan, V. (1991). Knowledge flows and the structure of control within multinational corporations. Academy of Management Review, 16, 768-792. Hampden-Turner, C. and Trompenaars, F. (1997). Mastering the Infinite Game: How EastAsian Values Are Transforming Business Practices. Oxford: Capstone. Hedlund, G. (1986). The hypermodern MNC: a heterarchy? Human Resource Management, 25(1), 9-35. Hofstede, G. (1980). Culture’s Consequences: International Differences in Work-Related Values. London: Sage. Hofstede, G. (1991). Cultures and Organisations: Software of the Mind. London: McGraw-Hill. Hunt, B. and Targett, D. (1995). The Japanese Advantage? Competitive IT Strategies Past, Present, and Future. Oxford, Butterworth-Heinemann.

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JETRO. (1998). The 14th Survey of European Operations of Japanese Companies in the Manufacturing Sector, JETRO, Tokyo, December. JETRO. (2000). The 16th Survey on Japanese Manufacturing Affiliates in Europe, the Middle East and Africa, JETRO, Tokyo, November. Karimi, J. and Konsynski, B. R. (1991). Globalization and information management strategies. In Deans, C. and Jurison, J. (Eds.), Information Technology in a Global Business Environment, 169-189. Danvers, MA: Boyd & Fraser. Kay, J. (1993). Foundations of Corporate Success. Oxford: Oxford University Press. Khalil, T., El-Gammal, Lefebre, L., Hosni, Y. and El-Laithy, H. (Eds.). (1999). Civilization, modern technology and sustainable development. In Proceedings of the 8th International Conference on Management of Technology, IAMOT. Cairo, March 15-17. Kidd, J. B. and Richter, F. J. (2001). The hollowing out of the workforce: What potential for organizational learning? Human Systems Management, 20(1), 7-18. Kidd, J. B. and Teramoto, Y. (1995a). The learning organization: the case of the Japanese RHQs in Europe. Management International Review, 35(2), 39-56. Kidd, J. B. and Teramoto, Y. (1995b). Can the Japanese localize? A study of Japanese production subsidiaries in the UK. In Park, S. J. and Jovanovic, M. (Eds.), What is Behind the Japanese Miracle? 136-152. London, Megatrends I.E.C. Kidd, J. B. (1994). Gobalization through localization: Reflections on the Japanese production subsidiaries in the UK. In Schütte, H. (Ed.), The Global Competitiveness of the Asian Firm, 39-56. London: Macmillan. Kidd, J. B., Stumm, M. and Richter, F. J. (Forthcoming). Learning and trust in supply chain management. In Logistics Information Management Special Issue: Enterprise Systems and Business Integration. Krumwiede, K. R. and Jordan, W. G. (2000). Reaping the promise of enterprise resource systems. Strategic Finance, October, 49-52. Lacity, M. C. and Hirshheim, R. (1995) Beyond the Information Systems Outsourcing Bandwagon: The Insourcing Response. Chichester: John Wiley & Sons. McCormick, K. (1997). Managing R&D overseas: Japanese companies in the UK. Japan Forum, 9(1), 53-74. Merry, P. (2001). Cultural literacy–its link to business success in Asia-Pacific. In Kidd, J. B., Li, X. and Richter, F. J. (Eds), Maximizing Human Intelligence Deployment in Asian Business: The Sixth Generation Project. London & New York: Palgrave Press. Milne, I. (2001). Global Briefing Note 9: Foreign Direct Investment. Accessed July, 2001 from the World Wide Web at: http://www.globalbritain.org/Docs/MW/1144_GB-B9.htm. Nohria, N. and Ghoshal, S. (1997). The Differentiated Network. San Francisco, CA: Jossey-Bass. Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organizational Science, 5(1), 16-35. Oliver, N. and Wilkinson, B. (1992). The Japanization of British Industry: New Developments in the 1990s. Oxford: Blackwell. Peters, T. J., Peters, T. and LeBaron, D. (1997). The Circle of Innovation. San Francisco, CA: Knopf. Porter, M. E. (1986). Competition in global industries: A conceptual framework. In Porter, M. E. (Ed.), Competition in Global Industries. Boston, MA: Harvard Business School Press

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Salter, S. B. and Niswander, F. (1995). Cultural influences on the development of accounting systems internationally. Journal of International Business Studies, 26(2), 379-398. Stijn, E. V. and Wensley, A. (2001). Organizational Memory and the completeness of process modeling in ERP systems: Some concerns, methods and directions for future research. Business Process Management Journal, 7(3), 181-194. Trompenaars, F. (1993). Riding the Waves of Culture: Understanding Cultural Diversity in Business. London, The Economist Book. UNCTAD. (2000) World Investment Report. United Nations Conference on Trade and Development. Geneva. Wheatley, M. (2001). ERP training stinks. CIO, 13(16), 86-96. Zarzeski, M. T. (1996). Spontaneous harmonisation effects of culture and market forces on accounting disclosure practices. Accounting Horizons, 10, March, 18-37. American Accounting Association.

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Chapter XIV

Can National Information Infrastructures Enhance Social Development in the Least Developed Countries? Peter Nelson Meso and Nancy Bogucki Duncan Kent State University, USA

The need for national information infrastructures (NII) in the world’s least developed countries (LDCs) tends to be overshadowed by the nation’s severe deficiencies in physical infrastructure. Consequently, NII may be inadequately addressed by governments and supporting agencies in their plans for stimulating social growth. The example of Singapore’s TradeNet and other less-developed countries developing national, electronic information infrastructures suggests that information technology infrastructure may enable an LDC to develop at a particularly advanced rate. This paper studies the relationship of information infrastructure and social development. It establishes a clear correlation between 1) levels of information infrastructure and social development, and 2) growth rates of information infrastructure and social development. The findings suggest that governments of LDCs may enhance their countries’ growth by developing strategic plans for NII development.

INTRODUCTION The value of information technology infrastructure in business has been well documented over the past few years (e.g., Brancheau et al., 1996; Broadbent et al., 1996; Duncan 1995). It is understood to affect the firm’s process efficiencies (Keen, 1991; Weill, 1994) and to have strategic potential for the firm’s comparative performance in its industry (Keen, 1991; Brancheau et al., 1996; Duncan, 1995). It enables firms to economize on transactions through “virtual integration” (Clemons and Row, 1991; Miller et al., 1993) and to compete in markets that would otherwise be inaccessible. Appeared in Journal of Global Information Management, vol. 8, no. 4, 2000. Reprinted by permission.

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The concept and perceived value of a national information infrastructure (NII) arises from similar needs within and across national boundaries. As information technology expands a nation’s interconnectivity and capacity for information integration, hitherto independent sectors such as education, health, social policy, commerce and trade, government, agriculture, communications, and science and technology can be integrated. An NII that allows members of the various sectors to share information and related resources may increase process efficiencies and intellectual activity that lead to economic productivity. Sharing resources reduces the cost of affected projects or services, which in turn increases feasibility of new endeavors. Consequently, the span and scope of its information infrastructure can affect a nation’s delivery of social services and national productivity, and may ultimately stimulate economic growth. This synchronous development of a vision for integrated national services makes evident the importance and value of an integrated national information infrastructure. The value of greater information integration across independent sectors has been explored and exploited by nations with highly developed economies such as the U.S. In economically less developed countries, the need for NII is less obvious. It may be obscured by needs for more basic infrastructure (such as roads, electricity, and water treatment networks), or it may simply not be in demand because the need for information occurring in service-based economies is not yet pressing (Odedra et al., 1993). Yet if the NII can offer strategic economic benefits to a developed country, it may likewise offer means for more efficient economic development in the least developed countries (LDCs). Indeed, it may offer new and more efficient means to both social and economic growth. Since the concept of an NII is very recent, hardly any empirical research has been conducted to study the correlation or causal relationships existing between the development of an NII and the social and economic development of particular countries, least of all the LDCs. LDCs face immense disadvantages in social and economic development. Their precarious position is exacerbated by the current global economic order centered on international open-market trade. However, it is generally accepted that the increasing polarity between the developed nations and the LDCs is not beneficial for the sustainable growth of the international economy. Therefore sustainable growth of LDC economies is rapidly becoming an international concern. This paper examines the potential relationship between national information infrastructure and social development in LDCs. The next section of the paper examines the hypothesized role of information infrastructure in the social development of developing countries as well as in the international economy. It posits the unique capabilities of information infrastructure in providing access to markets and basic services unattainable without an adequately developed physical infrastructure. Such capabilities may offer an efficient alternative to physical infrastructure through which infrastructure-dependent services can be dispensed within LDCs. Part three presents the research design and method. Data collection and analysis are described, and the assumptions of the study elaborated. Part four documents the findings of the study and the inferences drawn therefrom. Our conclusions focus on the implications of this study for future research.

INFORMATION INFRASTRUCTURE AND SOCIAL DEVELOPMENT Previous research establishes that the quality and levels of services provided by sectors including education, health, commerce, government, agriculture, communications, and

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science and technology impact positively the rate of economic and social development in LDCs (Sadowsky, 1996; Antle, 1983; Romero, 1995; Saunders, 1996; Leff, 1984; Stone, 1993; Wingrove, 1993). To the extent that service quality is dependent on quality and quantity of information, and to the extent that delivery of service depends on efficient access to and delivery of information, we may expect economic and social development to be affected by the breadth and capabilities of the NII. In this section, we discuss the research problem, describe the research model, and present the hypotheses of the study.

The Problem: Can NII Development Catalyze Social Development in LDCs? Economic development data shows that developed countries exhibit higher information infrastructure indices—as measured by the proportions of the population having direct access to telephones, television sets, radio sets, cable television, newspapers and periodicals, postal services, and the Internet—than do developing countries. They also exhibit more extensive communication networks—as measured by total length of telephone, television, Internet, and Electronic Data Interchange cable per geographical area—than do developing countries. Further, these countries have a larger total number of broadcasting stations, television channels, newspaper and periodical titles, libraries, and post offices per geographical area than do the developing countries. A comparison of the developing countries to LDCs reveals the same type of relationships—developing countries have higher information infrastructure indices than the less developed countries (World Factbook, 1994; World Bank, 1994; Danowitz, 1995). This data suggests that as a given country achieves a higher level of economic development, it requires a more advanced information infrastructure to support the increased volume and complexity of the transactions taking place within its economy. Therefore the country’s national information infrastructure develops in the same direction as the overall economic development of that nation (Danowitz, 1995). These data suggest increased economic development pushes NII development. As a given country achieves a higher level of economic development, it will require a more advanced information infrastructure to support the increased volume and complexity of the transactions taking place within its economy. Therefore the country’s NII develops in the same direction as the overall economic development of that nation (Danowitz, 1995). In order to bring about rapid and widespread economic development, LDCs might develop concurrently all infrastructure components to such levels as will capacitate citizens to exploit fully the production resources within these countries. However, these countries lack the capital to develop these infrastructures (Odedra, 1993). The costs involved in developing the infrastructure have proved to be prohibitively high for most LDC governments (Antle, 1983). A feasible and quicker solution may be to develop an NII that will deliver intangible services such as education, health care, commercial services, and technological know-how to a wider population of citizens, regardless of their physical location or economic status in the LDC. The knowledge acquired by these citizens may then capacitate them to derive their own solutions to the tangible infrastructure limitations, such as poor transport networks and inadequate machinery. With adequate information access, citizens may obtain information on where to source cheap and reliable machinery and how to obtain financing for such machinery. They may also obtain information on how to use locally available materials to develop or build cheap and reliable machinery, hence expanding their productive capacity. They may identify methods

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of collaboration with government and private organizations to develop transport networks, access to markets, access to energy, and access to material inputs. In so doing the citizens will be able to improve their productivity and increase their output far more quickly than they would should they wait on the government to develop all the needed physical infrastructures—schools, hospitals, commercial services organizations, roads, railroads, airports, and machinery—for them. How the resources for NII development should be acquired and managed is a further problem. Development literature identifies government as the key player in stimulating development and in using it for purposes of social welfare. This literature suggests government actions 1) create an environment conducive to investment in information infrastructure; 2) create the initiative for research and development of the technologies that constitute the information infrastructure; and 3) promote this infrastructure’s applications in the provision of both economic and social services (Sadowsky, 1993; King & Konsynski, 1995). The private sector is commonly the key source of the investments in information infrastructure and plays a pivotal role in enhancing the efficient, effective, and innovative provision of information services. Private sector participation enhances the efficient distribution of the information infrastructure resources to demand areas within a country. The private sector is also credited with providing the fastest approach to expanding the information infrastructure in a country owing to its profit-centric objectives (Jackson, 1995; Swaroop 1994; Stone, 1993; Stewart-Smith, 1995; Ingram, 1993). The problem with private sector development of NII, particularly in LDCs, is that national economic growth requires that development occur throughout the country. Where demand or private enterprise do not result in information service provision, NII is particularly needed to enable inexpensive delivery. Governmental influence is needed to ensure that information infrastructure services are extended to the areas and sectors inadequately serviced by the market-type economy (Jackson, 1995; Noam, 1995; Odedra, 1993; Danowitz, 1995). If NII can indeed affect the social development (and subsequently the economic growth) of an LDC, early government intervention and investment may be justified. This paper limits its scope to examining the potential contributions of an NII to the social development of LDCs.

The Model The role of NII in the development of LDCs is understood as a complex function, including social development, economic development, investment, and governance. Figure 1 depicts a model of the relationships among these variables and NII. The dashed line isolates the variables of the present study: the relationship between NII and social development. We are currently conducting further research on the role of governance and the other variables. According to economic theory, an abundance of quality information yields more competitive economic markets (Berliant et al.,1998; Mokerjee et al., 1997; Pietra et al., 1998). Such markets optimize both the efficiencies and productivity of economic activities evidenced in commerce, trade, agriculture, manufacturing, and other value-creating sectors of the country’s economy. The greater the productivity and efficiencies of a nation’s economy, the larger the rate of economic growth. Abundant and widely accessible information reveals wealth creation opportunities, the risks inherent in such opportunities, the valuation of existing and emerging investment opportunities, the sources of existing and emerging investment opportunities, the sources of funding for entrepreneurial undertakings, and the markets available

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Figure 1: Model of NII in social, economic, and governance environment Governance Investment

Economic Growth

NII

Social Development

for investment transactions. In so doing, it impacts the quality and magnitude of investments in the nation’s economy. Easy and plentiful access to quality information enhances the quality and levels of educational, health, and habitat services in a nation. It enhances the awareness and knowledge of the nation’s citizens, resulting in higher nutritional, hygiene, habitat, economic engagement, and primary health care standards among the citizens. The net effect is an improvement in the social development of the nation owing to a better-educated, healthier, more economically productive citizenry and better standards and conditions of living throughout the nation. Access to information, and to the channels for information distribution, are therefore linked to the rate of national development. However, access to quality information depends largely on the nature of the nation’s NII. Therefore the reach and scope of the NII may be expected to affect the rate of development of the nation. But the level of economic growth and investment may reciprocally influence the rate of NII development. Low levels of gross investment result in less investment in the NII, which results in a slower rate of NII development. Slow economic growth results in less demand for quality information by the key agents and sectors of the economy, which further slows the rate of NII development. Hence we posit a bidirectional relationship between the NII and the economic development, and between NII and gross investment of a nation.

Hypotheses We may well expect that different countries will place development emphasis in different sectors and related infrastructure components. In this regard, some LDCs are expected to have significantly higher information infrastructure capabilities compared to fellow member countries. Likewise, the level of social development attained by each country is expected to differ, with some countries recording much higher levels of social develop-

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ment than others. We posit that those countries that exhibit high levels of information infrastructure development also exhibit higher levels of social development. H1: A significant positive correlation is expected between the level of social development and the level of NII development. It is possible that without causal interaction, infrastructure and social development may both increase as a country develops. Identifying three possible reasons for economic development as measured by the net increase in aggregate output, McCallum (1989) emphasizes that true and sustainable economic development seems to stem from technological progress, rather than in the increase in population or capital stock. Hayami and Ogasawara (1999) augment this perception. They write: Widely recognized as a stylized fact in the growth of advanced market economies is that the growth of national product depends predominantly on improved efficiency (or technological progress broadly defined) rather than capital accumulation…. Such results underlie the basic characterization of “modern economic growth” (MEG) by Simon Kuznets (1966, p. 9) as predominantly dependent upon sustained improvements in technology rather than capital accumulation due to the “extended application of science to the problems of economic production.” (1999, p. 2) In another study, David Mowery and Joanne Oxley (1995) acknowledge that the influence of international technology transfer on national economic development has rapidly increased, especially in the post-World War II era. They identify the importation of technology as the chief cause of the meteoric economic development evidenced in most of the newly industrialized countries. This is in direct contrast to the success stories of the nineteenth century—such as the United States—whose development was largely from the domestic generation of new technologies based on the exploitation of local natural resources and increasing physical capital accumulation. Mowery and Oxley (1995) further claim that those nations that have benefited the most from international technology transfer are those that have advanced “national absorptive capacities.” They define national absorptive capacity as the institutions, policies, and infrastructure that enables a country to readily adapt new technologies and internalize them into their local economic productivity activities to the extent that they are able to advance these new technologies without external assistance. National absorptive capacity in turn relies on investments in social infrastructure such as scientific and technical training, research and development institutions, and a healthy and a well-educated pool of human resources. In addition, economic policies that enforce competition among domestic firms enhance the national absorptive capacity of a given economy. Therefore, it may be that the higher the level of social development in a country, especially the level of education and technical human resources skills, the greater its national absorptive capacity. The higher the level of a nation’s national absorptive capacity, the greater is its rate of technological progress. A country with a higher rate of technology progress certainly experiences faster economic and social development. This suggests that the rate of technology development, of which the national information infrastructure is part, may be strongly correlated to that of social development within a given country or group of countries. To test whether a causal relationship exists between information infrastructure and social development, we further posit: H2: The rate of NII development is positively correlated with the rate of social development. Regardless of the trade method used to implement international trade—whether direct foreign investment, licensing, technical agreements and cooperation, joint ventures, turnkey

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projects, or the purchase of capital goods—three core flows distinguish how technology transfer content flows from the exporting to the importing nation: engineering services, managerial services, and capital goods; skills and know-how for operation and maintenance; and knowledge, expertise, and experience for generating and managing technical change. Each succeeding level of content flow entails a greater intensity of knowledge than its preceding flow (Wei, 1995). All are information intensive. In fact, the nature of these flows suggests that information infrastructure may enhance the rate and intensity of technology transfer between nations by providing the conduits though which such knowledge can more readily flow from the exporting to the importing nations. Hence the suggestion made earlier, that the rate of technology development may be strongly correlated to that of social development within a given country or group of countries, can be made even more specific: There may be a strong correlation between the rate of national information infrastructure development and social development within a given country or group of countries. This gives further credence to the second hypothesis (H2). Madden and Savage (1998) suggest that “investment in telecommunications infrastructure has the potential to improve national productivity and economic growth” (p. 174). Studying a group of 11 transition economies of Central and Eastern Europe, they found that the level of development in telecommunications infrastructure, as measured by the investment in the infrastructure, was indeed related to economic growth. They built on the work by Aschauer (1989), who also argued that public infrastructure investments have a strong association with productivity and growth. Fisher (1995) goes further to suggest that the rate of investment can determine the rate of development in a particular country. So can policies geared at promoting capital formation. Applying their suggestion to infrastructure, the rate of investment in economic infrastructure—of which the national information infrastructure is part—and the adaptation of policies that enhance the development of these infrastructures, are expected to influence the rate of a nation’s social and economic development.

RESEARCH DESIGN To study the impact of the NII on social development in the LDCs requires an operationalization of NII that is relevant to LDCs. The Organization for Economic Cooperation and Development (OECD) envisions NII as a cohesive network, able to send and transmit text, graphics, audio, and video messages at any time, from any source to any destination on the network. The concept of the NII emerged in the early 1990’s—an offshoot of the commercialization of the Internet and the World Wide Web, and the globalization of the world economy (OECD, 1996). The OECD recognizes that pure national information infrastructures are nonexistent. Instead, a country will have a limited collection of integrated or integrating networks that provide for the exchange and dissemination of information. Thus information infrastructures can be seen to include: broadband communication technologies which, through the process of digitalization of communication infrastructures, the convergence of these technologies with broadcasting technologies, and recent technological developments for switching and transmission allow rapid transmission of large quantities of information at low cost (OECD, 1996, p. 12). These infrastructures, regardless of their configurations or topologies, are capable of handling multimedia services and represent the information in digital form (OECD, 1996). It is important to recognize that NII does not necessarily mean the Internet. Until this decade, NII throughout the world meant radio, newspapers, postal services, etc. These are

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still vital components of information infrastructure throughout the world, and they are still the basis of information infrastructure in LDCs. While our ultimate goal is to establish the value Internet resources offer LDCs as an inexpensive means for rapidly expanding NII, the relationship of NII to social and economic development can only be empirically tested using the “old technologies” that comprise current LDC information infrastructure. Interest in national information infrastructure as an avenue for social and economic development is relatively new (Firestone, 1995). The empirical testing and validation of the emergent theories in this topical area is just beginning to take shape (Palvia, 1997; OECD, 1996). This study intends to provide initial or foundational insights on the association between social development and national information infrastructure—hence its use of correlation analysis. This approach has been used in the past in similar studies. Notable among these is the work by Aschauer (1989), who studied the relationship between public investment and productivity growth. McGuire (1987), Merz (1999), Verbrugge (1999), and Malliaropulos (1999) also used correlation in their studies on economic relationships. The study employs longitudinal data to test the hypotheses. Data on social development is collected for each LDC in the study for the years 1984 and 1994. Likewise, data on information infrastructure is collected for each of these countries over the same period of time. The information infrastructure data is then analyzed to compute the Information Infrastructure Index (II-INDEX) for each country. These measures are then used to classify the LDCs into two categories: High-II-Countries and Low-II-Countries. A social development factor is derived for each country by analyzing the data measuring the social development parameters—education, health, and economic performance. The study includes only those LDCs that have been listed as such over the 10-year period 1984-1994. This period constitutes an “NII-Emergent” period—i.e., during this time the concept of the NII received global appeal as a potential pivot for economic and social development. Increasing government awareness of the potential value of NII to LDCs appears to have led to stepped-up development of state information resources. At present there are 48 countries classified as LDCs. Of these, 33 are African countries, three are Asian countries, and one is a Latin American country. The rest are small island states of the Pacific and Indian Oceans. Only 45 of these countries have adequate quantities of consistent data over the period of the study. These 45 countries make up the sample for this study (UNDP, 1998). A list of these countries can be found in Appendix A. NIIs of LDCs cannot be expected to include widespread sophisticated computer networks. Consequently, the reach of information media is a reasonable initial measure of information infrastructure. Radio, TV, and phone are essential and basic forms of information transfer. We will expect radio density always to be highest because radios can function without corresponding physical infrastructure (such as electrical wiring), while TV and phone—at least during the period of study—would not. The Information Infrastructure Index (II-Index) is calculated from the following: 1. Radio density (Number of radios per 1,000 population) 2. Television density (Number of televisions per 1,000 population) 3. Telephone density (Number of telephones per 1,000 population) 4. Newspaper circulation (Number of newspapers per 1,000 population) The first two measures assess the broadcasting infrastructure, the third measures the telecommunications infrastructure, while the fourth assesses the newsprint infrastructure. We calculate the “Information Infrastructure Iindex (II-Index)” by obtaining the mean of the radio density, television density, telephone density, and newspaper circulation as a percentage.

Can National Information Infrastructures Enhance Development? 215

The Social Development Index (SDI) is determined from three types of social development indices: i) Education: measured by the illiteracy rate (as a percentage of population above 14 years of age) and primary school enrollment rate (as a percentage of school-age population). ii) Health: measured by life expectancy at birth (years), infant mortality rate (as a ratio per 1,000 live births), access to safe water (as a ratio to 1,000 population), and access to health care (as a ratio to 1,000 population). iii) Economic: measured by the Per Capita Gross National Product (GNP). In order to determine the SDI, we convert all the above indices into percentage scores and ensure that all use the same interpretation scale (the larger the value the better). To do this, we convert: i) Life expectancy into a percentage score by setting an ideal score of 100 years to be equal to 100%, ii) GNP per capita into a percentage score by setting an ideal score of US $1,000 to be equal to 100%, and iii) Infant mortality rate into a percentage score by first setting 1,000 deaths per 1,000 population to be equal to 100%, then obtaining the “infant survival” rate by subtracting the score so derived from 100. Therefore the Social Development Index is the mean of the literacy rate, primary school enrollment rate, life expectancy, access to health care, access to safe water, “infant survival,” and gross national product as a percentage. Three other indices are used in testing Hypothesis 2: i) Increase in telephone lines (net increase in the number of telephone lines over the decade); ii) Rate of growth in telephone density (compounded annual increase in telephone density); and iii) Rate of growth in telephone lines (percentage change in telephone lines over the decade). We use these indices to corroborate the results obtained from the analysis of the first hypothesis by correlating the rate of development of social development to each of these indices. All three measure the rate of development of the telecommunications infrastructure. Data on the other infrastructure was insufficient to determine their rate of development over the decade 1984 to 1994. However, the telecommunications infrastructure is the most extensive type of information infrastructure in the countries we studied. Therefore we feel that the correlation measures obtained between the rate of development of the telecommunications infrastructures and social development rate are indicative of the general relationship between information infrastructures’ development and social development. The main sources of data used in this study are development databases and social development publications. Social development data is derived from the World Development Indicators, The World Development Report, and the Social Development Indicators for the years 1984-1997. Data on information infrastructure is obtained from the World Telecommunications Handbook, the World Fact Book, Lexis-Nexus Database, and also from the social development data sources above.

Limitations and Assumptions of the Study Data collection on information technology in LDCs is constrained by numerous factors. In our own effort, we found that:

216 Meso & Duncan

i)

No source provides complete data on the range and reach of computers and computer networks in the least developed countries. This is not surprising when we consider that the infrastructure limitations themselves would impede accurate collection of the data. Thus, we excluded computer data from this study and relied on more basic information media. ii) For every country, at least one piece of data in the years studied was missing. No country has a complete data set. iii) 1984 data on NII resources in LDCs is quite sketchy. Apparently in 1984, NII was not yet viewed as a major concern to development, and consequently, data was not collected systematically. In order to optimize the accuracy of our study and our interpretation of the data, we make the following assumptions: i) All data obtained from development databases and publications on social development are accurate, correct, and truly representative of the state of affairs in LDCs. ii) These secondary sources of data provide rational and unbiased data about the LDCs. iii) The results of this finding are representative of LDCs but may not be generalized to the rest of the global family of nations. iv) Because, on the whole, information infrastructure in LDCs is still grossly underdeveloped compared to that of developed nations, none can be said to own what can truly be defined as a national information infrastructure. However, since an NII evolves from a collection of integrated information infrastructures, we assume that the relationships observed between the common information infrastructures in LDCs and their social development are truly representative of the relationship between an NII (including computers) and social development. v) The mean of a given variable is a better indicator of the measure of that variable for a country where no data on that variable exists, than is the null value. Thus, we use the means-plugging method of managing missing data. vi) The overall level of development of the information infrastructure in a particular country is a stronger determinant of the rate of social development than is the rate at which that infrastructure was (or is currently being) developed.

RESULTS Findings with Respect to Hypothesis 1 Correlation analysis of the data collected in the study indicate that Hypothesis 1 is fully supported. The analysis revealed a significantly strong positive correlation between the level of information infrastructure development (as measured by the II-INDEX) and the level of social development (as measured by the SDI) of 0.35. Table 1 outlines the correlation measures of the information infrastructure indices and all primary social development indices for the year 1994. As can be observed from these measures: i) The correlation between the SDI and each of the information infrastructure indices except radio density is significantly positive. This is a clear indication that information infrastructure directly relates the level of social development in given country. Therefore developing the information infrastructures, especially those which strongly influence social development in LDCs, may provide an avenue through which the development of these countries can be accelerated.

Can National Information Infrastructures Enhance Development? 217

Table 1: Correlation of information infrastrucuture indices and social development indices for 1994 CORRELATION OF: Social Development Index Literacy Rate Rate of Primary School Enrollment Infant Mortality Rate (I-Infant Mortality Rate) Access to Health Care Access to Safe Water Life Expectancy at Birth GNP per Capita

ii)

iii)

iv)

v)

INFORMATION INFRAST RUCT URE INDEX (II-INDEX) 0.35

TELEPHONE DENSIT Y (1994) 0.63

TELEVISION DENSIT Y (1994) 0.15

RADIO DENSIT Y (1994) 0.02

NEWSPAPER CIRCULATION (1994) 0.43

(0.08)

(0.01)

(0.03)

(0.32)

(0.42)

0.33 (0.18) 0.18

0.29 (0.54) 0.54

(0.04) 0.01 (0.01)

0.20 0.02 (0.02)

0.52 (0.23) 0.23

0.20 0.08 0.28

0.42 0.45 0.53

0.10 0.09 (0.04)

0.18 (0.28) 0.03

0.28 0.06 0.28

0.37

0.61

0.36

0.13

0.45

Save for television density, there is a strong positive correlation between the rate of primary school enrollment and each information infrastructure index. Once more, this provides the evidence that information infrastructure may directly impact the levels of educational attainment–one of the pillars of social development–hence providing a feasible avenue by which the social development of LDCs can be accelerated. Information infrastructure may be equally contributing to the enhancement of health services in these countries. The correlation measures of Access to Health Care and all information infrastructure indices are significantly positive. So are the measures of the “infant survival” rate (1–infant mortality rate) and the life expectancy at birth to all information infrastructure indices, except television and radio density. Health is the second pillar to social development. Therefore the direct relationship observed between the level of information infrastructure development and the level of health care may be indicative of the primary contribution of information infrastructure to the acceleration of health care and medical services development in LDCs. This reinforces the importance of information infrastructure to the social development of each country. There is a significant positive correlation between each information infrastructure index and the per capita GNP of the LDCs. This confirms that information infrastructures directly relate to the enhancement of the economic sector. Developing adequate information infrastructures for the LDC countries may thus provide a concrete avenue by which these countries can overcome the economic constraints they currently face and hence alleviate the poverty problem they face. A close look at the telephone density and how it correlates to each social development index provides revelations of immense potential. Except for the literacy rate, the correlations between telephone density and each social development index are strongly positive. Given that the telecommunications infrastructure is the foundation to the present-day electronic information superhighway (as exemplified in the Internet, the World Wide Web, cable media networks, and high speed backbone networks), these correlations reveal the immense potential that the information superhighway has in impacting the rate and the level of social development in the LDCs. It is this one observation that convincingly suggests the true worth of information infrastructure to the enhancement of developmental activity in these countries. Therefore there is good

218 Meso & Duncan

reason to support the direct development of information infrastructure in the LDCs as an effective, efficient, and reliable strategy bringing about meaningful and sustainable development in these countries. In summary, the strong correlations between the SDF and the II-INDEX, and between the individual information infrastructures and the individual social development infrastructures, suggest that information infrastructure may be directly contributing to the state of the economic, education, and health sectors in a country. The strong correlation between this infrastructure and education is a clear indication of the potential this resource has to the enhancement of education in the least developed countries. The combined strong correlations between these infrastructures and all aspects of social development make them strategically valuable as assets for sustainable development. The fact that they seem to positively impact each sector without having to be fine-tuned to the needs of each sector make them a viable and feasible avenue for fostering sustainable development in the LDCs.

Findings with Respect to Hypothesis 2 To test Hypothesis 2, we correlated the infrastructure growth rate variables to the social development indices—the volume of telephone lines, the rate of growth in telephone density, and the percentage increase in telephones over the study period. Correlation results for this test are presented in Table 2. The correlation of the net change in SDI over the period 1984 to 1994 and each of the II measures was significantly positive. This provides evidence of a direct relationship between the rate of information infrastructure development and the rate of social development. Therefore, a development strategy pegged on enhancing the rate of development of information infrastructure may accelerate the rate of social development. This finding is indicative of the central position of information infrastructure in the development of a country and its potential contributions to a sustainable level of development. Given that the key development problem in almost all LDCs is their inability to achieve sustainable development, a strategy centered around enhancing the information infrastructures within an LDC may provide the means by which that LDC can attain a sustainable level of development. This dynamic positive relationship may provide a means by which current obstacles to development can be skipped. Bennet (in Odedra, 1993) asserts that “IT is not, and will never be, a way to leapfrog development, an immensely complex process having its roots in educational and infrastructural building which cannot be bypassed” (p. 28). The strong positive correlation values observed between education and all information infrastructure indices may be in contradiction with this assertion. By providing the means through which a larger number of citizens can be educated concurrently, information infrastructure may enhance capacity building. Since social and economic development result from a better educated and more productive population, the beneficial ripple effects of adapting an information-infrastructure-based education policy may be immense.

Further Analysis of the Results To obtain a better understanding of the results obtained in Hypothesis 2, we used cluster analysis to classify the LDCs in the study. Figure 2 identifies the ensuing clustering of all LDCs studied. To corroborate the results in Figure 2, we clustered the countries on the basis of the volume of telephones, the percentage increase in telephone lines over the study period, and the compounded annual growth rate of telephone density, vis-a-vis the social development factor. Figures 3, 4, and 5 pictorially outline these results.

Can National Information Infrastructures Enhance Development? 219

Table 2: Correlation Of Control Information Infrastructure Indices and Net Change In Social Development Indices (1984 To 1994) CORRELATION OF:

Increase in Telephones over the Decade (1984 to 1994)

Percentage Increase in Telephones over the Decade (1984 to 1994)

Co mpounded Annual Growth Rate of Telephones over the Decade (1984 to 1994)

0.17 0.20 0.20 (0.13) 0.13 (0.15) 0.08 0.20 0.04

0.40 0.21 0.14 (0.08) 0.08 (0.10) 0.25 (0.04) 0.41

0.33 0.25 0.17 (0.11) 0.11 (0.08) 0.23 0.00 0.25

Net Changes in: Social Development Inde x Literacy Data Rate of Primary School Enro llment Infant Morality Rate (1-Infant Mortality Rate) Access to Health Care Access to Safe Water Life Expectancy at Birth GNP per Cap ita

(Net change is the measure of the magnitude of change in each social development index over the period 1984 to 1994) Figure 2: Clustering Of LDC’s By Information Infrastructure Index And Social Development Index (1994) high SOCIAL DEVELOPMENT INDEX (SDI) 1994

LESOTHO BENIN ANGOLA COMOROS ZAMBIA

GUINEA BISSAU BANGLADESH BURKINA FASO YEMEN RWANDA

LAO TANZANIA BURUNDI HAITI NIGER CAMBODIA NEPAL UGANDA ZAIRE

DJIBOUTI BHUTAN GUINEA CENTRAL AFRICAN MALI AFGANISTAN SOMALIA MOZAMBIQUE

low

CAPE VERDE VANUATU KIRIBATI SOLOMON ISLANDS SAO TOME & PRINCIPE EQUITORIAL GUINEA MYANMAR MAURITANIA LIBERIA MADAGASCAR CHAD SIERRA LEON ETHIOPIA

INFORMATION INFRASTRUCTURE INDEX (II-INDEX) 1994

GAMBIA MALDIVES SUDAN MALAWI TOGO

high

Figure 3: Clustering Of LDC’s By Increase In Number Of Telephone Lines and Increase in Social Development Index (1984-1994) high

INCREASE IN SOCIAL DEVELOPMENT INDEX (1984-1994)

low

MALDIVES

BURUNDI

BANGLADESH

SOLOMON ISLANDS CAPE VERDE TOGO LESOTHO VANUATU MALI MAURITANIA BHUTAN UGANDA KIRIBATI COMOROS AFGANISTAN BENIN SUDAN SAO TOME ANGOLA ZAIRE DJIBOUTI

GUINEA MALAWI GAMBIA GUINEA BISSAU SOMALIA CHAD NIGER

MYANMAR BURKINA FASO NEPAL

CENTRAL AFRICAN LIBERIA CAMBODIA SIERRA LEON LAO HAITI RWANDA MADAGASCAR EQUITORIAL GUINEA

YEMEN ZAMBIA ETHIOPIA TANZANIA MOZAMBIQUE

INCREASE IN NUMBER OF TELEPHONE LINES (1984-1994)

high

220 Meso & Duncan

Figure 4: Clustering Of LDCs By Percentage Increase in Telephone Lines and Increase in Social Development Index Over The Decade 1984-1994 high

INCREASE IN SOCIAL DEVELOPMENT INDEX (1984-1994)

low

TOGO LESOTHO BANGLADESH VANUATU MALI MAURITANIA UGANDA AFGANISTAN BENIN ZAMBIA SUDAN SAO TOME ANGOLA ZAIRE ETHIOPIA

GUINEA MALAWI GUINEA BISSAU SOMALIA CHAD NIGER DJIBOUTI LIBERIA CAMBODIA SIERRA LEON HAITI MADAGASCAR TANZANIA MOZAMBIQUE

EQUITORIAL GUINEA KIRIBATI MALDIVES COMOROS BURKINA FASO KIRIBATI COMOROS YEMEN CENTRAL AFRICAN LAO RWANDA EQUITORIAL GUINEA

PERCENTAGE INCREASE IN TELEPHONE LINES (1984-1994)

high

Figure 5: Clustering Of LDC’s By Compounded Annual Growth Rate In Telephone Density and SDF high

INCREASE IN SOCIAL DEVELOPMENT INDEX (1984-1994)

low

i)

ii)

iii)

LESOTHO MALI MAURITANIA GUINEA MALAWI GAMBIA

SOMALIA NIGER

UGANDA AFGANISTAN BENIN ZAMBIA SUDAN SAO TOME ANGOLA ZAIRE ETHIOPIA

DJIBOUTI LIBERIA CAMBODIA SIERRA LEON HAITI MADAGASCAR TANZANIA MOZAMBIQUE

MALDIVES SOLOMON ISLANDS CAPE VERDE TOGO BANGLADESH VANUATU BHUTAN KIRIBATI COMOROS YEMEN CENTRAN AFRICAN LAO RWANDA EQUITORIAL GUINEA

BURUNDI MYANMAR GUINEA CHAD BURKINA FASO NEPAL

COMPOUNDED ANNUAL GROWTH IN TELEPHONE DENSITY (1984-1994)

high

A comparison of the results in these tables indicates that Majority of the LDCs exhibited a dismal level of development in information infrastructure. Sixty percent (27 out of 45 countries) of the LDCs registered a II-INDEX below the group mean (Figures 2 and 6). Further, all the LDCs in the study registered a II-INDEX of less than 25%. This means that when assessed on a 100% scale, they all fall in the lowest quartile of the assessment scale. This observation is consistent with the findings of Danowitz et al. (1995), who assessed the scope of computing in North Africa. The assessment of Odedra et al. (1993) of computing in Sub-Saharan Africa reveals the same results. 53.4% of all the LDCs in the study registered an SDI less than the group mean. Thus, about half of the LDCs performed under par with respect to social development. When the SDI is assessed on the 100% point scale, 4 LDCs fall in the highest quartile, 34 in the second highest quartile, and 9 in the third highest quartile (Figure 2). 53.4% (24 out of 45 countries) of the LDCs registered a net change in SDI (depicted by the magnitude of increase in SDI from 1984 to 1994) below the group mean of 2.51% (Figures 3, 4, 5, and 6). This result is consistent with the findings in Figure 2 where the same percentage of countries registered a 1994 SDI Figure below the group mean.

Can National Information Infrastructures Enhance Development? 221

iv)

v)

vi)

vii)

viii) ix)

x)

80% (36 out of 45 countries) of the LDCs in this study registered an increase in number of telephone lines Figure that was below the group mean of 17.79% (Figure 3). This result indicates that there was dismal improvement in the telephone and telecommunications infrastructure of most LDCs during the period 1984 to 1994. 64% (29 out of 45 countries) of the LDCs in the study registered a percentage increase in telephone lines that was below the group mean of 2.47% (Figure 4). This result confirms that there was dismal improvement in the telephone and telecommunications infrastructure of most LDCs during the period 1984 to 1994. 55% (25 out of 45 countries) of the LDCs registered a compounded annual growth rate in telephone density that was below the group mean (Figure 5). This result confirms that there was dismal improvement in the telephone and telecommunications infrastructure of most LDCs during the period 1984 to 1994. The proportion of countries that cluster into the HIGH/HIGH segment of Figure 2 (11 out of 45 countries) is very close to that of the same segment in Figure 6 (10 out of 45 countries). The same is true for the HIGH SDI, LOW II-INDEX segment in Figure 1 (10 out of 45 countries) and the HIGH SDF, LOW II-INDEX segment of Figure 6 (11 out of 45 countries). Those countries that clustered into the HIGH/HIGH segment in Figure 1 tended to cluster into the same segment in Figure 6. This indicates that the social development policies in these countries may have been closely tied to the information infrastructure. Those countries that clustered into the LOW/LOW segment in Figure one tended to cluster into the same segment in Figure 6 (10 out of 17 countries). This result may point to the relationship between information infrastructure and the rate of social development. A high level of information infrastructure development does not guarantee a high level of social development. This is evidenced in the significant proportion of countries that registered a high II-INDEX that occupies the LOW SDF, HIGH II-INDEX segment (8 out of 24 countries) in Figure 6. A similar proportion of countries appears in the LOW SDI, HIGH II-INDEX (7 out of 24 countries) in Figure 2. The same proportion of countries is maintained in the LOW SDF, HIGH PERCENTAGE INCREASE IN TELEPHONE LINES segment of Figure 4 (7 out of the 24 countries). Figure 4 reveals the same result (7 out of the 24 countries registered high compounded annual growth rate in telephone density). These results indicate that for the information infrastructure to contribute directly to enhancing social development, there may be need for the existence a clear national policy that directly links the country’s information infrastructure to the social

Figure 6: Clustering of LDCs by II-Index 1994 and increase in Social Development Index (SDI) 1984 -1994 high

INCREASE IN SOCIAL DEVELOPMENT INDEX (SDF) (1984 - 1994)

low

LESOTHO GUINEA BISSAU BANGLADESH BURKINA FASO BURUNDI NIGER BENIN ANGOLA COMOROS ZAMBIA YEMEN RWANDA LAO TANZANIA

NEPAL BHUTAN GUINEA MALI SOMALIA

CAPE VERDE VANUATU SOLOMON ISLANDS TOGO GAMBIA

HAITI CAMBODIA UGANDA ZAIRE DJIBOUTI CENTRAL AFRICA AFGANISTAN MOZAMBIQUE

KIRIBATI SAO TOME & PRINCIPE EQUITORIAL GUINEA SUDAN LIBERIA MADAGASCAR SIERRA LEON ETHIOPIA

INFORMATION INFRASTRUCTURE INDEX (II-INDEX) 1994

MALDIVES MALAWI MYANMAR MAURITANIA CHAD

high

222 Meso & Duncan

xi)

development activities. Therefore we confirm Odedra’s (1993) assertion that: “LDCs should use IT (and information infrastructure at large) for selected and discriminated applications to bring about substantial benefits to their economies and people. The choice of applications must match the priorities set by government and have a high developmental impact.” (p. 27) Though a high II-INDEX does not guarantee a high rate of social development, a low rate of development in information infrastructure almost certainly curtails the rate of social development. This is evidenced by the fact that the majority of LDCs that registered below mean II-INDEX in Figure 2 (17 out of 27 countries) also registered below mean SDI in 1994 (17 out of 24 countries). Figure 6 confirms the results observed in Figure 2 since a similar proportion of countries (16 out of 27 countries) that recorded below mean II-INDEX also registered below mean SDF (16 out of 24) over the study period. Similar proportions of the countries studied cluster into the LOW/ LOW segment of Figure 4 (17 out of 24), hence further confirming the result.

CONCLUSION If the quality of NII substantially affects social development of a country, then we have a strong case for encouraging governments, both internal and international, to subsidize the development of NII. If NII affects social development in such a way that the quality and size of the labor pool improves, then business and industry, both national and international, will benefit likewise from contributing to the development of the NII. Our study addresses the relationship between NII and social development. It clearly establishes a link between the sophistication of information infrastructure and the rate of social development in LDCs. This relationship is significant where the infrastructure is strategically developed to support the core development mission of a country. However, accurate interpretation of the direction of causality is critical to effective investment strategies. While the analysis does not indicate direction, a logical interpretation based on previous research, infrastructure theory, and our own findings suggest that NII enables increased rate of growth of social development. To the extent that this is true, governments may justifiably link the planning of their countries’ development strategies to the development of their information infrastructure. It is reasonable for them to expect their nations to benefit significantly socially, as well as economically, from this infrastructure. The positive correlation found in this study strongly supports the unique and pivotal role that national information infrastructure may play in the future advancement of any nation. In so doing it provides a feasible and high-impact alternative through which the LDCs can leapfrog development, despite the limitations they suffer owing to their inadequate or nonexistent traditional infrastructure. The model presented in this paper proposes bidirectional relationships between economic growth, investment, and NII. The characteristics of these relationships require a great deal further research. Similarly, the causality in the relationship established between social development and NII must be studied further. We suggest that it is likely that eventually social development may affect NII. For instance, as a population becomes better educated, it may begin to demand continuous improvements in access to information for better education, more flexible ways of working, and the new avenues for economic enterprise

Can National Information Infrastructures Enhance Development? 223

available through the World Wide Web. As entrepreneurial efforts increase in a nation, business owners may begin to add to the NII because it is economically advantageous for them to do so. NII research has only begun to identify and “flesh out” the mediating and moderating variables that affect the relationships illustrated in our model. Further research on these variables and their place in the model will have profound implications for NII planning for governments and for NII theory development.

APPENDIX A: LIST OF THE LEAST DEVELOPED COUNTRIES Countries included in the study: AFGANISTAN ANGOLA BANGLADESH BENIN BHUTAN BURKINA FASO BURUNDI CAMBODIA CAPE VERDE CENTRAL AFRICAN REPUBLIC

CHAD COMOROS DJIBOUTI EQUITORIAL GUINEA ETHIOPIA GAMBIA GUINEA GUINEA BISSAU HAITI KIRIBATI

LAO PEOPLE’S DEMOCRATIC REPUBLIC LESOTHO LIBERIA MADAGASCAR MALAWI MALDIVES MALI MAURITANIA MOZAMBIQUE MYANMAR NEPAL

NIGER RWANDA SAO TOME AND PRINCIPE SIERRA LEON SOLOMON ISLANDS SOMALIA

Countries excluded from the study due to insufficient data: ERITREA SAMOA TUVALU Reproduced from UNDP .(1998). “List of the Least Developed Countries,” gopher://gopher.un.org/00/sec/dpcsd/ oscal/idc1997.txt. June 19th.

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Information Infrastructure, 34-62. Fisher, E. O. (1995). Growth, trade, and international transfers. Journal Of International Economics, 39(1-2), 143-158. Gatica, L. (1994). Liberation and tariff legislation in Chile. IEEE Communications Magazine, November, 34-35. Hayami, Y. and Ogasawara, J. (1999). Changes in the sources of modern economic growth: Japan compared to the United States. Journal of the Japanese and International Economics. 13, 1-21. Jackson, C. L. (1995). Telecommunications infrastructure from the carrier’s point of view. The Changing Nature of Telecommunications/ Information infrastructure, 199-203. Keen, P. (1991). Shaping the Future: Business Design through Information Technology. Cambridge, MA: Harvard Business School Press. King, J. and Konsynski, B. (1995). Singapore TradeNet: A Tale of One City, September 30, 487-504. Madden, G. and Savage, S. J. (1998). CEE telecommunications investment and economic growth. Information Economics and Policy, 10(2), 173-195. Malliaropulos, D. (1999). Identifying the Effects of Nominal and Real Shocks on the S&P 500 Stock Price Index, 67(3), 304-324. The Manchester School. McCallum, B. T. (1989). Monetary Economics Theory and Policy. New York: Macmillan Publishing Company. McGuire, M. C. (1987). Foreign assistance, investment, and defense: A methodological study with an application to Israel, 1960-1979. Economic Development and Cultural Change, 35(4), 847-873. McKay D. T. and Brockway, D. W. (1989). Building I/T infrastructure for the 1990s. Stage by Stage, 9(3), 1-11. Merz, M. (1999). Heterogeneous job-matches and the cyclical behavior of labor turnover. Journal of Monetary Economics, 43(1), 91-124. Miller, D. B., Clemons, E. K. and Row, M. C. (1993). Information technology and the global virtual corporation. In Bradley, S. P., Hausman, J. A. and Nolan, R. L. (Eds.), Globalization, Technology, and Competition: The Fusion of Computers and Telecommunications in the 1990s, 283-308. Boston, MA: Harvard Business School Press. Mookerjee, R. and Qiao, Y. (1997). Macroeconomic variables and stock prices in a small open economy: The case of Singapore. Pacific-basin Finance Journal, 5(3), 377-388. Mowery, D. C. and Oxley, J. E. (1995). Inward technology transfer and competitiveness: The role of national innovation systems. Cambridge Journal of Economics, 19(1), 67-93. Nidumolu, S. R., Goodman, S. E., Vogel, D. R. and Danowitz, A. K. (1996). Information technology for local administration support: The governorates project in Egypt. MIS Quarterly, June, 197-221. Niederman, F., Brancheau, J. C. and Wetherbe, J. C. (1991). Information systems management issues for the 1990s. MIS Quarterly, 15(4), 474-500. Noam, E. (1995). Economic ramifications of the need for universal telecommunications service. The Changing Nature of Telecommunications/ Information infrastructure, 161-164. Odedra, M., Lawrie, M. and Goodman S. (1993). Sub-Saharan Africa: A technological desert. Communications of the ACM, 36(2), 25-29. OECD. (1996). Information Infrastructures: Their Impact and Regulatory Requirements. Paris: OECD. Philip, G. (1988). Regulation and deregulation of telecommunications: The economic and

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political realities. Part III: Japan, The Pacific Basin and the less developed countries. Journal of Information Science Principles & Practice, 14(6), 329-334. Pietra, T.and Siconolfi, P. (1998). Fully revealing equilibria in sequential economies with asset markets. Journal Of Mathematical Economics, 29(2), 211-223 Sadowsky, G. (1996). The Internet society and developing countries. On The Internet: An International Publication of the Internet Society, November-December, 23-29. Sadowsky, G. (1993). Network connectivity for the developing countries. Communications of the ACM, 36(8) 42-47. Stewart-Smith, M. (1995). Private financing and infrastructure provision in emerging markets. Law & Policy in International Business, 26(4), 987-1011. Stone, P. B. (1993). Public-private alliances for telecommunications development: Intracorporate baby bells in the developing countries. Telecomminications Policy, 17(6), 459-469. Swaroop, V. (1994). The public finance of infrastructure: Issues and options. World Development, 22(12), 1909-1919. The Economist Intelligence Unit. (1997). Country Report 3rd Quarter 1997 Singapore. London: The Economist Intelligence Unit. The Economist Intelligence Unit. (1995). Country Report 4th Quarter 1995 Singapore, London: The Economist Intelligence Unit. The Economist Intelligence Unit. (1991). Singapore, Country Profile 1990-91: Annual Survey of Political and Economic Background. London: The Economist Intelligence Unit. The New ITU Association of Japan. (1997). World Telecommunications Visual Data Book, 1997: Telecommunications & Broadcasting in the World and ODA by Graphical Representation, Tokyo: The New ITU Association of Japan. The World Bank (1994) Social Indicators of Development 1994. Baltimore: The John Hopkins University Press. The World Bank. (1988) Social Indicators of Development 1988. Baltimore: The John Hopkins University Press. Verbrugge, Randal J. (1999). Cross-sectional inflation asymmetries and core inflation: A comment on Bryan and Cecchetti. The Review of Economics and Statistics, 81(2), 199-202. Wei, L. (1995). International technology transfer and development of technological capabilities: A theoretical framework. Technology in Society, 17(1), 103-120. Weill, P. (1993). The role and value of information technology infrastructure: Some empirical observations. In Banker, R. D., Kauffman, R. J. and Mahmood, M. A. (Eds.), Strategic Information Technology Management: Perspectives on Organizational Growth and Competitive Advantage, 547-572. Hershey, PA: Idea Group Publishing. Economic Commission for Africa. (1998). Paris Declaration for the Least Developed Countries for the 1990s : A Review Of the Progress Achieved by African Least Developed Countries in the Implementation of the Paris Declaration and Programme of Action for the Least Developed Countries for the 1990s (1990-1994), http:// www.un.org/plweb-cgi/idoc2.pl?919, February 18, 1998. Government of India. (1998). Information Infrastructure Initiatives in India. Available on the World Wide Web at: http://www.ncb.gov.sg/nii/96scan4/india2.html#p1. Palvia, P. (1997). Research, theory, and practice (Lunch keynote speech delivered at the IFIP Working Group 8.7: Information in Multinational Enterprises in Washington D. C.):

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http://www.people.memphis.edu/~ppalvia/speech.htm, October 1997, pp.1-11. Singapore Internet Next Generation Advanced Research & Education Network. (1998). Infrastructure Developments in Singapore. Available on the World Wide Web at: http://www.sigaren.net.sg/html/infrastructure.html. Singapore Trade Development Board. (1997). Press Release and I&E Notice. Available on the World Wide Web at: http://www.tdb.gov.sg/index.html. The World Factbook. (1994). Available on the World Wide Web at: http// elo.www.media.mit.edu/people/elo/cia/index.html. UNDP. (1998). List of the Least Developed Countries. Available on the World Wide Web at: gopher://gopher.un.org/00/sec/dpcsd/oscal/idc1997.txt. Accessed June, 19, 1998.

Contract, Control, and “Presentation” in IT Outsourcing 227

Chapter XV

Contract, Control, and “Presentiation” in IT Outsourcing: Research in Thirteen UK Organizations Thomas Kern Erasmus University Rotterdam, The Netherlands Leslie Willcocks University of Oxford, UK

Information technology (IT) outsourcing continues to experience phenomenal growth, with an estimated market size of over $100 billion in 2000. Its adoption by some of the largest international corporations has seen outsourcing become considered a key component of the information management agenda. Critical to this agenda is the formulation of comprehensive contracts. For this, legal experts and/or advisors can be consulted, but enforcement depends very much on client and vendor account managers. A theoretical analysis of the contract contrasted with empirical data from client and vendor post-contract management practice revealed that the contract has a number of purposes beyond its sole legal nature, outlining a number of control dimensions both parties aim to enforce. This paper presents findings from 13 UK-based organizations on the role of the outsourcing contract and its purpose for ensuring control over the client’s outsourcing destiny.

INTRODUCTION Information technology (IT) outsourcing continues to experience a phenomenal growth rate, especially in North America, Europe, and more recently Australia. Ever since the Kodak watershed deal in 1989, IT outsourcing has continued to mature to a status where nowadays it is considered a viable management option, making it an integral component of the information management agenda (Feeny & Willcocks, 1997; Rockart et al., 1996; Rockart & Appeared in Journal of Global Information Management, vol. 8, no. 4, 2000. Reprinted by permission.

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Ross, 1995). This agenda in many circumstances deems it prudent to compare the performance of the in-house IT department with the services available externally (Willcocks et al., 1996). IT outsourcing is broadly defined as a decision taken by an organization to contract out or sell the organization’s IT assets, people and/or activities to a third-party vendor, who in exchange provides and manages assets and services for monetary returns over an agreed time period (Loh & Venkatraman, 1992; Lacity & Hirschheim, 1993). Research so far has shown that the client-vendor relationship is indeed more complex than a mere contractual transaction-based relationship (Kern, 1997; Klepper, 1994, 1995; McFarlan and Nolan, 1995; Willcocks and Choi, 1995; Willcocks and Kern, 1998). A major complexity is the near impossibility of presentiation2 of future requirements in long-term deals such as outsourcing, due to the volatility of information technology and the likely changes in user and company requirements. Suggestions have thus been made that the client-vendor relationship has to include relational contract and/or partnering dimensions (Kern, 1997; Willcocks and Kern, 1997). However, research and industry best practice has clearly shown that a central focus has to remain on the contract and hence its enforcement in the postcontract management stage (Lacity & Hirschheim, 1993; 1995). So far, little to no research has focused on explaining which contractual dimensions are eventually operationalized. Such information would allow practitioners to better understand and prescribe the contractual dimensions of the client-vendor relationship. Moreover, we conjecture that these dimensions essentially define the client company’s, and to some extent the vendor’s, control agenda over whether the major objectives of the outsourcing arrangement are being achieved. Pilot analysis of two IT outsourcing contracts revealed a number of dimensions that pervaded the post-contract management agenda. In each case the client attempted to maintain control through two detailed contractual clauses/schedules, acting essentially as a third-party judicial entity. By control we mean the process by which the client company initiates activities to assure contractually agreed terms are by the vendor’s company delivered in full and according to expectations and objectives. “Control, in other words, is aimed at ensuring that a predictable level and type of performance is attained and maintained” (Child, 1984, p. 136). In this paper we discuss and analyze the role of the contract in IT outsourcing to elucidate the post-contract management agenda. This agenda essentially prescribes the operationalization of the contract and the control dimension in IT outsourcing. Drawing upon two precedent contracts, we highlight some of the clauses being effectuated. Next, we present findings from an exploratory research study into the client-vendor relationship that reveals how organizations attempt to enforce the contract. The ensuing discussion identifies five different purposes of the contract in the client-vendor relationship, which allow us to infer that a number of contractual dimensions also define the control agenda for the client in the post-contract management stage.

IT OUTSOURCING CONTRACT The contract in outsourcing has been described as a mechanism that establishes the balance of power between the client-vendor (Lacity & Hirschheim, 1993). Contracts essentially have to be as “airtight” as possible (Lacity & Hirschheim, 1993; Fitzgerald & Willcocks, 1994abc; Saunders et al., 1997), because research has shown that vendors tend to refer to it as their chief source of obligation. Vendors, however, would prefer to see the contract as a working document (cf. EDS lawyers Hartstang & Forster, 1995), giving them flexibility to suggest improvements and new services. Clearly, this is in the interest of most vendor companies, for their goal is one of profit margins.

Contract, Control, and “Presentation” in IT Outsourcing 229

An IT outsourcing contract tends to be more complicated than other business contracts, resembling as it does a “hybrid between an asset purchase and sale agreement, and a sale/leaseback agreement, in that there is a sale of assets or transfer of operations, transfer of employees, and a lease back to the customer of the information technology services that were divested” (Halvey & Melby, 1996, p. 43). This legal complexity is evident in the detail and in the time typically invested in negotiating agreement. Third-party legal experts have for quite some time emphasized the need for a comprehensive contract, not only because it is their livelihood, but also because it basically becomes a reference point specifying how the client and vendor relate (Fitzgerald & Willcocks, 1994). The table in the appendix summarizes the main clauses of an outsourcing agreement as specified by legal experts (Burnett, 1998; Clifford Chance, 1997; Halvey & Melby, 1996; Klinger & Burnett, 1994; Mayer et al., 1996).

The Nature of the Outsourcing Contract As previously discussed, the outsourcing contract is unlike other service contracts because of the nature of what is being contracted for and the length of the contracts. This makes it extremely difficult to presentiate service provision or any other exchanges that may be needed in the future. Outsourcing contracts, and indeed most long-term contracts, have a tendency to be incomplete, which raises the possibility of opportunistic behavior by the vendor (Williamson, 1975; Hart, 1995). Macneil (1974b; 1980) in turn proposes to alleviate the incompleteness and presentiation situation through a relational, as opposed to a transactional, contract. However, there is evidence that, despite Macneil’s theorem, most effective outsourcing contracts are essentially neither completely transactional nor relational but mainly transactional intertwined with relational aspects (Currie and Willcocks, 1997; Lacity and Hirschheim, 1993; Willcocks and Kern, 1998). Actual operationalization of the written letter of any contract requires procedures that Macneil (1974ab) prescribes to the relational contract (e.g., extensive cooperation). In this paper we will focus solely on the transactional aspect of how the contract is enforced, which we identify as determining the control agenda. In the following sections we first discuss control, before looking at the post-contract management agenda in outsourcing. The analysis of two proforma precedent contracts elicits the dimensions which pervade post-contract management and further defines the ‘transactional’ level of the client-vendor relationship (or “contractual” as we have termed it elsewhere—see Kern, 1997).

THE CONCEPT OF CONTROL Control is a complex issue that has received considerable attention in the literature. Table 1 lists some important contributions. Anthony’s (1965) contribution in particular is often referred to and well known for its distinction between strategic planning, management control, and operational control. Strategic planning is defined as the process of deciding on the objectives of the organization, on changing these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use, and disposition of these resources. Anthony distinguishes strategic planning from the more management and operational control issues like Child (1984) does. Management control is defined as the process by which management assures that resources are obtained and used effectively and efficiently in the accomplishment of organizational objectives, whereas operational control focuses more on the actual efficient and effective performance of

230 Kern & Willcocks

activities. Child (1984), Eisenhardt (1985), Hofstede (1981), and Ouchi (1979) determine the context of control in organizations and determine a number of characteristics that lend themselves to define a typology. On the other hand, Boland (1979) and Orlikowski (1991) reveal how control is applied in the context of information management. Looking at the existing theories, three common dimensions can be identified according to Fischer (1993) that describe a useful typology for analyzing control in IS: focus of control (directed at whom or what), measures of control (degree of control), and process of control (means of enforcing control). Using this typology as an underlying guide, the next section presents the post-contract management agenda as the focus of control, before looking at the process of control in the empirical findings. The subsequent discussion will then allude to the degree of control in outsourcing.

POST-CONTRACT MANAGEMENT IN IT OUTSOURCING The greatest challenge that client companies face following the signing of the contract is the achievement and the enforcement of agreed terms. A number of stipulated terms will always be integral to driving the outsourcing venture forward for both sides. For the majority of client organizations we can assume they are service levels and costs (i.e., payments), whereas for the vendor it is clearly payment (i.e., profits). This control agenda defined by the contract is an integral part of post-contract management. By 1997, based on over 10 years of drawing up outsourcing contracts, several law firms had developed pro-forma precedent contracts. Here we analyze these and related sources to establish templates against which to assess our case histories and also briefly look at the often elusive concept of control. To enforce the contract, the appointed client managers and/or residual IT group are held accountable for the management and delivery of all products and services related to the outsourcing venture (Fitzgerald and Willcocks, 1994a,c). Related to this task will be the Table 1: Post-contract management agenda (adapted from Halvey & Murphy Melby, 1996). 1. Setting and/or approving IT strategy, architectural directions, and business improvements; 2. Insuring user service objectives and customer satisfaction targets are achieved; 3. Insuring quality and continuous improvements; 4. Setting and changing priorities to insure objectives of the business are met; 5. Being the focal point for determination and translation of all new business requirements necessitating vendor action; 6. Resolving disputes that arise; 7. Overseeing the vendor’s performance as specified in the agreement; 8. Monitoring overall service quality and continuous improvement initiatives; 9. Assuring proper charges and billing for the services rendered; 10. General contract administration and amendment control; and 11. Involvement in allocating new managers in vendor company to handle the account.

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Table 2: Overview of important control literature Author & Year Anthony (1965) Boland (1979) Child (1984) Eisenhardt (1985) Hofstede (1981) Orlikowski (1991) Ouchi (1979)

Control context Management control process Control versus control over Control use in organisations Control as part of organisational design Typology of management control Impact of IT on control in organisations Typology of control

conjoint rationalization and implementation of the vendor’s processes for service changes, charges, and general financial and operational management of the contract, as well as approval of any special projects that may arise. Appointing duties and responsibility in the post-contract stage is critical, as effective management necessitates continuous communication between the responsible persons to ensure services, payments, and extra requirements are met and conflicts resolved. In our sources we found the post-contract management agenda for the client to cover the issues detailed in Table 2. For the client to accomplish this management agenda, an effective communication and operations structure has to be established in each organization and between both parties. McFarlan and Nolan (1995, p. 22) suggest interfaces have to occur at multiple levels: “At the most senior levels, there must be links to deal with major issues of policy and relationship restructuring, while at lower levels, there must be mechanisms for identifying and handling more operational and tactical issues. Both the customer and outsourcer need regular, full-time relationship managers and coordinating groups lower in the organization to deal with narrow operational issues and potential difficulties.” To ensure the various interfacing points on the vendor’s side matches the client’s operational and management style, they should ensure mutual involvement in selecting key vendor personnel.

Contract Operationalization and Control We undertook a closer analysis of some of the key clauses and schedules in a UK (Clifford Chance, 1997) and a North American (Halvey and Melby, 1996) precedent contract. The following contractual issues, for analytical purposes classified under each type of interaction, were found to demarcate the transactional focus of the post-contract management agenda.

A. Service Exchanges The most important part of every outsourcing agreement is the description of the services the vendor has to supply (Klinger and Burnett, 1994). Therefore, the service requirements have to be as detailed as possible to avoid disputes over service scope. Services are typically described in a series of exhibits, i.e., schedules. The following give an indication of what exhibits might cover: • architecture and product standards (services delivered according to these standards); • company critical services (non-achievement may result in liquidated damages); • new technology environment (new products/services and migration plan); • security services (data and/or physical security services); and • value-added services (e.g. risk/reward sharing, marketing, and others).

232 Kern & Willcocks

B. Service Enforcement and Monitoring To enforce services, performance standards and service levels have to be established and agreed for each service the vendor has to provide. Service levels typically include response times, processing priorities, systems availability used to provide services, and percentages for processing errors (Halvey and Melby, 1996). In some cases clients want to streamline the service levels through the joint efforts of the parties after the contract has been signed. In these circumstances, but also when all service levels have been specified, it is essential that the client monitors the service levels and possibly benchmarks them against previous and/or best-in-class service levels. The vendors’ non-achievement of service levels is often directly tied to liquidated damage provisions, giving clients a powerful leverage and control mechanism. Typical clauses and exhibits for service enforcement and monitoring are: • application development measure procedures (allows client to monitor development); • benchmarking (the client can compare at any time services with other services of third parties); • customer satisfaction survey (to be carried out by the vendor at certain intervals and reported to the client); and • performance-reporting requirements (reports on service performance to be provided by the vendor in intervals).

C. Financial Exchanges For the vendor to provide the services according to the agreement, the client will be charged a base fee with respect to the base services provided. Fees allocated to these base services need to be as exact as possible to avoid any confusion and dispute. Any additional services outside the previously agreed service scope (e.g., overtime, additional volume of services) will be charged according to agreed price rates. Similarly, details of fees payable to the vendor for services above baseline (e.g., hourly, daily, weekly, monthly) should also be covered to give the client flexibility. The timing of the payments has to be agreed, but they depend largely on the client’s approval. The following are typical clauses and schedules: • base fees (fees payable for base services); • expenses (previous agreement on expense budget); • incremental fees (fees payable for additional services above baseline); and • new service fees (fees payable for new services out of services scope).

D. Financial Control and Monitoring To ensure the client has some level of control over the costs, appropriate means to monitor the fees charged by the vendor need to be agreed. Klinger and Burnett (1994) suggest the client must have the right to audit and request verification of the charges put forward by the vendor at any time. Additionally, the client can enforce liquidated damages in circumstances of nonperformance of service levels. Other suggested means included: • audit (access to financial information and charges); • liquidated damages (for failing to meet service levels); • open book accounting (vendor keeps an open book of costs and charges accessible by the client); and • price lists (list or catalogue of prices of different services, hardware, software and technology that the client can request from the vendor).

Contract, Control, and “Presentation” in IT Outsourcing 233

E. Key Vendor Personnel Of fundamental importance to the client will be to know who is responsible for certain services, areas, or technology in the vendor company, and vice versa. The precedent contracts suggest that key vendor employees will be explicitly listed in the contract as remaining with the account for specified time periods, or equivalent staff made available (Clifford Chance, 1997). The client should have approval rights over vendor employees and their length of involvement with the account. Furthermore, the vendor has to disclose to the client how it will structure its organization to be able to respond to the client’s needs. Both the key contact points and the structure are fundamental to ensure communication. The contract will address these under the following terms or schedules: • supplier personnel and key employees; and • vendor account management team structure.

F. Dispute Resolution Typically the contract will give guidance on an informal resolution mechanism to deal with disputes. If disputes cannot be resolved in the first instance, the contract describes an escalation procedure and the appropriate persons, groups, or committees to contact. As a final resort, a neutral third-party advisor or even a judgement is suggested in the contract to resolve a dispute: • dispute resolution (details of procedures for resolution).

G. Change Control and Management Finally, to ensure the contract allows for flexibility to cater for changes in user and company requirements, the contract specifies change procedures the client can initiate formally. For this a change request has to be issued detailing the changes required from the vendor. This will most likely affect pricing arrangements and possibly take effect with a time delay. The agreed procedures will be specified in a schedule referred to something like: • change control procedures. The analysis revealed that service exchanges, service enforcement and monitoring, financial exchanges, financial control and monitoring, and change control and management circumscribe the nature of the ongoing transactional processes between both parties. Secondly, it identifies in the vendor company the key contact points and provides an overview of the account management team’s organizational structure describing some of the structural factors of the client-vendor relationship, whereas the dispute resolution method describes some of the skills the managers handling the relationship must have. Combined, these arrangements will come to bear upon the client-vendor relationship and describe the focus of the control agenda in post-contract management.

FIELD STUDIES Findings from the research portray in detail those issues that play a crucial part in client organizations’ attempts to control their outsourcing arrangements. Our analysis suggests that maintaining control over the outsourcing venture through contractual means was seen as particularly important. The general concern following hand over was loss of control and

234 Kern & Willcocks

over-dependency on the vendor. Clients were thus keen to affirm their control in the venture, through a number of different contractual dimensions and considerations. Although we recognize the study focuses on a small and geographically distinct sample where a particular set of contracting practices apply, there are a number of learning pointers applicable to outsourcing contract management in general.

Research Approach In early 1997 we undertook research into client and vendor relationship practice in 13 organizations based in the United Kingdom. Using a semi-structured interview protocol a series of interviews were undertaken with a range of participants, including lawyers, IT managers, contract managers, account executives, general managers, and support managers in both customer and vendor organizations. Questions addressing the contract, post-contract management, relationship management, the nature of the working relationship, and the evolution of a relationship were posed, with a strong emphasis on what characteristics influenced the operationalization of the contract. These are some of the key questions asked: • What role does the contract play in the relationship? Have you had to refer, enforce it, or use it in anyway in the relationship so far? • Could you describe the state of the relationship? What operational difficulties have you encountered? • What were some of the major milestones, achievements and/or developments in the relationship? Examples? • Are you achieving your expectations and outsourcing intentions? Why not? • What are the upcoming challenges for the relationship? While we made no judgement as to whether the 13 contracts were successful or otherwise, we did need to be in a position to assess whether specific contractual practices were experienced as essential, helpful, or otherwise. The interviews were scheduled for one hour but in many cases lasted anywhere up to three hours. All of the interviews were tape-recorded and transcribed, after which the responses from the client and the vendor companies were grouped together into subject categories by applying a “data display” method (Miles & Huberman, 1994). The resulting checklist matrices of subject categories were then classified into areas of agreement and commonality, and into sets of disagreement and problems. The areas of agreement that illustrated a within-group similarity (Eisenhardt, 1989) identified those variables which underpinned the outsourcing relationship and also provided the means for further subjective cross-case analysis. In some cases it was possible to cross-case analyze a client company’s response with its respective vendor company’s response. The interviews formed the basis for a number of case studies, which were corroborated by the collection and the ensuing analysis of relevant documentation, including internal memos, company information, minutes of meetings, and outsourcing contracts. Tables 3, 4, and 5 present an overview of the companies interviewed, clients’ perceptions of their relationship focus, and subjective third-party ratings of the partnering capabilities of the vendor companies interviewed. Tables 3, 4, 5 are constructed from interview responses, as indicated.

Contract, Control, and “Presentation” in IT Outsourcing 235

FINDINGS The Contract Contracts were found to stipulate at length the terms and obligations the vendor and the client had to fulfill. Their ultimate function was explained by their legal nature, allowing the client and/or vendor to produce the contract in court, in cases of, for example, dispute or termination (Solicitor, Service A). This legal nature of the contract3—in the United Kingdom—makes it near impossible to include non-legalistic terms such as trust, cooperation and so on in the contract (Partner, Service A). The vendor could not commit to these terms contractually because they did not know what the client’s requirements are. In essence then, the contract outlines the bare bones of the deal “which is the formal structure of the relationship on which you might actually rely if it all collapsed and you had to seek legal redress” (Partner, Service A). The contract was found to build the foundation on which the ensuing client-vendor relationship is then based (Business Director, Vendor E; Managing Director, Vendor A). It “defines how you are going to work more than anything else, but you then still have to make it work. This is just paper, it’s people that make things work. This gives them the guidelines, the stepping stones, the structure” (Management Service Manager, Client C). Getting the contract, i.e., the foundations right (Group IS Manager, Client B), is vital, because a badly formulated contract can lead to frustration and in some circumstances—as Client A experienced—lead to costly renegotiations, and eventuate in possible failure.

Table 3: Client companies Client Company & Interviewee

Industry

Annual Turnover

Origin

Outsourced

Client A Business Support Manager Client B Group IS Manager

Retailing & Stores

£780mn1 (1995)

British

Total

Chemicals Manufacturer

£10bn 2 (1996)

British

Client C Management Services Manager

Property Investment & Development

£472mn 1 (1995)

British

Client D Economic Analyst

Aerospace Manufacturer

£3.5bn 2 (1995)

British

Client E MIS Executive

Motor Car Manufacturer

£397mn 2 (1995)

British

Client F IT Coordinator

Electronics Manufacturer

£270mn1 (1995)

Japanese

Client G Corporate IT Adviser

Oil, Gas, & Nuclear Fuels

£453mn 2 (1995)

Dutch/ British

Selective (Europe) 1. telecomms network 2. data center, software support & legacy systems 3. desktop systems & phones Selective 1. hardware & software maintenance 2. legacy system, & software development Total & major business process reengineering programs Selective 1. software development & IT operations 2. systems integration 3. global networking Selective legacy & operating systems Selective & Total (Global) 1. desktop computing, networking, & others 2. Total

Start of Deal

Length of Deal

Size of Deal

No. of People Transferred 120

Relationship 3 Focus (1997)

1993

10 years

£1bn

1. 1994 2. 1995 3. 1997

1. 3 years 2. 5 years 3. 4 years

1. <10mn 2. £75mn 3. £40mn

1. <10 2. 4000 3. <10

1. Transactional 2. Relational 3. Too recent

1. Confidential 2. Vendor B 3. Confidential

1. 1993 2. 1995

1. 4 years 2. 3 years

1. £2.5mn 2. £10mn

none transferred

1. Relational 2. Transactional

1. Confidential 2. Confidential

1996

10 years

$900nmn

850

Relational

Vendor A

1. 5 years 2. <3 years 3. 3 years

1. <0.5mn 2. <.05mn 3. £1mn

1.12

1. Transactional 2. Transactional 3. Transactional

1. Confidential 2. Vendor B 3. Confidential

5 years

£2.5mn

none transferred

Transactional/ Relational

Vendor D

1. <1 year 2. 3 years

1. <20mn 2. <20mn

1. <10 2. <10

1. Transactional 2. Transactional/ Relational

1. Others 2. Vendor A

1. 1992 2. 1992 3. N/A

1994

1. N/A 2. 1993

Transactional/ Relational

Customer of Vendor Company Vendor B

United Kingdom turnover; 2Total including other subsidiaries; 3Findings from research in 1997 rated according to Macneil (1974a) distinction between transactional and relational. 1

236 Kern & Willcocks

The contract’s role in the post-contract management stage was also found to be one of guidance. During this stage managers implementing the venture will use the contract as a management guide to operationalize the contract. The Manager from Client C explained the use of the contract in the beginning as essential for “bedding down the exact processes. We are still doing things for the first time and therefore it gets referred to in the sense of this is how we thought we would do it, how does that actually match up to what we are doing, what’s the next step, what’s missing, shall I just check that I’m doing this right. So it’s being referred to in that way, but it’s not being referred to in an adversarial way.” It is used as a vehicle for describing the relationship and getting rid of ambiguity (European Strategic Director, Vendor B). The contract and its schedules define the level of control and the responsibility and expectations of each side (Managing Director, Vendor A). In most situations, the contract gives the client ultimate control through the possibility of invoking early termination via exit clauses (according to MIS Executive, Client E; Business Director, Vendor D). Seldom are these invoked, though, as they could introduce new cost factors (e.g., switching), and a loss of time and result in a breakdown of services. Consequently: “Although we legally have the option to do that [terminate] the much more practical solution is to learn your lessons and to renegotiate the contract to address the things that you think you would like to be better” (Business Support Manager, Client A). This seemed to be an approach a number of customers adopted. Termination is really the last resort (MIS Executive, Client E). Interestingly, though, the IT Coordinator from Client F and the Manager from Client A explained they do not find the contract that important. In fact, as the Manager at Client Table 4: Vendor companies Employees (Globally) Approx. 70,000

Annual Turnover (Global) £12,4bn (1995)

American

Approx. 50,000

£4,2bn (1996)

American

38,000

£4,2bn (1995)

Vendor D – Executive Director (UK)

British/ French

27,000

£1,8bn (1996)

Vendor E – Business Director & Principal Consultant

British/ French

9,400

£678mm

Vendor Company & Interviewee Vendor A – Managing Director & Program Director Vendor B – European Strategic Director Vendor C – Partner

Origin American

Business or Service Areas Consulting, systems development, systems integration, systems management, & process management Management consulting/ professional services, systems integration, outsourcing Consulting, business process management, outsourcing, change management, strategic management IS and business process management, project services, products, consulting, and education & training IT consulting, systems integration, products and outsourcing

Explicit Relationship View Yes

Partnering Capabilities 3

No

2

No

3

Yes

3

No

4

Meta Group, Inc.’s (1996) global rating of IT vendors on a scale of 1 to 5; (1 is best). Partnering capabilities entail the “ability to partner at various levels, including megadeal alliances and project-specific partnerships.”

1

Table 5: Outsourcing advisor Outsourcing Advisor & Interviewee Service A Solicitor & Partner

Origin British

Employees (Globally) approx. 5,000

Annual Turnover (Global) approx. <£5mn

Business or Service Areas Financial, corporate, commercial and litigation matters

Specialist Area IT Outsourcing contract development

Contract, Control, and “Presentation” in IT Outsourcing 237

A explained “the existing contract is treated the way many companies treat a strategy document: you don’t really want a strategy process [where] you produce a document and stick it on the shelf and never read it again. Occasionally we get the contract out and we refer to what it actually says. … And if we get the contract out, we’ve failed in our ability to manage the situation.” Similarly, the Coordinator at Client F explained, “If we ever have to go back to the contract then the outsourcing deal has failed. The contract is there to actually protect us as a company, but to have to invoke anything within the contract means you have failed to negotiate with the supplier. And really it’s not something we want to do lightly.” The reason is that in most situations if you operate an outsourcing venture solely by the contract, the ensuing relationship could go dangerously wrong, because the contract does not adjust according to possible changes. The outcome of a contract may become totally inflexible, and to actually specify the relationship in any detail over that length of time of the contract is really outside of reality (MIS Executive, Client E). Therefore, the only way flexibility was found to be attainable, was through agreeing upon specific contractual change procedures.

Flexibility and Changes In essence, the legal nature of the contract does not exactly allow for flexibility. Therefore, the contract is “drafted as a long-term commitment, and pricing takes into account the changes in some way, shape, or form” (Client C). In other words, the contract requires renegotiation or amendment if major parts where to be changed, but for service or technological requirement changes there are procedures available in the contract that cater for these. As the partner from Service A explained, there are “very detailed change control procedures because clearly you know that technology is going change. It is the most difficult thing to provide for, you need to encourage the suppliers to come up with changes, because you want them to be proactive. But then you also want the strategy to stay with the customer so they can actually determine whether the changes go with their objectives. … But it is difficult. You can’t prescribe what’s going to happen; all you can do is provide provisions in the contract to point people in the right direction and give them flexibility as far as possible” (Partner, Service A). According to Client and Vendor companies, change procedures are commonly initiated in two steps. Upon realizing changes in the business that require alterations in the services delivered by the IT function or system, clients will issue a request for change with the vendor company. This change request states in detail the requirements for which the vendor will then present the specifications and costs. In some situation vendors may actually propose change, as services may have become defunct or services are duplicated (Executive Director, Vendor D). The second step will be for the client to formally sign-off the proposed changes and their price, so that the vendor can arrange for them to be implemented. However, change management and control was found in practice very problematic as clients were uncertain in many occasions about whether they had catered for all eventualities (Solicitor, Service A; Management Services Manager, Client C, and Corporate IT Advisor, Client G).

Post-Contract Management The findings from client and vendor companies revealed that essentially the postcontract management agenda is concerned with enforcing the contract and achieving the stipulated terms. Interviewees corroborated this finding by suggesting that control over the vendor and vice versa is enforced through the following five contractual dimensions: • financial control and monitoring; • penalty payments;

238 Kern & Willcocks

• • •

monitoring of service levels and/or products; performance measurements; and selection of key interface points.

Financial Control and Monitoring Clients and Vendors suggested that everything in the contract at the end of the day winds down to a financial consideration. “The case where we do stick firmly to the contract primarily is when it comes to money. If we are duty bound to pay something or if we are not bound to pay for something, we either will or won’t depending on what it says. … I think we are softer on service where we are looking for flexibility, but hard-nosed on cost issues where we are very precise” (Business Support Manager, Client A). However, this is not to say that other stipulated terms in the contract will be disrespected. It was just emphasized that the profit margins and payments to be made will always be closely monitored and scrutinised by both parties (Manager, Client A; Director, Vendor E). It is one of the key areas where control is emphasized. For example, the Economic Analyst from Client D explained that in their contract with Vendor A, every change initiative and/or major service delivery improvement is cost benefit analyzed. And the way that is essentially measured is usually pounds over a period of time (Economic Analyst, Client D). To be able to undertake such an assessment, you need complete access to the costs and pricing strategy of your vendor (Executive Director, Vendor D). In other words, as Clients explained, you need an open book arrangement. Essentially, this arrangement gives the client a lot of control over where the vendor actually makes money. This is apparent in Client A’s objective: “The new arrangement should make it clearer how Vendor B makes their money. We don’t want them to go out of business, we don’t want them to have such a bad deal that they walk away from it. But we do want to understand, and we have in the past understood them, where we think they make their money, but it will be clearer with the open book arrangement. The deal was always set up that we would save costs in the first few years and they would make more money in the later years of the contract. And it could well be that they weren’t sure that those costs were going to be generated in the first few years of the contract. So they may feel they’ve lost money in the first couple of years” (Manager, Client A). However, when the vendor suggests an open book arrangement because the problem or issue cannot be settled through a fixed price, the client subsequently gives the vendor control over large profit margins. This is exemplified by the Director’s (Vendor D) explanation of an open book arrangement: “If you want to out-source that kind of situation then the other way of doing it is … [by] an open pricing arrangement. In other words I say to you, I don’t know how much this is going to cost, you don’t know either, and what we will do is put sufficient people and hardware in and we will write all the costs of those down and you can look at those and make sure you are happy that we are not putting enough people on that problem. It’s open. We will agree in addition to that cost that we can charge you a certain figure, a certain percentage, or a certain amount of money. … So I would rather say we will do that and in addition we will charge you £50,000 a month for our management, for our profit, for our margin. And we will look together at the cost of doing this and then our total charge would be those costs plus our management charges.” Clearly, this latter arrangement would give the vendor significant to total control over the costs and possible services they will deliver at the end of the day. Another means for controlling the costs is through the introduction of a competitive benchmarking process (Partner, Service A). This was found to be an important contractual

Contract, Control, and “Presentation” in IT Outsourcing 239

contingency (Solicitor, Service A). It protects customers against increasing prices, while the quality of services decreases. It also allows customers to compare prices and services against competitors and request the vendor to match industry “best practice.” This seemed especially appropriate for commodity processes, such as basic computing or telecommunications. To ensure cost control “you continually set your suppliers of the commodity services at each other’s throat, demand that they keep to a certain international standard, and request lower and lower prices the whole time” (Group IS Manager, Client B). Cost control is crucial for the client to have, since the motivation of the vendor is always to make a profit (Principal Consultant, Vendor E; European Strategic Director, Vendor B; Executive Director, Vendor D; Partner, Vendor C). In some cases, such as total outsourcing deals, before the vendor can actually make a profit they will have to recuperate the initial premium payment, and only then will the vendor begin to make a profit from the deal. “So premium payment may be say £ 300 or what number it might be, but how do you pay for it? You pay for it by charging them back for it. You squeeze a bit more to actually pay for some of that money. Therefore you are putting a tighter squeeze on the situation as you go along” (Partner, Vendor C).

Penalty Payments In the event of a client not receiving the quality of services for the value of the money, it was suggested that would be a just cause for enforcing penalty payments or in extreme cases early termination of the contract (MIS Executive, Client E). Clients described penalty payments as a formalized means of control, to ensure, for example, target deadlines are met (Management Services Manager, Client C). However, requesting penalty payments and enforcing them unilaterally damages the overall relationship. It was suggested a mutual understanding of the reason for enforcing penalty payment is necessary, to avoid reoccurrence and to ensure the client-vendor relationship moves forward. It is similar to early contract termination; it is really the last resort to enforce control over service delivery.

Monitoring of Service Levels and/or Products Another key control factor is the monitoring of services and their delivery. These are very carefully monitored, as services are in many cases the main part of the deliverables for which the client contracted the vendor (Group IS Manager, Client B; Management Services Manager, Client C; Solicitor, Services A). In most deals services were explicitly detailed in the service level agreement (SLA), which outlined what client companies expect as their basic service requirements. For example, Client E stressed that they had very detailed SLAs, including specific availability targets, response times, outages, and so on for their service requirements. The SLAs essentially defined the chief (hard) measure. “If we are not actually getting the SLAs, then it is our right not to pay. We are paying for a quality service and that’s what we specified in the SLA and if the SLA is not achieved, then in my view the contract stresses that we should pay less” (MIS Executive, Client E). The importance of service level agreements in the contract was emphasized by both client and vendor companies. The UK Managing Director from Vendor A described this importance as a level of control it gives both parties and the extent to which the SLAs define each other’s responsibilities and the client’s expectations. The Executive Director from Vendor D endorsed this view and further explained that “a service level agreement really expresses what the customer wants and what’s important to him. Because what a customer would say normally is, ‘I want 99% availability of service.’ When you get down to the service

240 Kern & Willcocks

level agreement, they might well say, ‘Actually in this system we want 99.5% availability and this one we would be happy with 75% or 50%.’ You actually really get down to what they want in a detailed sense. That then enables you to measure whether you are billing them for that service. So it helps the relationship, because when the customer says your service is no good you can say, ‘Well that’s pretty strange because according to my statistics we hit every one of these service levels.’” It thus becomes a control factor through which both parties were found to assert their power.

Performance Measures To ensure services and/or products are delivered according to expectations and agreement, clients and vendors operate an array of hard and soft performance measurement methods. Depending on the outsourcing intent, clients focused their performance measures on cost reductions, services delivered, service improvement, specific projects, new technology, user satisfaction, and others. In the majority of cases Clients and Vendors explained they measure a range of the former, to address both business and user measures. “You have got to be able to put together an analysis that is partly people’s subjective reaction to what’s going on, partly objective measures of where their contribution has been … And it’s a combination of those different measures all coming together that allows you to do it. You must have some very hard measures in there, more of those hard measures that are output oriented the better” (Group IS Manager, Client B). Thus, Client B uses service delivery according to contract, step changes performance measure, return on net assets, and other business measures, such as customer responsiveness, and output measures (such as On Time In Full: did the customer get everything they wanted in good time) as their main measures. Alternatively, Client A employs a scorecard scheme that allows them to “look at are we on time with the budget, does the user community like the new systems, do the board of directors feel that the new systems are a good thing. This allows us to measure whether our programs succeed…. So we are trying to more formally set up a tool for measuring the success of the program, as we don’t have anything similar at the moment for the Vendor B relationship” (Business Support Manager, Client A). Vendors explained their performance measures similarly involve an array of objective and soft methods, including third-party auditing. The Executive Director from Vendor D explained they measure their performance against the SLAs, perform a customer satisfaction survey, undertake an internal quality review of staff, and attain an external auditor’s assessment of specific contracts. Similarly, the Partner from Vendor B explained they use surveys, reviews, and external audits to measure success in contracts. Accordingly, the Director from Vendor E explained, “we have every month a service measurement report. So we have a clear statement every month on at least the objective measures. That doesn’t tell the whole story because it’s the subjective measures which are also very important. So if a customer carries out at their expense a survey every year which measures the subjective satisfaction of all the receivers of the service, both managers and technical people—and that’s a useful guide on an annual basis—we also from time to time commission bits of research from a market research organization who go to our customers and ask them about services, service values, and so forth.” The subjective measures employed in some cases are crucial as they elicit whether the services delivered satisfy the user community. Clients explained that sometimes formal measures are achieved according to agreement, but they do not actually satisfy the user’s requirements. It is then a matter of adjusting them accordingly, which in many situations the vendor will not undertake without formally increasing costs (Corporate IT Advisor, Client

Contract, Control, and “Presentation” in IT Outsourcing 241

G). Vendor A employs in Client D a contract measurement scheme of customer values and expectations, alongside their objective indicators. “So it isn’t just a matter of asking the customer are you satisfied or not, we have to understand what his expectation is rather than what his requirement is. Then there are some quite sophisticated measurement systems that we deploy to actually take a particular user, look at all the parameters of interest to him…. It might be reliability, it might be the quality of original thought, empathy, all these sorts of things. And we get the user to identify, first of all what are the dimensions of what you would expect from us, and what is the most important. … So you get a picture of what he wants and then how he thinks we are measuring up against that. So that’s how you measure the soft issues. And we have to do that on a continual basis across all aspects of the relationship. Different people have very different expectations from us” (Program Director, Vendor A). User satisfaction is the most common soft measure elicited by both vendor and client companies. Although extremely difficult to measure and most commonly arrived at by customer satisfaction surveys, it was found to be an important indicator of whether vendors achieve the users service requirements (MIS Executive, Client E; IT Coordinator, Client F). Vendors find user satisfaction surveys fundamental, because “that’s what actually is going to affect our reputation. That’s what, if someone goes through a reference visit, they are not going to tell them that we achieved all these SLAs, they are going to tell them whether we are good or not so good. It’s going to be perception on a particular subject” (Executive Director, Vendor D).

Interface and/or Contact Points The Clients explained that in situations where discrepancies about service levels and/ or payments arise, they would contact a specific manager in the vendor company. In most cases the Clients revealed, they know the managers in the vendor company quite well because they were involved in selecting them as their contact points (Management Services Manager, Client C). In a number of Client companies the residual IT group defines the actual contact points. So for example at Client A, the remaining five IT managers who handle the outsourcing deal—which included a senior manager in charge of the contract, two middle managers in charge of the headquarters IT requirements and the overall store systems, and two operational managers in charge of assessing the service levels and delivery, business developments and requirements—are also the main contact points for the vendor. Similarly, at Client D a small remaining client team represents the main interface point for Vendor A in matters of IT (Program Director, Vendor A). In most instances the vendor company mimics this interface structure. “There tends to be a matching process where you take the structure of the company that you are going to service provide and take the structure of the customer and kind of match it. So our managing director matches with their managing director and so on. When you start in terms of building the relationship, you need to have that matching pulled through. To make sure you don’t fall over each other” (Business Director, Vendor E). In some cases, Vendors explained, the contact points in the client company interface with a number of managers on the vendor side (Business Director, Vendor D and Program Director, Vendor A). This suggests the client company contact point may have a one-tomany relationship. “It is rarely a simple one-to-one relationship. In Vendor E’s case in every contract there will be two managers contacting the person on the client’s side. One will be a service or customer service manager and the other will be a business development manager. These two managers’ job is to develop business in a very proactive way and to make sure the service is satisfactory and is on time. So there is a set of relationships for each of these customers” (Business Director, Vendor E).

242 Kern & Willcocks

Client and Vendor companies stressed the importance of staffing the interface points. For the Client this entails retaining a group of experienced managers who can effectively handle the vendor. This group can then act as a controlling agent. Findings suggest that the IT team will take responsibilities for researching and defining the IT function for the business, and for controlling the vendor. To ensure continuation of the relationship between the IT group and the vendor, “you have to engage the delivery team. [To do that] most people are expected to stay on a contract for 18 months to two years. And some people will stay there longer” (Partner, Vendor B).

DISCUSSION The findings confirm past researchers’ insistence on the critical importance of the contract in outsourcing. From our evidence we would suggest that this importance derives from the multiple purposes that are associated with the contract. The study of its enforcement revealed that in postcontract management, there were five main ways in which the contractual terms affect or influence the management of the client-vendor relationship. In the following we discuss these and elaborate the control agenda inherent to enforcing the contract.

The Outsourcing Contract The contract undergirds the IT outsourcing venture in a number of ways, even though clients stressed essentially it is only “paper.” The document might be termed, though, the manual to the deal, outlining each other’s commitments and the client’s expectations. Clearly, it is not the agreement that will make the outsourcing deal work, but the people. However, for the people, it takes on a significant enough role beyond merely a “strategy document on a shelf” (Manager, Client A); indeed, it would appear to be associated with five purposes in post-contract management. Firstly, the contract has a legal function, in the sense that it can be produced in court to explain the arrangements of the deal that were agreed by both parties. Its legal status encapsulates, for example, termination clauses, penalty demands, and dispute resolution procedures that client companies can legally enforce in court. Although companies emphasized that such extreme measures are seldom implemented, they still pose a strong means of putting pressure on the vendor to ensure contractual achievement. The legality of the document allows clients to ultimately wave it as a “sword and shield,” as the Solicitor from Service A highlighted. Secondly, the contract attempts to presentiate service levels as far into the future representing user and organization requirements. Of course, uncertainty cannot be avoided, only mitigated, due to the nature of the rapid changes in information technology and likely changes in user and business requirements (Willcocks, Feeny & Islei, 1997). To this extent the actioning of presentiation as it might be ascertainable in transaction or discrete deals, is not possible in long-term IT outsourcing ventures. This would seem to be the case for most deals, given the fact that on average deals last, as reported by recent survey results from Saunders et al. (1997) and Fitzgerald and Willcocks (1994a,b,c), somewhere between three to five years. Therefore, it would seem plausible to consider outsourcing contracts more relational (according to Macneil’s description) than transactional, especially when considering the rate at which they become outdated. Of course building in regular contract reviews and renegotiations terms can restore the transactional focus, and indeed this is a major feature of newer (1995-97) trends in contracting (Currie & Willcocks, 1997; Willcocks & Lacity, 1997).

Contract, Control, and “Presentation” in IT Outsourcing 243

Thirdly, as evident from the findings, the contract assures client control over the outsourcing venture in that it initially defines the obligations and expectations bearing on the vendor. It also gives the client ultimate control through its legal status (possibility to terminate proceedings). The findings revealed that, as we had theoretically conjectured, client companies affirm their control via a number of contractual clauses that are later operationalized in the post-contract management stage. These then also become the measures through which the client monitors the vendor’s performance and vice versa. Fourthly, the contract is to be understood as the “bare bones” of the client-vendor relationship. It prescribes the start, the length of the venture, and,, through a number of clauses and schedules, outlines the structure of the relationship, at least to the point of determining the key interfaces (e.g., interface and/or contact points). It further describes, at least in the start-up phase, the exchanges that need to occur to achieve the stipulated terms (e.g., service levels and financial exchanges). Additionally, the contract also prescribes ultimate dissolution and termination of the relationship via exit clauses and schedules. Fifthly, the outsourcing contract provides guidance to the managers chiefly involved in the outsourcing venture. The findings revealed that in the post-contract management stage, at least five contractually agreed clauses and/or schedules pervade the agenda. They comprise some of the reasons for why the client contracted the vendor, and thus describe the early objectives both parties aim to achieve.

Post-Contract Management and Control As evident, one of the purposes or roles of the contract is its use for the client to assure control over those functions and reasons for which it had essentially outsourced. All client companies interviewed revealed that the baseline services, their delivery, and costs are some of the key factors over which they affirm control. For the vendor companies it was clearly stated that payment, i.e., profit, is their main goal. The affirmation of both parties’ control truly emerges in the post-contract management stage. Post-contract management essentially is the starting point of “working together.” Respondents explained that at this point the client-vendor relationship begins to take shape. The early endeavour is the conjoint operationalization of the contract. But with enforcement a number of control issues arise for the client. On a routine basis these are chiefly focused on what the vendor is delivering, the charges incurred, and the effectiveness of the working relationship. Other control issues emerge from the dilemma of presentiation and the possibility that a client over time finds the deal unworkable. It was found that these control concerns pervade the post-contract management agenda so much so that the client companies invested considerable time to affirm their control. This then provided the basis upon which the client-vendor relationship began to be built. In other words, the control dimensions defined enforcement of the contract and thus delimited those contractual management issues inherent to the dyad. It became apparent that a number of contractual dimensions, which resultantly pervade the post-contract management agenda, specify early on those activities that the client designates later on as their control agenda with the vendor. In part these are management issues but essentially can be summarized as the clients’ control dimensions. Table 6 outlines these findings in line with the control typology adopted. Looking at these control activities and the purposes of the contract, it would seem one can draw a number of parallels. Firstly, all the control dimensions are enforceable legally in court. Secondly, the service levels agreed and the possibility to adjust requirements through change control, gives the contract presentiation flexibility. Thirdly, combining the two would

244 Kern & Willcocks

Table 6: Control Agenda in the client-vendor relationship Contract • • •

• •

• •

•

•

Post-Contract Management

Service level agreements & exchanges Service measurements and monitoring procedures Penalty clauses for non-performance

•

Financial payments & exchanges Financial monitoring & assessment

•

Assuring proper charges and billing for the services rendered.

Dispute resolution procedures Key vendor personnel

•

Resolving disputes that arise. Involvement in allocating new managers in vendor company to handle the account.

Arrangements for adapting to changing circumstances in the future Early termination clause

•

•

•

•

•

Overseeing the vendor’s perfor mance as specified in the agreement. Insuring user service objectives and customer satisfaction targets are achieved. Monitoring overall service quality and continuous improvement initiatives.

Setting and changing priorities to insure objectives of the business are met. No management agenda.

Control (Findings according to participants) Client and vendor spend • considerable time on assuring services are delivered according to agreement. However, client has the ultimate • responsibility to assure services are delivered and users are satisfied. For the vendor, delivery is a • necessity as payments are dependent on service level achievement. Again, both parties spend • considerable time on monitoring and controlling costs. Clients have the ultimate • responsibility to monitor charges raised by the vendors. Vendor’ s goal obviously is to • make a pro fit, so this is where one of their core focuses will be. In cases of dispute the client can • raise complaints with senior managers and escalate matters until satisfactorily resolved. Extreme disputes may demand a third party arbitrator. Client knows and sometimes • selects managers appointed on the vendor side. Breakdown of relations may cause clients to request the vendor company to allocate a new manager. Change control and manage ment • allow the client to initiate change requests when new requirements arise in the business. This legal arrangement allows the • client ultimately to terminate the contract. Although seldom enforced, it gives the client company a me ans of putting pressure on the vendor.

Client’s Level of Control High

Client Control Dimensions Output Control

High

Financial Control

High to Shared with Vendor

Relational Control

Total

Change Control

Total

Control over Control

make the contract the controlling factor in IT outsourcing. Fourthly, they define the contractual level of the client-vendor relationship and thus support the notion that they outline the bare bones of the relationship (Davis, 1996).

CONCLUSION In this paper we discussed the experiences of 13 organizations with IT outsourcing contracts and their operationalization in the post-contract management stage. The empirical findings corroborated our initial assumptions about which contractual issues are enforced. These were also identified as the control agenda the client employs in the venture to manifest its outsourcing destiny. A number of issues were determined which may need consideration prior to outsourcing. Output, financial, relational, and change issues, and how to retain control over control, emerged as requiring careful planning prior to contracting and will undoubtedly have to inform the client’s outsourcing strategy. Hence, it would seem prudent for organizations considering outsourcing to establish a task list for the group of managers selected to handle the deal that assures firstly that managers have the greatest control over these and related issues, and secondly that the outsourcing strategy is achieved. This requires the group to have a clear understanding of contractual requirements and the general organizational

Contract, Control, and “Presentation” in IT Outsourcing 245

objectives. In most situations the organizational IT goals will then be mirrored by the outsourcing strategy. Table 7 summarizes those management implications from paper that need attention prior to outsourcing to ensure strategic alignment of the outsourcing deal with the clients’ overall business objectives. Controlling occurs at different intervals in the post-contract management stage. Clearly, daily and weekly interactions involve output and financial controls and sometimes relational and change control. However, relational and change control occur infrequently, and control over control may only be enforced in complete breakdowns or as the last resort of putting pressure on the vendor. In the client-vendor relationship, therefore, one could expect output, financial, relational, and change control to essentially define the contractual level. We can assume that the critical relationship factors such as cooperation, communication, and trust will develop on back of the contract and the enforcement of these control dimensions. Contracting in the UK, as explored in this paper, was shown to focus primarily on the legality of contracting, thus preventing the inclusion of informal issues such as trust and cooperation that inherently provides a form of contractual flexibility that enables parties to develop their relationship. Contracting in the UK thus might be considered as standing at the extreme end of contractual formality in outsourcing, raising concerns about whether the strict adherence to the contract may hamper relational developments. Of interest here would be to study outsourcing contracts in other countries in light of the subsequent relationship development along the lines of the degree of contractual formality and flexibility. For example, comparing contracting in the UK and USA, our research shows contracting in the USA

Table 7: Management implications - contractual issues to consider prior to outsourcing Control Dimension Output Control

Contract

•

Service level agreements and exchanges Service measurements and monitoring procedures Penalty clauses for non-performance

Financial Control

• •

Financial payments and exchanges Financial monitoring and assessment

Relational Control

• •

Dispute resolution procedures Key vendor personnel

Change Control

•

Arrangements for adapting to changing circumstances in the future

Control over Control

•

Early termination clause

• •

Management Implications (Attention warranted prior to outsourcing) Specify in detail service levels and what is expected • from the vendor. Specify both hard and soft performance measures. • Best practice suggests appointing additionally an external third party to undertake evaluations. Specify penalty clauses and use them! • M ake sure the contract details all prices for services. • Ensure you are aware of how vendor prices and • charges for services. Best practice suggests an open book arrangement for closest scrutiny. Predetermine procedures and/or methods for • assessing vendor charges. Include clear escalation procedures with specific • people or positions to approach in the vendor firm and third-party arbitrators. Strongly, request the vendor to commit its account • management team for at least two years. Include clauses that enable you to partake and veto • appointments Assure contractual change management and • procedures are specified. Define pricing mechanisms that apply for change • requirements and services. Specify the possibility for future negotiations of • services and prices. Include exit clause and the procedures for • termination. Specify the length of assistance vendor has to • provide following termination.

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provides interesting informal and flexible contracting vehicles, giving parties a head start in developing their relationship. We assume similar contractual arrangements might also be available in other countries, but what they look like is not clear. This is an area with significant further research interest, exploring the vehicles available for balancing contractual formality and flexibility. Finally, there are a number of limitations in terms of sample size and geographical distinctiveness. Due to the rather small sample further studies need to look at expanding and verifying the findings from this study. Also the distinctiveness of legal systems and hence contracting across countries and continents, may give rise to a number of additional issues that are unique and country specific to contract management practice. Thus we suggest further research is needed into the post-contract management agenda to elaborate in detail the tasks client managers need to perform prior to outsourcing to assure the greatest possible success of their deal. We suggest that these will revolve strongly around the control dimensions identified in this paper.

ENDNOTES 1 2 3

Address for correspondence: Thomas Kern, Erasmus University Rotterdam, [email protected]. “To make or render present in place or time; to cause to be perceived or realized as present” (Macneil, 1974a). North American contracts on the other hand can include goodwill gestures and relationship important notions such as trust, cooperation, etc. in the contract and exhibits, i.e., schedules (Partner, Service A).

Contract, Control, and “Presentation” in IT Outsourcing 247

APPENDIX: IT OUTSOURCING CONTRACT: ESSENTIAL CLAUSES AND ISSUES

Clauses, i.e, Terms and Conditions 1. Parties and term 2. Definitions 3. Supporting documentation

4. Asset transfer 5. Base services, i.e., service supply and testing 6. Performance standards, i.e., service level agreement 7. Service & equipment location(s) 8. Additional services and projects 9. Service management and contract monitoring 10. Disaster recovery and security 11. Obligations & responsibilities of the client 12. Benchmarking 13. Vendor personnel 14. Payments 15. Payment schedule 16. Texas 17. Audits 18. Change control and management 19. Dispute resolution 20. Termination–fees and assistance 21. Proprietary rights 22. Confidentiality 23. Damages 24. Miscellaneous provisions 25. Appendices

Brief Outline The companies and length of contract Explanations and definitions of working Any documentation clarifying the clients and vendors intentions and objectives, and that can be helpful for dispute resolution (e.g., RFP) Transfer of assets and employees to vendor Description of services to be delivered to the vendor Description of the service levels vendor is expected to provide The actual physical locations of services and security issues Any other services or projects the client may need or is considering Both parties endeavor to achieve the terms stipulated in the contract Backup and emergency services and other security concerns Client should make all reasonable efforts to ensure achievement of the contract Method for monitoring vendor’s performance Overview of vendors key employees for contract Describes the base charges and any additional charges for services delivered The times of payment for the different services delivered Explains the tax situation Financial control and monitoring Provisions to change services and its management Procedures for dispute resolution Reasons for termination, the fees that may arise when client wishes to terminate the contract, and the length of assistance the vendor shall perform Legal property rights given to the vendor for the length of the contract to deliver services of software and systems Confidentiality of information and the effects of breach Liquidated damages in the event the vendor fails to meet service levels. Also liability for damages by the client or vendor to the other party when relating to the performance of the contract Numerous other contractual terms and conditions Exhibits, i.e., schedules

REFERENCES Anthony, R. N. (1965). Planning and Control Systems–A Framework For Analysis. Boston, MA: Harvard Business School Press. Boland, R. J. (1979). Control, causality and information systems requirements. Accounting, Organizations and Society, 259-272. Burnett, R. (1998). Outsourcing IT: The Legal Aspects. Aldershot, NH: Gower Publishing. Child, J. (1984). Organization: A Guide to Problems and Practice (second edition). London: Harper and Row Publishers, London. Clifford-Chance. (1997). Outsourcing Agreement Precedent. London: Clifford Chance. Currie, W. and Willcocks, L. (1997). New Strategies In IT Outsourcing: A Study of Best Practices and Emerging Trends in Europe and The USA. Business Intelligence, London. Davis, K. J. (1996). IT Outsourcing Relationships: An Exploratory Study of Interorganizational Control Mechanisms, 310. Unpublished DBA Thesis, Graduate School of Business Administration. Boston, USA, Harvard University. Eisenhardt, K. M. (1985). Control: Organizational and economic approaches. Management Science, 31, 134-149. Eisenhardt, K. M. (1989). Building theory from case study research. Academy of Management Review, 14(4), 532-550.

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Feeny, D. F. and Willcocks, L. P. (1997). The IT function: Changing capabilities and skills. Oxford, Oxford Institute of Information Management. Working Paper. Fischer, S. (1993). The paradox of adoption and routinization in technology management. Malaysian Journal of Management Science, 2(1), 3-20. Fitzgerald, G. and Willcocks, L. (1994a). Contracts and partnerships in the outsourcing of IT. 15th International Conference on Information Systems, Vancouver, Canada, ICIS. Fitzgerald, G. and Willcocks, L. (1994b). Information Technology Outsourcing Practice: A UK Survey. London: Business Intelligence. Fitzgerald, G. and Willcocks, L. (1994c). Outsourcing Information Technology: Contracts and Client/Vendor Relationships, 10, 1-20. Oxford: Oxford Institute of Information Management. Halvey, J. K. and Melby, B. M. (1996). Information Technology Outsourcing Transactions: Process, Strategies, and Contracts. New York: John Wiley & Sons. Hart, O. D. (1995). Incomplete contracts. NBER Reporter, Summer, 5, 18-24. Hartstang, S. and Forster, K. (1995). Der Outsourcing Vertrag. Outsourcing in der Informationstechnologie: Eine strategische Management-Entscheidung, 60-81. Frankfurt: Campus Verlag. Hofstede, G. (1981). Management control of public and not-for-profit activities. Accounting, Organizations and Society, 193-211. Kern, T. (1997). The gestalt of an information technology outsourcing relationship: An exploratory analysis. International Conference on Information Systems, Atlanta, Georgia. Klepper, R. (1994). Outsourcing relationships. In Khosrowpour, M. (Ed.), Managing Information Technology with Outsourcing. Hershey, PA: Idea Group Publishing. Klepper, R. (1995). The management of partnering development in IS outsourcing. Journal of Information Technology, 10(4), 249-258. Klinger, P. and Burnett, R. (1994). Drafting and Negotiating Computer Contracts. London: Butterworths. Lacity, M. C. and Hirschheim, R. (1993). Information Systems Outsourcing: Myths, Metaphors and Realities. Chichester: John Wiley & Sons. Loh, L. and Venkatraman, N. (1992). Diffusion of information technology outsourcing: Influence sources and the Kodak effect. Information Systems Research, 4(3), 334-358. Macneil, I. R. (1974a). Commentary: Restatement (second) of contracts and presentiation. Virginia Law Review, 60(4), 589-610. Macneil, I. R. (1974b). The many futures of contracts. Southern California Law Review, 47, 691-816. Macneil, I. R. (1978). Contracts: Adjustment of long-term economic relations under classical, neoclassical, and relational contract law. Northwestern University Law Review, 72, 854-902. Macneil, I. R. (1980). The New Social Contract: An Inquiry into Modern Contractual Relations. New Haven: Yale University Press. Mayer, Brown, and Platt (1996). Information Technology Outsourcing: Legal Issues Information. Chicago, Illinois. McFarlan, F. W. and Nolan, R. L. (1995). How to manage an IT outsourcing alliance. Sloan Management Review, Winter, 9-23. Miles, M. B. and Huberman, A. M. (1994). Qualitative Data Analysis (second edition). Thousand Oaks, CA: Sage.

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Orlikowski, W. (1991). Integrated information environment or matrix of control? The contradictory implications of information technology. Accounting, Management and Information Technology, 9-42. Ouchi, W. G. (1979). A conceptual framework for the design of organizational control mechanisms. Management Science, 25(9), 833-848. Rockart, J. F. and Ross, J. W. (1995). The changing IT organization. Centre for Information Systems Research, Sloan School of Management, Massachusetts Institute of Technology, 3876(288), 1-27. Rockart, J. F. and Earl, M. J. and Ross, J. W. (1996) Eight imperatives for the new IT organization. Sloan Management Review, 38(1), 43-55. Saunders, C., Gebelt, M. and Hu, Q. (1997). Achieving success in information systems outsourcing. California Management Review, 39(2), 63-79. Willcocks, L. and Choi, C. J. (1995). Cooperative partnership and total IT outsourcing: From contractual obligation to strategic alliance. European Management Journal, 13(1), 67-78. Willcocks, L. and Lacity, M. (Eds.). (1997). Strategic Sourcing Of Information Systems. Chichester: John Wiley & Sons. Willcocks, L. P. and Kern, T. (1997). IT outsourcing as strategic partnering: The case of the UK inland revenue. Proceedings of the Fifth European Conference in Information Systems, June, Cork, Ireland. Willcocks, L. P. and Kern, T. (1998). IT outsourcing as strategic partnering: The case of the UK inland revenue. European Journal Of Information Systems. Willcocks, L., Feeny, D. and Islei, G. (Eds.). (1997). Managing IT As A Strategic Resource. Maidenhead: McGraw Hill. 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, 143-160. Williamson, O. E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications, A Study in the Economics of Internal Organization. New York: Free Press.

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Chapter XVI

A Systematic Model to Integrate Information Technology into Metabusinesses: A Case Study in the Engineering Realms Luiz Antonio Joia Brazilian School of Public Administration–Getulio Vargas Foundation, Brazil Rio de Janeiro State University, Brazil This article presents a framework to link effectively different information technologies in order to coordinate a metabusiness, an innovative organizational model. The information technologies needed to create this new organizational environment are presented, as well as a systemic model based on a technology-service-process-production taxonomy. A case study addressing a major engineering company in Brazil, now playing the role of an integrator within a metabusiness, is analyzed, in order to validate the proposed model. Some conclusions in this realm are presented addressing the main obstacles and hurdles to accomplish a metabusiness, as well as the solutions to overcome them.

OBJECTIVES In 1994, the Sloan School of Management at MIT inaugurated a multi-year research and education initiative called “Inventing the Organizations of the 21st Century,” headed by Thomas Malone, Director of the Center for Coordination Science. One of the key activities of this initiative has been developing a series of coherent scenarios of possible future organizations. The Scenario Working Group considered a wide variety of possible driving Copyright © 2002, Idea Group Publishing.

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forces, major uncertainties, and logics that might shape 21st-century organizations. Two scenarios were then created, addressing the size and the modus-operandi of the future organizations: “Small companies, large networks,” as the ones found at Northern Italy (textile production in the Prato region of Italy), and “Virtual Countries,” as more mergers and acquisitions are turning up worldwide (e.g., Exxon and Mobil) (Laubacher & Malone, 1997). Nowadays, one of the greatest challenges of management is to deal with new organizational forms, i.e., the ones that challenge traditional notions of structure, coordination, and control, such as the companies derived from the “small companies, large networks” scenario. When all the tasks and processes of an enterprise are centralized in just one company, it is far from difficult to organize and manage the knowledge accrued from a project. However, a lot of different players can be now involved in major projects. Some very important research has addressed some features of this issue, such as: “Knowledge Links,” Badaracco, J., in The Knowledge Link: How Firms Compete Through Strategic Alliances, 1991, Harvard Business School Press; “The Emerging Flexible Organization: Perspectives from Silicon Valley,” Bahrami, H., California Management Review, Vol. 34, No. 4, 1992; “Building Intelligent Networks,” Baker, W., in Networking Smart, Chapter 3, 1994, McGraw-Hill, Inc. and “The Real Value of On-Line Communities,” Armstrong, A. and Hagel III, J., Harvard Business Review, May-June 1996, just to name a few. Notwithstanding being very important in their realm, these research just tap on how to coordinate an enterprise encompassing a lot of different companies, in different places, with different–although important–duties. It is paramount to understand how the information and communication technologies can leverage and strengthen the coordination skills among the players of a major project involving a lot of subcontractors, suppliers, and other firms. A metabusiness is a quasi-firm created through digital links among several companies, in such a way that it is almost impossible to know exactly its boundaries (Keen, 1991). A metabusiness is also independent of its organizational structure, as each node has its own structure that can be changed without interfering in other nodes’ structures. “The organization is its formal structure” and “structure follows strategy” (Chandler, 1962) are two hypotheses challenged by a metabusiness that wisely use information technologies. Some trends are forcing companies to be engaged in a metabusiness, such as the globalization of the economy and the terrific pressure on firms for increased adaptability, innovation, and process speed; the awareness of the value of specialized knowledge, as embedded in organizational processes and routines of the nodes of a metabusiness; the awareness of knowledge as a distinct factor of production; and cheap networked computing, which is at last giving us a tool to work and learn with each other (Prusak, 1997). The main objective of this paper is to integrate effectively different Information Technologies into a metabusiness to adequately coordinate a major project or enterprise and present how this can be actually done by presenting a case study addressing the Brazilian engineering realm.

THEORETICAL FRAMEWORK Data–Information–Knowledge “Data” means a set of discrete and objective facts concerning events. Therefore, it can be understood as a structured record of transactions within an organization (Davenport & Prusak, 1998).

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Information is data that makes difference and is relevant, or as Peter Drucker says: “information is data with attributes of relevance and purpose.” Normally, information is understood as a message, usually having the format of a document or visual and/or audible messages. Information is, above all, context based. Knowledge is linked to the capacity of action (Sveiby,1997). It is intuitive, therefore hard to be defined. It is linked to the user’s values and experience, being strongly connected to pattern recognition, analogies, and implicit rules. Most of the time, knowledge within an organization is located both inside employees’ heads (tacit knowledge) and in documents (explicit knowledge). This can explain why too much confusion has arisen between document management and knowledge management. Although it is a generally accepted distinction, doubts have been cast recently over the tacit-explicit dichotomy (Polanyi, 1958). According to the autopoietic epistemology school (Varela et al., 1992), knowledge is a private, personal thing, and so an organization cannot possess it. Hence, knowledge cannot be explicit, only tacit: explicit knowledge is actually data and/or information which help other people to create their own knowledge through what is known as “structural coupling.” However, this article will accept the tacit-explicit distinction, which will enable us to reach more interesting conclusions. Then, assuming the tacit-explicit dichotomy, the following mathematical formulas depict what was said (Joia, 1999b): INFORMATION = DATA + ∑ (Attributes, Relevance, Context); KNOWLEDGE = INFORMATION + ∑ (Experience, Values, Patterns, Implicit Rules). The main question is to know how knowledge can be transformed into individual and organizational intelligence (Kim, 1993)

Degrees of Reach–Range–Structuring This study analyzes the role and impact of the Information Technologies in three branches of a metabusiness: its degree of reach, its degree of range and its degree of structuring (Haeckel & Nolan, 1993). These three parameters are considered vital to establish the coordination of a metabusiness. The degree of reach of a metabusiness addresses if and how the involved companies are linked within the metabusiness in order to transmit data and information among themselves. It must answer the following question: “Whom must I be connected with?”. The degree of range of the metabusiness addresses the type of transactions developed within the metabusiness and the way the companies are working together, in order to set up a workgroup environment. It must answer the following question: “Which transactions must I develop with my peers?” Finally, the degree of structuring deals with the ability that the companies have to extract knowledge from the data and information retrieved and shared by them. It must answer the question: “How can these data and information make sense, so as to create knowledge and intelligence?” The following Exhibit 1 depicts the degree of reach, range, and structuring concepts. Hence, different technologies such as EDI (electronic data interchange), EDMS (electronic document management systems), workflow systems, Internet/intranet/extranet, and mainly WBI (Web-based instruction), just to name a few, are integrated to leverage the metabusiness’ coordination skills (Malone & Crowston, 1994). In a metabusiness, the integrator keeps the core competency of the business, outsourcing most of the other productive processes. The integrator is in charge of managing dependen-

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Exhibit 1: Degree of reach, range, and structuring DEGREE OF REACH Whom must we connect with?

Customers, Suppliers etc., with Any IT Platform

Customers, Suppliers etc., with the Same IT Platform

Offices of the Company Abroad

DEGREE OF RANGE

Which ser vices must w e sh are? Internal Departments

Standard Messages

DEGREE OF STRUCTURING How can these things make sense?

Data Base Access

Independent Transactions

Cooperative Transactions

Data

Information Knowledge INTELLIGENCE

cies and restraints among the players and their due processes, coordinating the transactions among the involved partners.

METHODOLOGY We draw on organizational literature on coordination science and knowledge management to identify the challenges associated with dispersed and noncoordinated processes within the same enterprise. We then present an integrated information technology-based model with their associated processes, compare several variants of these processes, and explore criteria guiding managers in central process design activities. The model is based on the technology-service-process-production taxonomy (Joia, 1999a). The information technologies are classified into ones according to their characteristics. So, we manage to define the reach, range and structuring technologies. The proposed framework allows us to deeply understand the linkage between the information technologies deployed, the services and processes associated with them, and the production process as a whole. To validate the proposed model, a case study is analyzed and presented. In this case study a process-based Brazilian engineering company working currently as an integrator within a metabusiness is studied, so as to better understand the role the information technologies play in the development of the coordination skills. Using the data got from this example, it is possible to infer the hurdles a company faces to manage adequately the restraints and dependencies within a metabusiness.

REACH TECHNOLOGIES The “degree of reach” in a metabusiness is paramount. So, the first step to build an effective metabusiness is to choose the correct technologies to connect the players. According to Badaracco (1991):

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“‘What is a computer?’ The old answer was: a solitary central-processing unit. The new answer: a computer is a network.” Therefore, the ideal solution is an intranet-based infrastructure within each firm, linked to the integrator through extranets. Exhibit 2 depicts the necessary infrastructure. To link all the nodes of a metabusiness, wide-area networks are needed to work as extranets, allowing the connection among the players’ intranets. Satellite channel, optical fibers, dedicated link, etc., are just some ways of having the metabusiness connected altogether. A client-server platform supports the intranet-based infrastructure. However, many problems must be overcome to achieve this degree of connectivity, as for most companies (especially smaller ones) this infrastructure is still expensive, and different protocols are frequently used, which hinders correct communication among the companies; and the infrastructure to transmit the data through these technological links is still precarious and unreliable in the emerging markets. All the data and information exchanged by two or more nodes of a metabusiness must go through the integrator, as otherwise frequent loss of coordination arises. This, of course, will lessen the flexibility, responsiveness, and agility of the players, although keeping the main control of the fragmented processes (Volberda, 1999).

RANGE TECHNOLOGIES Currently, the networking boom, mainly based on Internet, intranet and extranet potentialities has changed the computer from a calculation machine into a communication device. This allows people to work together in a collaborative and integrated environment. As an example, several software programs have been developed to allow different persons working at the same time, on the same document; to allow the intelligent tracking of messages and documents within a productive process; and to help the employees, together, to view

Exhibit 2: Intranet-based client server architecture EXTRANET

CLIENT

INTRANET SERVER

WAN (Wide-Area Network) NODE OF THE META BUSINESS PRINTER

CLIENT

CLIENT

JUKEBOX LAN

INTRANET

RELATIONAL DATA BASE

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and manipulate information in a more efficient way. CSCW (computer supported collaborative work) is now a reality and can be used in complex enterprises. The range technologies allow the nodes (or players) to work in a cooperative and collaborative way, sharing data and information online, at real time, in order to build knowledge for the enterprise altogether. In a broad sense, there is a range of technologies, from the simplest to the most complex, that can be used to accomplish this target. The systems usually can be classified according to the number of professionals that use them and the number of tasks to be performed, as shown below in Exhibit 3. Groupware and workflow systems, also called workgroup systems, compound the range technologies, as several professionals are performing one or more tasks. However, there is a great misunderstanding between the main concepts underlying these two technologies, as the former has its focus in the information, and the latter in the process. Exhibits 4 and 5 below present these very important differences. Among the most important groupware technologies we can cite the intranet/Internetbased ones, such as electronic mail, bulletin board, NewsGroup, chat, and video conferencing. Exhibit 3: General taxonomy of systems PROFESSIONALS TASKS

ONE

SEVERAL

ONE Systems of Personal Productivity

Groupware Systems

SEVERAL Integrated Systems Workflow Systems

Exhibit 4: Groupware

INFORMATION FOCUS

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Exhibit 5: Workflow

PROCESS FOCUS

The latter one is becoming very important for the effective sharing of tacit knowledge, through the face-to-face socialization process (Skyrme, 1997). Other very important groupware technologies are both EDI (electronic data interchange)–that allows companies to exchange forms, reports, etc. in a standardized way–and the distributed database that allows the partners to get and share records of a database, as well as perform real-time transactions among them. Surely, the most important range technology is the workflow one. The workflow systems belong to another more comprehensive technology: EDMS–electronic document management system. EDMS is not one technology, but a set of technologies linked to accomplish a target: the full life-cycle control of a document in a project. The following technologies are normally embedded in an electronic document management system: imaging, that deals with the need of transforming documents on paper into digital ones, by using scanners; full-text retrieval, that retrieves documents searching for words within them; workflow, that allows the innovation of productive processes by reengineering them, making it possible to control a document route within a company; and multimedia, the least developed EDMS technology that allows the storage and retrieval of frames of animation, sounds, etc.

STRUCTURING TECHNOLOGIES While the reach and range technologies have been undertaking great developments, the same can not be said concerning the structuring technologies. Although great advances have been made lately, such as the development of the data mining technology, this realm is the bottleneck for the effective coordination within a metabusiness. Structuring, as said before, is about creating meaning (or knowledge) for lots of data and information. Some research shows that the overload of information does not necessarily convey to adequate knowledge creation (Joia, 1999b) and is the main cause of problems in complex enterprises developed in a relational way. Hence, it is important to address the differences between data, information, and knowledge.

Digital Thinking There is a new reality today, when the Cartesian, Taylorist, fragmented, and sequential thinking is being replaced in a very fast way by what can be named hereinafter as digital

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thinking (Joia, 1999 b). Digital thinking depends upon the creation of a new mental model that, far from what is preached by the analogic and Cartesian concepts, is based on an asynchronous mental model and on the ability of linking, combining, and associating different or even opposite ideas. Digital thinking has its rationale on the blending of some intelligences despised by most educators and managers for a long time. In 1983, at the Harvard University School of Education, through a seminal work, research was presented describing seven different types of intelligence, and theorizing about a concept that had always seemed quite obvious for most of us: intelligence is multiedged and multidimensional (Gardner,1983). Later on, the emotional intelligence concept was gathered into this array of multiple intelligences (Goleman, 1995), and other authors have expanded this initial string of intelligences (Handy, 1997). The digital thinking concept has most of its features accruing to the following intelligences (Handy,1997): analytical–defined as the ability to rationalize and formulate concepts and questions; numerical–defined as the ability to handle numbers; spatial– defined as the ability to recognize patterns of action and behavior; and expositive–defined as the ability to have verbal and written communication skills. The world is being submitted to a transition from the electro-mechanical to the digital era. The mental model of the ordinary worker is an analogic-based one, which generates great difficulties for most of them for handling informatized processes in this current digital era. Most foremen do not understand how a string of commands, launched from computer screens, can command a machine far from them that was formerly commanded directly through the manual contact of gears, levers, and buttons. As they cannot understand this rationale, a mental routine is created by them, to memorize automatically the needed procedures. As a result, most of the technological innovations based on information technologies implemented in the companies are far from reaching the forecast productivity target, as people are not taking advantage of all the potentialities to which these innovations can lead. The ability to learn new things, or learn to learn, is paramount today. Rather, the ability to unlearn what was learned is necessary most of the time, which is not a very smooth process unless well led. Learning to learn, the ability to solve problems which were not faced before, to be creative and to use inductive thinking instead of deductive thinking that still forges the current educational process, among others, are the workers’ current major challenges when working in a relational business ecosystem that is supposed to be intelligent. In an intelligent relational business ecosystem, the integrator must rely on the other nodes’ capabilities and skills to solve correctly the problems turned up. Some integrators take it for granted. Experience has shown that if a metabusiness is to be well coordinated, all the players must have reached a minimum level of expertise in their realm, and the integrator must be in charge of auditing the quality of the work done by their partners. More recently, the integrators are conscious that they must train the other companies, or at least deploy procedures, methods, etc. that can be followed by the players to develop the project. This explicit knowledge can be stored mainly both on documents and databases, and the main technologies to spread this knowledge among the nodes of a metabusiness are expert systems, data mining, and Webbased instruction (WBI) systems. The expert system is a very important structuring technology that leads the professional to a knowledge internalization process: from explicit to tacit knowledge (Nonaka & Takeuchi, 1995), as shown in Exhibit 6. The expert systems can convey the following benefits: 1. Acquisition, storage, and deployment of the strategic knowledge; 2. Full-time availability of the specialist’s knowledge;

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Exhibit 6: Basic structure of an expert system WORKING MEMORY

KNOWLEDGE BASE ( Factual & Heuristis Rules)

INFERENCE MECHANISM

HELP FEATURES

GRAPHICAL USER INTERFACE

KNOWLEDGE ACQUISITION

LEARNING

EXPLANATORY FEATURES

USER

BASIC STRUCTURE OF AN EXPERT SYSTEM

3.

Liberation of the specialist to solving complex problems the expert system is not able to deal with; 4. New techniques training that depends on the basic knowledge of a problem; 5. More consistent and qualified solutions for a problem, spending less time; and 6. Standardization of operational procedures. The expert system, also called “Knowledge-Based Computer System” must be used cautiously. It is important not to fall into the trap of having an “intelligent machine,” but rather a system to augment human thinking (Skyrme, 1997). Data Mining Technology aims to develop intelligent ways to navigate a great amount of data and information, so as to extract what is actually relevant and to create recognition patterns that help the users not to suffer from unnecessary information overload. The purpose is to judge the relevance of the information for the one interested in it. Unfortunately, this intelligence is still low, leading the user to waste time in making the necessary judgment. WBI systems are engines developed to using the intranet/Internet capabilities, as distance learning can be deployed within a relational business ecosystem in an interactive and hypertextual way. The user needs just a browser (Netscape, IExplorer, etc.) in his/her personal computer. The system with the respective course’s content is stored either in the intranet server of the integrator or in a generic Internet server. WBI systems are compounded of three distinct modules: authoring module, used to create automatically the course by the content’s author or another professional; utilization module, used to process the training; and tracking module, used by the course administrator to track and manage the performance of the pupils and the course as a whole, through the students’ grades, evaluations, drawbacks, etc. that stay stored into the log of the system. Using a WBI system based on Internet/intranet resources and, if possible, coupled with video conference, video multicasting and/or video-on-demand, a new modus-operandi can be defined that allows a just-in-time education, or an education anytime and anywhere. This new process is based on 1. Definition and generation of the programmatic content; 2. Content modularization for hypertextual browsing in the WEB;

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3.

Definition and choosing of the following tools: a) Communication tools: E-mail between the students and the teacher, NewsGroup, list server, chats, video conferences. b) Coordination tools: diary, news, assessments, assignments, and exercises. c) Cooperation tools: texts, presentations, videos, bibliography, papers, and library of digital media; 4. Availability of the content through the authoring tool; 5. Use by the students of the system with its content inside; and 6. Evaluation of the course and the students by the virtual mentor through the tracking module. All of these tools can be integrated into one single system and made available via WEB as also with videoconference equipment. Most of the events are asynchronous, and just a few of them are synchronous, such as chats and videoconferences.

AN INTEGRATED MODEL FOR METABUSINESSES To integrate all the technologies presented before in a structured taxonomy for metabusinesses, it is taken for granted that technologies are important as they can allow services to be deployed, and services are important as they convey to productive processes, according to the following formula: TECHNOLOGIES => SERVICES => PROCESSES => PRODUCTION, as shown in the following Exhibit 6 (Joia, 1999 a). Therefore, Table 1 can present more deeply the idea shown in Exhibit 6, relating the reach, range and structuring issues–the three facets of an intelligent metabusiness–with the needed services and productive processes within a relational enterprise.

A CASE STUDY We are going to analyze the case of PROMON Engenharia, a major consultancy company in Brazil with revenues of more than US$ 800m in 1997, in charge, for instance, of Itaipu Dam design, the biggest hydroelectric power plant in the world. This company had to reinvent itself in order to survive in the Brazilian engineering consultancy industry. As Table 2 shows below, a stalemate has occurred in the engineering consultancy market, with loss of organizational memory and human capital (Joia, 1998). Exhibit 6: Taxonomy of the integrated model

PRODUCTION PROCESSES SERVICES TECHNOLOGIES

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Table 1: Integrated model for intelligent metabusinesses REA CH Client-Se rver-Based Intranet, TECHNOLOGIES Extranets, LAN, WAN, Satellite Links, Dedicated Links, Fiber-Optics Net work

SERVICES

Physical Lin k among the Players (Star Topology with the Integrator as the Hub)

PROCESSES

RANGE

STRUCTURING

Internet, Groupware, Electronic Data Interchange (EDI), EDMS, Workflow, Video Conferencing and Distributed Database

Web-Based Instruction Systems, Data Min ing, Expe rt System

Data and Information Transactions, Forms Exchange, Documents Life -Cycle Control and Trac king

Education Anytime, Anywhere Just-in-Time Education, Knowledge Acquisition, Pattern Recognition

PRODUCT INNOVATION; OPERATION MANA GEMENT; PLA YERS’ COORDINATION (management of restrains and dependencies); QUALITY CONTROL OF THE NODES OF THE BUSINESS

Table 2: Brazilian engineering consultancy industry data YEAR

PERSONNEL (HIGHER EDUCATION)

PERSONNEL (TOTAL)

1981

REVENUE (MUS$) 1,000

10,900

42,500

1982

1,200

11,200

44,300

1983

800

10,200

39,600

1984

600

10,100

39,000

1985

700

10,900

42,400

1986

800

13,100

47,000

1987

1,100

15,500

56,400

1988

1,450

16,200

60,000

1989

1,000

12,800

45,300

1990

900

9,600

34,000

1991

870

8,200

28,000

1992

880

7,500

25,500

1993

1,030

7,400

24,400

1994

900

7,000

25,300

1995

1,090

6,100

21,300

1996

1,200

6,200

21,500

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Exhibit 7: Personnel evolution in the Brazilian engineering industry

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1981

PERSONNEL (Total) PERSONNEL (College Level) 1985

1989

1993

YEAR

Exhibit 8: Percentage of the engineering industry in the Brazilian GNP

% GNP 0.50 0.40 %

0.30 0.20 0.10

95 19

93 19

91 19

89 19

87 19

85 19

83 19

19

81

0.00

YEAR

To avoid the impact of this situation, PROMON became itself an integrator, looking for turnkey projects and BOOT (build-own-operate-transfer) ones (Joia, 1998), keeping some core competencies, such as the know-how of designing and managing civil enterprises, both explicitly–through procedures, codes, databases, etc.–and tacitly–through informal employees’ networks (socialization process) (Nonaka & Takeuchi, 1995). It creates a strategic ecosystem (Moore, 1996) based on knowledge links (Badaracco, 1991) with construction and

262 Joia

assembly companies, suppliers, banks, subcontractors, etc. as shown in its virtual structure, depicted in Exhibit 8. PROMON has also included itself as a process-oriented structure that involves the major players of an engineering enterprise, as depicted below in Exhibit 9. The production macro-process, also called “contract accomplishment,” was divided into the following processes: Exhibit 8: PROMON’s metabusiness

WAN

SUPPLIERS

LAN

SUBCONTRACTORS

INTEGRATOR

(PROMON ENGENHARIA )

ASSEMBLER BUILDERS

CLIENT

Exhibit 9: PROMON’s process-oriented structure Communication with the Customer

MARKET

CUSTOMER

INTEGR ATOR’S PROCESSES New Products and Services (Busin ess) Developm ent

BANKS

Commerci alization, Proposal Prep aration and Contract Management

MAJOR PL AYERS

Contract Accomplishm ent PRODUCTION

MINOR PLAYERS (Subcontractors )

Customer Assi stance after the delivery of Delivery of the the Enterpriset

SUPPLIERS

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263

A) Basic Design This is the enterprise conception. It is without doubt the most important phase of the enterprise. In this stage, the later a mistake is picked up, the more financial losses and delays there are in the project. B) Detailing Also called executive design, as the name says, it is the detailing of the basic design. The basic design delivers information for this phase.The work now is much more repetitive, not always presenting an actual added value. Most of the detailing is done by subcontractors (small players) coordinated and managed by the integrator that is in charge of the quality assurance of the work done. C) Construction and Assembling In this stage the builder and the assembler who have taken part in the basic design play their role. Once again, all the work must be coordinated by the integrator that manages the dependencies and constraints. D) Equipment Supply The equipment (if needed) is then delivered by other companies, according to the specifications of the integrator who is in charge of auditing them before they go to the site. They must arrive just in time for the builder and assembler to locate them in the field, according to the schedules, which shows, once again, a complex chain of dependencies and restrictions that must be managed by the integrator, using Information Technology and the necessary services. E) Management This is where the enterprise engineering (Liles et al., 1995) integrates all the former stages into just one–the enterprise workflow. Usually, PERT/CPM networks and Gantt charts are used. All the information of the enterprise should pass through the integrator, the one in charge of all this complex workflow. The integrator, without doubt, can be considered as an information factory. PROMON invested heavily on information technologies to increase its “degree of reach” (connectivity) and “degree of range” (sharing), as shown in Exhibit 10 below. Therefore, some concepts and techniques, such as concurrent engineering (Zangwill, 1992), could be implemented in its metabusiness, allowing the partners not to work in a sequential way, but rather simultaneously. Unfortunately, no investment was made on structuring technologies, i.e., PROMON didn’t foresee that its main players should be trained on how to work together in a major enterprise and that it was paramount to manage, coordinate, and equalize the needed knowledge among the several involved players. Hence, there were great difficulties for the nodes of the relational business ecosystem to get knowledge from the data and information available. Due to that, several quality assurance problems arose, increasing the forecast costs of the enterprise. A Web-based instruction system would be absolutely necessary to fill this gap. Besides, some cultural and organizational problems, as well as technological ones, turned up, as this was a new modus-operandi for most of the players. Another main problem was on the different technological platforms used by the players. Some of them did not even use Internet as a normal production tool. These inequalities lower heavily the intelligence of any relational business ecosystem and must be solved in order to accomplish the targets forecast.

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Exhibit 10: PROMON’s metabusiness IT infrastructure SUBCONTRATORSSUPPLIERS

CUSTOM ER

INTERORGANIZATIONAL COMM UNICATION: WAN Concurrent Engineering Documentation Control & Workflow Documentation Control & Workflow Corporate Database

Corporate Server

WAN: Private Line Optical Fiber Internet/Extranet Satellite MAJOR PARTNERS

X-Terminals Workstations

Printer

INTERORGANIZATIONAL COMM UNICATION: WAN Concurrent Engineering Documentation Control & Workflow PERSONAL PRODUCTIVITY

Corporate LAN (Intranet) INTERPERSONAL COMMUNICATION Document’s Server Jukebox (M OD)

So, PROMON was very successful to get information as soon as needed but unsuccessful in transforming information into knowledge. The very contempt of the necessary training of all the players involved in the endeavor, so as to be able to create and manage knowledge derived from the received information, along with technical incompatibilities among the players’ platforms, hinder PROMON to take advantage of the intangible benefits the company might have accomplished. PROMON overlooked the importance of the human and innovation capital in the knowledge creation and management process (Joia, 2000).

CONCLUSIONS The metabusiness is an extreme case that challenges our general understanding of coordinating processes in virtual organizations through the use of technology. The intelligence of a metabusiness depends on its degree of reach (connectivity), range (sharing), and structuring (meaning). We can conclude firstly that technology, itself, does not create either knowledge or intelligence. Technology is just an enabler to achieve this stage. Notwithstanding that a lot of information technologies are already available to be used to increase the connectivity, sharing and meaning issues of a metabusiness in order to make it intelligent and with a high degree of reach, range, and structuring, the organizational and cultural obstacles are still very high to be smoothly overcome–and the causes and solutions must be analyzed. The attitude is dangerous that drives management towards strong investments in information technology, possibly at the expense of investments in human capital. This is the second conclusion. The danger lies on an IT-driven knowledge management strategy that may end up objectifying and calcifying knowledge into static, inert information, thus

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Table 3: Barriers, causes and solutions within an intelligent metabusiness BARRIERS

CAUS ES

SOLUTIONS

Structural Focus only on direct man-power

Obsolete decision criteria

and indexes

Deep analysis of the costs and benefits involved

Failure to perceive the actual

Lack of measures to intangible

Intangible and tangible

benefits

benefits

productive analysis

High risk for the managers

Reward system not considering

Diffe rent reward systems for

innovation

managers

Organizational frag mentation

Systems to allow

Lack of coord ination and cooperation High expectation and hidden

coordination/cooperation Selling of an unreal system

Planning strategic objectives

costs Human To avoid the risk

Fear of change and uncertainty

Resistance

Fear of loss of power and status

Co mmunicat ion and involvement Board engaged in project implementation

Unplanned decisions and fear of

Orientation and action: lac k of

Pilot project planning: long-range

being made redundant

patience with planning

objectives

Technical Incompatibility of systems

Purchase of different hardware

Purchase of only one integrated

and software platforms

system; write own system; neutral transfer files

disregarding altogether the role of tacit knowledge. It can be mentioned that the major problem Volkswagen has faced in its newly built truck plant in Resende, Brazil–regarded as the most advanced automobile production process implemented in the world–has come from problems with the quality of the products/services delivered by its partners. As part of the enterprise, VW built a training center in Angra dos Reis, near Resende, close to the factory, where all the relational business ecosystem nodes’ employees are trained before being engaged in the production network. However, the quality problems still remain, mainly due to the lack of employees’ structuring skills, which hinder them from creating their own knowledge through the training process. Notwithstanding that the main players of this metabusiness work in the same geographical place, without certain physical boundaries, this innovative project has shown the need of investing in the leverage of the human capital of all the companies, otherwise; all of the enterprise can be jeopardized. The third conclusion is the very need to homogenize the technological platform of all the nodes involved in a metabusiness, defining a “bottom-line” platform, as just one node with an inadequate platform can jeopardize the intelligence of the relational business ecosystem altogether.This will lead all the players to use open systems, so as to avoid incompatibilities within the metabusiness.

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The case study conveys us to some issues, concerns, and findings that can be generalized to companies worldwide working within similar metabusinesses. Table 3 presents, in a structured way, the generalization of the barriers, causes, and solutions for similar organizational structures. A deep analysis of Table 3 is enough to set forth that the main obstacles to use information technology within a metabusiness are derived from structural and human (cultural) issues. The technology, itself, is not a problem. Hence, a holistic approach is absolutely necessary to look for solutions in order to implement information technology effectively in this very innovative organizational model. The knowledge society with its knowledge workers demands new organizational forms, organic, flexible, seemingly almost anarchic, but coordinated enough to allow knowledge to be created, stored, retrieved, and reused. Metabusinesses are one among several possible innovative business models. However, developments and improvements in the newly created coordination science (Malone & Crowston, 1994) are paramount to spread intelligent metabusinesses as the “knowledge-based organizational structure.”

REFERENCES Armstrong, A. and Hagel, J., III. (1996). The real value of online communities. Harvard Business Review, May-June, 134-141. Badaracco, J. (1991). Knowledge links. The Knowledge Link: How Firms Compete Through Strategic Alliances, Chapter 5, 107-128. Boston, MA: Harvard Business School Press. Bahrami, H. (1992). The emerging flexible organization: Perspectives from Silicon Valley. California Management Review, 34(4). Baker, W. (1994). Building intelligent networks. Networking Smart, Chapter 3. New York: McGraw-Hill. Chandler A.D., Jr. (1962). Strategy and Structure. Cambridge, MA: MIT Press. Davenport, T. H. and Prusak, L. (1998). Working Knowledge. Boston, MA: Harvard Business School Press. Gardner, H. (1983). Frames of Mind. London: Heinemann. Goleman, D. (1995). Emotional Intelligence. London: Bantam Books. Haeckel, S. and Nolan, R. (1993). Managing by wire. Harvard Business Review, SeptemberOctober, 122-132. Handy, C. (1997). The Hungry Spirit. London: Hutchinson, Random House. Joia, L.A (1998). Capital intelectual nas empresas de engenharia consultiva Brasileiras (Intellectual capital in the Brazilian engineering consultancy companies). Proceedings of the Business in the Knowledge Era Seminar, September, Rio de Janeiro. http:// www.competenet.org.br/evento/semi_work.htm. Joia, L.A (1999a). An IT-based taxonomy model for enterprise engineering. Information Strategy: The Executive’s Journal, 15(3), 27-35. Joia, L.A (1999b). A new model for workers’ retraining in Brazil. Journal of Workplace Learning, 11(4), MCB University Press. Joia, L.A (2000). Measuring corporate intangible assets: Linking business strategy and intellectual capital. Forthcoming in the Journal of Intellectual Capital. MCB University Press. Keen, P. (1991). Shaping the Future. Boston, MA: Harvard Business School Press. Kim, D. (1993). The link between individual and organizational learning. Sloan Management Review, Fall, 37-50.

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Laubacher, R. and Malone T. (1997). Two scenarios for 21st century organizations: Shifting networks of small firms or all-encompassing “virtual countries?” MIT initiative on inventing the organization of the 21st century, Working Paper 21C WP #001, Sloan School of Management, MIT. Liles, D.H., Johnson, M., Meade, L. and Underdown, D. R. (1995). Enterprise engineering: A discipline? Society for Enterprise Engineering Conference Proceedings, June. Malone, T. and Crowston, K. G. (1994). The interdisciplinary study of coordination. ACM Computing Surveys, 26(1), 87-119. Moore, J. (1996). The Death of Competition. New York: HarperCollins Publishers Nonaka, I. and Takeuchi, H. (1995). The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation. New York: Oxford University Press. Polanyi, M. (1958). Personal Knowledge. London: Routledge. Prusak, L. (1997). Introduction to knowledge in organizations. In Prusak L. (Ed.). Knowledge in Organizations, ix-xv. Butterworth-Heinemann. Skyrme, D. (1997). From information to knowledge management: Are you prepared? Online’97. http://www.skyrme.com/pubs/on97full.htm. Sveiby, K. E. (1997). The New Organizational Wealth. Berret-Koehler Publishers, Inc. Varela, F. J., Thompson, E. and Rosch E. (1992). The Embodied Mind. Cambridge, MA: MIT Press. Volberda, H. W. (1999). Building the Flexible Firm. Oxford: Oxford University Press. Zangwill, W. (1992). Concurrent engineering: Concepts and implementation. IEEE Engineering Management Review, 20(4), 40-52.

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Chapter XVII

Facial Social Risks in IT Development in South Africa–Learning from Scandinavia Helana Scheepers University of Pretoria, South Africa Lars Mathiassen Aalborg University, Denmark

South Africa is undergoing a number of changes, which has an effect on every aspect of society from the workplace to everyday life. South Africans need to reflect on this situation and determine how to proceed. The purpose of this article is to consider the development and implementation of information technology, one particular problem area, in this broader context. The article draws an analogy between the trade unionist systems development tradition in Scandinavia and the possible application it might have in South Africa. The article describes the situation in South Africa, presents the trade unionist approach to systems development, and describes the underlying principles that have been identified by Scandinavian researchers. It then evaluates these principles from a South African perspective and discusses the possible uses they might have in the South African situation.

INTRODUCTION South Africa (SA) of today is an emerging society. The emergence of new beliefs and values create both uncertainty and a number of expectations. One of the expectations is for social democracy within a society, which is characterized by heterogeneity, no tradition of social democracy, and a high level of illiteracy. The expectation for social democracy is described in the SA Bill of Rights (1996): “Heal the divisions of the past and establish a society based on democratic values, social justice Copyright © 2002, Idea Group Publishing.

Facial Social Risks in IT Development in South Africa 269

and fundamental human rights; improve the quality of life of all citizens and free the potential of each person.” A further expectation is that of a people-driven process. The SA Reconstruction and Development Program (1994) states: “Regardless of race, or sex, or whether they are rural or urban, rich or poor, the people of South Africa must together shape their own future. … It is about active involvement and growing empowerment” and “Above all, the people affected must participate in decision-making. … It is, rather, an active process enabling everyone to contribute to reconstruction and development.” One of SA’s biggest challenges is that the society is heterogeneous in a number of ways. Some of these are differences in nationality, race, language groups, and religions, as well as a third and first world dualism. Each group has different expectations, values, beliefs, and ways in which to evaluate situations that lead to a high degree of complexity (Kriel, 1996) and a high level of conflict in social life. This dualism is reflected in the SA information technology (IT) environment. The spectrum of the IT environment ranges from the highly sophisticated, for example, in the banking environment at the one end, to the opposite extreme of both computer and general illiteracy. The expectation is that further development in the use of IT can contribute to solving SA’s general problems with education, and a great deal of attention is given to this specific topic by government and private organizations. The IT environment in SA is, however, largely influenced by the system rationalist viewpoint of IT in which efficiency plays a major role. The system rationalist viewpoint does not take into consideration situations where a number of different groups with differing viewpoints are involved, and the probability of conflict is high (Kling, 1980). A further complicating factor is that IT is seen as an important resource in socioeconomic development in third world countries (Avegerou & Madon, 1995). This poses a number of opportunities and threats that should be taken into consideration by the developing countries. The difficulties as identified by Avgerou & Madon (1995) are that a number of imperatives are imposed when developing countries participate in the international system; large numbers of individuals and groups are further marginalized; dependence is promoted instead of interdependence; self-determination is neglected; and there is a likely domination by a single culture. To address these difficulties technology should be implemented by delinking the technology from the source and allowing the local context to determine the implementation (Amin, 1990). The question, however, is how this should be done in more practical terms. The emerging situation in SA and the importance of IT for SA has an effect on the way in which IT systems are developed and adopted. Furthermore, IT can be used as a tool for emancipation in SA. One of the requirements underlying the SA science and technology policy, as identified in the White Paper on Science and Technology (Department of Arts, Culture, Technology and Science, 1996), is by promoting an Information society that serves SA’s needs but does not echo that of other countries. The SA government has thus promoted the importance of IT at governmental level, thereby establishing an important social force for IT development in a developing country (Korpela, 1995). Although the SA government has identified ethical and policy proposals for IT development, no concrete implementation issues have been identified (Korpela, 1995). SA needs to be proactive in identifying how the community’s information needs should be identified and put into practice. There are a number of research and development traditions within IT that SA could turn to for some inspiration on how to fulfill the expectations outlined above. These traditions should be based on democratic values with a strong social flavor, and they should explicitly include the objective of emancipation. The Scandinavian

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countries have extensively used projects such as the trade union projects for emancipation of workers (Ehn, 1988), and the experiences are well documented. Scandinavian research and development traditions represent in this way an interesting source of inspiration, despite obvious differences between the two environments (see Figure 2): Scandinavian countries are homogeneous, with well functioning traditions for handling negotiations and cooperation, and their social democracy is well established. Iivari & Lyytinen (1999) divide the Scandinavian IT research and development into eight different traditions. One of these traditions is the trade unionist approach. This tradition corresponds with the critical tradition in Bansler (1989) and the collective resource approach in Ehn & Kyng (1987). The basic ideas and values that underlie this tradition are identified by Bansler (1989) as follows:“ researchers…deal with the use of information technology and workplace democracy. They want to strengthen the position of employees and unions visa-vis managers and capital owners.’’ Because of the basic assumption of democracy, emancipation and a “people-driven process,” the trade unionist approach is one possible starting point for the development of a SA systems development tradition. In the following section we shall review some of the Scandinavian experiences and subsequently explore their possible relevance in the SA context. In doing so we will take the differences between the two contexts into account. The research question that will be answered in this article is: What principles can be identified for socio-economic development of IT in the SA environment as inspired by the Scandinavian trade union research tradition? The article will firstly give a description of the Scandinavian projects. This will be followed by a theoretical base for identifying five types of principles in these projects and will furthermore identify what the principles were for these projects. Four projects for the SA environment based on the Scandinavian trade union projects will then be described. In the discussion that will follow the description of the SA projects, the principles for the SA environment will be developed. Finally, the conclusion summarizes the implications for SA and also discusses the implications these principles will have for other developing countries.

THE SCANDINAVIAN PROJECTS The Scandinavian trade union projects were initiated in the 70’s and 80’s. At that time, the use of computers and information systems were becoming a fact in everyday working life (Sandberg, 1979) that in many respects were conceived to have a negative effect on workers and the conditions of worklife (DUE project group, 1979). The trade unions decided to initiate projects about IT systems in working life to ensure and further develop the ideal of democracy in the workplace. There was also a demand for local trade union competence on how to influence the introduction of IT (Nygaard, 1979). Most of the projects were about computers, planning, and democracy. In the trade unionist approach two generations of projects can be identified. According to Kyng (1996), the first generation consists of the Iron and Metal project started in January 1971 in Norway; the DEMOS (DEMOS is the Swedish acronym for democratic control and planning in working life: On computers, trade unions and industrial democracy) started in 1975 in Sweden; and the DUE project (DUE is the Danish acronym for democracy, development, and EDP) started in 1977 in Denmark. The secondgeneration projects are the UTOPIA project (UTOPIA is the Swedish acronym for training, technology, and product from the quality of work life perspective) started in 1981 in Sweden; and the Florence Project started in 1984 in Norway.

Facial Social Risks in IT Development in South Africa 271

These projects can be divided into three different types of projects: the Iron and Metal, DEMOS, and DUE projects were launched to research the influence of planning and IT systems on worklife; UTOPIA was a project to design computer artifacts for skilled work; while Florence was a project for the computerization of the nursing profession. Each type of project had a different purpose, but the combining factor in all of these projects was that they were based on the interests of users and organized workers.

PRINCIPLES UNDERLYING THE SCANDINAVIAN PROJECTS To obtain useful information for the SA situation, we shall examine the principles that underlie the trade union projects. The Oxford dictionary (Oxford dictionary, 1990) defines principle as: “fundamental truth or law as the basis of reasoning or action.” In this article, principles refer to the fundamental assumptions on which the projects were based and which directed the course of the projects. Checkland & Scholes (1990) identify useful concepts for learning about a problematic situation with the purpose of improving it. There are one or more problem owners for a specific situation, and each problem owner has a certain worldview, or weltanschauung with which the situation will be viewed. Furthermore, there is a certain methodology that is used for learning about the problematic situation. Involvement in the situation yields some ideas that are used together with the methodology to learn more about the situation. This basic framework gives rise to a number of different principles that can be identified as part of the Scandinavian trade unionist research and development tradition: Problem owner: All the projects were undertaken for a specific problem owner linking the project to the beliefs and ideas of that particular problem owner. The problem owner identified who took part in the project and determined the underlying motivation for doing so. Figure 1: Framework for principles

Problematic situation

Used in Weltanschauung

Methodology for learning about the world

Problem owner

Yields

Ideas

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Weltanschauung: The problem owner had a specific weltanschauung which defined what the project was all about. Methodology: The methodology identified how a project was executed under the auspices of the problem owner. IT-use ideas: The ideas for the use of IT were influenced by the problem owner and the Weltanschauung of the project. These ideas expressed what was considered good, acceptable, and unacceptable usage of IT. IT-development ideas: The ideas for development of IT were influenced by the problem owner, weltanschauung, methodology, as well as the IT-use ideas. These ideas expressed which development strategies were considered to support or not support the interests of the problem owner. In studying the literature of the Scandinavian projects, two different perspectives on the trade unionist approach to systems development emerge: a perspective formed by researchers who were part of the projects (insider’s perspective) and another perspective formed by researchers who were not part of the projects but commented on them (outsider’s perspective). Both of these perspectives are used in the discussion that follows to improve the validity of the arguments. In the subsequent section, each of the principles (problem owner, weltanschauung, methodology, IT-use ideas, and IT-development ideas), will be discussed from both insider and outsider perspectives. The summarizing principle is presented, in each case, followed by a discussion of its background, development, and use in the Scandinavian context.

Problem Owner The research is undertaken by the unions from the perspective of workers and their local union. Computers and new systems for planning, control, and data processing were being implemented and had an effect on every part of working life (Nygaard, 1979). The new systems increased productivity, which satisfied the goals of management, but they also had negative effects on workers, such as an increased number of injuries, deskilling of jobs, isolation of workers, and management control over planning (DUE project group, 1979; Kyng & Mathiassen, 1982; Bansler, 1989). Joint projects for system development between management and trade unions were undertaken, but the trade unions could not effectively influence the IT development projects to satisfy their own goals (Ehn & Kyng, 1987). The situation created a demand for new knowledge and strategies on how to influence the implementation of the new IT systems. This demand coincided with the introduction of co-determination laws in the 70’s (Nygaard & Bergo, 1975; Nygaard, 1979; Ehn, 1988; Iivari & Lyytinen, 1999). The trade unions were seen as the obvious organizations to defend and promote the interests of the workers because of the Scandinavian industrial relations (Ehn, 1988). However, the trade unions encountered problems with negotiations because of the differences between the traditional negotiation issues (such as wages, working hours, and general employment conditions) and negotiation issues introduced by IT (Ehn, 1988). These differences can be described by the time horizon of the issues: traditional issues were shortterm negotiation issues, whereas IT-related issues were longer-term issues. Unions had wellformulated objectives for traditional issues but vaguely formulated objectives for IT (Ehn, 1988, Iivari & Lyytinen, 1999; Kyng, 1996). To deal with this problem, a number of projects were begun with the explicit goal of creating new knowledge thus enabling workers and local unions to influence the introduction of information systems (DEMOS project group, 1979; DUE project group, 1979; Nygaard, 1979; Bansler, 1989; Iivari & Lyytinen, 1999). These projects were in opposition to management-endorsed development projects.

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The organization of the research projects reflects the significance that was placed on the context of the local workers and their trade union. The local trade union formed working groups at specific work places, and these groups determined the problems to be researched. This type of strategy was used throughout the DEMOS and DUE projects, making the local trade union and the workers key players in the research process (Nygaard, 1979; Mathiassen et al., 1983). The role of the central trade union was to support the local trade union in educational issues and to exert pressure for changes in laws and agreements between trade unions and employers (Ehn & Kyng, 1987). The best-known result of the Iron and Metal project is the data agreement between employers and the trade union regulating the design and introduction of IT systems (Nygaard, 1979). The first generation projects resulted in local data agreements, new knowledge, and training courses for trade union members on IT systems (Nygaard, 1979; Mathiassen et al., 1983). In the second generation projects, for example, UTOPIA, the emphasis was changed from just influencing the introduction of IT and the effect it had on worklife to trade union design of IT systems for realizing the expectations of the workers (Ehn, 1988). These projects used the same type of organization, where the workers themselves participated in the research. Florence, the third type of project, was an ordinary systems development project, but it was organized from the nursing profession’s perspective so that they could gain control over IT systems in their work. This project was based on communication and mutual learning between the nurses and the systems developers (Bjerknes & Bratteteig, 1987). Hence, there was a gradual change from opposition to management towards a participatory strategy. This is confirmed by Iivari & Lyytinen (1999) who suggest that there was a gradual softening of the original radical tones and a movement towards a more cooperative approach. The main contribution of all these projects is that they effectively challenged the prerogative of management to determine the goals of systems development and IT use (Iivari & Lyytinen, 1999).

Weltanschauung The general worldview is democratization of work, and specific objectives are developed from the point of view of the local trade union. The major worldview of the trade unions was democratization of the workplace (Nygaard, 1979; Sandberg, 1979; Bansler, 1989). The first projects had the general objective of democratization of planning (DEMOS project group, 1979; DUE project group, 1979; Nygaard, 1979) supplemented by: participation of workers, gaining of knowledge to influence the introduction of IT systems, and development of skills within the trade unions (Kyng & Mathiassen, 1982; Ehn & Kyng, 1987). Each local union developed their own objectives in support of the objectives already mentioned, through the participation of the workers (Nygaard, 1979; DEMOS project group, 1979; DUE project group, 1979). Trade unions decided to undertake their own research because all knowledge about development and use of IT that existed at that time was from the perspective of management and was biased toward the attainment of management’s goals (Ehn & Kyng, 1987; Iivari & Lyytinen, 1999). The objective of democratization was in direct conflict with the goal of management (generation of profits). Technology was a tool which management used to further its goal, by centralizing information about production and administration to increase management control and other negative effects on workers, as already mentioned (DEMOS project group, 1979; DUE project group, 1979; Sandberg, 1979; Ehn & Kyng, 1987). By starting

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their own process, the trade unions were able to identify strategies to influence and negotiate the development and introduction of new IT systems in attaining the goal of industrial democracy. For a number of reasons the extent and impact of the activities of the trade unions did not meet expectations (Ehn, 1988): the influence on the introduction of IT only succeeded to a certain degree, the resources that were required were underestimated, and existing technologies limited the feasibility for developing alternatives. The UTOPIA project tried to address these aspects by going one step further to design new technologies for good use and skilled work with the objectives of democratization, mutual learning, and participation. In the Florence project, the objectives were increased skill and quality in the development of a computer-based environment for nurses (Bjerknes & Bratteteig, 1987; Ehn, 1988). The sub-objectives were participation, mutual learning, and communication (Bjerknes & Bratteteig, 1987). Industrial democracy was the overall worldview for all the projects, but the supplementary objectives differed. In the first generation projects the objective was to increase the power of the trade unions. The objective of the second generation project was the use of IT-based systems to support and further develop quality of work, and in the Florence project the supplementary objectives were cooperation, mutual learning, and participation by local workers. Bansler (1989) describes it as a change from the attainment of power to cooperation.

Methodology The methodology is action research performed by workers at specific workplaces with the help of researchers and under the auspices of the central union. The methodology for all the projects was action research. This approach was not evident from the beginning, as a traditional way of undertaking research was used with the researchers doing most of the work. The workers and local trade unions could not see the value of this research (Nygaard, 1979) and a new strategy was implemented where the workers at the local trade union formed work groups at specific workplaces (DEMOS project group, 1979; Nygaard, 1979). Action research in this environment meant that the local trade unions, through the work groups, made enquiries into the conditions of the enterprise. With the buildup of knowledge within the groups they could determine which actions to take (DEMOS project group, 1979). The research activity consisted of iterations of investigation, preparation, and dissemination (DUE project group, 1979). During the investigation phase, information was collected from the workplace through visits to workplaces; meetings and actions of the workplace groups; discussion with other trade union members at the local level; study of relevant literature and critical assessment of other IT systems. The knowledge and material that was collected during the investigation was prepared in order to support the needs of the local trade union. This led to the formulation of proposals for activities or to new research proposals and teaching material. The results were disseminated to other workers with the goal of gathering further experience and feedback (Kyng & Mathiassen, 1982). The Iron and Metal project was the role model for the other projects (DEMOS project group 1979, DUE project group, 1979). The philosophy of Paulo Freire was a further influence, as described in the DEMOS project group (1979) and DUE project group (1979).

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The research approach had a radical influence on the role of the researchers. They were seen as resources for the work groups instead of being the key players in the projects. The workers could tap the knowledge of the academics in their investigations, and the researchers also wrote parts of the reports (Nygaard & Bergo, 1975). The researchers supplemented the investigation of the work groups with theoretical and empirical studies about the identified problems (DEMOS project group, 1979). The general perception of the researchers that formed part of these projects, about the role of researchers changed: it was no longer assumed that the researcher was neutral and could undertake value free research (Nygaard 1979, Bansler, 1989). The research done in these projects was from the perspective of the trade unions to fulfil their objectives (Nygaard & Bergo 1975, Demos project group 1979, DUE project group, 1979; Nygaard, 1979). The UTOPIA project was carried out in a research environment. Skilled workers participated directly in the UTOPIA project with the same goal of democratization, but the design of computer artifacts for skilled work was emphasized. During the project mutual learning between graphic workers, computer scientists, and social scientists was emphasized. Utopia can be divided into two phases. During the first phase a number of workshops were held, and joint visits were organized to determine good quality use of graphic products. The second phase consisted of a requirement specification. The requirements were determined mainly through experimentation and simulation (Ehn, 1988). The Florence project consisted of a phase to determine the type of computer and IT systems needed by nurses through investigation of other hospital systems and by observing nurses at work. An important aspect during this phase was mutual learning and communication between nurses and computer scientists. This was followed by a second phase where various prototypes were developed, to simulate possible IT systems for the nurses (Bjerknes & Bratteteig, 1987). Throughout these projects action research was used. Kyng (1996) identifies a drift from union-based research projects to IT-designed projects with an emphasis on mutual learning, experimenting, participation, and cooperation. In the first projects, the main purpose was to attain enough knowledge for the unions to influence the development of systems in the organizations, whereas, the purpose of the UTOPIA project, as well as the Florence project was to develop an information system for skilled work. The users were still part of a union, but the emphasis was on how users could use IT systems to their advantage.

IT-Use Ideas The idea for IT use is that of work-oriented design of computer artifacts implying that computers should be used as tools to support and develop quality of work. IT development did not take workers into consideration, and the systems were built to satisfy the goals of management. This had a negative effect on the workplace (DUE project group, 1979; Kyng & Mathiassen, 1982; Bansler, 1989). The first three projects (Iron and Metal, DUE and DEMOS projects) had the ideal of combating the negative effects of IT and ensuring a positive use of IT to support industrial democracy (DUE project group, 1979; Nygaard, 1979; Kyng & Mathiassen, 1982; Bansler, 1989). The result of these projects can be seen in laws and agreements in the Scandinavian countries that regulate the use and development of IT (Mathiassen et al., 1983). The IT-use ideas for the UTOPIA project were tools for skilled work (Ehn, 1988). When IT systems are seen as tools for the user, the focus is on the individual use of the system. The application provides the user with a toolkit to deliver better quality work. This perspective views the user as the expert in a domain, and the computer-based tool is designed to support

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the skilled user. The idea is not to automate parts of the work, but to build technology support and a platform for further development of skills (Bødker et al., 1987; Hirschheim & Klein, 1989). The Florence project has a similar type of IT-use idea as was used in the UTOPIA project. An important aspect in this project was that the nurses wanted to influence the way in which the new IT system was designed to ensure the best support for them in their work. Again, the perspective of the IT system is that of a tool that should enhance the work environment and knowledge of the nurses (Bjerknes & Bratteteig 1987). The IT-use idea changed in the first projects from an idea of enhancing the work environment to a tool perspective that will enhance the work of skilled workers in the UTOPIA and Florence projects. These IT-use ideas have an effect on the IT-development ideas and the way in which a user will be involved in the development process.

IT-Development Ideas The IT-development ideas are participation and negotiation between workers, systems developers, and managers with the understanding that systems development is a mutual learning process. The idea for systems development for the first three projects (Iron and Metal, DUE, and DEMOS projects) was participation by the users in the development process combined with negotiation between management and the local union about the system and the development process. It was assumed that there were severe conflicts between the goals of management and the trade union goals of democratization (DEMOS project group, 1979; DUE project group, 1979; Nygaard, 1979). The IT-development ideas for the Utopia project also had participation as a major principle for the development process, but with mutual learning as an important outcome of the collaboration between workers and systems developers (Ehn, 1988). A further principle for this project was “design by doing” and experiments where the user could test the proposed system and determine if the system met the needs at the workplace. To foster an environment of mutual learning through participation and “design by doing,” a number of tools and techniques were developed (Bødker et al., 1987). An important aspect is that the design of the new system should be done with and by the users and not for the users (Briefs, 1983; Ehn & Kyng, 1987). In the Florence project, mutual learning through participation and collaboration was also a key principle. A supplementary technique that was used in the Florence project was observation of the nurses at work by the systems developers. The “design by doing” was done with the help of prototyping (Bjerknes & Bratteteig, 1987).

APPLICATION TO THE SOUTH AFRICAN ENVIRONMENT (SAE) To learn from these principles in relation to the SA situation, it is necessary to focus on the similarities of the underlying values and approaches, as well as the differences between the Scandinavian and SA contexts (see Figure 2). The fundamental similarities are the objectives of democratization and emancipation in a situation with inherent conflicts between different groups. These similarities are the important building blocks for the development of the principles, even though the dominant characteristics of the two environments are quite different. The Scandinavian environment is characterized by homogeneity, an established legal framework, a high level of education and skills, and rich societies, whereas the opposite

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characteristics are dominant in SA: heterogeneity, an emerging legal framework, a considerable disparity in education and skills, and a poor developing country. Moreover, the Scandinavian experiences are based on collaborations with strong and well-established trade unions, and they are rooted in the more conventional technologies of the seventies and eighties’ where networks and distributed computing were rarely used. For these reasons one should carefully evaluate and modify the principles governing the Scandinavian trade union approach to explore their possible usage in the SA setting. It is also necessary to note that the type of democracy in the two environments differ. The trade union projects in the Scandinavian environment had as goal industrial democracy; general democracy was already in place. In SA, general democracy has only started in 1994. Thus the type of democracy in the SAE is industrial as well as furthering general democracy. As a starting point for developing principles for the SAE, a number of possible IT research projects will be described, inspired by the learning principles from the Scandinavian trade union projects. These projects emphasize the similarities of emancipation and democracy of the two environments and concentrate on the aspects of socio-economic development related to IT. Furthermore, these projects are accessible in the SAE; the timeframe within which these projects can take place is manageable and they can be funded from a research and development point of view. Each of these projects is designed for a specific community or group of people corresponding to the problem owner principle as discussed previously,

Project 1: Self-Organized IT Facilities for Teachers The first project could aim at developing an IT facility for teachers in a local school in a community with disadvantaged groups. The project should address the IT qualifications needed by teachers to support and promote the use of IT in schools. Previously disadvantaged teachers without the necessary IT training should be used to identify needs and possibilities. Furthermore, the teachers should take responsibility for organizing of the IT Figure 2: Analogy between South Africa and Scandinavia Similarities •Objectives democracy and emancipation •Inherent

Characteristics of Scandinavian •Rich •Homogeneous •Established legal framework •High level of education •Highly skilled

Learning principles Scandinavian trade union •Problem Owner •Weltanschauung •Methodology •IT use ideas •IT development ideas

Characteristics of South African •Poor •Heterogeneous •Emerging legal framework •Disparity in education •Disparity in skills

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facilities, and the necessary knowledge for the management of the facility should be transferred to the teachers. The use of IT should be addressed at different levels: In which ways could IT be integrated into the educational process? How could a useful IT infrastructure be established in the schools? How could IT be used to support the administration of the school? How could the teachers attain appropriate qualifications in order to take a leading role in the transformation required to implement the above mentioned?

Project 2: IT Knowledge and Skills A second project could aim at developing an IT training program for all disadvantaged groups in an organization. The general need for training has been identified as can be seen in the discussion document, “Education for All” (NCSNET/NCESS, 1997). The important characteristic of this training program should be that the disadvantaged groups should determine their own needs for IT qualifications and be given the resources to design one or more training programs in response to these needs. The cultural setting and the professional knowledge of relevant groups of workers should be taken into consideration. The emphasis in these projects should be on the development of the necessary skills for the use of IT as well as the knowledge to allow the participants to be able to influence IT in their working environment. They should thus be able to determine in what way policy and procedures surrounding IT should be changed to make the employees more effective. The training program should be developed by smaller groups of employees with shared interests and needs. The courses can subsequently be disseminated to the rest of the organization. All the training should preferably be performed in a small group setting.

Project 3: IT Medium for a Local Community The third project could aim at developing an information kiosk at a community centre where information applicable to the residents can be displayed. The project should help the community to develop the necessary structures to determine what information should be displayed on such a kiosk as well as structures for the dissemination and development of the information for such a kiosk. There are a number of requirements for such an information kiosk that can be identified: The user interface should be user friendly and should take illiteracy into account; the output should be graphical and voice based and should be in several languages; the users of this information kiosk should be able to help themselves and not depend on other people to obtain the information. The information kiosk should supply information such as cultural events, local organizations and groups, local government information, bus, train, and taxi schedules, and the locations of the nearest clinic, police station, library, etc. The main objective of such a project should be the enhancement of community IT skills. The communities should determine the type of information to be displayed and how the kiosk should be organized. They should also be able to maintain the information kiosk themselves.

Project 4: Information System for the Unemployed Finally, a project could aim at organizing unemployed people from a community. A database to support the needs of all unemployed workers and employment opportunities can be developed. The database should be used to identify the need for training programs and shortages in certain types of skills. The primary problem owner for this project will be the unemployed, disadvantaged

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members of a community. The community leaders, government, municipality, and possible employers should all participate in this project. The objectives of the project could be: The unemployed people of the community should be organized in a structure to allow them to be able to use this information to their advantage; information should be gathered about the skills that are available in the area and the skills which are needed in the area. This knowledge can be used to identify programs for skill development and education of the unemployed; information about available jobs in the database would increase the possibilities of attaining jobs by members of the community. This would provide better opportunities for the community in which the system is implemented. The participants from government, municipality, and industry will be heterogeneous not only socially and culturally, but also with regard to interests in jobseekers. The necessary resources (information, knowledge, etc.) to participate on an equal footing with the rest of the participants should be ensured for the unemployed in the area. The people who will undertake the capturing and dissemination of the information in the database should be from the community. This will give a number of users access to computer literacy training and the proposed database system. Again it is important that the knowledge to use, maintain, and update this database should be transferred to the participants. One of the authors is presently involved in an action research project at the SEIDET (Siyabuswa Education Improvement and Development Trust) Centre at Siyabuswa, which is based on the hypothetical example of Project 1: Self-organized IT-facilities for teachers. The SEIDET Centre is a community learning centre established in 1992 and is a non-profit, nongovernmental education improvement institution and a registered development trust. One of the objectives of the centre is to provide a supplementary tuition program for grade 10, 11, and 12 pupils. The focus is mainly on English, Physical Science, Mathematics, and Commercial subjects, with the aim of increasing the number of students seeking entry to tertiary institutions in these respective studies (Conradie et al., 1998). SEIDET’s activities are concentrated on Saturdays when school pupils receive, on a voluntary basis, additional tuition. The SEIDET Centre has received a donation of 27 Pentium PCs as well as funding for the building of an extra classroom and safeguarding of the hardware. The project for the diffusion of the IT to the SEIDET community was called the Computer-Ndaba. The word ndaba is a Zulu (a local SA language) word and is defined as “a topic of conversation, affair” (English-Zulu, Zulu-English dictionary, 1953). This word was chosen because it called the teachers together to discuss, plan, and formulate ideas for the use of the computers to the advantage of the community and themselves. The letter of invitation to the Computer-Ndaba which was sent to the teachers identified three questions to be answered: How will the IT-laboratory be managed?; How are we as teachers going to use the IT-laboratory in the work of the centre?; How are we as teachers going to learn about PCs and other aspects relevant to PCs? These questions place an emphasis on their needs and the importance of their opinion, which coincide with the problem owner principle. The purpose of the Computer-Ndaba is to put into practice the principles as set out in the following section of the paper and to determine from this practice whether the principles are valid and how they should be changed. A further purpose for the Computer-Ndaba is to develop the necessary skills and knowledge of the teachers at SEIDET to manage the IT-facility as well as to develop the necessary policies and procedures for incorporating the IT-facility into their daily activities at SEIDET.

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PRINCIPLES FOR SOUTH AFRICAN PROJECTS The projects proposed in the previous section of the paper are inspired by the experiences from the Scandinavian trade union projects and could be undertaken in the SAE. Based on such examples, we can develop a set of principles for designing and conducting such projects.

Problem Owner The SA government has already set out its intention to use IT for development through the White Paper on Science and Technology (Department of Arts, Culture and Science, 1996). To give all relevant groups a chance to realize these intentions there is a need for a variety of research initiatives to defend and promote the interests of disadvantaged groups: some at the level of workplaces in collaboration with specific disadvantaged groups such as the proposed IT knowledge and skills project; and some at the level of society to develop and disseminate knowledge to promote the interests of disadvantaged groups in relation to IT such as the proposed information system for unemployed and the IT medium for local community projects. The IT knowledge and skills project, as well as the self-organized IT facilities for teachers project could use the pedagogical approach as identified in Nygaard & Bergo (1975) and at the same time give the disadvantaged groups access to information and influence in IT. This type of knowledge and influence corresponds to the goal of the first generation trade union projects (Kyng, 1996). On the level of society, the project for the development of an information system for the unemployed can express the needs of disadvantaged groups through IT. The underlying database could also highlight the need for training programs and shortages in certain types of skills or education, which might assist the local government. All of these projects will have problem owner which has been previously disadvantaged. The problem owners should identify in what way they will use the IT to their advantage. In the example of the Computer-Ndaba this principle will be realized, because the teachers that form part of the course are from a disadvantage rural community. The course starts with a session in which the teachers will identify the goals from their point of view. They will be encouraged to make changes to the proposed course of events. The teachers will identify a number of subjects of interest from their point of view which will be discussed further. There is a need for a variety of research projects to promote the interests of disadvantaged groups as part of IT development and use.

Weltanschauung The general worldview in the Scandinavian environment was democratization based on participation, communication, and mutual learning. The general worldview of SA, as a whole, is identified in the SA Bill of Rights (1996) as democracy and equality of all people. Hence, SA and Scandinavia share the worldview of democratization, but currently emancipation is added as a very important objective of the previously disadvantaged people of SA (South African Reconstruction and Development Program, 1994). The way in which emancipation is dealt with is through “affirmative action.” Clement (1996) identifies democratic empowerment as that which “emphasizes the rights and abilities of people to participate as equals in decisions that affect them.” Although the ideal of democracy at government level (the election of a government by all the citizens of SA) has been realized, it has not yet diffused to the business sector (Cosatu, 1996) and to all levels of society. Government has identified

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these aspirations through the RDP which addresses the needs of the poor who will not be able to realize their basic needs, such as housing, water, electricity and social welfare (Reconstruction and Development, 1994). One possible way in which previously disadvantaged groups which are active in business can be set free from restraint is through projects based on the ideals of democracy, emancipation, and equality. A further aspect is that SA is seen as a developing country, and IT is seen as a way in which socio-economic development can be realized. The socio-economic development is defined by Todaro (1989) as “the process of improving the quality of all human lives.” The traditional way in which the quality of life is measured is by measuring the quantitative growth in economics, such as the gross national product or the exchange rate. In socio-economic development quality of life should rather be evaluated on the improvement of the requirements for living, such as self-actualization and survival (MaxNeef et al., 1989). One way in which to promote self-actualization is through the dissemination of knowledge and skills. The SA business community has not yet identified what the objectives in support of democratization should be. In this regard, the SAE can learn from the Scandinavian trade union approach. Most organizations have a policy in support of affirmative action, but this is not enough, as the SA Deputy Minister of the Department for Arts, Science and Technology has said, “Currently the race and gender disparities in science and technology are unacceptably high. We need to address this imbalance pro-actively, not just because it is right to do so, but because if we do not we will simply not have adequate human resources to deal with our problems” (White Paper on Science and Technology, Department of Arts, Culture, Technology, and Science, 1996). To address the issue of democracy and emancipation business would need to do more than just employ the “right people.” In the White Paper on Science and Technology the importance of IT for the future of SA is expressed. The White Paper identifies dissemination of knowledge in general as well as the importance that IT has in support of democracy and emancipation (Department of Arts, Culture, Technology, and Science, 1996). The government hopes that by defining the playing field the private sector will follow and identify projects in this regard (White Paper on Science and Technology, 1996). We see at least three areas in which project objectives can be identified to support the worldview of democratization and emancipation within the IT field in the SAE: develop 1) relevant knowledge and skills; 2) IT systems that support democratization of work and society; and 3) IT-development approaches that support participation of heterogeneous groups of users. The proposed IT knowledge and skills project can realize the three objectives in the following way: 1) Knowledge will be given through the training program that will be applicable to the needs of the disadvantaged users and will provide them with the necessary skills to perform their day to day activities in the workplace. 2) The program will identify and satisfy the needs of the disadvantaged groups by involving them as key actors in the process. This might lead to more equal relations in the workplace, and with the necessary power these workers might be able to fulfill their own expectations. 3) The challenge is to make different disadvantaged groups collaborate through integration and participation in specific work groups. More generally, by giving the necessary knowledge to disadvantaged groups they will not feel inferior, and the spirit of the “rainbow nation” might prevail to facilitate collaboration between rather heterogeneous groups. The way in which this principle will be realized during the Computer-Ndaba is through the development of a procedure for the use of the IT facility; and the teachers will identify duties for the management of the IT facility. The people who will perform the duties will receive

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the necessary training for them to be able to do the managing without the help of outside organizations. The same could be said for the teachers, they would be able to use the facilities in their work as teachers without the help of outsiders. The intention with the ComputerNdaba is that the teachers will share their new-found knowledge with the rest of the community. The teachers will hopefully see themselves as the trainers of the community in terms of IT. They will thus be able to make choices in terms of their work and in terms of their relationship with the rest of the community. The Computer-Ndaba will be a cooperation between a heterophilous change agent and the teachers, and thus the last part of the principle will be realized. The research projects should—based on the interest of disadvantaged groups— develop 1) relevant knowledge and skills, 2) IT systems that support democratization of work and society, and 3) IT-development approaches that support participation of heterogeneous groups of users.

Methodology The main approach in the trade union projects was action research with workers at the local trade union level or with the future users of a new computer-based information system. The use of action research ensured that workers and users could see the relevance of the research in relation to their everyday situation, and it gave them the opportunity to develop new knowledge about IT, based on their own experiences and interests. This is an important aspect for the SAE, because of the expectation for a “people-driven process” and because of the heterogeneity of the SAE. By using action research with participation as a cornerstone, both research in general and systems development in particular will be undertaken from the perspective of the problem owners including their interpretation of the general objectives of democratization and emancipation. A number of characteristics of action research, important in this type of research, can be identified (Checkland, 1981; Checkland, 1991): the researcher forms part of the change process; it is a collaborative process between the researcher and the people involved in the problematic situation; there is a practical outcome; the focus is on social practice; and the researcher is a change agent. In the Scandinavian trade union approach, the role of the researcher and how the collaborative process should take place has been identified. The researcher is a resource, and the participants in the research are the main actors in the process. This same organization for the research should be used in the SAE, because it gives the participants the responsibility for what should form part of the research and how this should be performed. This will ensure that the principle of problem owner is implemented and that the project is understandable for the participants. The role of the researcher might differ because the level of knowledge of the participants is such that they might not know how to proceed with such a project. The researcher should thus play a more important role in the how of the project, but not in the what. Furthermore, the development of a relationship between the researcher and participants should be developed with care, because the researcher will be heterophilous from the participants. Action research can be employed in the practical example of an IT knowledge and skills project and would be similar to the first generation projects of the trade union approach. In these projects people identified, from their own knowledge, problems that should be addressed relating to IT (Ehn, 1988). The previously disadvantaged groups must be given the opportunities and resources to identify important problems from their point of view, and these problems must then be related to IT and to how IT could help address these problems. In the example of the information system for unemployed, a number of disadvantaged users

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should be identified, and their inputs should determine the direction for the development of such a system. The important aspect here is that previously disadvantaged jobless people should have influence and provide input on how this system should answer their needs. The techniques that could be used include negotiation on the goals of the system by using approaches such as soft systems methodology (Checkland & Scholes, 1990) and mock-ups to determine the interface of the system, as described in the UTOPIA project (Ehn, 1988). Users from the previously disadvantaged groups would not necessarily be computer literate or even literate, and it would thus be necessary to use mock-ups in which their frame of reference is used to represent the proposed IT system. By using this approach, users can overcome the learning barrier in the analysis phase. An important aspect of the action research approach is that of learning, e.g., developing and disseminating IT knowledge based on the interests and needs of a particular disadvantaged group. The way in which the trade union projects carried out the knowledge development and dissemination from the local trade union level to other parts of the trade union was through written material and training courses. Strategies should be put in place in the SAE to allow disadvantaged groups to disseminate their experiences with IT to other members of the group and to other groups with similar interests. One possibility is to develop training packages that can be distributed and used by other organizations. It is also important to give media coverage to the projects so that other organizations can learn from these experiences. In the Computer-Ndaba, the methodology will be action research with soft systems methodology and the use of small group discussions. Various methods for gathering data will be used: writing diaries, questionnaires, and interviews. The relationship between the researcher and the participants will be developed through the use of an opinion leader at SEIDET and a homophilous aide. The participants will identify their worldview through a goal setting session. An action research approach should be taken based on the active participation of one or more disadvantaged groups of IT users.

IT-Use Ideas One of the prerequisites for the tool perspective in the Scandinavian environment is that of a skilled and educated workforce. In contrast, the disparity in skills and education is one of the greatest challenges for the SAE. Not all individuals who are employed necessarily have sufficient skills and education. Organizations need to invest huge amounts of money in addressing this general lack of skills and education. Another important prerequisite for the tool perspective is the types of IT systems that were developed and used during the seventies and eighties in Scandinavia. These applications seldom included communication and networking as key features, simply because the appropriate technologies were not in place at the time. The needs for specific knowledge and skills should be identified by ensuring participation and influence from those who use IT, and systems developers should change their view of IT as a tool for increasing profit to a tool for enhancing the quality of work. IT systems should help users perform their task in what Heidegger calls a ready-at-hand mode so that the system does not become a hindering factor between the user and the task (Dahlbom & Mathiassen, 1993). IT systems should support users, and this often requires a new perspective on software interfaces, help facilities, and computer-based training. This can be called IT used as a “tool and crutch,” For example, the help facility should not only give advice on the use of a system, but also assist the user to grasp basic concepts and should take the

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level of the knowledge of the user into consideration. IT systems that support the user to improve the quality of work and more generally the organizations’ ability to deliver enhanced quality service to its customers. On the level of society, the IT medium for local community can be used to disseminate information via IT to people in the community. These information kiosks can ensure that knowledge will reach the people in the area. People will thus have more information available that will hopefully increase their quality of life. Similarly, the information system for unemployed, IT knowledge and skills, and the self-organized IT facilities for teachers projects will increase the knowledge and information available in the involved communities. In the Computer-Ndaba the teachers will identify areas of their work for IT use. In order for the teachers to visualize the IT use in these areas, sessions for developing plans will be held. The success of these sessions will hopefully be seen in changes in SEIDET work procedures. The IT-use ideas are that of human-oriented design of computer artifacts to support and develop the democratization of society, the quality of work, the knowledge and skills of individual users, increase self-esteem, and give freedom from servitude.

IT-Development Ideas It is important to see IT development as a learning experience: The users need to learn about systems development and how IT can be developed and used to their advantage; the systems developers need to learn how to manage a multicultural environment with an inherent and considerable potential of conflict. Knight (1993) identifies the lack of knowledge about the culture of the situation in a developing country as one of the major factors for systems failure. Systems analysts should be able to learn about and address these cultural factors through certain tools. Bell & WoodHarper (1993) identify a multiperspective methodology for this purpose, where hard as well as soft issues should be taken into consideration during the development of an IT system. The users can learn about systems development when an approach such as “design by doing” is used. One of the ways in which the Florence project achieved this was by using prototypes (Bjerknes & Bratteteig, 1987). Prototypes allow the users to determine whether the proposed system will address their problems and whether the IT system will fit into the working environment. Kyng (1996) identified other non-computer techniques, such as mockups (the simulation of computer artifacts by using non-computer objects), organizational tool kits (the use of icons for functions, tools, and materials for describing the work environment), and workplace visits. An important aspect of participation is that design should be with the user. Kyng & Mathiassen (1982) define it as “a process carried out by a group of computer specialists and users in which the participants in cooperation gain a better understanding of the system.” It will be necessary to develop tools for determining the goals in a systems development project that satisfies the expectations of the users. Specific resources should be allocated in the systems development life cycle for determining these goals. The implications for the systems developers are that they must have skills for handling conflict, have an understanding of multicultural environments, and master the techniques and tools to determine the goals for a specific systems development project. The systems developers will need to change their views of IT systems when a “tool and crutch” use-ideal is considered to address the disparity in skills and the ideals of democracy. A systems developer should think about the concepts a nonskilled user will need, how the user interface should support a nonskilled worker, and how training can be incorporated into

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the system to satisfy the needs of nonskilled and skilled workers. The IT-development ideas are participation and negotiation between heterogeneous groups of users, systems developers, and managers with the understanding that systems development is a mutual learning process.

CONCLUSION The purpose of this paper is to determine and develop some principles and guidelines that are useful in developing a SA IT development tradition. The discussion above has identified a number of principles of the Scandinavian trade unionist approach to IT development that can be used in the SA situation. The underlying similarities and differences between the two environments were used to proactively identify principles for IT development and implementation in SA. A further factor that was used in the identification of the principles was the idea of socio-economic development relating to IT in the SAE. Principles such as these are needed as part of developing a democratic society, and they will, as discussed, have an effect on a number of areas in SA: organizations, education of IT professionals, and IT development practice. Organizations in SA should be aware that they are facing risks in developing systems– not only of a technical, but also, and even primarily, of a social nature. Thus, IT development projects should take the characteristics of the SAE into consideration by developing tools, techniques, and practices to address the expectations of users. The education of IT professionals should include the necessary skills and tools to manage the situations they are going to face. To achieve this, research projects are required in which disadvantaged groups are given the opportunities to express, defend, and further develop their interests related to the use of IT in the emerging SAE. Taking the differences between the Scandinavian and the SA environments into account, a number of such initiatives have been outlined. The principles have been developed for the SAE, and the question can be asked whether they are applicable to other developing environments, such as Latin American countries, Asian countries, the rest of Africa, or some Eastern European countries. All of these countries have different characteristics. The Eastern European countries are highly unionized, and in countries in Asia and Africa trade unions are not part of working life. The one characteristic that these environments have in common is that they are developing environments and in need of socio-economic development. On a general level Max-Neef et al. (1991) distinguishes between basic needs and the satisfiers of these needs. Basic human needs are universal for all people and can be categorized as existential and axiological. The existential needs are being, having, doing, and interacting. The axiological needs are subsistence, protection, affection, understanding, participation, idleness, creation, identity, and freedom. Culture and environment determine the ways in which these basic needs are satisfied. The needs can also be satisfied on different levels: with regard to the individual, with regard to the social group and with regard to the environment. The basic needs in all of the developing environments are in these terms similar, but the way in which they will or can be satisfied differ. The proposed principles will, from this point of view work well as sources of inspiration for serving the interests of disadvantaged groups of users in IT. But the interpretation of the principles will differ because each of the developing environments will satisfy the basic needs in different ways. An obvious problem owner for Western European countries might be trade unions, and the original principle as identified for the Scandinavian trade union movement could serve as inspiration. In the other developing countries, as in SA, such an obvious problem owner

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does not exist, and it is necessary to identify specific groups or communities for which the project should be developed. The weltanschauung principle is an expression of the basic need of participation and the need to set goals that reflect the interest of the problem owner. A further important aspect of the weltanschauung principle is that knowledge should be transferred to the people involved so that they can become self-reliant. Furthermore, groups with different points of view, within the project environment, should be able to function together. In this respect the SAE weltanschauung principle should be applicable with minor changes to other developing environments. The methodology principle as specified for the SAE will be applicable to all the environments because participation is a cornerstone for socio-economic development. Furthermore, as the action research method lends itself to the building of knowledge to create self-reliance, this approach can be seen as a further important cornerstone for socioeconomic development. The important aspects of the IT-use ideas for all developing countries are that the computer artifacts should support and develop the knowledge and skills of individual users. Furthermore, they should increase self-esteem and should free the participants from servitude. The important aspects of the IT-development ideas for developing countries are that participation and negotiation should take place and that the process should be seen as a mutual learning process. These principles of IT use and IT development will be applicable to different developing environments, but they would have to be further developed and tailored depending on the way in which people perceive their basic needs. In summary, it could be said that the basic needs of all people are the same, but the way in which these needs are satisfied differ from environment to environment. The people that participate in projects on IT should determine the details and goals for these projects, and the researchers will have to be sensitive towards the cultural environment within which these projects take place and only let the principles serve as guidelines. The theoretical research presented in this paper should be tested in practical projects in SA and other developing environments. The experience should be used to further develop the principles. A good example of a project in this environment is the research project that one of the authors is conducting at SEIDET. In this project the practice of the teachers at the community centre is changed to include the computer laboratory, based on their needs for IT. We invite others to engage in similar efforts to develop knowledge to support the needs of disadvantaged users in IT in developing environments.

Reflection Since the publication of this article one of the authors was part of the Computer-Ndaba project described in the paper. Although the experience the author has gone through cannot be easily described by a few comments, we do believe it is appropriate to highlight a few aspects of the project in terms of the principles. The context and environment of the problem owner within which the intervention takes place is a critical factor for a successful intervention. Aspects of the environment that were effectively utilized by the Computer-Ndaba were the well-established infrastructure for disseminating information and the apparent goodwill and collaboration of all the participants. The community and its willingness to help with the project further emphasized the goodwill. The risk for such a project will become very high if there is no support from the community and when there is not a well-organized structure within which these projects could take place.

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A further risk factor is the commitment of the participants. They must have the will and the need to learn and then teach others in the community. One important aspect described in the weltanschauung and the methodology principle is the relationship between the researcher and the participants. In the course of the trade union projects, the role of the researcher was defined as a resource. The researcher in the case of a socio-economic development project cannot play this type of role. The knowledge of the participants is such that the researcher had to play a more leading role, but not a primary role. The researcher should determine the way in which the project enfolds. This implies that the researcher should walk a fine line between identifying what should happen and being lead by the participants of the course. The Computer-Ndaba has been very successful. Since the intervention and with the help of other well wishers a group of the Computer-Ndaba participants were chosen to act as tutors and later as teachers for a community-based computer literacy course.

ACKNOWLEDGMENTS A previous version of this paper was published as: Out of Scandinavia: (2000). Facing social risks in IT development in South Africa. Journal of Global Information Management, 8(2), 38-49.

REFERENCES Amin, S. (1990). Maldevelopment: Anatomy of a Global Failure. London: Zed Books Ltd. Avgerou, C. and Madon, M. (1995). Development, self-determination and information. SACJ, 4-12. Bansler, J. (1989). Systems development research in Scandinavia: Three theoretical schools. Scandinavian Journal of Information Systems, 1. Bell, S. and Wood-Harper, T. (1993). Systems analysis and systems design in developing countries: Real needs, analytical honesty, and a multi-perspective methodology. In Cotterman, W. W. and Malik, M. B. (Eds), Information Technology in Support of Economic Development, 31-54. Research Monograph No. 106. Atlanta, GA: Georgia State University Business Press. Bjerknes, G. and Bratteteig, T. (1987). Florence in wonderland: Systems development with nurses. In Bjerknes, G., Ehn, P. and Kyng, M. (Eds), Computers and Democracy, 279295. England: Gower Publishing Company. Bjerknes, G. and Bratteteig, T. (1995). User participation and democracy: A discussion of Scandinavian research on system development. Scandinavian Journal of Information Systems, 7(1), 73-97. Briefs, U. (1983). Participatory systems design as an approach for a workers’ production policy. In Briefs, U., Ciborra, C. and Schneider, L. (Eds), Systems Design For, With, and By the Users, 311-315. Amsterdam: North-Holland. Bødker, S., Ehn, P. and Kyng, M. (1987). A UTOPIA experience: On design of powerful computer-based tools for skilled graphic workers. In Bjerknes, G., Ehn, P. and Kyng, M. (Eds), Computers and Democracy, 251-278. London: Gower Publishing Company. Checkland, P. (1981). Systems thinking, Systems Practice. Chichester: John Wiley & Sons. Checkland, P. and Scholes, J. (1990). Soft Systems Methodology in Action. Chichester: John Wiley & Sons.

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Checkland, P. (1991). From framework through experience to learning: The essential nature of action research. In Nissen, H. E., Klein, H. K. and Hirschheim, R. (Eds), Information Systems Research: Contemporary Approaches and Emergent Traditions, 397-403. Amsterdam: North-Holland. Clement, A. (1996). Computing at work: Empowering actions by low-level users. In Kling, R. (Ed.), Computerization and Controversy: Value Conflicts and Social Choices (second edition), 383-406. San Diego, CA: Academic Press. Conradie, P., Phahlamohlaka, J. P. and Greyling, M. (1998). An evaluation of the functioning of the Siyabuswa educational improvement and development trust (SEIDET). Human Science Research Council, March. Cosatu (1996). Social equity and job creation–The key to a stable future: Proposals by the South African labor movement. Available on the World Wide Web at: http:// www.cosatu.org.za/docs/jobs.html. Last updated 1 April 1996. DEMOS project group. (1979). The DEMOS project: A presentation. In Sandberg, Å. (Ed.), Computers Dividing Man and Work, 108-121. Stockholm, Sweden: Arbetslivcentrum. Department of Arts, Culture, Technology and Science (1996). White Paper on Science & Technology: Preparing for the 21st Century. Available on the World Wide Web at: http://www.dacst.gov.za/science_technology/stwp.htm. DUE project group. (1979). Project DUE: Democracy, development, and EDP. In Sandberg, Å. (Ed), Computers Dividing Man and Work, 122-137. Stockholm, Sweden: Arbetslivcentrum. Ehn, P. (1988). Work-Oriented Design of Computer Artifacts. Stockholm: Arbetslivscentrum.. Ehn, P. and Kyng, M. (1987). The collective resource approach to systems design. In Bjerknes, G., Ehn, P. and Kyng, M. (Eds), Computers and Democracy, 17-57. England: Gower Publishing Company. English-Zulu, Zulu-English Dictionary. (1953). English-Zulu, Zulu-English Dictionary (second edition). Johannesburg: Witwatersrand University Press. Grawitzky, R. (1996). 20% of workers are union members. Business Day, September. Hirschheim, R. and Klein, H. K. (1989). Four paradigms of information systems development. Communications of the ACM, 32(10), 1199-1216. Iivari, J. and Lyytinen, K. (1999). Research on information systems development in Scandinavia– Unity in Plurality. Scandinavian Journal of Information Systems, 10(1-2), 135-185. Kling, R. (1980). Social analyses of computing: Theoretical perspectives in recent empirical research. ACM Computing Surveys, 12(1), 61-110. Knight, J. (1993). The contumacious computer. In Cotterman, W. W. and Malik, M. B. (Eds.), Information Technology in support of Economic Development, 95-112. Research Monograph No 106, Atlanta, GA: Georgia State University Business Press. Korpela, M. (1995). Who will implement information technology for development? SACJ, 20-25. Kriel, A. (1996). Eenders Dink, Eenders Doen? Cape Town, South Africa: Lux Verbi. Kyng, M. (1996). Users and computers: A contextual approach to design of computer artifacts. Doctor Scientarium Thesis. Kyng, M. and Mathiassen, L. (1982). Systems development and trade union activities. In Bjørn-Andersen, N., Earl, M., Holst, O. and Mumford, E. (Eds), Information Society: For Richer, For Poorer, 247-260. Amsterdam: North-Holland. Lessem, R. and Nussbaum, B. (1996). Sawubona Africa: Embracing Four Worlds in South African management. Sandton, South Africa: Zebra Press.

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Mathiassen, L., Rolskov, B. and Vedel, E. (1983). Regulating the use of EDP by law and agreement. In Briefs, U., Ciborra, C. and Schneider, L. (Eds), Systems Design For, With, and By the Users, 251-264. Amsterdam: North-Holland. Max-Neef, M., Elizalde, A. and Hopenhayn, M. (1989). Human Scale Development: Conception, Application and Further Reflection. New York: The Apex Press. NCSNET/NCESS. (1997). Education for all: Summary of public discussion document. Available on the World Wide Web at: http://www.polity.org.za/govdocs/discuss/ edforall.html. Last updated in November 1997. Nygaard, K. (1979). The iron and metal project: trade union participation. In Sandberg, Å. (Ed.), Computers Dividing Man and Work, 94-106. Stockholm, Sweden: Arbetslivcentrum. Nygaard, K. and Bergo, O.T. (1975). The trade union–New users of research. Personnel Review, 4(2), 5-10. Oxford Dictionary. (1990). The Concise Oxford Dictionary of Current English. Oxford: Clarendon Press. Sandberg, Å. (1979). Computers Dividing Man and Work. Stockholm, Sweden: Arbetslivcentrum. South African Government (1996). South African Bill of Rights. Available on the World Wide Web at: http://www.polity.org.za/govdocs/constitution/saconst.html. South African Reconstruction and Development Program. (1994). Reconstruction and Development Program. A Policy Framework. Available on the World Wide Web at: http://www.polity.org.za/govdocs/rdp/rdp.html. Todaro, M. P. (1989). Economic Development in the Third World (fourth edition). New York: Longman Group Limited.

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Chapter XVIII

IS Project Characteristics and Performance: A Kuwaiti Illustration Adel M. Aladwani Kuwait University, Kuwait

Empirical research on project-level success of systems development in developing regions is lacking. Managers cannot rely on prescriptions suggested by IS projects research in developed countries to understand IS projects in developing countries without empirical evidence supporting the applicability of these guidelines. We collect data from 61 IS project leaders to test eight research hypotheses tapping the relationship between IS project characteristics and performance in a developing country. Our analyses reveal that adequacy of development tools, formal planning, management support, and participation are positively related to IS project performance. However, the data find no support for a significant relationship between members’ abilities, project uncertainty, and conflict and performance. Contrary to previously reported findings, our data highlight the possible damaging effect of increased horizontal coordination in IS projects. We discuss these results and suggest directions for future research.

INTRODUCTION The effective management of information systems (IS) projects continues to be an important issue facing organizational managers all over the world (Badri, 1992; Deans et al., 1991; Marchewka & Keil, 1995; Watson et al., 1997). This interest stems in part from the fact that the outcome of such projects can lead, in many cases, to profound organizational consequences ranging from reducing costs to creating a competitive advantage over rivals. In compliance with this interest, some scholars have examined the salient project characteristics that determine the performance of IS projects (e.g., Saarinen, 1990; Robey, Smith, & Vijayasarathy, 1993; Kraut & Streeter, 1995; Nidumolu, 1995; Deephouse et al., 1996). These empirical investigations, although significant, have come from developed regions like Appeared in Journal of Global Information Management, vol. 8, no. 2, 2000. Reprinted by permission.

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the United States and Western European countries, thereby limiting the external validity of these studies. Culture plays an important role in many situations and certainly in IS implementation (Odedra, 1993). Previous research found differences between developed and developing countries along certain cultural dimensions—power distance, individualism, masculinity, and uncertainty avoidance (Hofstede, 1980). Therefore, one cannot rely on prescriptions suggested by IS projects research in developed countries to understand IS projects in developing countries without empirical evidence supporting the applicability of these guidelines. Empirical research on project-level success in developing regions is lacking. Previous research in developing countries (e.g., Abdul-Gader, 1990; Khalil & Elkordy, 1997; Odedra, 1993; Siderisdis, 1988) focused on system-level success as opposed to project-level success. Although system-level success is an important construct, it is important to recognize that it is a different construct from IS project performance (Robey et al., 1993). Hence, there is a pressing need to study IS project performance in developing countries. The purpose of the present study is to examine the relationship between IS project characteristics and IS project performance in Kuwait. We hope that the findings of this investigation will accomplish at least two goals. First, this study will help pinpoint some of the facilitators and inhibitors of IS project performance in Kuwait. Second, the paper will become a reference for IS practitioners and researchers to evaluate the extent to which the guidelines, proposed by similar research that has been conducted in developed countries, can be applied in a developing country like Kuwait. The second goal is extremely important given the critical need for IS managers to understand global information resources management issues (Khosrowpour & Greenawalt, 1997).

BACKGROUND & PROPOSED RELATIONSHIPS Several IS researchers have examined the relationship between IS project characteristics and IS project performance (e.g., Saarinen, 1990; Robey et al., 1993; Kraut & Streeter, 1995; Nidumolu, 1995; Deephouse et al., 1996). Two main conclusions come out of this research. First is that this research comes from developed countries like the United States and Western European countries. Second is that IS project characteristics that influence IS project performance are many. Based on past research on IS project performance in developed countries, we identify an initial set of project characteristics that may influence IS project performance in Kuwait (Figure 1). The selected variables are horizontal coordination (Nidumolu, 1995), participation (Robey et al., 1993), formal planning (Deephouse et al., 1996), members’ abilities (Saarinen, 1990), adequacy of development tools (Saarinen, 1990), project uncertainty (Kraut & Streeter, 1995), and conflict (Robey et al., 1993). Because of its importance for IS initiatives in developed countries (Lucas, Ginzberg, & Schultz, 1990) and certainly in developing countries (Abdul-Gader, 1990; Khalil & Elkordy, 1997), management support is also added to our list of predictor variables.

IS Project Performance IS scholars used many surrogates to measure the dependent variable in IS implementation research. Usage, user satisfaction, system quality, information quality, and economic impact are examples of surrogates of systems development success used in many past implementation studies (see DeLone & McLean, 1992 for a review). As can be noticed from

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the reviews by DeLone and McLean (1992) and Lucas et al. (1990), past IS implementation research was concerned with success or effectiveness at the system level. Project-level success is often overlooked in IS research (Robey et al., 1993). Although IS effectiveness is an important construct, it is important to recognize that it is a different construct from IS project performance. From an analytical point of view, the unit of analysis in IS effectiveness research is the system, whereas in IS project performance research, the unit of analysis is the development project. Further, the IS effectiveness construct is usually measured using a unidimensional index such as usage or satisfaction, while on the contrary, IS project performance is usually considered as a multidimensional construct (Henderson & Lee, 1992). Given the differences between the two constructs, one expects that the factors that influence the two constructs will also be different. A typical view of IS project performance encompasses two dimensions (Henderson & Lee, 1992; Robey et al., 1993): work efficiency (as measured, for example, by adherence to cost and schedule constraints) and effectiveness (as measured, for example, by quality). Consistent with this conception, IS project performance, in this study, is defined as the extent to which the IS project is viewed as efficient in its work and effective in its outcome.

Horizontal Coordination Horizontal coordination refers to “lateral communications through meetings and oneto-one discussions between users and IS staff” (Nidumolu, 1995, p. 195). Information is conveyed through numerous channels like interpersonal verbal, group verbal and voice messaging, printed reports, and interpersonal written communication (Lind & Zmud, 1991). Each coordination modality has its peculiar characteristics that differentiate it from the other types of media and determine its level of richness. Face-to-face interaction ranks highest, and interpersonal written document ranks lowest on the richness continuum. Previous research stressed the importance of coordination to the favorable outcome of IS projects. Kraut and Streeter (1995), for example, highlighted the importance of horizontal sharing of information for achieving the goals of the IS project. Moreover, Nidumolu (1995) underscored the importance of horizontal coordination for superior IS project performance. Thus, we hypothesize that: H1: Horizontal coordination will be positively associated with IS project performance.

Participation Robey, Farrow and Franz (1989) define participation as “the extent to which members of an organization are engaged in activities related to system development.” (p. 1174). Participation can have many favorable implications for IS project performance. Participation can result, among other things, in better assessment of users’ needs and better users’ understanding of the developed system. Some empirical evidence supports this premise. Robey et al. (1993), for example, found a positive correlation between participation and IS project performance. Abdul-Gader (1990), Hassan (1994), and Khalil and Elkordy (1997) also reported a positive relationship between participation and system success. This leads us to the following hypothesis: H2: Participation will be positively associated with IS project performance.

Formal Planning Formal planning, or the predefinition of project activities and resources and their interrelationships, can have a major influence on IS project performance. Formal planning

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Figure 1: Research model

Development Development tools tools

Horizontal Horizontal coordination coordination

Project Project uncertainty uncertainty

Participation Participation

Members Members abilities abilities

Formal Formal planning planning

Management Management support support

Conflict Conflict

IS Project Performance

Project Effectiveness

Project Efficiency

helps, among other things, in improving the planning, the control and the coordination of work flows within the IS project (Deephouse et al., 1996; Kraut & Streeter, 1995). IS researchers in developing countries were not successful in explicitly studying the relationship between formal planning and IS project performance. However, studies on information systems success in developing countries identified IT planning as a major issue that deserves researchers’ attention. For example, Abdul-Gader (1990) reported a positive relationship between end-user computing planning and system success. Odedra (1993) identified lack of planning as a major factor influencing the introduction and utilization of information systems in Africa. Thus, we hypothesize that H3: Formal planning will be positively associated with IS project performance.

Members’ Abilities The results of past research suggest that project members’ abilities can be a source of an increased level of project performance (Rasch & Tosi, 1992; Saarinen, 1990). Intuitively, a project that possesses a significant inventory of experiences and skills is more likely to perform better than one that does not enjoy the same privilege. The scarcity of qualified personnel represents a challenge to IS management in developing countries. Hassan (1994) identified the lack of competent IS personnel as one of the inhibitors of successful implementation of information technology in Pakistan. Thus, we hypothesize that H4: Members’ abilities will be positively associated with IS project performance.

Adequacy of Development Tools According to Henderson and Cooprider (1990), there are three components of the production dimension of development tools: representing information requirements, analyzing information flows and data relationships, and transforming users’ views into program codes. Adequate development equipment and tools have been argued to have an indisputable voice in determining the success or failure of information systems projects (Saarinen, 1990). Thus, we hypothesize that H5: Adequacy of development tools will be positively associated with IS project performance.

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Project Uncertainty The notion of project uncertainty in this study refers to the ambiguity associated with the system design process (e.g., Tait & Vessey, 1988). Project uncertainty can be conceptualized in terms of the level of difficulty in determining information requirements, level of processing complexity, and overall level of complexity of the design process (Tait & Vessey, 1988). Available research reports a negative relationship between project uncertainty and IS project performance. Tait and Vessey (1988) reported that high system complexity is related to less successful systems. Saarinen (1990) analysis showed that projects, which had problems with requirements’ specification, were more likely to fail than those that did not have the same problems. Thus, we hypothesize that H6: Project uncertainty will be negatively associated with IS project performance.

Conflict In this study, we define conflict as to the extent to which there are communication barriers among the members of the IS project. Reducing conflict to create mutual understanding between communication partners is an extremely important element of the effective functioning of the IS project. Some scholars empirically examined the role of conflict within IS projects. Robey and his colleagues (1993), for example, found a negative relationship between conflict and IS project performance. Thus, we hypothesize that H7: Conflict will be negatively associated with IS project performance.

Management Support Management support refers to the willingness of management to provide the required resources and authority for project success (Slevin & Pinto, 1986). Top management support was found to relate to the success of many types of information systems (Lucas et al., 1990). Moreover, Abdul-Gader (1990) found a positive relationship between management support and end-user computing satisfaction. Odedra (1993) found that lack of management support was the main cause of information system failure. Hassan (1994) identified management support as one of the factors affecting information systems utilization in Pakistan. Thus, we hypothesize that H8: Management support will be positively associated with IS project performance.

SAMPLE The data for this study was made available via a field survey. Fifty-five Kuwaiti organizations were contacted to solicit their participation in our study. Thirty-two of the contacted organizations agreed to participate. We identified 79 IS project leaders in the 32 participating organizations. The research assistants distributed questionnaires to all 79 information systems project leaders and collected usable responses from 61 (response rate of approximately 77 percent).Forty-three percent of the IS project leaders in our sample were less than 30 years old. The majority, or close to 87 percent, of these leaders had a bachelor’s degree. Further, the responding project leaders had on average seven years of field experience. Table 1 summarizes the profile of respondents. The IS projects in our sample consisted of five members on average. Moreover, the time duration of these projects varied widely. Figure 2 illustrates the duration in months of the projects in our sample.

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Table 1: Profile of respondents Characteristic

Value

Frequency

Age

Less than 30 years old 30 years and above Unknown Bachelor Non-bachelor Mean = 5.98 SD = 4.16 Range = 1-16

26 34 1 53 8

Education Field experience

Approximate Percentage 43 55 2 87 13

Figure 2: Summary of projects’ duration Unknown Unknown (16%)

(16%) More than More than 12 Months (7%) 12 Months

1 to 3 Months 1 to 3 Months (23%)

(23%)

(7%) 7 to 12 Months (26%)

7 to 12 Months (26%)

4 to 6 Months (28%)

4 to 6 Months (28%)

Table 2: Univariate statistics for ordinal scales Scale Cronbach’s alpha # of items Project performance .92 7 Horizontal coordination — 4 Participation .83 3 Formal planning .78 5 Members’ abilities .80 2 Adequacy of development tools .82 3 Project uncertainty .82 3 Conflict — 1 Management support .82 5

Mean 4.42 3.15 4.69 4.56 4.55

S.D. 1.20 .86 1.24 1.02 .76

3.67 3.83 4.63 4.43

.71 1.12 1.54 1.04

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DATA ANALYSIS Preliminary Analysis Since bias of the variables represents a serious threat to the validity of empirical results, it is imperative that we ensure the normality of the study variables. To test the normality of the criterion and predictor variables, we examined: (1) skewness and kurtosis levels, and (2) the normal probability plots (a plot of the observed cumulative proportion against the cumulative proportion that would be expected if the data were a sample from a normal distribution). The results revealed that all the variables showed no strong deviation from normality, indicating that bias was not a problem in our data. Table 2 summarizes univariate statistics of the study variables.

Validity and Reliability Testing for convergent and discriminant validity allowed us to assess construct validity. Convergent validity was examined by submitting each scale’s items to a factor analysis procedure to explore the underlying dimensions of the construct. The traditional cut-off points of 0.30 for item loadings and eigenvalue of 1 were used in this study (Kerlinger, 1986). Discriminant validity was established using across-scale correlations test. Whenever a scale’s inter-items correlations were greater than the across-scale correlations for 50 percent of all possible comparisons, then discriminant validity was supported for the same scale (Robey et al., 1993). Table 3 summarizes discriminant validity results and shows that all of the tests exceed the 50% benchmark. All multi-item scales in this study (effectiveness, efficiency, participation, formal planning, members’ abilities, development tools, project uncertainty, and management support) showed adequate convergent validity (Table 4). In every factor analysis run, each scale’s items converged cleanly on the same factor representing these items. Moreover, all scales except project efficiency and project effectiveness showed acceptable discriminant validity. The items that belong to efficiency and effectiveness were not able to draw a line between the two constructs. Fortunately, our discriminant validity tests showed that project efficiency and project effectiveness were unique from the predictor variables. Moreover, because project efficiency and effectiveness correlated highly (r=0.83), we decided to submit all the items that belong to efficiency and effectiveness to the same factor analysis procedure. The results showed that the seven items loaded on a single factor. These results gave an indication that the seven items actually gauged the same construct. Hence, we combined the seven items into an overall construct and we called it IS project performance. We tested the reliability of the variables using Cronbach’s alpha. Horizontal coordination and conflict (single item) were not tested for reliability because of the nature of their scale design. The results of the reliability tests (Table 2) indicated that the variables exhibited high reliability levels—above the 0.70 alpha level deemed appropriate by most information systems researchers.

RESULTS AND DISCUSSION We used stepwise regression analysis to examine the explanatory power of the overall model and to test the proposed relationships. We entered the full set of predictor variables in a regression model to examine their overall effect on IS project performance. The tested

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model had an adjusted R2 of approximately 70 percent (p < .01). This result indicates that, taken together, the eight predictor variables in the model explain a significant proportion of the variance in IS project performance. Table 5 summarizes regression analysis results. The following paragraphs discuss the findings in more detail.

Hypothesis H1 There is a negative relationship between horizontal coordination and IS project performance (Beta= -.24; p < 0.05). This finding does not support our first hypothesis (H1) and is not consistent with the suggestions of previous research (e.g., Kraut & Streeter, 1995; Lind & Zmud, 1991; Zmud et al., 1990). A possible explanation for this finding may be found in the way people accustomed to work in developed countries. In underdeveloped countries, there is a general social tendency towards highly personalized mode of working (Hassan, 1994). Hence, IS project members may perceive the increased level of horizontal coordination as a disruption to their work and contribution, and this in turn may lead to negative rather than positive performance effects.

Hypothesis H2 A positive and significant relationship exists between participation and IS project performance (Beta=.29; p < 0.01). This finding supports our second hypothesis (H2). The result is in general agreement with the literature, which reports a positive relationship between involvement and system success (e.g., Abdul-Gader, 1990; Hassan, 1994; Khalil & Elkordy, 1997; Robey et al., 1993). The finding of our study confirms that participation should be promoted to ensure success of IS projects in a developing country like Kuwait.

Hypothesis H3 Formal planning is found to positively relate to IS project performance (Beta=.24; p < 0.05). This finding gives support to our third hypothesis (H3). Deephouse et al. (1996), Kraut and Streeter (1995), and Saarinen (1990) reported similar results. Deephouse et al. (1996) reported a strong influence for formal planning on project performance. Kraut and Streeter (1995) found a significant positive relationship between formal procedures and software quality. The basic managerial notions of plan and control are important for the work to flow appropriately within the IS project (Henderson & Lee, 1992).

Table 3: Discriminant validity results Scale

Project performance Participation Formal planning Members’ abilities Adequacy of development tools Project uncertainty Management support

Number of Number of Inter-Scale Possible Correlations > AcrossComparisons Scale Correlations 441 434 75 75 230 196 26 26 75 75 230

75 75 216

Approximate Percentage 98% 100% 85% 100% 100% 100% 96%

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Hypothesis H4 The analyses failed to identify a significant relationship between members’ abilities and IS project performance. This result is inconsistent with our postulation (H4) and with the findings of Saarinen (1990). Given that organizations in developing countries face difficulties in procuring qualified IS personnel (Odedra, 1993), it is possible that the projects in our sample are composed of members of limited capabilities. Another more likely interpretation of this interesting finding is that the abilities and experiences of the concerned members may not fit the work nature of the studied projects, thereby limiting the significance of abilities in our sample.

Hypothesis H5 Adequacy of development tools has a significant positive relationship with project performance (Beta=.36; p < 0.01). The result supports our fifth hypothesis (H5). Saarinen (1990) reported similar results. Supply for qualified computer programmers and analysts is short worldwide. In a small developing country like Kuwait, the problem may be greater because of population size limitations. Hence, a likely interpretation of this finding may be that development tools and automated design aids are used as supplements for the abilities and productivity of the programmers/analysts in the IS project (Henderson & Cooprider, 1990).

Hypothesis H6 We found no support for a significant relationship between project uncertainty and IS project performance. This finding is inconsistent with what we proposed (H6) and with the findings of Kraut and Streeter (1995) and Nidumolu (1995). Our failure to find support to our hypothesis may be because project uncertainty is uniformly low in our sample; and this is evident by the below average mean score in project uncertainty. The question is why this is so. According to Hofstede (1980), Mideasterners demonstrate more uncertainty avoidance compared, for example, to North Americans. We believe that it is unlikely for Kuwaitis to undertake a project initiative unless it is relatively certain.

Hypothesis H7 The results failed to find a significant relationship between conflict and IS project performance. The finding is inconsistent with the findings of Robey et al. (1993). It is probable that there may be little conflict within the examined projects. However, a more plausible interpretation of the same finding can be attributed to what we refer to as the “Diwaniah” effect. We argue that there may be some conflict within the studied IS projects, but certain social factors suppress these disagreements. Kuwait is a very small country and the social fabric is strong, hence, any conflict between two persons will probably be quickly subdued by one of the parties out of respect and as a nonverbal acknowledgment for the other person(s).

Hypothesis H8 Management support is found to positively associate with IS project performance (Beta=.17; p < 0.10). The result marginally supports hypothesis H8. The finding is consistent with the findings of Abdul-Gader (1990), Khalil and Elkordy (1997), Odedra (1993), and Sideridis (1988). This result highlights the importance of top management support for

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Table 4: Convergent validity results for ordinal scales Factor Project performance

Participation

Formal planning

Members’ abilities Adequacy of development tools

Project uncertainty Management support

Conflict Horizontal coordination

Items Loading a. Quality of produced work .88 b. Effectiveness of interactions with non-members .76 c. Ability to meet the goals .88 d. Efficiency of operations .87 e. Adherence to schedules .86 f. Adherence to budget .72 g. Amount of produced work .84 a. Every member was frequently consulted for his/her opinion. .89 b. The members frequently asked questions during meetings. .90 c. Members usually came prepared for the meetings. .81 a. We knew which activities contained slack time or resources .60 which could be utilized in other areas during emergencies. b. There was a detailed plan for completion of the project. .84 c. Key personnel needs were specified in the project plan. .74 d. There was a detailed budget for the project. .66 e. There were contingency plans in case the project was off schedule or off budget. .78 a. Native intellectual ability .91 b. Quality of academic education .91 a. Representing objects, relationships, and processes (e.g., DFD, E-R diagrams) .89 b. Analyzing objects, relationships, and processes (e.g., consistency and redundancy checks) .84 c. Executing planning or design tasks thereby substituting for a human designer or planner (e.g., code generation, reverse engineering) .84 a. Difficulty of determining requirements .78 b. Complexity of processing .88 c. Complexity of the design process .92 a. Upper management supported me in crises. .83 b. Upper management was responsive to our requests for additional resources. .79 c. Top management granted us the necessary authority and supported our decisions concerning the project. .76 d. Top management shared responsibility with the project team for ensuring the project’s success. .79 e. I agreed with upper management on the degree of my authority and responsibility for the project. .66 There were some significant barriers to communication on this team. NA To what extent were the following communication modes used in the project? NA a. Interpersonal verbal comm. (e.g., one-to-one chats, telephone) b. Group verbal & voice messaging (e.g., voice conferencing, group meetings) c. Printed reports (e.g., computer reports, printed documents and reports) d. Interpersonal written comm. (e.g., handwritten notes, fax, e-mail)

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Table 5: Summary of regression results (Dependent variable = IS project performance) Beta Adequacy of development tools Participation Horizontal coordination Formal planning Management support Conflict Project uncertainty Members abilities

.36*** .29*** -.24** .24** .17* .08 -.05 -.01

Relationship Supported? Yes Yes No Yes Yes No No No

Adjusted R2 = .704** ***

p < .01 ; ** p < 0.05; * p < 0.10

technology initiatives within organizations and especially those operating in developing countries (e.g., Odedra, 1993). In Kuwaiti organizations, the prevailing management model is the bureaucratic style (Badawy, 1980) under which management tends to centralize decision making and dominate the distribution of resources within the organization. In this context, management support for the IS project is essential to ensure superior performance.

CONCLUDING THOUGHTS This investigation is pioneering in that it attempts to study the relationship between IS project characteristics and performance in a developing country, namely Kuwait. Our study, unlike previous implementation research in developing countries, examines project-level as opposed to system-level success of information systems initiatives. The findings reveal that management support, adequacy of development tools, formal planning, and participation are positively related to IS project performance. Our analyses, however, show no support for a significant relationship between members’ abilities, project uncertainty and conflict, and IS project performance. The findings further point to the possible damaging effect of increased horizontal coordination within IS projects. Overall, the results point to the fact that one can partially rely on prescriptions suggested by IS projects research in developed countries to understand IS projects in a developing country like Kuwait. Nevertheless, these prescriptions must not be taken as is, i.e., the guidelines must be understood in light of the culture within which the IS project operates.

Limitations Like any other research project, this study has a few limitations. First, the research variables were measured through the perception of a single respondent. This gives rise to the possibility that common source variance may account for some of the results obtained. Second, the examined variables by no means represent a comprehensive list of all the important variables influencing the performance of IS projects in a developing country like Kuwait. Third, our study considered the direct relationship between IS project characteris-

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tics and performance. The research by Kraut and Streeter (1995), Nidumolu (1995), and Robey et al. (1993) brings to our attention the importance of mediating models for more accurately understanding the complex phenomenon of IS project performance.

Future Research The implications of our results for future research are many. First, future research may need to measure study variables through the perceptions of multiple members of the IS project (e.g., a member and a leader) or develop more objective measures of IS project performance. Second, other IS project characteristics, like leader commitment, boundary spanning, and project stage, to name a few, may be added to the proposed research model. Third, since stable guidelines cannot be stated based on a single empirical study, there is a need to continue examining the relationships proposed by this study in a variety of settings in other developing countries before formulating a conclusion on the issue. Finally, future investigations may need to pay more attention to constructing and testing mediating models within the context of IS projects performance in developing countries, e.g., studying the factors which motivate successful participation in systems development in developing countries.

Implications for Practitioners This study highlights the importance of project characteristics for the performance of IS projects in a developing country like the State of Kuwait. This is especially true given the fact that all the variables under examination are, in one way or another, under the direct control of management. The results call for more attention from management to establish appropriate work programs for IS projects. Training on successful coordination techniques, for example, must occupy an important part in the human resources development plan. Furthermore, management must pay more attention to the effective and efficient utilization and allocation of the skills and abilities of IS project members. One of the suggested work programs must also be concerned with the establishment of formal planning guidelines for the IS projects. Such guidelines, for instance, promote the sound practices of planning and controlling project activities. A general policy for using design and development aids must also be established. The same policy must be followed by all IS projects. Not only does management have to direct the operations of IS projects carefully, but also management must be committed and involved in the whole process.

REFERENCES Abdul-Gader, A. (1990). End-user computing success factors: Further evidence from a developing nation. Information Resources Management Journal, 3(1), 1-13. Badawy, M. (1980). Styles of Mideastern managers. California Management Review, 22(3), 51-58. Badri, M. (1992). Critical issues in information systems management: An international perspective. International Journal of Information Management, 12, 179-191. Deans, C. , Karwan, K., Goslar, M., Ricks, D. and Toyne, B. (1991). Key international IS issues in the US-based multinational corporations. Journal of Management Information Systems, 7(4), 27-50.

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Deephouse, C., Mukhopadhyay, T., Goldenson, D. and Kellner, M. (1996). Software processes and project performance. Journal of Management Information Systems, 12, 187-205. DeLone, W. and McLean, E. (1992). Information systems success: The quest for the dependent variable. Information Systems Research, 3, 60-95. Hassan, S. (1994). Environmental constraints in utilizing information technologies in Pakistan. Journal of Global Information Management, 2(4), 30-39. Henderson, J. and Cooprider, J. (1990). Dimensions of I/S planning and design aids: A functional model of CASE technology. Information Systems Research, 1, 227-254. Henderson, J. and Lee, S. (1992). Managing I/S design teams: A control theories perspective. Management Science, 38, 757-777. Hofstede, G. (1980). Culture’s Consequences: International Differences in Work-Related Values. Beverly Hills, CA: Sage. Kerlinger, F. (1986). Foundations of Behavioral Research (third edition). Fort Worth, TX: HBJ. Khalil, O. and Elkordy, M. (1997). The relationship of some personal and situational factors to IS effectiveness: Empirical evidence from Egypt. Journal of Global Information Management, 5(2), 22-34. Khosrowpour, M. and Greenawalt, D. (1997). The IRM curriculum model: An international curriculum model for a 4-year undergraduate program. Information Resources Management Journal, 10(2), 5-20. Kraut, R. and Streeter, L. (1995). Coordination in software development. Communications of the ACM, 38(3), 69-81. Lind, M. and Zmud, R. (1991). The influence of a convergence in understanding between technology providers and users on information technology innovativeness. Organization Science, 2(2), 195-217. Lucas, H., Ginzberg, M. and Schultz, R. (1990). Information Systems Implementation: Testing A Structural Model. Norwood, NJ: Ablex Publishing Corporation. Marchewka, J. and Keil, M. (1995). Portfolio theory approach for selecting and managing IT projects. Information Resources Management Journal, 8(4), 5-14. Nidumolu, S. (1995). The effects of coordination and uncertainty on software project performance: Residual performance risk as an intervening variable. Information Systems Research, 6, 191-219. Odedra, M. (1993). Critical factors affecting success of CBIS: Cases from Africa. Information Resources Management Journal, 3, 16-31. Rasch, R. and Tosi, H. (1992). Factors affecting software developers’ performance: An integrated approach. MIS Quarterly, 16, 395-413. Robey, D., Farrow, D. and Franz, C., (1989). Group process and conflict in system development. Management Science, 35, 1172-1191. Robey, D., Smith, L. and Vijayasarathy, L. (1993). Perceptions of conflict and success in information systems development projects. Journal of Management Information Systems, 10(1), 123-139. Saarinen, T. (1990). System development methodology and project success: An assessment of situational approaches. Information & Management, 19, 183-193. Sideridis, A. (1988). Informatics and municipalities: The Greek approach. Information & Management, 14, 183-188. Slevin, D. and Pinto, J. (1986). The project implementation profile: New tool for project managers. Project Management Journal, 18, 57-71.

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Tait, P. and Vessey, I. (1988).The effect of user involvement on system success: A contingency approach. MIS Quarterly, 12, 91-108. Watson, R., Kelly, G., Galliers, R. and Brancheau, J. (1997). Key issues in information systems management: An international perspective. Journal of Management Information Systems, 13(4), 91-116. Zmud, R., Lind, M. and Young, F. (1990). An attribute space for organizational communication channels. Information Systems Research, 1, 440-457.

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Chapter XIX

Information Systems Leadership Roles: An Empirical Study of Information Technology Managers in Norway Petter Gottschalk Norwegian School of Management, Norway

Information systems (IS) leadership roles have undergone fundamental changes over the past decade. Despite increased interest in recent years, little empirical research on IS managers has been done. This article presents results from a survey in Norway. The survey collected data on general leadership roles such as informational role, decisional role, and interpersonal role, as well as on specific IS leadership roles such as chief architect, change leader, product developer, technology provocateur, coach, and chief operating strategist. The empirical analysis indicates that strategic responsibility as well as network stage of growth influence the extent of informational role, while the extent to which the chief executive uses IT influences the extent of decisional role, and the extent to which subordinates use IT influence the extent of interpersonal role. IS managers with greater operating responsibility will be chief architects. The role of a change leader is positively influenced by the number of years in IT, the extent of IT use, the extent of strategic responsibility, and the organization’s revenue, while it is negatively influenced by the number of years in the current position. Product developer can be predicted by strategic responsibility and chief executive’s IT use, while technology provocateur can be predicted by the extent of IT use. Coach can be predicted by the extent of subordinates’ IT use, and chief operating strategist can be predicted by the extent of strategic responsibility. Although several significant predictors of IS leadership roles were identified in this research, the search for more significant explanations should continue in future research. Appeared in Journal of Global Information Management, vol. 8, no. 4, 2000. Reprinted by permission.

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INTRODUCTION Information systems (IS) and information technology (IT) leadership roles have undergone fundamental changes over the past decade (Applegate & Elam, 1992; Cross et al., 1997; CSC, 1996; Stephens et al., 1995). Despite increased interest in recent years (e.g., Armstrong & Sambamurthy, 1995; Earl & Feeny, 1994; Rockart et al., 1996), little empirical research on IS/IT leadership roles has been done. This paper was motivated by the need for identification of IS/IT leadership roles and their potential explanations. The research makes a contribution to the stream of studies which examine the characteristics and role of the chief information officer (CIO) or IT director (Peppard, 1999). The paper presents results from a survey conducted in Norway. Survey results are compared with previous empirical studies by Applegate and Elam (1992), CSC (1997), and Stephens et al. (1992).

LEADERSHIP ROLES Managers undertake activities to achieve the objectives of the organization. Mintzberg (1994) notes a number of different and sometimes conflicting views of the manager’s role. He finds that it is a curiosity of the management literature that its best-known writers all seem to emphasize one particular part of the manager’s job to the exclusion of the others. Together, perhaps, they cover all the parts, but even that does not describe the whole job of managing. Mintzberg’s role typology is frequently used in studies of managerial work (e.g., Pinsonneault & Rivard, 1998). According to Mintzberg (1990), the manager’s job can be described in terms of various roles: 1. Informational Roles. By virtue of interpersonal contacts, both with subordinates and with a network of contacts, the manager emerges as the nerve centre of the organizational unit. The manager may not know everything but typically knows more than subordinates do. Processing information is a key part of the manager’s job. As monitor, the manager is perpetually scanning the environment for information, interrogating liaison contacts and subordinates, and receiving unsolicited information, much of it as a result of the network of personal contacts. As a disseminator, the manager passes some privileged information directly to subordinates, who would otherwise have no access to it. As spokesperson, the manager sends some information to people outside the unit. 2. Decisional Roles. Information is not an end in itself; it is the basic input to decision making. The manager plays the major role in a unit’s decision-making system. As its formal authority, only the manager can commit the unit to important new courses of action; and as its nerve centre, only the manager has full and current information to make the set of decisions that determines the unit’s strategy. As entrepreneur, the manager seeks to improve the unit, to adapt it to changing conditions in the environment. As disturbance handler, the manager responds to pressures from situations. As resource allocater, the manager is responsible for deciding who will get what. As negotiator, the manager commits organizational resources in real time. 3. Interpersonal Roles. As figurehead, every manager must perform some ceremonial duties. As leader, managers are responsible for the work of the people of their unit. As liaison, the manager makes contacts outside the vertical chain of command.

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IS/IT LEADERSHIP ROLES Changes in both information technology and competition continue to change the role of the information systems executive. CSC (1996) has suggested six new IS leadership roles which are required to execute IS’s future agenda: 1. Chief Architect. The chief architect designs future possibilities for the business. The primary work of the chief architect is to design and evolve the IT infrastructure so that it will expand the range of future possibilities for the business, not define specific business outcomes. The infrastructure should provide not just today’s technical services, such as networking, databases, and desktop operating systems, but an increasing range of business-level services, such as workflow, portfolio management, scheduling, and specific business components or objects. 2. Change Leader. The change leader orchestrates resources to achieve optimal implementation of the future. The essential role of the change leader is to orchestrate all those resources that will be needed to execute the change program. This includes providing new IT tools, but it also involves putting in place teams of people who can redesign roles, jobs, and workflow, who can change beliefs about the company and the work people do, and who understand human nature and can develop incentive systems to coax people into new and different behaviors. 3. Product Developer. The product developer helps define the company’s place in the emerging digital economy. For example, a product developer might recognize the potential for performing key business processes (perhaps order fulfillment, purchasing, or delivering customer support) over electronic linkages such as the Internet. The product developer must “sell” the idea to a business partner, and together they can set up and evaluate business experiments, which are initially operated out of IS. Whether the new methods are adopted or not, the company will learn from the experiments and so move closer to commercial success in emerging digital markets. 4. Technology Provocateur. The technology provocateur embeds IT into the business strategy. The technology provocateur works with senior business executives to bring IT and realities of the IT marketplace to bear on the formation of strategy for the business. The technology provocateur is a senior business executive who understands both the business and IT at a deep enough level to integrate the two perspectives in discussions about the future course of the business. Technology provocateurs have a wealth of experience in IS disciplines, so they understand at a fundamental level the capabilities of IT and how IT impacts the business. 5. Coach. The coach teaches people to acquire the skillsets they will need for the future. Coaches have two basic responsibilities: teaching people how to learn, so that they can become self-sufficient, and providing team leaders with staff able to do the IT-related work of the business. A mechanism that assists both is the centre of excellence—a small group of people with a particular competence or skill, with a coach responsible for their growth and development. Coaches are solid practitioners of the competence that they will be coaching but need not be the best at it in the company. 6. Chief Operating Strategist. The chief operating strategist invents the future with senior management. The chief operating strategist is the top IS executive who is focused on the future agenda of the IS organization. The strategist has parallel responsibilities related to helping the business design the future, and then delivering it. The most important, and least understood, parts of the role have to

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do with the interpretation of new technologies and the IT marketplace, and the bringing of this understanding into the development of the digital business strategy for the organization.

RESEARCH MODEL IS/IT leadership role is the dependent construct in this research, as illustrated in Figure 1. Three groups of role explanations were identified. First, individual characteristics of the IS/IT leader consist of years worked in the organization, years worked in IT, years worked in the current position, years of higher education, extent of own IT use, and relationship with chief executive (Applegate & Elam, 1992; Earl & Feeny, 1994; Feeny et al., 1992; Stephens, 1993; Watson, 1990). Second, position characteristics consist of personnel reporting to IS/ IT manager, reporting level, operating responsibility, and strategic responsibility (Applegate & Elam, 1992; Armstrong & Sambamurthy, 1995; Boynton et al., 1992; Broadband et al., 1994; Cross et al., 1997; Rockart et al., 1996; Stephens et al., 1995). Third, organizational characteristics consist of revenue, persons in the organization, IT use by colleagues, IT use by chief executive, IT use by subordinates, extent of data processing stage, extent of information systems stage, and extent of network stage (Applegate & Elam, 1992; Khandelwal & Ferguson, 1999; Nolan, 1973, 1979; Peppard, 1999).

VARIABLES AND MEASURES In this section, all variables in the model are explained. There are three groups of independent variables: individual characteristics, position characteristics, and organizational characteristics. There is one group of dependent variables: leadership roles based on both Mintzberg (1990) and CSC (1996).

Individual Characteristics Organization year measures the number of years the IS leader has been in the current organization. It has been argued new, externally hired leaders will be more change oriented than leaders who have been in the organization for several years (Applegate & Elam, 1992). IT years measures the number of years the IS leader has worked in the field of information technology. It has been argued that persons with mainly an IT background will be more technologically oriented than persons with fewer IT years (Earl & Feeny, 1994). Position years measures the number of years the IS leader has been in the current position. It has been argued that new leaders will be more change oriented than leaders who have been in the position for many years (Applegate & Elam, 1992). Education years measures the number of years of higher education after high school. It has been observed that the first generation of DP managers were often programmers with little formal education, while CIOs have more formal education, often master’s degrees. It has been suggested that more formal education will have an impact on the strategic orientation and the extent of strategic IS leadership role (Cross et al., 1997). IT use measures the extent to which the IS leader personally uses technology. It has been argued that CIOs with greater personal IT use will spend more time in technologi-

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Figure 1: Research model INDIVIDUAL CHARACTERISTICS Organization Years IT Years Position Years Education Years IT Use Relationship POSITION CHARACTERISTICS Personnel Reporting Level Operating Responsibility Strategic Responsibility

LEADERSHIP ROLES General Leadership Roles Informational Role Decisional Role Interpersonal Role IS/IT Leadership Roles Chief Architect Change Leader Product Developer Technology Provocateur Coach Chief Operating Strategist

ORGANIZATIONAL CHARACTERISTICS Revenue Personnel Colleagues’ Use Chief executive’s Use Subordinates’ Use DP Stage IS Stage NW Stage

cally oriented leadership roles (Broadbent et al., 1994). IT use was measured on a littleto-great extent scale. Relationship measures the relationship between CIO and CEO. It has been argued that the CIO/CEO relationship will impact IS leadership roles (Watson, 1990). For example, the extent to which the CIO is involved in strategic planning may be dependent on trust between the CEO and the CIO. The relationship was measured on a good-bad scale.

Position Characteristics Personnel measures the number of persons reporting to the IS leader. It has been argued that leaders who manage an IT function with a large staff will spend more time in human-oriented roles, for example interpersonal role and coach role (Stephens & Loughman, 1994). Reporting level measures the formal distance between CIO and CEO. If there are several management layers between the two, then it can be argued that the CIO role is less strategically oriented (Watson, 1990). Responsibility was measured on a multiple item scale. The item questions were concerned with responsibility for information systems, computer operations, communication networks, strategic IS/IT planning, bridging IS/IT and business strategy, benefits realization, information architecture, technical infrastructure, IS/IT budget, and IS/IT personnel (Applegate & Elam, 1992; Boynton et al., 1992; Cross et al., 1997; CSC, 1996; Earl & Feeny,

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1994; Rockart et al., 1996; Stephens et al., 1995). An exploratory factor analysis was applied to the 10 items, and two significant factors were identified. The two factors were labelled “operating responsibility” and “strategic responsibility.” The two factors were already taken into account in Figure 1 based on research results in Table 1. The two factors had Cronbach coefficients of .77 and .87.

Organizational Characteristics It is often argued that a CIO in a large organization will have different leadership roles than CIOs in small organizations. For example, the extent to which a CIO is involved in formal strategic IS/IT planning is dependent on organization size (Gottschalk, 1998). Organization size in this research was measured by gross revenue and total number of employees. The IT orientation of the organization may influence the extent to which various IS leadership roles are considered relevant (Broadbent et al., 1994). The IT orientation was measured by colleagues’ use, chief executive’s use, and subordinates’ use of technology. A Likert scale from little to great extent of use was applied to these three single item measures. Ever since Nolan (1973, 1979) introduced the concept of stages of IS growth in organizations, this concept has been applied to understand and explain variations among organizations. In this research, variations in IS leadership roles may be explained by the extent to which organizations are in the various stages. The three main stages are the data processing, information systems, and network stage (Khandelwal and Ferguson, 1999). In this research, the extent of each stage was measured, rather than treating the stages as mutually exclusive. A Likert scale from little to great extent was applied to these three single item measures.

Leadership Roles Mintzberg’s (1990) three main roles were included, as well as CSC’s (1996). A Likert scale from little to great extent was applied to these nine single item measures.

Table 1: Factor loadings for responsibility items Responsibility for Information systems Computer operations Communication networks Strategic IS/IT planning Bridging strategy Benefits realization Information architecture Technical infrastructure IS/IT budget IS/IT personnel

Oper. Respons. .67 .80 .82 .41 .16 .21 .58 .75 .75 .80

Strat. Respons. .12 -.36 -.32 .73 .84 .75 .38 -.09 -.17 -.19

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RESEARCH HYPOTHESES The research model suggests that the characteristics constructs will influence the extent of each leadership role. A total of 18 independent variables are assumed to predict nine leadership roles, giving rise to a set of 18x9 = 162 research hypotheses. As examples of research hypothesis, there are six research hypotheses on a higher level: Haa: An improvement in the relationship between the IS/IT leader and the chief executive will cause the IS/IT leader to spend more time in the interpersonal role. Hab: The more years in the current position, the less time spent in the change leader role. Hba: The greater the extent of strategic responsibility, the more time spent in the informational role. Hbb: The greater the extent of strategic responsibility, the more time spent in the change leader role. Hca: The greater the extent of subordinates’ use of IT, the more time spent in the interpersonal role. Hcb: The greater the extent of data processing stage, the more time spent in the role of product developer.

DATA COLLECTION Data was collected through a survey in Norway where IS/IT leadership roles are frequently debated. The top-ranked IS/IT leader, or CIO, as defined by Stephens et al. (1992), is typically called “IT-direktør” (IT director), “IT-sjef” (IT-manager), or “IS-leder” (IS-leader) in Norway. The survey sample comprised 168 private and public member firms of the Norwegian Computing Society (NCS). This sample is biased towards organizations that are interested in IS/IT issues in general. The desired informants in this research were IS/IT managers to determine their own perceptions of roles and possible explanations of roles.

RESEARCH RESULTS Of the 168 mailed questionnaires, 101 were returned, providing a response rate of 60%. Multiple regression analysis was applied between the three groups of independent variables (individual characteristics, position characteristics, and organizational characteristics) and the two groups of dependent variables (general leadership roles and IS/IT leadership roles). Results are listed in Tables 2a-c.

Informational Role Processing of information is a key part of the manager’s job. On a scale from 1 (little extent) to 6 (great extent), the informational role scored 4.1 among the 101 IS/IT leaders in the survey. The set of predictor variables in the research model explained only 9.7% of the variation in informational role, i.e., the adjusted R-square was .097. With a low F-value of 1.473, the regression was not significant. In the regression equation, the only significant predictor was strategic responsibility (table 2a).

Decisional Role Information is not an end in itself; it is the basic input to decision making. The manager plays the major role in a unit’s decision-making system. The decisional role scored on average

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Table 2a: Multiple regression analysis between predictors and general leadership roles Predictor description

Predictor value Informational Decisional M ean St. dv. Beta t-test Beta t-test Years in the organization 8.8 7.6 .071 .515 -.034 .257 Years in IT 15.3 8.0 -.032 -.220 -.123 -.900 Years in current position 4.1 3.6 -.147 .902 -.160 1.028 Years of higher education 4.5 2.3 -.014 -.119 .082 .713 IT use by respondent 5.6 0.7 .03 .092 -0.51 -.380 Relationship to chief exec. 1.6 0.6 .102 .693 -0.73 -.515 Persons reporting to resp. 19.7 39.5 .100 -.768 -0.67 -.543 Reporting level 0.9 0.8 .173 1.382 .083 .696 Operating responsibility 5.0 1.3 -.082 -.657 .115 .959 Strategic responsibility 4.5 1.0 .339 2.406* .265 1.973 Revenue of organization 2603 3576 .011 .078 .211 1.565 Persons in organization 2161 4142 -.235 -1.731 .026 .198 Colleagues use of IT 4.8 1.0 .023 .151 -.012 -.084 Chief executive’s use of IT 3.7 1.5 -.009 -.069 .287 2.242* Subordinates use of IT 5.5 0.7 .018 .137 .177 1.399 Data processing stage 4.3 1.1 -.130 -.800 -.263 -1.692 Information systems stage 3.8 1.4 -.291 -1.574 -.038 -.218 Network stage 3.9 1.4 .413 2.102* .334 1.780 ** for p<.01 and * for p<0.5 for statistical significance oft-values

Interpersonal Beta t-test .080 .644 -.236 -1.844 .125 .854 .116 1.078 -.307 -2.453* .337 2.552* .157 1.355 .067 .595 .110 .980 .071 .566 -.054 -.425 -.100 -.827 -.003 -.019 -.179 -1.492 .341 2.867** -.219 -1.501 -.014 -.085 .233 1.326

Table 2b: Multiple regression analysis between predictors and IS leadership roles (I) Predictor description Years in the organization Years in IT Years in current position Years of higher education IT use by respondent Relationship to chief exec. Persons reporting to resp. Reporting level Operating responsibility Strategic responsibility Revenue of organization Persons in organization Colleagues use of IT Chief executive’s use of IT Subordinates use of IT Data processing stage Information systems stage Network stage

Predictor value M ean St. dv. 8.8 7.6 15.3 8.0 4.1 3.6 4.5 2.3 5.6 0.7 1.6 0.6 19.7 39.5 0.9 0.8 5.0 1.3 4.5 1.0 2603 3576 2161 4142 4.8 1.0 3.7 1.5 5.5 0.7 4.3 1.1 3.8 1.4 3.9 1.4

Chief Architect Beta t-test .035 .238 .268 1.772 -.109 -.636 .095 .757 -.075 -.508 -.033 -.215 .075 .555 -.017 -.130 .319 2.434* .039 .264 -.065 -.443 -.263 -1.854 .135 .851 .007 .048 -1.164 -1.200 -.062 -.360 .148 .767 -.073 .356

Change Leader Beta t-test .120 .957 .283 2.163* -.369 -2.500* -.170 -1.560 .264 2.077* -.064 -.479 -.004 -.034 .114 1.007 -.138 -1.215 .308 2.408* .267 2.099 -.021 .169 -.211 -1.537 -.001 -.006 -.003 -.023 .138 .920 .146 .870 .023 .132

Product Devel. Beta t-test .140 1.037 .101 .718 .033 .207 .028 .242 .034 .251 .250 -1.734 .085 .671 .034 .278 .034 .279 .420 3.053** -.019 -.137 -.134 -1.010 -.015 .102 .321 2.442* .124 .971 .048 .297 .126 .701 -.116 -.612

** for p<.01 and * for p<.05 for statistical significance oft-values

4.5, which is the highest score among all roles. The predictor set provided better explanation of this role with a significant adjusted R-square of .179. The only significant predictor was the chief executive’s use of information technology. From a theoretical viewpoint, it may be hard to argue that the more the chief executive is a user of information technology, the more the IS/IT leader will spend time in the decisional role (Table 2a).

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Table 2c: Multiple regression analysis between predictors and IS leadership roles (II) Predictor description Years in the organisation Years in IT Years in current position Years of higher education IT use by respondent Relationship to chief exec. Persons reporting to resp. Reporting level Operating responsibility Strategic responsibility Revenue of organisation Persons in organisation Colleagues use of IT Chief executive’s’ use of IT Subordinates use of IT Data processing stage Information systems stage Network stage

Predictor value Mean St.dv. 8.8 7.6 15.3 8.0 4.1 3.6 4.5 2.3 5.6 0.7 1.6 0.6 19.7 39.5 0.9 0.8 5.0 1.3 4.5 1.0 2603 3576 2161 4142 4.8 1.0 3.7 1.5 5.5 0.7 4.3 1.1 3.8 1.4 3.9 1.4

Technology Pr. Beta t-test .091 .664 .077 .535 -.099 -.609 .101 .842 .414 2.958** -.106 -.720 -.163 -1.263 -.022 -.175 .049 -.391 .241 1.713 -.041 -.294 -.098 -.724 -.065 -.431 .006 .047 .046 .352 .093 .563 -.181 -.983 .132 .680

Coach Beta .124 .031 -.149 .087 -.053 .082 .191 -.210 .043 .044 -.163 -.047 -.174 -.063 .313 .053 -.081 .056

t-test .882 .209 -.900 .715 -372 .550 1.452 -1.659 .336 .304 -1.143 -.344 -1.132 -.465 2.368* .317 -.435 .284

Chief Oper. St. Beta t-test .203 1.675 .061 .482 -.092 -.646 -.101 -.965 .173 1.404 -.084 -.649 -.036 -.318 -.086 -.783 -.100 -.912 .644 5.215** .095 .774 -.008 -.064 -.185 -1.396 -.003 -.028 .139 1.214 -.042 -.288 .103 .639 .011 .064

** for p<.01 and * for p<.05 for statistical significance of t-values

Interpersonal Role As leader, every manager must perform some ceremonial duties, represent the work of the people, and make contacts outside the vertical chain of command. The interpersonal role scored on average 4.4. The predictor set provided even better explanation of this role with a significant adjusted R-square of .279. Three predictor variables were significant. First, when subordinates use IT more extensively, then the IS/IT leader will spend more time in the interpersonal role. Second, an improvement in the relationship between the IS/IT leader and the chief executive will cause the IS/IT leader to spend more time in the interpersonal role. Finally, IS/IT leaders who use IT more extensively will also spend more time in the interpersonal role (Table 2a).

Chief Architect The chief architect designs future possibilities for the business. The chief architect role scored on average 4.3. The adjusted R-square was only .026, and the regression was not significant. The only single significant predictor was operating responsibility (Table 2b).

Change Leader The change leader orchestrates resources to achieve optimal implementation of the future. The change leader role scored on average 4.4. This regression analysis was significant, since it was able to explain 27% of the variance in the role. Five predictors were significant. First, IS/IT leaders spend more time as change leaders when they have more IT experience. Second, IS/IT leaders spend less time as change leaders when they have been in the current position for many years. Third, more use of IT by the IS/IT leader causes more time spent in the change leader role. Fourth, more strategic responsibility causes the IS/IT leader to spend more time in the change leader role. Finally, IS/IT leaders in larger organizations spend more time as change leaders (Table 2b).

Product Developer The product developer helps define the company’s place in the emerging digital economy. The product developer role scored on average 3.5 which is the lowest score among

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all roles. A significant explanation is provided with an adjusted R-square of .155. Two predictors are significant. First, increased strategic responsibility causes IS/IT leaders to spend more time as product developers. Second, increased IT use by the chief executive causes the IS/IT leader to spend more time as a product developer (Table 2b).

Technology Provocateur The technology provocateur embeds IT into the business strategy. The technology provocateur role scored on average 4.3. This regression was not significant, and the only significant predictor was the extent to which the respondent used IT (Table 2c).

Coach The coach teaches people to acquire the skillsets they will need for the future. The coach role scored on average 4.2. Again, the regression was not significant, and the only significant predictor was the extent to which subordinates used IT (Table 2c).

Chief Operating Strategist The chief operating strategist invents the future with senior management. The chief operating strategist role scored on average 4.3. In this very significant regression with an adjusted R-square of .319, a very significant relationship existed between strategic responsibility and the extent of chief operating strategist role (Table 2c).

DISCUSSION Many potential predictors have little or no impact on leadership roles. The stages of growth will serve as an example in this section since many authors have argued that computing evolution in organizations will impact IS leaders (e.g., King & Kraemer, 1984; Khandelwal & Ferguson, 1999). Richard Nolan’s (1973, 1979) stage model is the best-known and most widely cited model of computing evolution in organizations (King & Kraemer, 1984). The stages theory provides an insight into the way IT evolves and offers IT management the possibility of managing this complex phenomenon (Khandelwal & Ferguson, 1999). The model does not appear in the literature as single model, but rather as a number of versions of the same model which have developed over time. Nolan (1973) suggested that planning, organizing, and controlling activities associated with managing the computer resource will change in character over time and will evolve in patterns roughly correlated to four stages of the computer budget: Stage I–computer acquisition, Stage II– intense system development, Stage III–proliferation of controls, and Stage IV–user/service orientation. Some years later, Nolan (1979) introduced a set of six stages: Stage I–initiation, Stage II– contagion, Stage III– control, Stage IV–integration, Stage V–data administration, and Stage VI–maturity. In this research, the number of stages has increased to nine based on Khandelwal and Ferguson (1999). Stages are assigned to eras, where each era consists of three stages. The stages theory then identifies three eras—data processing (DP) era, information systems (IS) era, and network (NW) era—that an organization will pass through in its information technology growth. Nolan’s (1973, 1979) stages of growth model has been criticized by academics. An analysis of the model’s logical and empirical structure reveals a number of problems in

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formulation that help to account for the fact that its principal tenets have not been independently validated (King & Kraemer, 1984). With this limitation in mind, the eras were applied in this research. However, only one IS leadership role was influenced by stages of growth. It was the informational role that was influenced by the network stage in addition to strategic responsibility. Many potential predictors have little or no impact on leadership roles, leading to possible lack of confidence in the logic of the current research model. It is argued that individual characteristics, position characteristics, and organizational characteristics should drive leadership roles. However, it could be argued that data on job descriptions, achievements, etc. should have been collected.

COMPARISON OF SURVEY RESULTS Among the respondents, 44 percent reported to the managing director (CEO), while 23 percent reported to the financial director, and 33 percent reported to others (technical director, staff director, or other). As illustrated in Table 3, these results are in line with recent previous studies. The conducted survey also collected data on the three roles defined by Mintzberg (1990). Stephens found that the five CIOs that she studied spent most of their time in the decisional roles (60%), less of their time in the informational roles (36%), and very little time in the interpersonal roles (4%). This research suggests that Norwegian CIOs, on a scale from 1 (little extent) to 6 (great extent), have the same decision roles ranked on top (4.5), but they spend much more time on interpersonal roles (4.4) and informational roles (4.1) than the CIOs in the Stephens study. In this survey, respondents had been in the current position for the last 4.1 years. This is slightly less than the results obtained by CSC (1997), which found that the average reported tenure of a company’s senior IS professional was 4.7 years worldwide, ranging from 5.0 years in North America via 4.9 years in Europe to 4.0 years in Asia Pacific. Seven years ago, Boynton et al. (1992) posed the question: Whose responsibility is IT management? They claimed that line managers were increasingly assuming responsibility for planning, building, and running information systems that affect their operations. In this perspective, it is interesting to study results from this survey. For example, Table 3: Information systems executive reporting relationship Reporting Applegate relationship & Elam CSC of respondents (1992) (1997) Reports directly to managing director (CEO) 27% 43% Reports to financial director (CFO) 44% 32% Reports to other officer 29% 25%

Gottschalk (1998)

This study (1999)

48%

44%

21%

23%

31%

33%

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realization of benefits was not a large responsibility of IS leaders (this was one item in the responsibility scale). A possible explanation is that this responsibility is assumed by line managers.

TOWARD A MODEL OF IS LEADERSHIP ROLES When the six IS leadership roles defined by CSC (1996) are combined with the three stages of growth (Khandelwal & Ferguson, 1999), it results in Figure 2. In the figure, stages of growth are introduced in the vertical axis, while the horizontal axis depicts the focus dimension as identified in the factor analysis (i.e., technology and organizational leadership). Two of the six locations in the figure were explicitly confirmed in this research: the positive relationship between the extent of data processing era and the extent of technology provocateur, and the positive relationship between the extent of networks era and the extent of chief operating strategist. In this study, IS/IT managers were asked about their own perceptions of roles. According to Beyer et al. (1997), managers typically have a selective perception. For example, perception of roles may be influenced by functional experience. As a consequence, respondents may have distorted perceptions of their own roles.

IMPLICATIONS FOR MANAGEMENT The CIO function is a continuously evolving role (Stephens, 1993). The present research provides a snapshot in this progression. Identifying these trends in information systems leadership has implications for both research and practice. First, educators can use this information to develop management programs. Second, these roles and trends represent important guidelines for practising CIOs. The senior IS executives must be able to bring both a business and IT perspective to the position. More definitive role expectations could also aid in career planning (Applegate and Elam, 1992). Finally, clarifying the CIO role also has implications for office technology design and use. Studies continue to show the executives’ preference toward verbal communications (Stephens, 1993). These studies also point to relatively limited use of the technologies that these managers purvey. One possibility is that this limited technology use is due in part to limitations in the technologies themselves. Identifying these limitations could improve executive acceptance of these systems. However, the survey data do not show us what technology the CIOs use. Figure 2: A model of IS leadership roles MAIN FOCUS STAGE OF GROWTH

IS/IT FUNCTION DATA PROCESSING

ORGANIZATION

Technology Provocateur

Coach

INFORMATION SYSTEMS

Product Developer

Change Leader

NETWORKS

Chief Architect

Chief Operating Strategist

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In practice, the IT director’s responsibilities range from strategy to operations. Many IT directors seem to struggle to spend more time on strategy and less time on operations. The strong relationship found in this research between strategic responsibility and the extent of chief operating strategist role indicates that strategy is a management responsibility issue.

NORWAY This study was based on work in Norway, but most of the research literature used is from the U.S. CIO is not a term commonly used in Europe. In Britain, for example, IT director is also used. The relevance of applied literature to companies in Norway can be questioned and should be explored in future research. Table 3 compares four studies that include samples from very different organizational and cultural backgrounds. IS leadership roles in the Norwegian culture may be different from other studies done in the US and UK or around the globe. For example, Norwegian organizations tend to be much smaller than surveyed organizations in the US, and hierarchies in Norway tend to be flatter than in most other countries. Such aspects can lead to implications for management practice and future research. According to the Scandinavian research on information systems development, Scandinavia has high living standards and educational levels, an advanced technology infrastructure, an open community and key innovative leaders (Boland, 1999). This research tradition seems different from research in other countries, such as the UK with control structures (Towell et al., 1998) and Mexico with economic development (Mejias et al., 1999), which may imply different IS leadership roles. In future research, eight cultural dimensions can be investigated: power distance, uncertainty avoidance, individualism, masculinity, time orientation, monocrony and polychrony, context, and polymorphic and monomorphic (Hasan and Ditsa, 1999). To enable comparisons of findings in this study with results obtained in other countries, three aspects seem important. First, the Norwegian managerial culture implies flat hierarchies, informal communications, and mobility. Second, the state of corporate use of IT is considered to be advanced. Third, IT management practices in Norway are concerned with bridging the gap between business strategy and IS/IT strategy.

FUTURE RESEARCH Of general interest is which findings from previous research (if any) are still applicable in this volatile environment. Previous research on the role of the CIO has either focused on the “micro” level—examining the executive’s activities and contacts—or at a “macro” level— analyzing the issues, strategies, and objectives of these executives. Micro- level activities can further be divided into deskwork and coordination activities (Applegate and Elam, 1992; Stephens et al., 1992). Deskwork includes activities performed in relative isolation, such as resume reviews, environmental scanning, and e-mail (Jordan, 1993; Watson, 1990). Coordination activities include activities conducted with one or more other individuals by means such as phone calls, scheduled meetings, unscheduled meetings, or tours (Stephens and Loughman, 1993). The second aspect of coordination activities are the activities completed by interfacing with a number of groups including superiors (corporate), subordinates (IS group), clients (business units), suppliers (consultants, vendors, etc.), and peers (other information system executives). At the macro level, there exists a need to look at strategies that distinguish higher and lower performing firms, organizational structures used to achieve

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strategic goals, and issues associated with these strategies and the technologies used to achieve these goals. Individual characteristics are also potential areas of future research. Individual characteristics such as CIO educational and career backgrounds and relationship with the CEO have been shown to influence perceptions (Stephens et al., 1992), which in turn affect strategy. CEOs often do not understand the CIO’s contribution well enough to properly evaluate the IS function’s performance (Earl and Feeny, 1994). An essential element to a good CEO/CIO relationship is a common understanding of business critical success factors and the role and importance of IT in the organization (Feeny et al., 1992). The CIO’s perception of key issues are influenced by the relationship with the CEO (Watson, 1990). National culture may also prove to have a bearing on issue perceptions. Future research may concentrate on further clarifying the role of the CIO. The strategic role of IT depends on the company’s business and top management’s perception of IT potential strategic contribution. Since the role of the CIO could be dependent on these variables, a future research model could include these dimensions in the model (Henderson and Venkatraman, 1992). This research has interpreted the stages of growth model (Nolan, 1979) as not mutually exclusive. Respondents were asked to rank their organization from 1 to 6 for each stage of the model. However, it can be argued that the rationale behind the concept of stage of growth is that it describes the evolution of an organization through a series of mutually exclusive phases. Future research should experiment with the latter interpretation. The potential predictors identified in the research literature and applied in this research provided varying degrees of explanation of leadership roles. Future research should identify other, possibly stronger, predictors of leadership roles. In addition, future research should attempt to improve instruments to measure constructs in this research (Moore and Benbasat, 1991). For example, validated multiple item scales should replace single item measures for three groups of IT users, for Nolan’s stages and for leadership roles. Finally, future research should explore role extent, i.e., the extent to which time is spent in a role, the extent to which a job is to be in a role, and the extent to which a role is the same as responsibility for a task. For example, an organization that has most of its activities in the mainframe era may nevertheless be spending a lot of time preparing itself for a move to the networked era. Similarly, an organization firmly in the networked era may currently be spending its time dealing with its few remaining mainframe applications. Since IT directors were asked to report themselves, a self-serving bias might have occurred in the current research.

CONCLUSIONS The empirical analysis indicated that strategic responsibility as well as network stage of growth influenced the extent of informational role, while the extent to which the chief executive used IT influenced the extent of decisional role, and the extent to which subordinates used IT influenced the extent of interpersonal role. IS/IT managers with greater operating responsibility were chief architects. The role of a change leader was positively influenced by the number of years in IT, the extent of IT use, the extent of strategic responsibility, and the organization’s revenue, while it was negatively influenced by the number of years in the current position. Product developer could be predicted by strategic responsibility and chief executive’s IT use, while technology provocateur could be predicted by the extent of IT use, coach could be predicted by the extent of subordinates’ IT use, and

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chief operating strategist could be predicted by the extent of strategic responsibility. Although several significant predictors of IS/IT leadership roles were identified in this research, the search for more significant predictors should continue in future research. The data provided in this research will hopefully stimulate similar research in other nations and regions. Just like key IS management issues research has enabled global comparisons, (Watson et al., 1997), future IS leadership research may gain from global comparisons as indicated in the section on survey comparisons. Practising IS leaders will gain from this research by balancing leadership roles according to individual characteristics, organizational characteristics, and stages of growth.

REFERENCES Applegate, L. M. and Elam. (1992). New information systems leaders: A changing role in a changing world. MIS Quarterly, 16(4), 469-490. Armstrong, C. P. and Sambamurthy. (1995). Creating business value through information technology: The effects of chief information officer and top management team characteristics. Proceedings of the International Conference on Information Systems, The Netherlands. Beyer, J. M., Chattopadhyay, P., George, E., Glick, W. H. and Pugliese, D. (1997). The selective perception of managers revisited. Academy of Management Journal, 40(3), 716-737. Boland, R. J. (1999). Some sources of the unity in plurality of Scandinavian research on information systems development. Scandinavian Journal of Information Systems, 10(1-2), 187-192. Boynton, A. C., Jacobs, G. C. and Zmud, R. W. (1992). Whose responsibility is IT management? Sloan Management Review, 33(4), 32-38. Broadbent, M., Butler, C. and Hansell, A. (1994). Business and technology agenda for information systems executives. International Journal of Information Management, 14(6), 411-423. Cross, J., Earl, M. J. and Sampler, J. L. (1997). Transformation of the IT function at British Petroleum. MIS Quarterly, 21(4), 401-423. CSC. (1996). New IS leaders. CSC Index Research, UK: London. CSC. (1997). Critical Issues of Information Systems Management–10th Annual Survey. Computer Sciences Corporation, USA: El Segundo, California. Earl, M. J. and Feeny, D. F. (1994). Is your CIO adding value? Sloan Management Review, 35(3), 11-20. Feeny, D. F., Edwards, B. R. and Simpson, K. M. (1992). Understanding the CEO/CIO relationship. MIS Quarterly, December, 435-448. Gottschalk, P. (1998). Content Characteristics of Formal Information Technology Strategy as Implementation Predictors. Tano Aschehoug Publishing, Norway: Oslo. Hasan, H. and Ditsa, G. (1999). The impact of culture on the adoption of IT: An interpretive study. Journal of Global Information Management, 7(1), 5-15. Henderson, J. and Venkatraman, N. (1992). Strategic alignment: A model for organizational transformation through IT. In Kochan, T. A. and Useem, M. (Eds.), Transforming Organizations. UK: Oxford University Press. Jordan, E. (1993). Executive information systems for the chief information officer. International Journal of Information Management, 13(4), 249-259.

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Khandelwal, V. K. and Ferguson, J. R. (1999). Critical success factors (CSFs) and the growth of IT in selected geographic regions. Proceedings of the 32nd Hawaii International Conference on Systems Sciences (HICSS-32), January 5-8, USA: Maui. King, J. L. and Kraemer, K. L. (1984). Evolution and organizational information systems: An assessment of Nolan’s stage model. Communications of the ACM, 17(5), 466-475. Mejias, R. J., Palmer, J. W. and Harvey, M. G. (1999). Emerging technologies, IT infrastructure, and economic development in Mexico. Journal of Global Information Technology Management, 2(1), 31-54. Mintzberg, H. (1990). The manager’s job: Folklore and fact. Harvard Business Review, MarchApril. Mintzberg, H. (1994). Rounding out the manager’s job. Sloan Management Review, 36(1), 11-26. Moore, G. C. and Benbasat, I. (1991). Development of an instrument to measure the perceptions of adopting an information technology innovation. Information Systems Research, 2(3), 192-222. Nolan, R. L. (1973). Managing the computer resource: A stage hypothesis. Communications of the ACM, 16(7), 399-405. Nolan, R. L. (1979). Managing the crisis in data processing. Harvard Business Review, MarchApril, 115-126. Peppard, J. (1999). Bridging the gap between IT organization and the rest of the business: plotting a route. Proceedings of the 7th European Conference on Information Systems (ECIS), 542-558. June 23-25, Copenhagen, Denmark. Pinnsoneault, A. and Rivard, S. (1998). Information technology and the nature of managerial work: From the productivity paradox to the Icarus paradox? MIS Quarterly, September, 287-311. Rockart, J. F., Earl, M. J. and Ross, J. W. (1996). Eight imperatives for the new IT organization. Sloan Management Review, 38(1), 43-55. Stephens, C. S. (1993). Five CIO’s at work: Folklore and facts revisited. Journal of Systems Management, 44(3), 34-40. Stephens, C. S., Ledbetter, W. N., Mitra, A. and Ford, F. N. (1992). Executive or functional manager? The nature of the CIO’s job. MIS Quarterly, 16(4), 449-467. Stephens, C. S. and Loughman, T. (1994). The CIO’s chief concern: Communication. Information & Management, 27(2), 129-137. Stephens, C. S., Mitra, A., Ford, F. N. and Ledbetter, W. N. (1995). The CIO’s dilemma: Participating in strategic planning. Information Strategy, 11(3), 13-17. Towell, R. E., McFadden, K. L. and Lauer, J. (1998). ISO 9000 certification in the U.K.: A study of the role played by the information systems organization. Journal of Global Information Technology Management, 1(4), 3-16. Watson, R. T. (1990). Influences on the IS manager’s perceptions of key issues: Information scanning and the relationship with the CEO. MIS Quarterly, 14(2), 217-231. Watson, R. T., Kelly, G. G., Galliers, R. D. and Brancheau, J. C. (1997). Key issues in information systems management: An international perspective. Journal of Management Information Systems, 13(4), 91-115.

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Chapter XX

The Problem of Networked Organizations in India: A Case Study Gurpreet S. Dhillon and Trevor T. Moores University of Nevada Las Vegas, USA Ray Hackney Manchester Metropolitan University, UK

We present a potential misalignment that many emerging economies may face with respect to the advent of networked organizations. We argue that although it may seem that networked organizations appear to offer a viable option for the progress of a nation, a deeper analysis suggests otherwise. This will be exemplified through the case of The Engineering Corporation and its presence in India. While The Engineering Corporation does indeed provide employment to the local economy, the host country must determine the right mix of the aspects involved in the collaborative venture. If this care is not taken, there will be little benefit for the host country, thus resulting in a skewed orientation in the relationship. The globalization of work supported by telecommunications technology and the advent of “networked” organizations has produced a potential dilemma in how to balance the interests of the new global company and the long-term national interests of the country supplying the workforce. A networked organization is one that is decentralized and has regional offices that deal with part of the business operation. For instance, an IT center in one location and a sales office in another. Global decentralization is motivated primarily in order to exploit cheap, skilled labor wheresoever it is found in the world. In true Dickens style, however, the emergence of such organizations has the potential to produce the best of times and the worst of times. On the one hand, the investment made in the economy by contracting the local workforce can produce regional micro-economies that become an engine of prosperity by reshaping global markets–the best of times. On the other hand, by failing to capitalize and promote further the competence that is attracting companies to the region in the first place, major infrastructure issues are being ignored by central planners–the worst of times. Copyright © 2002, Idea Group Publishing.

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The particular case to be presented here involves an engineering company in India. India has maintained an impressive growth in its technology exports since the mid-1980s, especially in the software industry, with software exports increasing more than ten-fold from US $24 million in 1985 to US $350 million in 1994, with exports rising to US $5.7 billion by 2000 (Moitra, 2001; Zorpette, 1994). In May 1998, the Indian Government launched an IT task force, aimed at simplifying the policies and procedures related to the technology and software industry, with the goal of increasing exports to US $80 billion by 2008, with some US $50 billion of that in software exports. It has been pointed out, however, that maintaining that impressive growth depends on the country developing technology-supportive infrastructures, policies, and an educated workforce (Bagchi, 1999; Kobitzsch et al., 2001). For instance, the United Nations’ Human Development Report 2001 and co-sponsored Digital Opportunity Initiative point to the need for third world nations to jump on the information technology bandwagon in order to improve their domestic economies. The happenings in India seem to suggest that although the megacorporations of the world are keen to exploit the competence of the Indians, India in itself does not seem to be prepared for this onslaught. Based on the assertions and our argument, we identify the possible impact of the influx of multinational networked corporations on the Indian business and economy as a whole. First, we review the benefits of a networked organization before presenting the case study. The implication of these networks on the success of the Indian businesses and economy is then analyzed.

THE EMERGENCE OF THE NETWORKED ORGANIZATION Increased competitive pressures and rapidly changing market conditions have caused organizations to depart from their traditional rigid hierarchies to adopt more flexible “networked” forms. This objective is commonly pursued through the availability of IT, which is considered a key enabler for effective networking and communication. The motivation for this drive is clearly the opportunity to exploit the richness of new information sources and opportunities. Clearly, there are a number of organizational forms that support or constrain management processes. These arrangements generally include the structure, systems, and culture of the organizations concerned. There is a continuing debate about the most effective form an organization should adopt to improve its internal efficiency and external effectiveness (Mintzberg, 1983). However, a fundamental view is that the organization should seek to adopt a form that is appropriate to its determined objectives in the face of competition. Organizations commonly pursue a strategy where a number of functions are undertaken by separate business units. These units could be internal or external to the organization. This is to adopt an organizational form which is believed to be responsive to the demands of a competitive environment. Miles and Snow (1978) initially argued that this form of organization stimulates traditional business units to make them more “market-sensitive.” Katzenbach and Smith (1993) have argued that there is a critical need for organizations to develop cooperative relationships between teams that share common objectives. This task-focused orientation is considered important for organizations that intend to improve their performance and effectiveness. Such improvement is also dependent on an alignment of organizational members and organizational goals, such as ensuring that organizational

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members hold common beliefs with respect to the objectives that they pursue. This alignment requires an analysis of the social network within the organization, which is distinct from the organization’s formal structure. Successful alignment, therefore, can often depend on the internal interactions between senior managers who either support or constrain the strategy of the organization (Hackney, 1996). Thompson (1967) earlier noted the importance of understanding the difficulties of coordination between decentralized business units. He termed these units “boundary spanning,” where they do not form the central core of an organization’s activities but are peripheral to it. Indeed, it has been argued that a traditional organizational hierarchy may not fully support business performance (Poynter & White, 1990; White & Poynter, 1989). They consider the notion of the horizontal organization that recognizes this difficulty where activities are centered on a number of business processes. The importance of managerial processes within these organizational forms again emerges as an important consideration for improved responsiveness and effectiveness. Volatile market conditions and intense competition are commonly cited drivers for such organizational changes. A significant feature of this changing business orientation has been the emphasis for more autonomy of subsidiary units where cooperation is emerging as the main characteristic with less centrally initiated control. The current view, therefore, is that the virtual organization will offer a balance between the extent of this autonomy and control (Gebauer, 1996). This is considered as a means of transcending the boundaries of traditional functions. The learning organization is another important concept for determining the behavior, and hence forms, of an organization. The idea of a “learning organization” is closely related to organizational culture in that patterns, procedures, and values are “hard-wired” into its structure. The ideas of Burns and Stalker (1961) in terms of the “organic” or “mechanistic” organization are also relevant. It is commonly suggested that organizations exhibit mainly a form of mechanistic behavior where formal rules are predominant and which are not easily changed. Organization members, therefore, need to learn to become more innovative to successfully execute their business strategy (Senge, 1992). Argyris (1992) identified two types of learning within organizations as adaptive and generative. Individuals initially engage in adaptive, or “single-loop,” learning when they first experience, for example, the introduction of IT. This experience then develops towards generative, or “double-loop,” learning when they are able to fully exploit the potential of the technology. Bartlett and Ghoshal (1990) forward the concept of the matrix organization where there is a gap between strategic thinking and strategic capabilities or action. They argue that organizations should adopt the principles of matrix management. Matrix management involves developing culture, relationships, and information flows horizontally. The role of senior managers is vital in achieving these aims. Three essential characteristics are identified to support the process of changing the organization’s psychology, i.e., to build a shared vision, develop human resources, and co-opt managerial efforts. In reality, however, organizations suffice on a culture of trust based on informal coalitions between dependent groups (Buchanan & Boddy, 1992; Englert et al., 1996). An organizational configuration entails an organic structure that facilitates the intense sharing of information, partnerships, cooperation, coordination, teamwork, and strategic alliances. These notions are believed to form the cornerstone within virtual organizations for success through “the open asking for and sharing of ideas and experience” (Hastings, 1993). As such, once the focus moves towards transnational networks, the success of a networked corporation will depend on engendering a culture of mutual trust and cooperation.

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THE ENGINEERING CORPORATION AND THE VIRTUAL TEAM NETWORK In this section we present a case example from India, where multinational organizations have been involved in setting up networks. More often than not these networked structures have emerged opportunistically, i.e., by foreign multinationals capitalising on the competence of people in a particular region. We use the case of an engineering company, although the name is changed here to maintain confidentiality. The Engineering Corporation was founded in the 1830’s and by the early 1990’s had grown to a multibillion dollar enterprise, with more than 14,000 people employed in 35 offices across 25 countries. Each office had its own area of expertise. As such, very different skill sets remained within the traditional company structure, although local offices could not easily gain access to others because of a very rigid hierarchical structure. Such was the extent of the problem that for a typical large project, 40% extra temporary manpower was usually required to meet a deadline. While the dispersion of manpower and skills created a problem, the local presence provided The Engineering Corporation with good “shop window” visibility, with a recognized expertise in local requirements and peculiarities. Although The Engineering Corporation made its presence in India and capitalised on cheap and competent workforce, it has established an intra-organizational norm that is rare to find elsewhere in the country. The company created its own infrastructure and network, unparalleled in the traditional Indian companies. This has changed in recent years. The CEO proposed a strategic vision that was concerned with developing a global capability to leverage expertise. This was based on the fact that the global client was the target. The CEO considered that developing competencies based on the concept of a global office was the way of creating scale without mass. Telecommunications would be the foundation for building project teams of people with unique skills from The Engineering Corporation offices around the world without them having to leave their desks. It was a risky strategy for The Engineering Corporation. In the late 1980’s the company had tried to take advantage of a low-cost, English-speaking labour force in India by establishing an office in Bombay, which would contribute resources to larger, distant projects. This had failed, largely because communicating with other offices proved very cumbersome, especially when the majority of project work travelled by courier between offices. This experience, however, convinced The Engineering Corporation top management that virtual teams could only work with the right foundations. The new vision was to link all the disparate and far-flung offices around the world using open systems, creating a global network of engineers, and thus creating a company greater in ability than the sum of its many parts. Using electronic corridors along which engineers could access, update, or amend project data, CAD drawings, proposals, project management information, teams of specialists from around the world could work together without having to change their desks, offices or cultural proclivities–at least immediately. Offices could retain their specialisms, whilst the IT systems became standard throughout the organization so that engineers, wherever they were in the company, could use the same tools to complete the engineering cycle, seamlessly. The organization would become transparent to all those who worked within it. The efforts of The Engineering Corporation to develop a virtual team showed results when the company won a project from a leading oil company. The initiative was made by the

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UK office, where the strategy was to use what the technology could offer and tender the “cheaper and better” bid by negotiating with The Engineering Corporation’s India office for CAD man hours for the UK project submission. Indian man hour rates were cheaper compared to those available in the UK. By buying lower cost internal resources, the overall project cost could be pared down and the offer to the customer kept highly competitive without making any compromises on quality. By distributing the work in this way, the new network Engineering Corporation estimated more than 20% cost savings throughout the product lifecycle. Besides the particular case of The Engineering Corporation, a large number of corporations are considering India to be a central hub in managing the extensive virtual networks. This trend raises two fundamental questions. First, what is the impact of such initiatives on the Indian economy? Second, in what way should India respond to the emergence of such networked organizations within its borders?

EMERGING NETWORKED ORGANIZATIONS AND THE INDIAN ECONOMY The impact on the Indian economy has become more profound since the liberalization drive and the intrinsic aspiration for growth. This is nothing unusual since the major economies in the world are inter-linked to the business dynamics, thus creating an inter-linked economy (ILE). Traditionally USA, Europe, and Japan have formed a triad. More recently Hong Kong, Korea, Taiwan, and Singapore have joined the ILE, while China, Malaysia, and Thailand have also been making their presence felt. For a detailed discussion on ILEs, see Ohmae (1985). Although the Indian government considers India to be moving towards an ILE, it is as yet a farfetched notion. The traditional ILE has approximately 1 billion people with an average per capita GNP of $10,000. While India has the requisite population, the per capita GNP of around $300 falls well short of that expected for an ILE. Since most of the wealth is created, consumed, and distributed within ILEs, it is essential that in order to have prosperity, a developing nation must establish links with an ILE. The nature of the business dynamics today suggests the wealth of a nation be no longer created by merely possessing and hoarding natural resources. It is now realized in the marketplace where nations have to participate. Such a marketplace is founded on the ILEs. Clearly the prosperity of a nation depends on its ability to create value within the ILE through its people. Coupled with the presence of multinational corporations within a developing economy, proactively contributing to the economic success is the notion of developing very strong regional pockets of excellence. Even countries within ILEs have seen a positive influence of such regional excellence centers. Notables among these are • The Kansai area in Japan spanning across the three cities of Osaka, Kobe, and Kyoto. The region in itself represents a $500 billion economy. • The Shenzhen area in China which has a per capita GNP of $5695 (as compared to China’s GNP of $317). • The Spartanburg-Greenville belt in South Carolina in the US with over 215 international companies. Nearly 50 companies have their headquarters in this belt. • Singapore, Johore, Malaysia, and the Riau islands (Indonesia) including Batam have often been termed as the growth triangle. • Penang in Malaysia, Medan in Indonesia, and Phuket in Thailand represent another emerging growth triangle. In Penang, for example, the unemployment rate fell from 16% 1969 to 2.9% in 1994. In fact, the GDP of Penang is 15% higher than the rest of Malaysia.

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It is worth noting that during the pre-liberalization era in India, a number of regional areas came into existence. Notable among these are the Mumbai/Pune belt for the automotive sector; the Chennai/Maraimalainagar/Hosur areas; and the Delhi/Gurgaon/Faridabad/ Ghaziabad belt. Bangalore and Hyderabad have made a mark for the electronics/IT/defense/ aerospace sectors. With respect to the advent of multinational corporations within India, the move towards economic prosperity has been rather skewed. To a very large extent this skewed orientation can be attributed to the advances in the computing and telecommunication technologies. As in the case of The Engineering Corporation, the technology allows companies to tap into a cheaper workforce and incorporate their labors effortlessly into the rest of the organization. However, such networks are controlled externally to the country, and so the economic prosperity remains transient, while any level of regional growth does not necessarily result in sustained economic prosperity. The prosperity is transient to the extent that the main attraction of India to networked organizations is the cheapness and competence of the workforce. Unless India actively seeks to establish itself as a center of excellence where the competence of its workforce outweighs solely financial considerations, the Indian option will always be subject to replacement by another cheaper alternative. For the same reasons, regional growth does not necessarily lead to sustained economic prosperity unless the factors that make India the most attractive option for networked organizations today are identified, supported, and further enhanced. To a very large extent this is something that has been lacking within India.

FAILINGS IN THE INDIAN RESPONSE One of the most inviting aspects for multinational companies setting up shop in India is that export-oriented companies are allowed to have 100% foreign equity. A consequence of having wholly-owned subsidiaries within India, however, is that Indian organizations are prevented from participating in the sort of companies that would help India move towards being an ILE. On the other hand, having a foreign company site an office within India circumvents the tendency of skilled Indians to leave the country. If India is to become globally competitive with respect to IT, the focus has to shift from an individual skill base to that of national competence. This means that “India plc” has to position itself not as a source of good programmers, but as a nation capable of producing good quality software products. At the present time, however, the relative position of India with a share of less than 1% global software market highlights the daunting task ahead. In comparison, the US has 75% of the global software market. So what are the critical issues that need to be addressed? The first issue relates to the response of the national government. Specifically, India does not have a very competitive domestic market. A consequence of this is that there is a limited need for information management. It is imperative, therefore, that in order to increase the demand for information management at a national level, concerted effort is made to develop local competition. The argument being that without this the domestic IT industry cannot grow enough such as to have a sound base for global growth. This will, however, not be possible unless the government stops playing a dominant role in key industrial sectors. Since the Indian government is the biggest buyer and supplier of goods, it means that any cash crunch slows down the government in buying any software product. This has a knock on effect on the growth and size of the domestic IT market. This results in the IT industry

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becoming largely dependent on the non-governmental sectors. This sector in turn is very difficult to impregnate. There are essentially three major impediments: higher cost of the IT products (because of import duties, etc.); lack of demand in many key areas because of virtually monopolistic situations (e.g., sectors such as insurance, road transportation, etc.); lack of exposure of many basic commodity sectors. Since the government is the largest employer, both directly and through its agencies, it has resulted in a two-fold negative influence. First, the competitiveness of the whole economy is affected. This seriously affects the competitive position of the IT industry. Second, this has acted as a barrier in the freeplay of market forces with respect to employment. These restrictions are particularly evident within the company law and income tax legislation. In comparison to the international income tax levels, we see that Indian employees pay higher taxes at lower incomes (particularly in comparison to the US–this is, however, on the verge of changing). This has but motivated young talented Indians to seek positions overseas.

DISCUSSION The advent of the virtual corporation is here to stay. Companies will continue to use talented people to leverage expertise for their competitive advantage. It is the responsibility of individual nations, however, to recognize the trend so as to orient their policies accordingly. India in particular has to reconcile the difference between Indians being sought by foreign companies and India being competitive in its own right. This dilemma raises a number of fundamental issues. First, does India consider individual skill base to be a measure of world competitiveness? Second, is developing national competence a means to achieve a higher degree of competitiveness? Third, what should Indian policy makers consider to be the benchmark for global competitiveness? In addressing these fundamental issues, this section synthesizes the various themes presented in this paper. Many countries, inclusive of India, base their national policy initiatives on the theory of comparative advantage. All other theoretical frames of reference seem to be banished in terms of developing global competitiveness. The primary reason for this shortsightedness is the “engineering” approach towards competitiveness. Nations often consider “competitiveness” to be based on the ability of the firms to adopt and shape the technical and managerial best practices in their activities. Hence the competitiveness of a country is the sum of the competitive strengths of the individual enterprises. Often individual competitiveness of firms is defined as their capacity to maximize productivity and factor incomes on a continuous basis. Competitiveness has also been gauged by assessing the extent of market share of a firm and a country at a global level. Often competitiveness is associated with the extent of market share–rather linearly. This has often been the case of India, especially with respect to the software export market. As has been argued above, the extent of export orientation is not necessarily a measure of a competitive industry of a nation. The dynamic interplay between the national and international market penetration is perhaps a better measure. Another false measure of increased competitiveness of a nation is the extent of foreign investment. What is often ignored is the nature of these foreign investments. In many cases direct investments can actually reduce the flow of exports, thus having a negative influence on the already volatile economies of certain countries. It has been argued that in the case of India, such direct investments are a double-edged sword. Although investment by foreign enterprises and preventing human capital movements (brain drain) is key to the success of

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most emerging economies, yet the very movement of human capital and exports form a significant chunk of the cash flow. This dilemma is evidenced by presence of The Engineering Corporation in India. Behind this backdrop, what should countries do in order to be competitive and at the same time avail the opportunities afforded by the presence of international corporations? As has been suggested by a number of authors (e.g., DeAnne, 1990; Dicken, 1992; Porter, 1990), nations need to establish a link between trade and direct investment. These links are of a very complex nature and often have a bearing on the measurement and significance of most indicators of competitiveness. Hence effort should be directed at developing indicators of inward and outward direct investment at a sector level. These indicators should include an assessment of investment flows, production, and employment. The analysis can then be extended to review scales of employment and industrial competitiveness. Another important aspect is to understand the nature and scope of technological links between an investing company and the host country (in the context of this paper, The Engineering Corporation and India). In particular, these links should evaluate the extent to which production and R&D have been relocated. Understanding the level to which R&D activities are confined to the host country should follow this assessment. In the case of The Engineering Corporation, for example, most of the conceptual work was done in centres elsewhere. India was only used because of resource availability. It is important for host countries to assess the level of technology transfers. In a final synthesis, it would be worthwhile to analyze the extent to which technological activities of a foreign company influence those of the host country.

REFERENCES Argyris, C. (1992). Reasoning, Learning and Action: Individual and Organization. San Francisco, CA: Jossey-Bass. Bagchi, S. (1999). India’s software industry: The people dimension. IEEE Software, 16(3), 62-65. Bartlett, C. A. and Ghoshal, S. (1990). Matrix management: not a structure, a frame of mind. Harvard Business Review, 68(4), 138-145. Buchanan, D. and Boddy, D. (1992). The Expertise of the Change Agent: Public Performance and Backstage Activity. Englewood Cliffs, NJ: Prentice Hall. Burns, T. and Stalker, G. M. (1961). The Management of Innovation. London: Tavistock. DeAnne, J. (1990). Global Companies and Public Policy. New York: Council on Foreign Relations Press. Dicken, P. (1992). Global Shift. London: Paul Chapman. Englert et al. (1996). Beyond automation: A framework for supporting cooperation. In Proceedings of the ECIS 96, Lisbon, July 2-4. Gebauer, J. (1996). Virtual organizations from an economic perspective. In Proceedings of the ECIS 96, Lisbon, July 2-4. Hackney, R. (1996). Sustaining an information systems strategy. In Proceedings of the UK Academy for Information Systems, Cranfield School of Management, April 10-12. Hastings, C. (1993). The New Organization: Growing the Culture of Organizational Networking. New York: McGraw-Hill. Katzenbach, J. R. and Smith, D. K. (1993). The discipline of teams. Harvard Business Review, 71(2), 111-120.

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Miles, R. E. and Snow, C. C. (1978). Organizational Strategy, Structure, and Process. New York: McGraw-Hill. Mintzberg, H. (1983). Structures in Fives: Designing Effective Organizations. Englewood Cliffs, NJ: Prentice-Hall. Ohmae, K. (1985). Triad Power: The Crossing Shape of Global Competition. New York: The Free Press. Ostrof, F. and Smith, D. (1992). The horizontal organization. McKinsey Quarterly, 148-168. Porter, M. (1990). Competitive Advantage of Nations. New York: The Free Press. Poynter, T. A. and White, R. E. (1990). Making the horizontal organization work. Business Quarterly, 54(3), 73-77. Senge, P. W. (1992). The Fifth Discipline: The Art and Practice of the Learning Organization. London: Century. Thompson, J. (1967). Organizations in Action. New York: McGraw Hill. White R. E. and Poynter, T. A. (1989). Achieving worldwide advantage with the horizontal organization. Business Quarterly, 54(2), 55-60.

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Chapter XXI

Knowledge Assets in the Global Economy: Assessment of National Intellectual Capital Yogesh Malhotra Florida Atlantic University, USA This article has the following objectives: to develop the need for assessing knowledge capital at the national economic level; to review a national case study of how intellectual capital assessment was done in the case of one nation state; to suggest implications of use of such assessment methods and needed areas of advancement; and highlight caveats in existing assessment methods that underscore the directions for future research. With increasing emphasis on aligning national information resource planning, design, and implementation with growth and performance needs of businesses or nations, better understanding of new valuation and assessment techniques are necessary for information resource management policymakers, practitioners, and researchers. Our government is filled with knowledge…We have 316 years’ worth of documents and data and thousands of employees with long years of practical experience. If we can take that knowledge, and place it into the hands of any person who needs it, whenever they need it, I can deliver services more quickly, more accurately, and more consistently. — From Knowledge management: New wisdom or passing fad? In Government Technology, June 1999.

Emergence of the service society after the last world war brought increased realization of the role of employees’ knowledge and creativity in adding value to the company. Attempts to capitalize company investments in people on the balance sheet in the 1970’s failed because of measurement problems. The subject gathered increased interest more recently in the 1990’s, with the rapid emergence of information and communication technologies (ICT). As business processes became increasingly “enabled” by large-scale information systems, information Appeared in Journal of Global Information Management, vol. 8, no. 3, 2000. Reprinted by permission.

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systems designers attempted to capture employees’ implicit and explicit knowledge in “corporate memory” by means of intranets and other similar applications (Malhotra, 2000a, 2000b). In contrast to the knowledge of individual employees, such corporate knowledge does contribute to the company's value-creation capabilities as well as financial valuation by analysts. Hence, such organizational knowledge or intellectual capital must be accounted for in the company's balance sheet that has generally focused on the traditional factors of production such as land, labor, and capital. The topic is not only pertinent to individual enterprises, but also to national economies that are making a rapid transition to a society based on knowledge work. This article develops the case for assessment of national intellectual capital by drawing upon existing research, practice, and a recent study of a nation representative of countries making a transition from “developing” to “developed” status. The issues discussed herein are important for information resource management policymakers, practitioners, and researchers for assessing their contributions in terms of new measures of performance. More importantly, as the world economies transition from the world of “atoms” to world of “bits,” they would be expected to plan, devise, and implement information and knowledge management systems that provide differential advantage in terms of “intellectual capital.”

Knowledge Assets and Intellectual Capital Traditional assessment of national economic performance has relied upon understanding the GDP in terms of traditional factors of production–land, labor and capital. Knowledge assets may be distinguished from the traditional factors of production–in that they are governed by what has been described as the “law of increasing returns.” In contrast to the traditional factors of production that were governed by diminishing returns, every additional unit of knowledge used effectively results in a marginal increase in performance. Success of companies such as Microsoft is often attributed to the fact that every additional unit of information-based product or service would result in an increase in the marginal returns. Given the changing dynamics underlying national performance, it is not surprising that some less developed economies with significant assets in ICT knowledge and Internet-related expertise are hoping to leapfrog more developed economies (San Jose Mercury News, 2000). Despite the increasingly important role of knowledge-based assets in national performance, most countries still assess their performance based on traditional factors of production. Today’s measurement systems are limited in their capability to account for tacit knowledge embedded in the human resources, although there is some agreement on measuring a few categories of knowledge-related assets, such as patents and trademarks. However, the emerging knowledge economy is characterized by industries that are more knowledge intensive and a service economy that is increasingly based on information-based intangible assets. Knowledge assets or intellectual capital may be described as the “hidden” assets of a country that underpin its growth, fuel its growth, and drive stakeholder value. There is increasing realization about knowledge management as the key driver of national wealth, the driver of innovation and learning, as well as that of the country’s gross domestic product (GDP). Increasing importance of knowledge assets and intellectual capital have been drawing greater attention of not only company CEOs, but also national policymakers, to non-financial indicators of future growth and performance. Knowledge asset measurement relates to the valuation, growth, monitoring, and managing from a number of intangible but increasingly important factors of business success. In the context of knowledge assets, knowledge represents the collective body of intangible

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assets that can be identified and is measurable. This interpretation of knowledge differs from the notion of knowledge as knowing and learning, which concerns how organizations acquire, share, and use knowledge–either helped or hindered by technology and organizational processes. In contrast, the notion of knowledge assets is about the identifiable aspects of the organization that although “intangible,” can be considered as adding some kind of value to it. “Knowledge capital” is the term given to the combined intangible assets that enable the company to function. Examples of such knowledge assets could include shared knowledge patterns and service and customer capability.

Assessment of Knowledge Capital and Intellectual Assets The worth of knowledge assets, taking the difference between market and book values as a proxy, is hidden by current accounting and reporting practices. However, as evident from current valuations of many Net-based enterprises, one observes a significant widening gap between the values of enterprises stated in corporate balance sheets and investors’ assessment of those values. The increasing proportion of intangible vis-à-vis tangible assets for most industrial sectors has been affirmed by various other observations (Edvinsson and Malone, 1997; Hope and Hope, 1997; Stewart, 1995). In the case of major corporations, often such high market valuations are attributed to brands. Recent business history has shown that huge investments in human capital and information technology are the key tools of value creation that often do not show up on company balance sheets as positive values themselves. Measurement of institutional or organizational value in the current business environment using traditional accounting methods is increasingly inadequate and often irrelevant to real value in today’s economy. For instance, while traditional accounting practices often treat brand as depreciable entity over time, in today’s economy, intangible assets like brands and trademarks often increase in value over time, often longer than the time periods accounted for their depreciation. Even, specific kinds of valuations of intellectual capital, such as patents, copyrights, and trademarks are not valued according to their potential value in use, but recorded at registration cost. Similarly, the distinction between assets and expenses is made arbitrarily on many balance sheets: an advertising campaign could be recorded in either column as evident from a case such as that of AOL. The traditional balance sheet, a legacy of the last five centuries of accounting practices, provides a picture of historic costs, assuming that the cost of purchase reflects the actual value of the asset. However, it does not account for the hidden value inherent in people’s skill, expertise, and learning capabilities; the value in the network of relationships among individuals and organizations; or the structural aspects relevant to servicing the customers. These hidden values or intangible assets assume an increasingly important role in an economy that is characterized by a transition from “programmed” best practices to “paradigm shifts” that characterize the new business world of “reeverything” (Malhotra, 2000c). Such factors are assuming greater importance in assessment of the potential for future growth of an enterprise or a national economy. This issue is compounded by an apparent paradox: the more a company invests in its future, the lesser is its book value [although the recent astronomical caps for various Netrelated stocks suggest increasing realization about intangible assets]. Extrapolating the case of such companies to the organizations within a national economy, one may understand the implications for accounting for intangible assets that do not show up in accounting reports but may underpin their future success or failure. Valuation from the perspective of intellectual capital and knowledge assets takes into

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consideration not only financial factors, but also human and structural factors (Stewart, 1997). Stewart defines intellectual capital as the intellectual material that has been formalized, captured, and leveraged to create wealth by producing a higher-valued asset. Intellectual capital is defined as encompassing i) human capital; ii) structural capital; and iii) relational capital. These aspects of intellectual capital include such factors as strong business relationships within networked partnerships, enduring customer loyalty, and employee knowledge and competencies. The compelling reasons for valuation and measurement of intellectual capital and knowledge assets include understanding where value lies in the company and the sectors of the national economy, and for developing metrics for assessing success and growth of companies and economies.

Measuring Knowledge Assets and Intellectual Capital Managers of business enterprises and national economies are trying to find reliable ways for measuring knowledge assets to understand how they relate to future performance. The expectation from finding reliable measures of knowledge assets is that such measures can help managers to better manage the intangible resources that increasingly determine the success of the enterprises and economies. The terms “knowledge capital” and “intellectual capital” are used synonymously in this article. Within the scope of subsequent discussion, such terms refer to “the potentiality of value as it exists in various components or flows of overall “capital” in a firm; the relationships and synergistic modulations that can augment the value of that capital; and the application of its potential to real business tasks… [it] includes an organization’s unrefined knowledge assets as well as wealth generating assets whose main component is knowledge” (Society of Management Accountants of Canada, 1999, p. 17). One may observe that it is the application of intellectual capital to practical situations that contributes, primarily, to the translation of its potential value to financial assets. Or as observed by Stewart (1997, p. 67): “Intelligence becomes an asset when some useful order is created out of free-floating brainpower–that is, when it is given coherent form (a mailing list, a database, an agenda for a meeting, a description of a process); when it is captured in a way that allows it to be described, shared, and exploited; and when it can be deployed to do something that could not be done if it remained scattered around like so many coins in a gutter.” Unless effectively utilized and applied, knowledge assets may not necessarily yield any returns in terms of financial performance measures. In other words, “knowledge assets, like money or equipment, exist and are worth cultivating only in the context of strategy…you cannot define and manage intellectual assets unless you know what you are trying to do with them” (Stewart, 1997). (For instance, a detailed account of how knowledge management is relevant to e-business strategy and performance is presented in a forthcoming article [Malhotra, 2000c].) The subsequent discussion reviews the case of a nation state that utilized one of the more popular methods for assessment of its national intellectual capital. Concluding discussion will highlight the existing caveats in the adopted methodology and underscore the important issues that need to be addressed in future research and practice.

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KNOWLEDGE CAPITAL OF A NATION STATE: THE CASE OF ISRAEL The nation state of Israel, having been classified as an industrialized nation in April 1997, represents an interesting case study for both less developed countries as well as industrialized nations. Having bridged this gap over its recent past, it provides a vantage point for understanding the transition from both sides of the industrial divide. Since 1950, Israel’s economy has grown 21-fold, resulting in overall rapid development and also resulting in significant growth in per capita income and an exponential increase in the number of hi-tech start-up companies. These developments have occurred despite a population growth of 330% and periodic wars that have impacted the region’s economies. A popular method of assessment of intellectual capital originally proposed by the Swedish company Skandia was recently applied to a joint Swedish-Israeli study that examined how to assess Israel’s intellectual capital. The study represented the first attempt to document Israel’s core competencies, key success factors, and hidden assets that provide comparative advantage and high potential for growth. The study compared Israel with other developed countries, not developing countries, since the objective was to assess the country’s ability to compete with other industrialized nations in the global economy. The study aimed to develop an assessment of intellectual capital of the country, which along with the more traditional focus on financial capital, could help in an integrated and comprehensive view of the nation’s assets as well as its potential for future growth. The study used Skandia’s model for measuring intellectual capital, a model that had been earlier used for developing the Intellectual Capital Balance Sheet for Sweden, the Skandia Model for Measuring Intellectual Capital. In Skandia’s view, intellectual capital denotes intangible assets, including customer/ market capital, process capital, human capital, and renewal and development capital. The value of intellectual capital is represented by the potential financial returns that are attributable to these intangible or non-financial assets. The Skandia model attempts to provide an integrated and comprehensive picture of both financial capital and intellectual capital. Generally, the national economic indicators supported by hard quantitative data are used for examining the internal and external processes occurring in a country. However, the model questioned if such indicators provided a full and accurate assessment of the country’s assets and if they provide an indication of its potential for future growth. In doing so, it developed the framework of intellectual capital as a complement of financial capital. In this model, there are four components of intellectual capital: market capital (also denoted as customer capital); process capital; human capital; and renewal and development capital. While financial capital reflects the nation’s history and achievements of the past; intellectual capital represents the hidden national potential for future growth. The value chain according to Edvinsson and Malone (1997, p. 11) expresses the various components of market value on the basis of the following model: Market Value = Financial Capital + Intellectual Capital The key determinants of hidden national value, or national intellectual capital, are human and structural capital, defined thus:

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Intellectual Capital = Human Capital + Structural Capital Human Capital: The combined knowledge, skill, innovativeness, and ability of the nation’s individuals to meet the tasks at hand, including values, culture, and philosophy. This includes knowledge, wisdom, expertise, intuition, and the ability of individuals to realize national tasks and goals. Human capital is the property of individuals, it cannot be owned by the organization or nation. Structural Capital: Structural capital signifies the knowledge assets that remain in the company when it doesn’t take into consideration human capital that is the property of individual members. It includes organizational capital and customer capital (also known as market capital). Unlike human capital, structural capital can be owned by the nation and can be traded. Structural Capital = Market Capital + Organizational Capital Market Capital: In the context of the original model applied to market enterprises, this component of intellectual capital was referred to as customer capital to represent the value embedded in the relationship of the firm with its customers. In the context of national intellectual assets, it is referred to as market capital to signify the market and trade relationships the nation holds within the global markets with its customers and its suppliers. Organizational Capital: National capabilities in the form of hardware, software, databases, organizational structures, patents, trademarks, and everything else of nation’s capabilities that support those individuals’ productivity through sharing and transmission of knowledge. Organizational capital consists of two components: process capital and renewal and development capital. Organizational Capital = Process Capital + Renewal & Development Capital Process Capital: National processes, activities, and related infrastructure for creation, sharing, transmission, and dissemination of knowledge for contributing to individual knowledge workers' productivity. Renewal and Development Capital: This component of intellectual capital reflects the nation’s capabilities and actual investments for future growth such as research and development, patents, trademarks, and start-up companies that may be considered as determinants

Figure 1: Components of intellectual capital (based upon Edvinsson & Malone, 1997) Market Value Financial Capital + Intellectual Capital Human Capital + Structural Capital Market Capital + Organizational Capital Process Capital + Renewal & Development Capital

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of national competence in future markets. In the context of the national intellectual capital assessment, while financial capital reflects the nation’s history and achievements of the past: 1. Process capital and market capital are components upon which the nation’s present operations are based; 2. Renewal and development capital determines how the nation prepares for the future; and, 3. Human capital lies at the crux of intellectual capital. It is embedded in capabilities, expertise, and wisdom of the people and represents the necessary lever that enables value creation from all other components.

Process of Measuring Intellectual Assets This article covers an overview of the various factors that were taken into consideration for assessing national intellectual assets for Israel. The details about the study and related statistical data about Israel are the subject of the report The Intellectual Capital of the State of Israel (Pasher, 1999). In this article, discussion will focus on only key aspects of the national intellectual capital assessment process with the motivation of providing a general framework that could be adapted for similar assessment for other national economies and businesses. The process of assessment of national intellectual assets as applied in the case of Israel was made of four phases: developing a vision of the nation’s future; identifying core competencies needed to realize the vision; identifying the key success factors for such competencies; and, identifying the key indicators for the key success factors. The vision for the country’s future was identified through brainstorming sessions and interviews with national leaders in various fields relevant to country’s future growth and performance as well as young leaders whose views were relevant to the country’s future progress. The core competencies devolved from the above process and its participants. These competencies were mapped in the form of clusters along each of the dimensions of intellectual capital based on Skandia’s model discussed earlier. The key success factors, or the most important determinants of the respective competencies needed for future performance, were identified. Specific indicators that were considered reliable measures for the critical success factors were then determined based on analysis of historical data as well as the analysis of the results of brainstorming sessions and interviews. Figure 2: Financial capital and intellectual capital (Based upon Edvinsson & Malone, 1997) Financial Capital

Market Capital

Human Capital

Present

Past

Process Capital

IC Present

Renewal & Development Capital Future

IC=Intellectual Capital

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The study found the vision of Israel has the substantiation of its position as a developed, modern, democratic, and pluralistic nation attractive to world Jewry, investors, tourists, and its citizens. Two key areas that were determined relevant to Israel’s future growth and progress included enhancement of quality of life of the citizens and making it attractive for future generations by improving its standing among developed nations. While the former goal could be achieved through cultural and regulatory interventions, the latter goal was to be achieved through economic growth fuelled by knowledge-based industries. It was also determined that both these growth-related areas would depend upon the country’s capability in nurturing peaceful relations in the geographical region that has been characterized by periodic intercountry wars. The study identified the key competencies necessary for the nation’s current and future performance and clustered them along the five components of the nation’s balance sheet: financial capital, market capital, process capital, human capital, and renewal and development capital. The specific indicators identified for each of the components represent the criteria that represent long-term competitive strength of Israel in comparison with other countries. As noted earlier, the specific criteria that are used as indicators of each of the components may differ for other countries. Financial Capital: As noted before, financial capital is an indicator of a nation’s past success and achievements. The valuation of the assets as they appear on a traditional balance sheet does not reflect the nation’s real value as assessed by the global market. This component of the nation’s balance sheet is based upon past performance and statistical data that express the rate of change in tangible assets. Such factors include gross domestic product (GDP), dollar exchange rate, external debt, unemployment, productivity rates within various sectors of the national economy, breakdown of exports according to industries, and inflation. Gross Domestic Product (GDP): This indicator represents the total value of all services and goods produced in the country. The change in the GDP per capita (in real terms) represents the change in the citizens’ well-being and in the country’s economic strength. Since its origin, Israel has enjoyed rapid economic growth: its GDP per capita (in real terms) has grown from $3,500 annually in 1950 to $17,200 in 1995, although interrupted by a stagnation and recession in 1996. In terms of purchasing power, this change amounts to an increase of 370%, reflecting a narrowed gap in the standard of living between Israel and the developed countries. Dollar Exchange Rate: As with other national economies, an inflationary process leads to increase in the cost of domestically produced goods and services, a relative decrease in the prices of imported products and services, and a devaluation of the domestic currency. Israel’s high level of inflation has resulted in the devaluation of its currency in the past, although inflation has been controlled in recent years. External Debt: Due to the financial crisis of 1980’s, Israel’s net external debt rose to 75% of GDP in 1985. This indicator showed a decrease until 1993 when it rose again due to loans taken by a large wave of immigrants. Finally, these loans showed an increase in production and restored the country’s external debt-to-GDP ratio to about 25%. Unemployment: Higher employment enables a national economy to increase production efficiency to maximum by using its existing resources. Until 1985, unemployment levels in the Israeli economy were below 5% when they started rising due to an influx of immigrants. After peaking to 11.5% in 1992, these levels had been falling again and in 1997 were lower than most industrialized nations. Productivity within Various Economic Sectors: Over the decade 1986-1996, Israel’s agricultural productivity grew at an annual growth rate of 8%. In the post-1990’s era, the productivity of the industrial sector has been growing at a moderate average annual growth

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rate of 1.5% as a result of slowdown because of structural changes in the industry. In the commercial and services sector, the average annual growth rate has been about 2% with greatest growth in the financial and business services as production has shifted from traditional sectors to more sophisticated, knowledge-based sectors. Breakdown of Exports According to Industries: The exports have reflected production in various economic sectors. Coming from an agriculture-intensive background, in 1950, out of $50 million in exports, agricultural products accounted for 70% of exported goods. The transition from a developing economy to a developed nation has been characterized by a shift in production and exports to the knowledge-intensive economic sectors such as electronic products, computer software, and pharmaceuticals. In 1994, agricultural products accounted for only one-half billion dollars of $25 billion in exported goods and services. In 1997, hi-tech exports constituted 33% of Israel’s total exports. Inflation: The 1980’s were characterized by very high inflation rates in Israel that reached a magnitude of 450% in 1984 and caused economic imbalance. Concerted efforts to reduce inflation thereafter have resulted in dramatic decreases, bringing the inflation rate to about 20% in 1986, to 10% in 1996, and to 7% in 1997. The study asserts that Israel’s economic history and economic picture of the mid-1990’s does not provide an accurate assessment of the country’s true growth potential. Hence, there is need for considering the country’s core competencies and key success factors in the form of intellectual capital that provides it with long-term advantage in terms of future growth and performance. Such core competencies are delineated in the form of market capital, process capital, human capital, and renewal and development capital. Market Capital: Market capital reflects the intellectual capital embedded in Israel’s relations with other countries. The intellectual assets in this area derive from a country’s capabilities and successes in providing attractive and competitive solutions to the needs of the international clients. Israel’s investments and achievements in foreign relations, along with its export of quality product and services significantly contribute to the intangible assets that comprise its market capital. Indicators of market capital include outgoing tourism, openness to foreign cultures, and international events and language skills. Such core capabilities create a basis for assessing the country’s attractiveness from the perspective of international clients. Providing Solutions to Market Needs: Given a dynamic business environment characterized by changing customer needs, a country’s capability in meeting such needs represents a competitive edge in the global marketplace. Israel is ranked among the top countries that are considered as having the fastest time for introduction of new products and services and their penetration in the market. International Events: The country’s level of participation in international events is an indicator of its strong desire for renewal as well its openness and willingness to gain knowledge. Given its high rate of participation, Israel is seen as having tremendous motivation to expose itself to new intellectual fronts. In addition, the high rate of hosting international conferences in Israel is an indicator of Israel’s attractiveness to business people from around the world. This indicator reflects the extent of Israel’s international openness and the increasing interest of international entities in Israel. Openness to Different Cultures: People’s desire to meet others, learn, see, broaden their horizons, and develop and renew themselves may be considered another indicator of its market capital. Such openness of Israel’s citizens toward different cultures constitutes an important channel of communication in learning about trends and needs in the global village. Language Skills: Knowledge of foreign languages alleviates problems of communications both in local culture and the global market. There is a realization in Israeli society that

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the willingness to learn languages contributes greatly to a country’s relations with other countries. Accordingly, Israeli schools are rated highly in professional teaching of foreign languages. Process Capital: This component represents the country’s intellectual assets that support its present activities, including sharing, exchange, flow, growth, and transformation of knowledge from human capital to structural capital. Such assets include information systems, laboratories, technology, management attention, and procedures. A nation’s longterm growth can be achieved if human capital is integrated within existing structural systems. Such integration through information and communication systems enhances the nation’s capability to anticipate and translate market needs into product and service applications. Information technology serves as a key tool for the production of high-quality products and services and the opening of access channels to new markets. Indicators of process capital include communications and computerization, education, agriculture, management, employment, development of service sector, and absorption of immigrants. Communications and Computerization: Strong communications infrastructure for domestic and international communications between the nation’s citizens and the rest of the world facilitate rapid exchange of information and its translation into knowledge inherent in innovative processes, products, and services. Some parameters that may be used for assessment of this indicator include communications and computerization infrastructure, extent of Internet use, circulation of daily newspapers, and extent of software use. • Communications and Computerization Infrastructure: An index of computer infrastructure that measured variables such as the number of PCs per capita and the number of PCs in homes and schools ranked Israel high among developed and developing countries. Similarly, an index of communications infrastructure that rates the level to which the communication infrastructure meets business organizations needs ranks Israel ahead of developed countries such as Germany, Japan, Belgium, and Italy. • Extent of Internet Use: Internet use makes it possible to rapidly share information and to communicate and collaborate even when isolated by geography and time zones. The report asserts that the extent of Internet use is also an important indicator for the assessment of a country’s effective management of knowledge. An index that measured extent of Internet use relative to population size ranks Israel high within the list of developed nations. • Circulation of Daily Newspapers: Per capita newspaper distribution is assumed to be another indicator of the level of knowledge sharing and involvement in the happenings around the world. According to a World Bank report, Israel ranks high on the list of nations with highest per capita newspaper distribution. • Extent of Software Use: The extent of software use reflects the level of knowledge sharing and the effort to turn human capital into structural capital. The extent of software use also serves as an indicator of the quality of the country’s current infrastructure that supports effective management of information and knowledge. An index based upon the relationship between the extent of expenditure for hardware and the extent of expenditure for software places Israel among the top ranks of developed nations. Education: Education enhances knowledge sharing and building and assimilation of mechanisms for the flow of knowledge in the society. Three indicators used for assessing Israel’s investments in education included student-teacher ratio (lower is better), PC-student ratio (higher is better), and freedom of expression in the school system. Based on available data and national surveys, Israel ranks high in all these criteria for assessment. Agriculture: In making transition from a developing country to a developed nation,

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Israel–like other developed nations–has shown greater focus on knowledge and servicebased industry with diminishing emphasis on agriculture. However, technological innovation in the agricultural sector has resulted in higher efficiencies resulting in higher agricultural worker’s added value. Management: The quality of management in a nation’s economy is an important determinant of the future health of its enterprises and long-term comparative advantage. Three criteria that were used in the study for assessing Israel’s intellectual capital included: top management’s international experience; entrepreneurship and risk-taking; and venture capital funding. • Top Management International Experience: International experience of management provides the country’s enterprises better ability for penetrating global markets and exploiting opportunities. • Entrepreneurship and Risk Taking: Government’s support in entrepreneurship and risk taking through financial support is necessary for technological innovation. Israel has championed such a program to support technological incubators for raising financing at an early stage when the technological idea is considered high risk for private sector funding. The high success rate of the magnitude of 56% of companies that graduate from the incubator stage for Israel compares favorably with other countries such as the USA, with a success rate of 10%. • Venture Capital Funding: A venture capital fund is an important basis for supporting entrepreneurship and in ensuring the success of start-ups. Israel has been successful in cultivating a number of hi-tech enterprises because of its infrastructure and venture capital funds, which invest in start-up companies. Employment: Israel owes its economic growth to its service industry that has enjoyed a high growth rate compared to other economic sectors. The financial and business sector, characterized by a relatively small number of employees and the application of advanced information and communication technologies, has been leading in production output among the various service sectors. Israel ranked high in the average annual growth rate of the service sector over the past decade or so, suggesting a greater share of experience and knowledge base in the nation’s economy. Also, Israel ranks high in computer skills among the developed nations, thus providing an indicator of superiority of the use of its information technologies. Development of the Service Sector: The trend of increasing percentage of commercial services based on the development of advanced and knowledge-based sectors is common among the developed nations. The high rate of growth of Israel’s service sector characterized by the GDP contributed by this sector, investments in R&D, high yield of invested capital, and productivity, wages and percentage of exports in this sector all point to growth in knowledgebased fields. Immigration and Absorption: Successful integration of highly skilled and professional immigrants is a key factor in the country’s ability to benefit from the immigration and its human capital. Sustained migration of high quality scientists and professionals into the economy of Israel and their successful absorption has resulted in consistent increase in the GDP. Human Capital: Human capital, as noted earlier, lies at the crux of intellectual capital. It constitutes the nation’s peoples’ capabilities reflected in education, experience, knowledge, intuition, and expertise. Human capital embodies the key success factors that provide a competitive edge in the past, present, and the future. The human capital is the most important component in value creation. However, due to the “soft” nature of these assets, it is often difficult to devise measures for many of them. As noted by Pasher (1999): “The analysis is especially complex when dealing with wisdom, intellect, experience, and knowledge. The

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attempt to assess wisdom or motivation ultimately differs from the quantitative evaluation of “hard” assets, such as the extent of personal computer use or the proportion of employees in R&D.” Despite the acknowledged difficulty of measurement of such assets, the study considers the following factors as key indicators of human capital. Education: This component is assessed in terms of percentage (and its growth) of students having, or working towards, advanced degrees (including certification studies); and the number of graduates and holders of doctorate degrees in fields considered fundamental for long-term growth–including computer sciences, life sciences, and engineering. Equal Opportunities: The study asserts that a country that grants equal opportunity for exploiting the citizens for wisely utilizing their inherent human resource generates greater human capital. The indicators that were used to measure this component included female students at institutions of higher education and women in the professional work force, two criteria in which Israel ranks strong among the developed nations. Culture: This factor was based on two indicators: number of published books per 100,000 inhabitants, and annual number of museum visits per capita. Health: Maintenance of good living conditions while guaranteeing the population a decent level of health was considered as important for maintaining the attractiveness of the nation for its citizens. Crime: A low rate of crime was considered as a positive correlate of human capital given lesser resources directed to fighting crime and more positive contributions to the society. Renewal and Development Capital: Renewal and development capital reflects the country’s desire and ability to improve and renew itself in order to progress. Early identification of changes in the dynamic business environment and their translation into business opportunities contributes to the nation’s future growth and performance. The six indicators used for this component of intellectual capital in the study included the following. • National Expenditure on Civilian R&D: Investments in civilian R&D are expected to facilitate incubation of innovative ideas and their translation into value-adding products and services that contribute to future economic growth. • Scientific Publications in the World: The extent of the scientific activity–represented in terms of scientific publications and the quality of that activity, in terms of citations by other scientists–are considered another indicator of the renewal and development capital. • Registration of Patents: In terms of per capita patent registrations, Israel ranks high among developed nations. • Work Force Employed in R&D: Human capital in technological fields is considered as Israel’s most important success factor. • Start-up Companies: The study reports that Israel has the third largest concentration of start-up companies in the world, led only by the Silicon Valley and the Boston area. • Biotechnology Companies: Considered as one of the industries that represents progressiveness of a country’s scientific and technological progress, the biotech sector represents another indicator for renewal and development capital. This is an area of emerging growth for Israel.

Synopsis of Israel’s Intellectual Capital Assessment The reported study and its assessment of national intellectual capital of Israel represented an initial attempt at presenting a holistic and organized picture of the knowledge and

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intellectual assets of a country. The distinction between financial capital and intellectual capital was underscored to suggest that while the former is a reflection of the country’s past progress and achievements, the latter provides a more accurate depiction of future growth and performance. The expectation from the study was that the report will be used by government and other policy makers to upgrade tools for exploiting knowledge to accelerate the process of long-term economic and social growth. In addition, the focus on intellectual capital, and its key components and indicators, brings into perspective key areas in which the country has growth potential. As noted by the investigators, the national intellectual capital balance sheet needs to be updated every year with reassessment of the key success factors and related indicators.

DISCUSSION AND ISSUES FOR FUTURE RESEARCH The reported study used specific indicators of the various components of intellectual capital that represent critical success factors pertinent to long-term future success and growth. However, such indicators may vary across different nation states depending upon their specific national economic strengths in the global market. Also, the case study discussed one popular method for assessment of national intellectual capital and illustrated its application. This doesn’t imply that there is only one method that may be used for such assessment. There are diverse methods that have been applied for the assessment of intellectual capital at the level of business enterprise, and they may be extrapolated to similar assessments at the level of nations and countries (see for instance, Society of Management Accountants of Canada, 1999, for a review of some of these methods). For national policy makers who plan to do intellectual capital assessment for their national economies, another document of interest would be the Netherlands Government’s Ministry of Economic Affairs pilot project, “Balancing Accounts with Knowledge” that provides comparison between methodologies used by four different accounting firms (Government of Netherlands Ministry of Economic Affairs, 1999). While the presented framework of intellectual capital and the illustrative case study have merit in communicating these issues to information professionals, however, they also raise important issues for advancing the research and practice in information systems. From the perspective of information professionals and researchers interested in strategic, organizational and behavioral issues, such issues provide venues for advancing understanding of knowledge assets and intellectual capital. The following discussion provides a brief synopsis for such issues for future research.

Information, Knowledge, and Performance Several practitioners and researchers have acknowledged that tacit knowledge is a key component of intellectual capital. However, the superficial distinctions between data, information, and knowledge are often criticized, as one person’s data could be another person’s knowledge. Or, to put in one such critics’ terms (Stewart, 1997): “Knowledge exists in the eye of the beholder.” Does this imply that information professionals and researchers can do nothing about management of knowledge assets or intangible assets? Not necessarily so! As noted earlier, knowledge assets, like money or equipment, exist and are worth

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cultivating only in the context of strategy. Or, keeping in perspective the (future) outcomesdriven focus of intellectual capital, rather than focusing upon information or information technology, one needs to focus upon “what gets done” with that information. This shift in perspective would certainly bring the focus closer to performance that is the key motivation for investments in information and technology. Although one person’s data may be another person’s knowledge, that distinction may spell the difference between effective use, misuse, abuse or non-use of information. Hence, it is important to understand why the same information often results in different actions (or inactions) when processed by different individuals. Seminal work in this area done by Malhotra and Kirsch (1996), Malhotra and Galletta (1999), and Malhotra (1999) could serve as a basis for developing further understanding for relating information and knowledge to performance.

Taking a Hard Look at the “Soft Issues” Human capital lies at the crux of intellectual capital. It is embedded in capabilities, expertise, and wisdom of the people and represents the necessary lever that enables value creation from all other components. Several practitioners and researchers have acknowledged that human capital, often characterized by “soft” issues such as individual motivation and commitment, is difficult to measure. The same assumption has often resulted in use of inappropriate surrogates for such “soft issues.” Given the relevance of such soft issues, it is the author’s recommendation that researchers and practitioners need to develop more rigorous measures of such constructs. Seminal work done by Malhotra (1998) that has tried to develop “hard” measures for such “soft” issues in the context of effective use of information systems could provide a base for developing better understanding of human capital. Based on this work, one may argue that many published accounts have incorrectly assumed that “organizational capital” is what remains after the employees “go home.” Based on existing research on motivation, compliance, and commitment, one may argue that many employees may be on the job, but they may still be “at home,” while others may telecommute from home and yet may contribute more to the human capital. In essence, given the increasing importance of knowledge work, the post-industrial concepts of organization and work need to be reconsidered in the same hard terms of “outcomes” and “performance.”

Intellectual Capital Entangled with Networked Systems Several popular accounts of the intellectual capital framework, including the one discussed in this article, have taken a simplistic view of the role of information systems. For instance, many such accounts have assumed that information systems, hardware, software, and databases form a part of the structural capital or process capital. However, it is the author’s argument that given the new networked economy, the advent of “free agents” and “knowledge intrapreneurs” (Malhotra, 2000d), individual education, knowledge, and experience are more related to personal pursuits than related to quality of life. In essence, as the new workers empower themselves by appropriating the networked technologies, they assume self-control and self-leadership for their own development regardless of their affiliation with a “closed” concept of an organization or a nation. In other words, they become denizens of the global electronic village. Similarly, with increasing automation, production processes become increasingly efficient: however, the ability to produce as such does not generate sufficient market differentiation. The focus shifts more towards excellence in marketing, product development, quality assurance, and customer management as evident from the more recent popularity of e-

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business issues such as customer relationship management, supply chain management, and selling chain management (Kalakota and Robinson, 1999). The role of knowledge management and information systems in developing new market niches, creating and distributing innovative products, and ensuring “stickiness” of “portals” by cultivating the loyalty of customers has also been recognized (cf: Malhotra, 2000c). Hence, information and communication systems also become a key part of the market capital as well as the renewal and development capital with increasing “virtualization” of the products, processes, and the delivery agents (Turban et al., 1999). As suggested by existing research in information systems, investments in information technologies may not necessarily correlate with increases in performance (Brown, 1996; Strassmann, 1997). Hence, in all such contexts, the emphasis should not only be on investments in relevant technologies, but effective utilization of such technologies. A large number of desktops or PCs may not necessarily correlate with higher performance in terms of outcomes. In other words, the concept of “intellectual capital” is based on the notion of “intangible assets”; however, many of the indicators seem to be grounded in the world of “tangible assets.” For instance, use of an indicator such as per capita distribution of newspapers needs to be reassessed given that such information is not a “scarce good” but an “abundant product.” Those not subscribing to any print-based publications may be using more updated and multifarious push- and pull-based channels—many of which are free—for remaining on top of what is important and relevant to them. Similarly, the number of scientific publications and citations as an indicator needs to be assessed in terms of its relevance as an indicator in terms of “real outcomes” in the form of economic growth or performance. As has been demonstrated by many authors (Kealey, 1996; Sobel, 1996) there is convincing evidence that the new knowledge (and its economic value), generated in the cause of technological or application-oriented research, far outweighs that of basic research. The latter is the subject of publications, while the former is not. As peer recognition is traditionally based on the number of publications and citations, the wrong conclusion is inevitably drawn that basic research adds more to the body of knowledge than technological or application-oriented research.

CONCLUSIONS Transition of most developing and developed nations to knowledge economies has resulted in an increasing awareness of “knowledge” as a key lever for economic growth and performance. Despite increasing importance of knowledge as a factor of production, most accounting systems are still based on the traditional factors of production. While accountants have been trying to determine how to capitalize the knowledge assets captive in the minds of the human employees, information system designers have been attempting to capture those assets into technology-based databases and programmed logic. The article discussed the framework for developing an understanding of intellectual capital and knowledge assets and provided an illustrative case study of a nation state that has applied this assessment method. The framework of intellectual capital—popularized by a Swedish company, Skandia—was described and then illustrated through its application for national intellectual capital assessment for Israel. In an attempt to bridge the gap between the accountants and the information resource management practitioners and researcher, some caveats were observed. These caveats were explained in the discussion as points deserving attention in future research and practice. One important issue that was not discussed in the

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article is that of fundamental and radical change that requires ongoing reassessment of all given models, frameworks, premises, and assumptions. This issue is discussed in detail elsewhere (Malhotra, 2000c). Such dynamic radical and discontinuous change seems to have significant implication about the stability of the models and frameworks that are based on a static view of the business environment.

REFERENCES Brown, J. S. (1996-1997). The human factor. Information Strategy. Edvinsson, L. and Malone, M. S. (1997). Intellectual Capital. New York: Harper Collins, 5. Government of Netherlands Ministry of Economic Affairs Directorate-General for Economic Structure Technology Policy Department. (1999). Balancing Accounts with Knowledge, VOS number 25B 19a, The Hague, Netherlands, October. Available in pdf format from http://info.minez.nl. Hope, J. and Hope, T. (1997). Competing in the Third Wave, 12. Boston, MA: Harvard Business School Press. Kalakota, R. and Robinson, M. (1999). e-Business: Roadmap for Success. Reading, MA: Addison Wesley. Kealey, T. (1996). The Economic Laws of Scientific Research. New York: St. Martin’s Press. Malhotra, Y. (2000a). From information management to knowledge management: Beyond the ‘hi-tech hidebound’ systems. In Srikantaiah, K. and Koenig, M. E. D. (Eds.), Knowledge Management for the Information Professional, 37-61. Medford, NJ: Information Today, Inc. Malhotra, Y. (2000b).Knowledge management and new organization forms: A framework for business model innovation. Information Resources Management Journal, 13(1), 5-14. Malhotra, Y. (2001c). Knowledge management for e-business performance: Advancing information strategy to “Internet time.” Information Strategy: The Executive’s Journal. Malhotra, Y. (2001d). Information ecology and knowledge management: Toward knowledge ecology for hyperturbulent organizational environments. In Kiel, D. L. (Ed.), UNESCO Encyclopedia of Life Support Systems (EOLSS) theme Knowledge management, Organizational Intelligence and Learning, and Complexity. Malhotra, Y. (1999). Bringing the adopter back into the adoption process: A personal construction framework of information technology adoption. Journal of High Technology Management Research, 10(1). Malhotra, Y. (1998). Role of social influence, self determination and quality of use in information technology acceptance and utilization: A theoretical framework and empirical field study. Ph.D. Thesis, July, Katz Graduate School of Business, University of Pittsburgh. Malhotra, Y. and Galletta, D. F. (1999). Extending the technology acceptance model to account for social influence: Theoretical bases and empirical validation. In the Proceedings of the Hawaii International Conference on System Sciences (HICSS 32) (Adoption and Diffusion of Collaborative Systems and Technology Minitrack), Maui, HI, January 58. Malhotra, Y. and Kirsch, L. (1996). Personal construct analysis of self-control in IS adoption: Empirical evidence from comparative case studies of IS users and IS champions. In the Proceedings of the First INFORMS Conference on Information Systems and Technol-

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ogy (Organizational Adoption & Learning Track), 105-114. Washington D.C., May 5-8. Pasher, E. (1999). The Intellectual Capital of the State of Israel: A Look to the Future–The Hidden Values of the Desert. Israel: Herzlia Pituach. San Jose Mercury News. (2000). Presidential visit marks India's clout: Clinton to push economic ties, reforms, February 22. Available on the World Wide Web at: http://www.mercurycenter.com. Sobel, D. (1996). Longitude. London: Fourth Estate Limited. Stewart, T. (1995). Trying to grasp the intangible. Fortune, October 2. Stewart, T. (1997). Intellectual Capital: The New Wealth of Organizations. New York: Doubleday. Strassmann, P. A. (1997). The Squandered Computer: Evaluating the Business Alignment of Information Technologies. New Canaan, CT: Information Economics Press. The Society of Management Accountants of Canada . (1999). Measuring knowledge assets (Management accounting guideline focus group handout). Tanaszi,M. and Duffy, J. (Eds.). Toronto, Ontario, Friday, April 16. Turban, E., Lee, J., King, D. and Chung, H. M. (1999). Electronic Commerce: A Managerial Perspective. Upper Saddle River, NJ: Prentice Hall.

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Chapter XXII

The Nature of E-Loyalty in B2C E-Commerce Daniel Tomiuk and Alain Pinsonneault McGill University, Canada

The present chapter discusses the nature of e-loyalty in B2C e-commerce. Based on previous theoretical work on loyalty in traditional commercial settings, we argue that highly affective forms of loyalty are unlikely to develop in online environments. Rather, we suggest that the e-commerce environment promotes self-sufficiency and mitigate the need for customer/employee interaction which represents a primary source of affect. Research on relationships in both social psychology and marketing suggests that this loss may not affect all customers equally. We distinguish between customers who value establishing interpersonal relationships with company employees (communally oriented) from customers who see customer/employee interactions as utilitarian and who derive little social benefits from such encounters (exchange oriented). The chapter suggests that online environments may be seen as useful by communally-oriented customers but relationally unsatisfying. Conversely, there exists a good “fit” between what exchange oriented customers value in their relationships with companies and what online environments offer. Consequently, online companies should not be surprised to find that e-loyal customers may be predominantly exchange oriented. Finally, we argue that because e-loyalty lacks a strong affective foundation, it may be less enduring than “traditional” customer loyalty. Implications of our analysis and areas for future research are discussed.

INTRODUCTION Self-service information technology (SSIT) allows companies to sell products or provide service without the aid of employees and include such technologies as automatic teller machines, commercial Web pages, and online ticketing services. Apart from a few studies (e.g., Globerson & Maggard, 1990; Dabholkar, 1996), empirical research on how SSIT environments affect customer attitudes, behaviors, and evaluations of their retail and service experiences has, in the past, received relatively little attention. Work directly addressing how these environments can affect customer loyalty has been even scarcer (e.g., Barnes et al., 2000). This lack of interest on the part of the research community is not surprising given that, Copyright © 2002, Idea Group Publishing.

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until the mid-1990’s, the implementation of self-service technology was mostly concentrated in specific industries (e.g., ATMs in banking) and that the large majority of archaic SSIT environments had limited graphical and transactional capabilities, and simply supplemented more traditional means of service delivery and retailing which continued to rely primarily on direct contact between customer/front-line personnel. Today, ongoing design improvements to Web pages allow for greater interactivity. These represent much richer environments, enabling a broader range of services and transactions to be effectively handled. Essentially, for companies the Internet represents a cost effective means to offer customers a more personalized and customizable service/shopping experience with little or no employee support when realizing a sale or during service provision. The growth and popularity of the Internet has been phenomenal. Worldwide, current estimates set the number of users at well above 300 million and rapidly growing. Predictions suggest that by 2005, this number should rise to more than 1 billion with about three quarters of users situated outside of North America. In 2000, in the U.S. alone, 44 percent of businesses sold goods and services via the Internet and online sales. In 2001, an additional 36 percent was added to this number. Online sales went from $25 to more than $37 billion between 1999 and 2000 while online revenues are expected to reach $233 billion by 2004. In fact, the number of Americans who will purchase something online is expected to reach 77% of the population by 2003, and each American’s yearly average of online purchases is expected to be around $1000 (ITTA, 2000). Although North America currently leads the ecommerce revolution, other continents are catching up. In Asia, for instance, the number of Internet users (and potential shoppers) will likely surpass that of both North American and European markets combined by 2003 (ITTA, 2000). The popularity of online retail and service environments is not surprising. These offer both customers and companies several advantages. For customers, SSITs offer increased availability of services (better location, time), increased customization, and more control over the realization of the service and product purchase (Eastlick, 1996; Meuter et al., 2000; Zeithaml, Parasuraman & Malhotra, 2001). For companies, providing services online can allow them to more easily reach a greater number of consumers, thus increasing their customer base. Several companies also realize significant cost savings through improved efficiency such as more effective supply chain management practices and the ability to service their customers more cost effectively. In fact, it is estimated that, by 2002, companies worldwide will have realized $1.25 trillion in savings by moving their operations online (ITTA, 2000). As companies and customers embrace online retail and service environments in everincreasing numbers, an important question arises: are these self-service environments more, less, or equally auspicious to building customer loyalty? To address this question, researchers need to (1) understand what is loyalty and (2) understand how employees contribute to the development of customer loyalty. The latter is particularly significant given, that SSITs promote self-sufficiency and mitigate the need for employee/customer contact. This chapter draws upon an article previously published in the Journal of Global Information Management (Tomiuk & Pinsonneault, 2001) pertaining to loyalty in e-banking environments. Our aim is to provide the reader with an understanding of loyalty and how it may be affected when customers use SSIT environments. We begin by exploring the organizational benefits associated with loyalty to establish the importance of the question addressed. We then look at the various conceptualizations of loyalty. Instead of being one state, recent work on loyalty (Oliver, 1999) postulates that loyalty encompasses several. These different loyalty states are believed to vary in strength and endurance, the weakest being founded strictly on the performance of the company and includes little if no affective

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base. As the affective forces increase, the more enduring loyalty becomes. In fact, the strongest forms of loyalty may occur when customers have strong emotional and affective ties to the company and its people. In particular, the bonds which develop between customers and employees may represent a very powerful factor explaining customers’ decisions to remain with a company. Because interpersonal bonding is unlikely to occur in online environments, some authors suggest that it may be very difficult for loyalty to develop in online environments (Barnes et al., 2000), while others suggest that online loyalty is possible but that it may be a weaker and much less enduring form of loyalty than that typically encountered in more traditional commercial settings (Tomiuk & Pinsonneault, 2001). Our analysis is followed by a discussion.

THE BENEFITS OF LOYALTY The study of loyalty in online environments is of prime importance to companies. In traditional environments, loyalty provides organizations with major benefits, including postpurchase consumer advocacy (i.e., positive word of mouth) (Reichheld, 1996; Zeithaml, Berry & Parasuraman, 1996); decreased search motivation (Holbrook, 1978); a greater resistance to counter-persuasion (Wood, 1982); an increase in the frequency of purchases (Reichheld & Sasser, 1990); and for companies with loyal customers, it translates into having more time to respond to competitors’ actions (Aaker, 1991). These benefits often lead to lower costs, additional revenues, and better organizational performance (e.g., Anderson & Sullivan, 1990; Fornell & Wernerfelt, 1987; Reichheld & Sasser, 1990), such as increased firm profitability (Heskett, Sasser & Hart, 1990). Loyalty reduces marketing costs because retaining customers costs less than attracting new ones. It may be five times more costly to attract customers than it is to retain them. By increasing retention by five percent, profits may go up by, up to, 100% (Reichheld & Sasser, 1990). Loyalty lowers transaction costs (i.e., time and cost of negotiation) and increases the possibility to cross-sell products and services (Griffin, 1996). Also, a relationship between loyalty and cost savings may be due to experience curve effects. Organizations serve their long-term customers more efficiently (Reichheld & Sasser, 1990). Regular customers understand how the organization operates and are familiar with its processes; consequently, they place less demands on employees (Chow & Holden, 1997). Furthermore, loyalty keeps customers away from competitors, and the moneys saved by dealing with loyal customers can be reinvested into improving products and services (Griffin, 1996). Although several of the benefits associated with loyalty are financial, many are intangible. One the most important benefits of loyalty may be the customer’s willingness to voice dissatisfaction and give the company the time necessary to respond and improve on its shortcomings instead of immediately exiting the relationship (Czepiel & Gilmore, 1987).

CONCEPTUALIZATIONS OF LOYALTY Conceptualizations of customer loyalty have been equivocal. To many authors, it represents a consistent and repetitive behavior. Companies classify customers as loyal when they buy repeatedly over some period of time. Others suggest that it is akin to a psychological state. Still others argue that it is a combination of both attitude and behavior. According to the behavioral perspective, loyalty has been defined as a customer’s tendency to continue to exhibit similar purchasing behaviors over time in similar situations

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(Reynolds, Darden & Martin, 1974; Newman & Werbel, 1973; Tellis, 1988; Massey, Montgomery & Morrison, 1970). Building loyalty is synonymous with making it difficult and expensive for customers to leave by introducing switching costs (Jackson, 1985). Strategies such as loyalty programs (Sharp & Sharp, 1997), for instance, “reward” repeat purchasing behavior through the giving of points, prizes, discounts, coupons, or other incentives. Thus, customers do not switch because, if they do, they lose out on these accrued benefits. Because customers do not switch, companies tag them as loyal. Several authors have criticized behavioral conceptualizations of loyalty as failing to capture its richness and depth (Too, Souchon & Thirkell, 2001) and have stressed the importance of considering the attitudinal processes occurring within the customer’s psyche (e.g., Day, 1969; Lutz & Winn, 1974). Accordingly, behavior alone cannot successfully differentiate whether a customer buys from the company because (a) he/she truly wants to, (b) because no alternative exists, or simply because (c) because the customer perceives little, if no, difference between alternatives (Assael, 1992). As such, purely behavioral conceptualizations of loyalty tend to overestimate loyalty because the motivation behind the behavior is left unexamined, and often “customer indifference” and loyalty become confounded (Huang & Yu, 1999). To address these limitations, some conceptualizations of loyalty take into account whether customers hold positive and strong internal dispositions toward the particular brand or store (e.g., Jacoby & Chestnut, 1978; Griffin, 1996). Customers are not loyal simply because they continue buying the same product or patronizing the same store, but rather, loyalty stems from an evaluative and decisional process. Simply put, loyalty includes attitudinal bias (Wernerfelt, 1991). Building on the early work of researchers which advocated the importance of considering customer attitudes (Jacoby & Chestnut, 1978; Day, 1969), Dick & Basu (1994) conceptualize brand loyalty as a composite construct of both relative attitude and patronage behavior. They define it as the strength of the relationship between the customer’s attitude towards the target relative to available alternatives and repeat patronage behavior. High relative attitude signifies that a customer strongly prefers a particular alternative compared to others. The authors’ model is presented in Figure 1. Dick and Basu’s (1994) conceptualization of loyalty led the authors to suggest that “true loyalty” ensues only when high relative attitude (a preference) is accompanied by high repeat patronage. “Spurious loyalty” emerges when the customer perceives little difference between alternatives (i.e., relative attitude is low) but purchases a brand more consistently than others (i.e., repeat patronage is high), a condition previously described as “customer indifference” (a.k.a., customer inertia). “Latent loyalty” is categorized by high relative attitude but low repeat patronage and may occur when situational and social factors intervene strongly and counter the effects of high relative attitude on behavior. Finally, under conditions of “no loyalty,” both relative attitude and repeat purchase behavior are low. The model suggests that relative attitude acts as a mediating variable between cognitive, affective, and conative forces and repurchase behavior (see Figure 1). Cognitive factors represent the customer’s “thinking states.” These relate to mental appraisals. Although the authors discuss cognitive antecedents from a micro-perspective (e.g., ease with which the attitude can be retrieved from memory, level of certainty associated with the attitude, how central the attitude is to the customer), from a macro perspective, popular conceptualizations of quality of service (e.g., SERVQUAL)1 fall into this category. Customers’ evaluations of quality of service are generally believed to stem from a mental comparison; the gap between what the customer expects to receive prior to the service experience and the level of service quality actually experienced. Good quality appraisals raise the customer’s relative attitude toward the service provider.

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Figure 1: Dick and Basu’s (1994) framework suggesting that loyalty is the relationship between relative attitude and repeat patronage

Cognitive Antecedents Loyalty Relationship

Affective Antecedents

Relative Attitude (High / Low)

Repeat Patronage (High / Low)

Conative Antecedents Social and Situational Constraints

Affective antecedents or factors represent “feeling states” and include primary affect, emotion and mood.2 A well-established affective antecedent to loyalty is “satisfaction” (e.g., Newman & Werbel, 1973; Bolton, 1998; Bolton & Lemmon, 1999; Fornell et al., 1996; Jones & Sasser, 1995; La Barbera & Mazursky, 1983; Gilly & Gelb, 1982). It represents how the customer feels following a service encounter or product purchase (Oliver, 1980). Whereas attitudes founded on cognitions can be considered as “cold,” stemming from a mental, calculative process, attitudes founded on affect can be thought of as “warm” and based on more holistic sensory experiences. Certain antecedents of loyalty, such as trust,3 do not cleanly fall into either cognitive or affective categories. Trust is linked to the consumer’s recognition that a certain level of risk and uncertainty prevail (Sheppard & Sherman, 1998; Lewicki et al., 1998) but represents a psychological rather than a contractual means of moderating this risk. Trust is a futureoriented “belief” based on consistency observed in the past (Anderson & Weitz, 1989). It is a multidimensional concept and can be both cognitively–and affectively–driven (McAllister, 1995). The first touches on credibility of the exchange partner, the second on his/her benevolence (Ganesan & Hess, 1997). Whereas the former is based on technical competence, the latter is more closely related to “goodwill” (Baba, 1999). Conative factors are related to customers’ behavioral dispositions. These include past behaviors and the consequences associated with discontinuance or switching. Included are prior customer investments (i.e., sunk costs associated with paid memberships, time invested in learning a new software) and switching costs (e.g., the potential investment in time and effort needed to familiarize oneself with a competitor’s way of doing business). Moreover, while Dick and Basu (1994) suggest that relative attitude drives repeat purchases (i.e., high/high and low/low conditions), they recognize that non-attitudinal pressures may also explain buying behaviors. Social norms and situational factors may moderate the strength of the relative attitude/behavior relationship. For instance, social

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pressures (e.g., parental disapproval) can be highly influential in predicting the purchases of teenagers, and situational pressures, such as store proximity, can also affect what stores customers frequent regardless of the customer’s attitude. For example, in traditional banking environments, proximity to home/work and operating hours have been identified as being central reasons dictating what bank customers choose (Rust & Zahorik, 1993). Only when relative attitudes are high should companies consider customer purchasing behaviors as indicative of loyalty. The authors’ conceptualization, however, raises the possibility of interpreting as loyal certain situations of high relative attitude/high repeat purchasing that may, at least intuitively, seem uncharacteristic of loyalty. It suggests that relative attitude may indeed be very high even when the customer’s attitude toward the actual target remains weak (i.e., a conceivable situation if the customer perceives all competitors’ offerings very unenthusiastically). Such a situation may inflate relative attitude considerably and trigger repurchasing, but should this be considered as loyalty? Although relative attitude and repeat purchases may be high, the customer may not feel any kind of attachment toward the product, store, brand, etc. Instead, several authors have stressed the importance that the customer’s attitude must reflect a positive bias towards the actual target. Rather than conceptualizing loyalty in terms of consistency (or strength) between attitude and behavior, they suggest that loyalty is, in fact, a form of psychological resolution, a decision, something which occurs in the customer’s mind. Some authors speak of a sense of loyalty developing in customers (Pritchard et al., 1999). Here, loyalty is seen as a form of “psychological attachment” that the customer feels toward a product, a brand, a service provider, etc. It is a conscious decision to shun away from competitors. Regular and frequent purchases are merely its physical manifestations.4 Recent work on brand loyalty by Oliver (1999) may help address several conceptual inconsistencies. Accordingly, instead of considering loyalty as one unequivocal concept, the author argues that it is best understood as including several transitional states and customers as migratory beings. In its least enduring form, loyalty is based solely on relative performance of the object (e.g., a brand, a store). This can include such factors as better pricing and reliable service delivery. Here, the consumer may not particularly like the product more than others, but he might like its price or convenience. This may be sufficient to trigger a positive but weak attitudinal bias, and repeat purchasing may result. Oliver (1999) refers to this as “cognitive loyalty.” Positive attitude is generated directly from a (rational) cost/benefit analysis of brand attributes, rather than an affective preference for the actual brand. Satisfaction derived from actually consuming the brand, however, may not even be processed. In the context of services, this form of loyalty can typically be found in such industries as long distance telephone service providers. All else being equal, up until the service provider does not deviate from performance expectations, the customer may have no real reason to become dissatisfied and possibly switch. This represents loyalty’s most shallow state. Although the customer’s behavior may be founded on an attitudinal bias (i.e., a preference), this attitude may not be very enduring or stable, but rather, may be quite easily dislodged by competitors. Because it is cognitively driven it remains subject to counter argumentation. For example, if the customer continuously buys a particular product because it is more convenient or lower priced, competitors may target these attributes by providing even more convenience at a lesser price, inducing the customer to switch. At higher stages of loyalty, attitude begins to be affected by cumulative “satisfying usage occasions,” and liking extends to the actual brand (rather than towards such attributes

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as price). Loyalty begins to take on affective overtones. Pleasure derived from consuming the brand (or experiencing the service) begins to factor into the customer’s attitude. As such, weaker forms of loyalty are cognitively driven and can be easily dislodged while loyalty founded on affect is more enduring. In its more powerful and durable forms, loyalty is anchored in higher affective forces created by social and emotional factors. For instance, the creation of a community-like structure around the consumption of the product or service may shift the customer from a state where consumption is based on mere liking/enjoyment to one where the consumption of the product, service, or brand is socially embedded and may even become part of one’s self-identity (e.g., I only drink Coke). The stronger the affective/ emotional aspects surrounding consumption, the more the customer willingly shuns away from alternatives.5 Oliver’s analysis of “brand loyalty” clearly suggests that it may evolve into a relational phenomenon. This perspective has also been suggested by several other authors (e.g., Chow & Holden, 1997; Sheth & Parvatiyar, 1995; Macintosh & Lockshin, 1997; Fournier & Yao, 1997) who speak of “bonds” developing between customers and companies and their employees which may act strongly and positively on customer retention (Buttle, 1996). Loyalty is described in terms of relational qualifiers using language more often found in studies of interpersonal relationships (e.g., friendships, marriage). As such, loyalty is often described as synonymous to a relationship built on “trust” and “commitment” between the customer and the company (e.g., Bowen & Shoemaker, 1998), a form of psychological allegiance, and a “pledge” of relational continuity (Dubé & Maute, 1998). Some refer to loyalty as a deeply held commitment to consistently continue buying a preferred product or service regardless of situational influences and the marketing efforts of competitors (Oliver, 1997, 1999; Morgan & Hunt, 1994; Sheth & Pravatiyar, 1995).

CUSTOMER/EMPLOYEE INTERACTIONS AND LOYALTY According to Oliver (1999), the weakest form of loyalty is cognitively driven, founded on economic and rational judgment and based primarily on performance. In more resilient forms, affective and emotional factors prevail, and loyalty becomes more difficult to dislodge by competition. Research suggests that retail and service environments dominated by interpersonal interaction may summon strong relational feelings leading to these powerful and more enduring forms of loyalty. Customer/employee interactions impact on loyalty for several reasons. On the one hand, employees epitomize the company in the eyes of the customer. Employee behaviors and performance reflect directly on perceived quality of service,6 customer satisfaction (Bitner, Booms & Tetreault, 1990), and may be an important factor contributing to building customer loyalty (Berry, Zeithaml & Parasuraman, 1990). Findings show that, for businesses that deliver services in interactive encounters, personalization is one of the most significant factors affecting customer perceptions of quality of service (Mittal & Lassar, 1996).7 Moreover, several researchers acknowledge that cumulative positive encounter experiences may also induce relational bonds to develop between customers and employees. Not only do long-term employees who are “rooted in the community” get to know who the best customers are which may add greatly to the company’s ability to focalize on specific, loyaltyprone customers, but these employees may also impact positively and directly on customer loyalty because they form emotional bonds with customers (Kandampully, 1998). Certain

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service encounters may, in fact, become very similar to a meeting among friends (Price & Arnould, 1999). Meetings between customers and employees may be enjoyable, and a “personal connection” may actually develop (Gremler & Gwinner, 2000). These interpersonal bonds evoke affect and may have powerful effects on customer satisfaction and trust and even discourage customers from seeking alternatives (Buttle, 1996; Berry, 1995; Cann & Sumrall, 1997).

LITERATURE ON E-LOYALTY Although the scholarly literature pertaining to the development of customer loyalty in SSIT environments is still meager, authors’ speculations regarding whether loyalty can develop in SSIT environments are diverging. Some suggest that a company’s ability to build customer loyalty may be lost when employee disintermediation occurs (e.g., Barnes et al., 2000), while others often describe how relationship building tactics may be used online and help build loyalty in SSIT environments. When compared to SSIT research based on such technologies as telephone banking and ATM technology, Web pages may offer a much richer and more enticing environment than that which was provided by the sterile interfaces of early SSITs allowing for greater personalization and customization. Authors who suggest that loyalty may suffer in SSIT environments acknowledge that SSIT environments provide some value to customers which may contribute to customer satisfaction (e.g., convenience, reliability, feelings of increased control) but that, at the same time, these environments often depersonalize the commercial experience (Prendergast & Marr, 1994) and create feelings of anonymity in customers because of the accompanying loss of personal contact (Moutinho & Meidan, 1989). In fact, companies often implement these technologies because they represent a cost effective means of delivering services. In exchange, the customer is believed to benefit from this arrangement because it offers him/ her a means of experiencing each encounter in a very convenient, reliable, and consistent manner. However, by reducing or completely eliminating interpersonal contact, companies may be unknowingly riding themselves of an important source of “affect” when doing away with interpersonal contact, a facet of service provision which, in fact, may play an important role in fostering loyalty (Barnes et al., 2000). These environments provide customers with little more than access to core services (e.g., using an ATM to withdraw money), access to support services (e.g., account information), and this, in a very efficient, consistent, and timely manner which provides the customer with technical performance. Although these value-adding aspects are maximized, the organization must often forego on its ability to manage the affective/emotional component of the service encounter.8 When contact occurs only through technology, the relationship which develops between the customer and the company may be much more superficial (Howcroft & Lavis, 1986), based on performance alone, and the customer is much less likely to feel loyalty toward the organization (Barnes et al., 2000). Alternatively, an increasing body of literature regarding whether loyalty is achievable in SSIT environments pertains primarily to Internet-based SSITs. Although there has been very little empirical research done pertaining to loyalty in online environments, several authors do suggest that it is, indeed, possible to achieve but that it entails more than simply an investment in technology. This begins with designing Web pages that are easy/intuitive to use and creating a service environment where companies are responsive to customer needs (Zeithaml, Parasuraman & Malhotra, 2001; Turban et al., 2000). Companies that go online often

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invest heavily into the technology itself and try to enhance the customer’s online experience. However, these technologies cannot correct for bad service practices (e.g., not answering customer email inquiries). Research shows that only about a third of online customers are actually satisfied when purchasing online; about the same amount of online purchase attempts actually result in failure, which disappoints customers (Zeithaml, Parasuraman & Malhotra, 2001). As such, there is room for improvement, and companies can capitalize on the shortcomings of online competitors (Law & Leung, 2000). Furthermore, although authors such as Bakos (1997) show that online environments (i.e., electronic marketplaces) increase competition because they lower customer search costs which makes switching easier, arguably, there is much consumer concern (e.g., security, privacy, and trust issues) regarding online commercial environments. Whereas online environments may, indeed, make switching from one online company to another easier (competition is a couple of mouse “clicks” away), the uncertainty associated with switching to an unfamiliar online retailer may also be perceived as significantly high. Some authors also argue that repeated experiences with a particular shopping environment (be it traditional or online) may contribute to customer retention by actually lowering “cognitive costs” relative to alternatives (e.g., users become familiar with the layout of a Web page). Simply put, familiar stores or Web pages are easier to shop and navigate. This familiarity effect may very well contribute to loyalty (Johnson, Lohse & Mandel, 1999) because customers may not be willing to spend the time needed to adequately explore and familiarize themselves with competitors’ store or Web page layouts. As such, although search costs may be reduced, several conative factors (i.e., prior investments) may deter customers from switching. These also include traditional relationship building tactics, such as personalization and customization, which have been adapted to the online commercial medium with the use of database technology (Goldsmith, 1999). Both have been advocated as a means of fostering customer loyalty by establishing meaningful one-to-one relationships with customers (e.g., Riecken, 2000). Online personalization may help to recreate part of the personalized attention provided by employees in traditional services encounters (Wells & Wolfers, 2000). It often requires registering at the site and then repeatedly using the Web page so that a customer profile can be established. Personalization consists of using such things as “cookies”; or small files deposited on the customer’s computer containing his/her personal information. This acts as an identification tag when the customer returns to the site during subsequent visits. Not only can customers be greeted by name when reaching the service provider’s site, but customer profiles can be build with the use of database technology by cumulating user information from previous sessions, analyzing it, and then targeting the customer’s individual needs by displaying, during future visits, particular information which the customer may deem as valuable (Roth & Van Der Velde, 1989; Goldsmith, 1999). Another such value-adding tactic is customization, which refers to the technology’s flexibility in offering, to each customer, the ability to configure the interface to one’s liking by adapting the “look and feel” and content of the page, thus, allowing the customer to experience a much more individualized retail or service environment.

THE NATURE OF E-LOYALTY In accordance with Oliver’s (1999) work, the seemingly conflicting analyses as to the development of loyalty in SSIT environments may be reconcilable. Although Barnes et al. (2000) do not define what they mean by loyalty, given their arguments, one can assume that they consider it as a form of attachment and adopt a narrower, more relational interpretation

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of the concept.9 When taken in perspective to Oliver’s (1999) stage model of loyalty, the criticism postulated by Barnes et al. (2000) does not, however, reject the possibility of loyalty developing in SSIT environments. Instead, a reader may reinterpret their arguments to suggest that SSIT environments are more likely to elicit less enduring forms of loyalty ranging from “cognitive loyalty” (based on performance aspects) to weaker forms of affective loyalty, based on satisfactory experiences with the technology alone. Although not containing the socio-emotional (strongly affective) substance often associated with loyalty in interpersonal settings, these represent loyalty states nonetheless (Oliver, 1999). Research on service quality in SSIT corroborates the idea that customer attitudes (and, thus, loyalty) in online environments are strongly cognitively driven rather than founded on affect and emotion (Zeithaml, Parasuraman & Malhotra, 2001). Through interviews with users of online retail environments, Zeithaml and her colleagues aimed to identify online quality dimensions. Results show that the positive feelings of warmth or attachment that emerged as part of the traditional SERVQUAL instrument (e.g., empathy) did not surface as characteristic of online shopping experiences.10 Similar conclusions have been drawn by others suggesting that online environments may promote cognition-based trust at the expense of affect-based trust (Tomiuk & Pinsonneault, 2001). In traditional commercial settings, cognition-based trust is linked to such things as competency and expertise of employees, the reputation of the company, the reliability of its technology, the robustness of its supporting applications, and the accuracy of the information companies provide (Tomiuk & Pinsonneault, 2001). It stems from the assurance that, in future encounters, a certain degree of consistent performance will be delivered by the company. This form of trust exists when the customer perceives that the company and its employees “get the job done” (Johnston, 1996). It is this form of trust which has predominated the literature on B2C e-commerce (e.g., Trust-E). In fact, although trust develops from direct, first-hand experience with a person or object, positive word of mouth and endorsements from independent third parties may contribute significantly to cognition-based trust. These act through a transference process (Doney, Cannon & Mullen, 1998) when advocated and supported by a trusted, non-biased source. However, it is unlikely that online environments can foster affect-based trust (i.e., the customer’s belief that he/she is truly cared about) as easily as traditional face-to-face environments can, if at all. To a great extent, this form of trust develops through interpersonal interaction with employees and can significantly affect loyalty. Research indicates that “rapport” (Gremler & Gwinner, 2000) may positively influence a customer’s decision to stay loyal. Customers experience rapport when both they and the employee ‘click’ together or have good “chemistry”–a definition closely approaching that of affect-based trust. Although there may be some customer/employee interactions occurring in online environments (i.e., to report problems, ask questions regarding products or services which require additional information), these may be infrequent (because SSITs promote self-sufficiency) and not as affectively charged when communications occur through channels other than face-to-face (e.g., email). In fact, the literature on communication channel effects (e.g., Social Presence Theory) suggests that such interactions may remain largely disaffected.11 Research on computer-mediated communications indicates that these may be less personal and socioemotional than face-to-face exchanges (Hiltz, Johnson & Turoff, 1986).12 Whereas, in traditional commercial environments, customers and employees often get to know one another, and their relations may even evolve past their customer/employee roles, this dynamic will likely not occur in online environments where customers and company representatives do not develop a shared interpersonal history. When persons do not

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share a common past and are not familiar with each other’s personalities, electronic communications are expected to be impersonal and task focused (Jarvenpaa, Knoll & Leidner, 1998). As such, affect-based trust may be much more difficult to develop when customer/ company communications occur infrequently, and interaction is primarily via SSIT. Further support that e-loyalty may lack strong affective foundations is evident when one considers how differently personalization and customization operate on attitude formation in SSIT when compared to traditional environments. Relationship building tactics used in SSIT environments are likely not to elicit affect from the customer, but instead, act as conative antecedents on e-loyalty. In face-to-face commercial encounters, the employee’s behavior (e.g., relating warmly to customers, including politeness and courtesy, getting to know the customer on a personal level, customizing services/products to answer individual needs) elicits positive emotion, giving the customer a sense of importance, recognition, and valorization when receiving individualized attention. In the context of SSIT, however, personalization and customization occurs via technology rather than through human actions. They are benefits which are self-generated rather than synonymous with personal treatment. Customers are no longer simply passive recipients of these tactics, but must actively invest their time and effort in order to take advantage of them. Online customization, in particular, often requires a significant investment (to make the desired changes to a Web page) on the part of the customer. These investments fall into the conative antecedent category of Dick and Basu’s (1994) model of loyalty. As such, although Bakos (1997) shows that online environments reduce customers’ search costs, arguably, when customers actually make the effort to register and change the Web page to suite personal preferences, the resources expended may further increase the customer’s unwillingness to switch. In sum, our analysis suggests that it is feasible for companies to establish loyalty in online environments. However, e-loyalty may encompass only the weaker or less enduring (less affective) states of loyalty as originally identified by Oliver (1999) in the context of traditional commercial environments. Cognitive (i.e., good performance) and conative antecedents may be the primary drivers of e-loyalty. The ability to generate strong forms of affect in customers may be largely lost to companies operating in B2C e-commerce environments because interpersonal contact is minimal and the socio-emotional component is drastically reduced. In the following section, we argue that, for some customers, the largely disaffected relationships which evolve in SSIT environments may not be detrimental to their loyalty. These relationships may, in fact, suit these customers quite well.

CUSTOMER HETEROGENEITY AND E-LOYALTY The bonds that develop between customers and company employees can be an important source of affect (Reynolds and Beatty, 1999) and contribute positively to loyalty (MacIntosh & Lockshin, 1997). All relationships are, however, inherently two-sided (Czepiel, 1990; Singh & Sirdeshmukh, 2000). Analogous to research on interpersonal relationships where psychologists recognize that people hold different beliefs for what constitutes a good/ bad relationship (e.g., Fletcher & Thomas, 1996), customers may have different relational expectations regarding their associations with companies. We suggest that whether customer loyalty develops, be it in traditional or online environments, may depend largely on whether the customer perceives that there is a ‘fit’ between the type of relationship he/she desires and the type of relationship which he/she perceives the company can provide (Tomiuk & Pinsonneault, 2001).

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Seemingly, there may exist a segment of consumers which may be more prone to loyalty in online environments. For these customers, the reduction of the socio-emotional component (i.e., loss of human contact) may have little deleterious effect on the quality of the relationship they experience with the company. Regardless of whether encounters occur face-to-face or via technology, the ability to interact on an interpersonal level with company representatives may not “affectively” factor into their loyalty decision. These customers do not derive any significant social value from personal encounters and perceive it simply as one means, among others, of obtaining products and services. In fact, several researchers have noted that attempts on the part of employees to “get close” may be viewed by certain customer as intrusive and may be rejected (Adelman, Ahuvia & Goodwin, 1994). What one customer considers as a warm, close, friendly relationship, can be considered as stifling and unnecessary by another, the latter preferring a more distant relationship characterized by much less warmth (Price & Arnould, 1999). Alternatively, some customers derive extensive social and emotional value from their interpersonal associations with front-line employees. These customers depend on their relations in the marketplace as a source of human contact (Tauber, 1972; Donovan & Rossiter, 1982). To them, the retail or service encounter is not merely a commercial transaction but has value as a surrogate for social contact. A familiar face and casual conversation with an employee may be a source of comfort, adding to a sense of community (Forman & Srivam, 1991). Research in social psychology sheds some light on these different customer segments. It shows that important differences may exist between, what are called communally and exchange-oriented relationships (Clark & Mills, 1993). The distinction lies on the “rules and norms” surrounding the giving and receiving of benefits. Behaviors characteristic of communal norms (characterized by relations with family and friends) are motivated by nurturing and caring for the needs of the other while people in exchange relationships give benefits with the expectation of receiving some benefit in repayment (Clark et al., 1987). When people want an exchange relationship, they prefer and expect direct reciprocity (i.e., immediate rewards). These relationships can be thought of as “balanced” or “economic.” They are “tit for tat” relationships and are often exemplified by relations with acquaintances and business partners. Benefits are given as repayment for benefits received in the past or because an expectation exists that what is given today will be reciprocated with valuable benefits in the very near future (Clark et al., 1987; Kickul & Liao-Troth, 2000). In simple terms, people with a high exchange orientation interact with others because it is useful and instrumental for them to do so. According to Clark and her colleagues, these typologies are not dichotomous but, rather, identify polar ends of a same continuum. This distinction has been used to understand relational preferences in the context of commercial relationships, as well (Goodwin, 1996; Tomiuk & Pinsonneault, 2001). In exchange-oriented relationships, behaviors during interpersonal encounters are highly role scripted (i.e., doctor/patient, police officer/law offender), and participants do not want or desire to breach these script boundaries.13 Exchange-oriented customers may categorize their relationships as ‘good’ when the employee is efficient and knows his/her job well. Thus, the exchange-oriented relationship is founded on or synonymous to the development of cognition-based trust. Communal relationships, on the other hand, are tantamount to what marketing researchers call “commercial friendships” (Price & Arnould, 1999). They transcend the service script (Goodwin, 1996) and are closely related to the development of affect-based trust (McAllister, 1995). They occur between persons rather than between “role personas.” For instance, the relationships between regular clients and the employees of a bar often

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surpass traditional bartender (or waiter)/ customer roles. In fact, research shows that divorce lawyers, doctors, and bartenders, for instance, often become part of a client’s social support network (e.g., Goodwin & Gremler, 1996). Communal behaviors are frequently observed in situations when participants develop an interpersonal history and engage in conversation topics not directly linked to service delivery (e.g., at the hairdresser’s). However, because they occur between “people,” they are not service-type specific but may be observed in longterm relationships, as well as when people do not expect any future interaction (e.g., confessional intimacy between strangers on a train, between a cab driver and a client) (Goodwin, 1996). Communality is influenced by factors such as a lack of social networks (e.g., the elderly), feelings of loneliness, and extraversion. Although not a personality variable per se, communality may be considered a stable orientation. For communally-oriented customers, human interaction during service provision may represent more than simply a conduit for service delivery. Largely devoid of human interaction, when commercial encounters are limited to online environments only, there may be a detrimental effect on customer loyalty for these patrons. These customers may not experience the type of relationship which they find valuable. Conversely, for exchangeoriented customers whose relationship with retail and service employees is primarily anchored in efficiency (i.e., the employee’s ability to provide reliable, accurate, and timely service), traditional and online environments may be perceived as being highly substitutable. For the latter, salient factors affecting their loyalty decisions may largely be cognitive, based on technological innovation, the SSIT’s performance, and the breadth of services offered over the SSIT (Tomiuk & Pinsonneault, 2001).

CONCLUSION AND IMPLICATIONS FOR FUTURE RESEARCH For companies, recognizing that different segments of customers exist is crucial to the effectiveness of their B2C e-commerce strategy. For researchers, understanding that consumers are heterogeneous may lead to valuable insights into future studies of loyalty in online environments. Our analysis suggests that SSIT environments may not be auspicious to experiencing communal relationships. We do not, however, believe that communality will necessarily lead to rejection of the technology. Equating exchange-oriented customers with adopters and communally-oriented customers with non-adopters of online commercial environments may be haphazard. Communally-oriented customers may, indeed, recognize its practical usefulness and take advantage of its benefits (i.e., flexibility, convenience) when needed (i.e., after regular store hours, on weekends, etc.). Communally-oriented customers may, however, feel that the social benefits obtained from close, personal, human interaction remain important. Companies able to establish an online presence in conjunction with a more traditional approach (i.e., brick-and-mortar locations) may be better able to ensure that these customers will remain with them. For instance, when both retail bank branches and online banking services are available, the communally-oriented bank customer may not feel that he/ she is sacrificing or foregoing the benefits provided by the traditional option to obtain the benefits that come with SSIT. As such, communally-oriented customers may perceive more value from an SSIT, knowing that the traditional service option is also available and that the technology merely supplements rather than replaces the traditional service option. However, companies should not expect loyalty to develop in communally-oriented customers when customer/company interaction is limited to technology alone. No matter its convenience,

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flexibility, and the added control it offers customers or the level of assurance as to its reliability, the company’s professionalism, and the security of a site through endorsements of third-parties (i.e., E-Trust), the use of SSIT may be perceived as practical by communallyoriented customers but relationally unfulfilling (Tomiuk & Pinsonneault, 2001). By contrast, SSIT environments may be particularly inviting to exchange-oriented customers. To them, the benefits received during face-to-face interaction are largely utilitarian in nature and instrumental. The loss of interpersonal contact may not deleteriously affect the development of loyalty. As such, although the users of a company’s SSIT may be either communally or exchange oriented, those that are likely to become loyal in online environments may be disproportionately exchange oriented. Consequently, companies should keep in mind that these customers’ loyalty (e-loyalty) is strongly cognitively and conatively driven and that it may be more vulnerable to deficiencies in service performance. The E-loyal customer (i.e., the exchange-oriented customer) may be much less forgiving. Given that e-loyalty may carry with it only very weak affective ties to the company and its employees, if any, these customers may be much less willing to weather service failures. As such, we agree with Zeithaml and her colleagues (2001) that it becomes crucial for companies operating in these environments to focalize on delivering superior quality of service by ensuring that the technology and its applications are robust, the information on their sites extensive and up-to-date, and, yet, that the entire package remains easy to use and that customer queries are responded to expeditiously. Understanding how and why customers become loyal is one of the most crucial issues in management today, and yet, our understanding of the concept remains limited (Pritchard, Havitz & Howard, 1999). In this chapter, we have attempted to fill some of this void with regard to e-loyalty. Still, more research on e-loyalty is desperately needed. Researchers, for instance, can begin by investigating what benefits associated with ‘traditional’ loyalty (e.g., advocacy, giving companies more time to match competitors’ actions rather than immediately exiting the relationship) can be extended and generalized to loyalty in online environments. Our analysis in the previous section suggests that generalizations of loyalty studies to online environments must be done judiciously. Given that e-loyalty lacks the strong affective foundations which often characterize loyalty in traditional settings, switching may not lead customers to have to give up on existing interpersonal bonds which may have developed between them and employees. As such, e-loyal customers may be less ready to forgive and may more readily switch than customers of companies with a physical presence. Moreover, additional research on the effects of personalization and customization on e-loyalty are needed. Whereas in traditional settings these tactics may elicit affect in the customer, in online environments they seem to operate on loyalty almost exclusively via conation, requiring that customers willingly invest time and effort to register on a site and customize it. These are investments that many customers may be unwilling to make. In their investigation of consumer perceptions of SSIT quality, Zeithaml et al. (2001) reported that many participants preferred to remain anonymous and to just have efficient transactions. As such, studies on how customer involvement14 affects the development of e-loyalty may be a rich area for future research. In traditional settings, relationship marketing tactics have been found to increase purchase likelihood (Gordon, McKeage & Fox, 1998); however, their effectiveness have been shown to depend, in part, on the role of involvement. Consumer involvement leads to a greater receptiveness to these tactics. Research in traditional service settings suggests that personalization and individualization tactics can be perceived as invasive or annoying when customer involvement is low (e.g., buying a carton of milk). Conversely, when involvement is high (e.g., purchasing a car), customers are more likely to

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value the company’s attempts to personalize and individualize their retail or service experience. These results may have important implications for companies regarding the effectiveness of these tactics in fostering e-loyalty. For instance, these results imply that customers who merely utilize online services for low involvement tasks (e.g., using a Web page to check a bank account balance, withdrawing money from an ATM) may not want to take the time and make the necessary effort to customize their interfaces. As such, for companies whose customers only experience/buy low involvement services/products via SSIT, the ability to elicit e-loyalty may be more difficult. In fact, forcing customers to personalize/customize in these situations may actually act as a deterrent to using a company’s SSIT for low involvement tasks. Uninvolved customers may see this as a waste of time and, possibly, as intrusive when they are simply looking for convenience, ease of use, and a quick transaction. The study of consumer involvement in SSIT environments may particularly be useful in gaining a better understanding in the design of Web pages. Involvement can be considered as an internal state indicative of the amount of arousal, interest, and drive evoked by a stimulus or particular situation (Mitchell, 1979). Depending on their level of involvement (i.e., high or low), consumers are thought to be either cognitively passive (i.e., when in low involvement) or cognitively active (i.e., when in high involvement) in their processing of information. The study of involvement in the context of advertising has been extensive. Research results indicate that involvement affects how ads are processed by consumers. As such, involvement may have important contributions in understanding how and when informational and pictorial content in Web pages can influence user attitudes. When customers are exposed to ads, high involvement has been shown to elicit greater and deeper attention to the content of information in a message (Greenwald & Leavitt, 1984), while for consumers in low involvement there is little motivation for extensive cognitive processing of the actual informational content. In the latter situation, users become cognitive misers and ease of use may become particularly important to them. Of equal significance is that customers in low involvement are thought to primarily focus on (less cognitive) peripheral cues (Petty & Cacioppo, 1983). These include relatively simple cues considered independently of the message content. For example, in advertising, a picture of a likable communication source (e.g., an attractive man/woman) may elicit positive affect in the consumer which may influence brand attitudes positively (Mazursky & Schul, 1992). When combined with our discussion on relational orientation (communal and exchange), the results from studies on involvement in advertising may also have implications for companies on how to make better use of the online self-service channel to try and elicit the most amount of affect possible. Companies operating in purely online environments, for instance, may make use of peripheral cues that signal its exchange orientation to customers (e.g., use of pictures of busy employees looking very professional and attentive). On the other hand, if a company operates its online environments in conjunction with the traditional option, the pictorial content of pages may be particularly useful to elicit some affect from communally-oriented customers while in low involvement. This could include using visual cues signaling the company’s openness to communality (e.g., pictures depicting employees engaging in extra-role activities with the elderly, in youth organizations, etc.), and accompanying messages on the site could, for instance, invite customers to visit a local brick-andmortar location to “get to know” its employees. Finally, service failure has been identified as a reason for customer defection (Keaveney, 1995) and, as such, is linked to customer loyalty. Future research may investigate whether companies which operate purely online may suffer from greater

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difficulty in their attempts to recover from service failures. Reliance on SSIT implies potential difficulties during service failure recovery efforts because of the absence of human interaction (Hackett, 1992). In fact, reliance on computer-mediated communications may make it difficult to communicate complex, equivocal messages (Daft & Lengel, 1984, 1986). In fact, although SSIT allows companies to offer their customers greater time/ location flexibility, companies may find it difficult to address certain aspects of flexibility which can only be provided in traditional face-to-face environments (e.g., employee ability to handle customer special needs and requests, or unforeseen circumstances) (Barnes et al., 2000). In this chapter, we have attempted to address the nature of e-loyalty. We based our analysis on previous theoretical explorations of the concept of loyalty in traditional commercial environments (i.e., Dick & Basu, 1994; Oliver, 1999). We argue that highly affective forms of loyalty are unlikely to develop in online environments because of the reduction of the socio-emotional component (i.e., SSIT environments are inauspicious to the development of interpersonal bonds between customers and employees). However, loyalty is not only driven by affect (Dick & Basu, 1994). As such, e-loyalty may be achievable by concentrating on cognitive and conative antecedents. This includes ensuring excellent performance (i.e., superior quality of service) and by making use of relationship building tactics, such as personalization and customization. Also, we argued that, although it is possible to build loyalty online, companies must not expect that all customers will become e-loyal customers, and this even if companies pay particular attention to delivering unfaltering quality of service to their SSIT users. This is because the accompanying loss of interpersonal interaction may not affect all customers equally. We distinguished between customers that prefer establishing communal-like relationships with company employees from customers who see customer/ employee interactions as a delivery channel and derive little social benefits from these associations (i.e., exchange-oriented customers). SSIT environments may be seen as useful to customers with high communality but relationally unsatisfying (Tomiuk & Pinsonneault, 2001). As such, it is unlikely that a sense of loyalty would develop in these customers. By contrast, there exists a good “fit” between what exchange oriented customers value in their relationships with a company and what SSIT environments can offer. Consequently, companies should not be surprised to find that E-loyal customers may be predominantly exchange oriented customers. Finally, companies must be aware that, because e-loyalty is primarily cognitively and conatively driven and lacks a strong affective foundation, e-loyal customers may be more sensitive to deviations in performance, given that performance represents the quintessence of their loyalty. E-companies must pay particular attention not to disappoint. E-loyal customers may be much less forgiving than loyal customers found in traditional commercial settings. This may be somewhat disconcerting to companies, given that it may be more difficult to recover from failures in SSIT environments.

ENDNOTES 1

The SERVQUAL dimensions include Tangibles (the appearance of physical facilities, personnel, etc.); Reliability (the ability to perform the promised service dependably and accurately); Responsiveness (the willingness to help customers and provide prompt service); Assurance (the knowledge and courtesy of employees and their ability

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2 3

4

5

6 7 8

9 10

11

to convey trust and confidence); and Empathy (the provision of caring and giving individualized attention to customers). Primary affect represents a sensory response which is independent of cognition, such as taste. Emotions are very intense states of arousal (e.g., joy), whereas moods are considered to be less intense but longer lasting. Although not specifically addressed in Dick and Basu’s (1994) loyalty framework, a link between trust and loyalty has been empirically demonstrated (Morgan & Hunt, 1994; Doney & Cannon, 1997; Anderson & Weitz, 1989; Keaveney, 1995; Chow & Holden, 1997). Recognizing the ongoing conceptual debate between attitude and behavior, an increasing number of researchers are beginning to acknowledge in their work whether they are studying ‘attitudinal loyalty’ or ‘behavioral loyalty’ (e.g., Chaudhuri & Holbrook, 2001). Very strong states of loyalty are exemplified when customers develop “love affairs” with certain products. Some owners of Harley Davidson motorcycles, for instance, form local chapters and meet on a regular basis. This type of loyalty is often accompanied by a strong “social support” mechanism (i.e., the development of relational forces around the consumption of a product or service) and the public display of association to the object of one’s devotion. Although empathy has been found to be the least important dimension of service quality, Parasuranam et al. (1988) advise against undervaluing its significance, suggesting that its ranking may have emerged because of multicollinearity. In traditional encounters, “personalization” concerns such aspects as politeness and courtesy, attempts to get to know the customer, and friendliness (Mittal & Lassar, 1996). Research in marketing lends support to Barnes et al.’s (2000) criticism. Westbrook (1987) has emphasized the importance of emotions in the evaluation of the service experience by noting that it is not limited to cognition alone and that the influence that affect and emotions play must not be ignored. Although emotions do not only occur when the customer/company encounter is experienced interpersonally, they are believed to be primarily socially generated (Kemper, 1991). For example, the authors note that whereas loyal customers often describe the “ambiance” and their strong feelings toward the service provider, “non-loyals” are more influenced by economic factors and convenience. Zeithaml, Parasuraman and Malhotra (2001) found eleven dimensions of online (retail) service quality. These included access (ability to get quickly online), ease of navigation, efficiency, flexibility (ways to ship and pay), reliability, customization (how much and how easily the site can be tailored), security/privacy, responsiveness (ability to get help when needed), assurance/trust, site aesthetics, and price knowledge (whether shipping price could be easily determined). Social presence (an inherent characteristic of the media) reflects the degree of salience of others during interaction (Walther & Burgoon, 1992; Westmeyer, DiCioccio & Rubin, 1998). It suggests that, when interactions between customers and employees are limited to or occur predominantly across computer mediated channels, affective cues may be significantly reduced (Westmeyer et al., 1998). Although these theories have received mixed support (see Lea & Spears, 1995), it appears, however, that the

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12

13

14

predictive effects of social presence theory on relational development should not be completely dismissed and may be valid in interactions among strangers expecting little if no future interaction (Walther & Burgoon, 1992). Research shows that when social cues are missing, communication becomes impersonal (Westmeyer et al., 1998). During computer-mediated communications, there are fewer spontaneous questions and more formal expressions (Kiesler et al., 1985). Furthermore, bonding especially develops during face-to-face interactions (Czepiel, 1990); consequently, if creating an interpersonal atmosphere is important, the medium should stress social presence (Westmeyer et al., 1998). “Scripts” are goal directed (Shoemaker, 1996). They represent procedural knowledge and resemble production rules. They are predetermined, stereotyped, and sequenced actions defining the socially accepted behaviors of actors in a familiar situation (Schank & Abelson, 1977). These actions are instrumental and solely intended to achieve a given purpose–the effective delivery of the service. There seems to be a consensus among researchers that the concept of involvement is related to or is synonymous with “personal relevance” and is an important factor in understanding consumer behavior and IT user behavior as well (Engel & Blackwell, 1982; Zaichkowsky, 1985; Greenwald & Leavitt, 1984; Park & Young, 1986; Petty & Cacioppo, 1983; Barki & Hartwick, 1994).

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Chapter XXIII

Generic Attributes of IS Graduates: An Analysis of Australian Views Robert Snoke and Alan Underwood Queensland University of Technology, Australia

This chapter describes the final phase of a study that validates a group of generic attributes of graduates of Australian undergraduate degree programs with majors in Information Systems (IS). The study, sponsored by the Australian Computer Society (ACS), involved 105 academics from all Australian universities that offer IS undergraduate degree programs of study and 53 industry representatives. A three-round Delphi questionnaire was used in the study. The results of this study are compared with a previous study of generic attributes conducted by the authors in Queensland, Australia. Differences between academe and industry are identified. The top three attributes in each study are the same, although the order is reversed in the national study. Some of the differences include the higher ranking of interpersonal skills, teamwork, and knowledge of the IS discipline by academics compared with the higher ranking by industry of self-motivation and the ability to learn independently. Other major findings include the high ratings of the attributes of team participation and the commitment to further learning and intellectual development. Oral and written communications are significantly rated as more important than a comprehensive knowledge of IS. This study has a very strong overall correlation with the previous Queensland study.

INTRODUCTION This chapter reports on the final phase of a study (Snoke & Underwood, 1998a, 1998b, 1999, 2000, 2001) that validates a group of generic attributes of graduates of Australian tertiary information systems (IS) programs of study. This study was motivated by increasing anecdotal reports from newspapers, statements from industry representatives, including professional societies such as the Australian Computer Society (ACS) and a study by Turner

Copyright © 2002, Idea Group Publishing.

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(Turner & Lowry, 1999) suggesting that tertiary curricula do not meet the needs of industry. Educators and trainers of future IS professionals, in order to gain accreditation and recognition for their programs of study from professional associations, must be able to identify and validate the generic attributes desired by employers of IS graduates. Apart from being a unique Australian study, the results are significant in that they samples wide crosssection of the IS community in Australia, including both academics and industry representatives. The study also provides a comparison of industry and academic views on the importance of preferred student attributes. These comparisons reveal a number of disparities, suggesting the need for closer collaboration between industry and academe in the development of courses in information systems. The study will form the basis for the development of an instrument for accreditation of courses by the ACS. The sample population included both academics and representatives from industry who employ the graduates of IS courses. The total sample population of 449 consisted of 354 academics and 95 industry representatives. A significant number of academics (30 percent) responded to all three rounds, while a high number of industry representatives (51 percent) participated giving an overall participation rate of 34 percent. A three-round Delphi study was used in which respondents were asked to rate rather than rank questionnaire items. The study used, as its initial question set, a previously identified set of attributes (Snoke & Underwood, 1998b). Respondents were asked to rate them according to their importance in the workplace. These responses were then ranked according to their mean rating. Industry and academic comparisons are made. The chapter proceeds as follows. First the aims of the study are explained and the definition of key terms given. The research method is then described, along with the results of the study and data analysis. Conclusions are drawn and recommendations made from the study.

AIM OF THE STUDY This Australian study identifies and examines the generic attributes required of entrylevel employees from IS programs of study. This project will help provide a focus for IS curriculum development in the next millennium. The results of the study will be used to develop a technique for developing a more responsive tertiary curriculum that meets the needs of the information systems industry. Institutions will be able to map their IS curriculum offerings against those of the Australian Computer Society (ACS) Core Body of Knowledge (Underwood, 1996) to identify strengths and weaknesses in their curricula. They will be able to offer a curriculum that is more responsive to the local employment market that their institution serves. This is particularly important for regional institutions, as they serve a much smaller employment area.

DEFINITIONS This paper uses the term generic attributes to describe a core set of abilities and characteristics of an individual (Sandberg, 1994, 1997). It has many meanings, interpretations, and synonyms such as generic skills, basic skills, qualities, knowledge and understanding and competencies (Moss & Liang, 1990; Stasz, McArthur et al., 1993; Crebert, 1995; Doyle, 1996; Bradley, 1997).

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The literature often refers to the concept of generic attributes as generic skills or competencies. Competencies may be defined as consisting of skills, attributes, or abilities and understanding or knowledge. Understanding or knowledge is defined as the content or core body knowledge of a subject discipline that a person has acquired. Skills are the routine implementation of the acquired knowledge or attributes. Attributes or abilities are the personal qualities that are applied by an individual to a specific task under a situation. Figure one gives one interpretation of the relationship between some of the terms used to describe generic attributes. To the authors’ knowledge this study of generic attributes of IS graduates is unique, however, there have been numerous studies conducted in other countries that identify the skill shortage of the IS profession. There exists much discussion as to the meaning of the terms competency, competent and competencies. A person by definition is defined to possess competencies if he or she is competent at a specified task under a given set of conditions. The possession of a set of competencies does not necessarily imply that a person is competent at any task. Therefore the task of educators is to identify a minimalist set of qualities or competencies that will enable a graduate of an IS course to obtain employment. This chapter equates generic competencies to generic attributes that a graduate possesses upon completion of his or her degree.

RESEARCH METHOD The Delphi technique for gaining consensus amongst a diverse group of individuals was used in the study. Previous researchers (Ball & Harris 1982; Dickson et al., 1984; Hartog & Herbert, 1986; Brancheau & Wetherbe, 1987; Watson, 1989; Niederman et al., 1991; Watson Figure 1: Components of competencies

Competencies

Skills

Attributes/ Abilities

Understanding/ knowledge

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& Brancheau, 1991; Pervan, 1993; Morgado et al., 1994; Brancheau et al., 1996; Pervan, 1996; Snoke, 1996) investigating the key issues in IS have used the Delphi technique to rank and rate the relative importance of the issues. The Delphi method was retained for its value in surfacing new issues and moving study participants toward consensus (Delbecq et al., 1986). The Delphi technique has been modified in recent years with the addition of focus groups, interviews and the use of different rating methods as a means of validating the results obtained in the study (Morgado et al., 1994). A traditional Delphi study starts with an open-ended statement and asks participants to respond to the statement. The information is collated and a variety of statistics calculated. A second questionnaire is then sent out which includes revised statement(s) based on information obtained from the first-round questionnaire asking respondents to revise their opinions about this revised statement. The process is repeated until the respondents have reached consensus or the facilitator identifies that they have acquired sufficient data for their purpose (Brancheau et al., 1996). In practice, however, the researcher frequently decides to end the process after two or three rounds, by which time firm trends have generally emerged. A modified form of the Delphi technique as suggested by Watson (1989) was used. Watson (1989) in his study of the key issues in information management modified the Delphi technique by having the respondents rate rather than rank the issues. This was done so that the respondents could focus their attention on the absolute importance of each of the questions rather than the comparative importance of the questions. Miller (1956) suggests that when the number of items to be ranked is large (greater than 10), humans have difficulty processing the information. Watson (1989; Watson & Brancheau, 1991; Morgado et al., 1994) also sent round two questionnaires to the non-respondents from round one of their studies. This has become the standard method of using the Delphi technique in all subsequent key issue studies and has been found to produce reliable results, with significantly higher participation rates, in the previous generic attribute surveys (Snoke & Underwood, 1998a, 1998b, 1999) that formed part of this study. Participants, in this study, were asked to rate, using a Likert scale from one to seven, each of the generic competencies as distinct from ranking them. This allowed them to concentrate on each individual attribute and to identify their importance to the entry-level employee. Space was provided at the end of the questionnaire for respondents to make any comments they desired or to add additional competencies that they thought should be included in future rounds of the study. The questionnaires were sent via e-mail asking respondents to use the reply function on their email package to complete the questionnaire. This allowed for a short turn-around time, as each round was completed within 10 working days. This is a significant reduction in the time for a survey as compared with traditional paper-based mail surveys that take a minimum of several weeks per round (Delbecq et al., 1986). The total length for the completion of the survey was eight weeks. The list of competencies used in the study was taken from a list prepared by a working party at QUT (Crebert, 1995) and from a previous studies of generic attributes of IS graduates in Queensland (Snoke & Underwood, 1998a; Snoke, 1996).

Participants Academic participants in the study were selected from Australian universities that offered undergraduate programs in IS. This was done by searching the universities’ homepages. Some pages listed IS personnel who had since retired or left the particular

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institution. Most faculty homepages also identified the position of the individuals listed. Industry participants were selected from The Australian Computer Society (ACS) membership list as well as selected national industry representatives. The list of industry participants from the ACS was restricted to those who had e-mail addresses and did not have “edu” in their e-mail addresses. Access to the ACS list was via the ACS secretariat who forwarded an invitation to participate in the study to its members. This invitation to participate was issued only once. The lack of direct access to the list presented a problem in being unable to send individual reminder notices that were individually addressed. An underlying feature of the adopted research methodology was the ability to use individually addressed questionnaires. Other surveys have reported a significantly lower response rate, in the order of only 5-10 percent, to non-personalised e-mail. The number of resondents per round for both industry and academics is shown in Table 1. As can be seen from the table there was an increase in the number of participants per round of approximately 2 percent. The final round participation rate of 34 percent is well within the accepted range for survey studies (Wallace, 1988). The mean, median, mode, and standard deviation for each attribute were calculated for each round of the study. An overall response rate of 31 percent was achieved in the first round, with industry representation being 36 percent and academic representation 64 percent.

Round One Each participant was sent a list of statements that were descriptions of the generic attributes or competencies of graduates from undergraduate degrees with a major in IS. They were asked to rate their importance in terms of the essential nature of the competency in the workplace for an entry-level graduate during his or her first year on the job. A seven-point Likert scale, in order of increasing importance, was used, where 1 = extremely unimportant, 2 = unimportant, 3 = of little importance, 4 = neutral, 5 = very important, 6 = of major importance, and 7 = extremely important (essential). Space was provided at the end of the survey instrument for additional attributes to be added or for other comments.

Round Two Respondents to the first round were sent a second questionnaire that contained the mean response for each of the competency statements as well as their individual responses to the first-round questionnaire. Non-respondents to the first round were sent a similar questionnaire with only the mean response for each of the competency statements included as additional information. Again the mean, median, mode, and standard deviation were calculated for each of the competency statements. An increase in the response rate of 2 percent gave an overall second-round response rate of 33 percent. In contrast to previous studies, the industry participation rate decreased slightly each round. Table 1: Respondent rates per round

Total Industry Academic Number Percent Number Percent Number Percent 141 31 51 36 90 64 Round 1 147 33 47 32 100 68 Round 2 153 34 48 31 105 69 Round 3

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Round Three Competencies with a mean below four were to be excluded from round three of the study. There were no competencies that were deleted from the third round. Round-three questionnaires were sent to respondents of either round one or round two. Respondents to round two received questionnaires that contained the mean and their individual responses to each of the competencies. Non-respondents to round two or round one received questionnaires with the mean response of each competency in the previous round questionnaire. An increase in the response rate of 1.5 percent gave an overall response rate of 34 percent. There were a significant number of industry respondents (31%) and academic respondents (58%) who did not change their opinion when given the additional information for the next round. This accounted for 50 percent of the responses to round three. This fact was used as the determining factor in concluding the study after three rounds. Reminder notices were sent to 12 percent of the participants in round three asking them to complete the questionnaire. If a modified Delphi technique had not been used, the final round response rate would have been at best 22 percent.

RESULTS AND DISCUSSION The data was analysed using the Statistical Package for the Social Sciences (SPSS). The participation distribution of industry data by size and type are shown in Table 2. There is little general agreement on what constitutes a particular size of a business. Most definitions are local or industry-specific definitions, depending on the type of industry. The definition used in this paper for the size of the business entity is from the Australian Bureau of Statistics (ABS) (Australian Bureau of Statistics, 1993), which defines a small business as one that employs less than 20 people. The ABS also defines a medium-size business as one that employs less than 50, and a large business as one that employs more than 50. The participation by ACS industry groupings (Australian Computer Society, 1998) is shown in Table 3. It should be noted that most industry classifications are represented. Five respondents identified with more than one classification and are therefore counted twice. This may give a slight bias when comparing results across classification groups. As may be expected, the largest number of participants was from the Information Technology Service classification. The competencies are listed in overall rank order in Table 4 using the mean of the third round to rank them as well as the ranking from the Queensland study. The Queensland study was conducted in 1997 and sought the opinions of 50 academics and 50 industry representatives on the importance of a list of generic competencies required of entry-level employees who have completed an undergraduate degree in information systems. From the mean values listed in Table 4, it can be seen that the top 26 competencies are rated as being at least very important (mean rating of 5.00 or greater) with the top five being Table 2: Participation by size and type

Government Non-Government Totals

Small 1 7 8

Medium 0 3 3

Large 14 26 40

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Table 3: Participation by ACS industry classification

Classification Accounting Agriculture Communications Construction Education Financial Banking & Investment Health Information Technology Hardware Information Technology Software Information Technology Services Insurance Legal Manufacturing Public Administration Recreation Resources Retail Trade Wholesale Trade Transportation Utilities Others (Consultants)

Number 5 1 3 0 6 4 0 4 5 10 1 5 2 2 0 1 0 0 4 0 3 56

Percentage 9% 2% 5% 0% 11% 7% 0% 7% 9% 18% 2% 9% 4% 4% 0% 2% 0% 0% 7% 0% 5%

rated as being of major importance with a mean rating of 6.00 or greater. A significant finding is that knowledge and skills in IS are rated fourteenth below many of the more general attributes, such as oral communications skills (ranked 4th) and written communications skills (ranked 9th). These results are generally consistent with the results obtained in the previous Queensland studies (Snoke & Underwood, 1998a, 1998b) and Turner’s (Turner & Lowry, 1999) study of third-year students and employer groups in Victoria, Australia. In today’s society it is not surprising to see that written and oral communications skills are rated highly. Both the attributes relating to communication have improved their relative ranking as compared to the earlier studies. Oral communications is now ranked fourth (up from seventh), and written communication is now ranked ninth (up from eleventh). The personal attributes of being willing to participate in continued learning and working as part of a team are rated at number one and two, respectively. This is consistent with anecdotal evidence and Turner’s (Turner & Lowry, 1999) study that employers value “people” skills more highly than traditional intellectual skills. A possible explanation of the difference in ranking between the technical and human attributes may be found in the controversial motivational theory of Herzberg (1968). Herzberg developed a theory of motivation related to work situations that proposed two groups of factors which related to job satisfaction. One group comprising environmental factors

Generic Attributes of IS Graduates 377

Table 4: IS generic competencies Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Competency

Mean StDev Queensland Ranking Be able to participate in continued learning and intellectual 6.19 1.04 3 development and develop critical, reflective and creative thinking. Work as part of a team in a productive and cooperative 6.16 1.00 2 manner Retrieve, evaluate and use relevant information 6.15 0.99 1 Oral communication skills 6.04 0.87 7 Define problems in a systematic way 6.00 0.88 5 Self-motivation 5.98 0.84 4 Analyze, synthesize and evaluate the various solutions 5.93 0.96 6 Interpersonal skills 5.92 0.92 12 Written communication skills 5.91 1.02 11 Consider the quality of the solution and its timeliness 5.76 1.02 9 With respect to the IS discipline be technologically 5.73 1.00 13 competent (the person is able to use the current technology competently) Value the ethics of the information technology profession 5.73 1.28 18 8 Embrace change and be obliged to engage in incremental 5.72 0.97 improvement to keep up with the rapid change in technology With respect to the IS discipline possess coherent, 5.70 1.03 15 extensive, theoretical and practical knowledge Confidence about their ability to learn independently 5.70 0.98 14 Work independently 5.52 0.97 16 Time management skills 5.48 1.09 9 With respect to the IS discipline possess theoretical and 5.44 1.05 22 practical knowledge in at least one reference discipline Participate in on-going professional development Ability to reflect on own strengths and weaknesses Sensitivity to differences in gender, culture and customs Demonstrate practical knowledge and understanding in at least one computer language Possess a sense of basic curiosity about technology Knowledge of how a business operates, is structured or is orientated Adapt to unfamiliar cultures and operate in a socially and culturally diverse environment With respect to the IS discipline possess the theoretical and practical knowledge of related disciplines

5.41 5.38 5.34 5.32

1.17 1.04 1.31 1.49

16 19 23 21

5.28 5.24

1.04 1.14

20 24

5.13

1.05

26

5.01

0.99

28

Research skills Project management skills Understand the profit motive of business

4.91 4.78 4.75

1.08 1.29 1.15

25 26 29

378 Snoke & Underwood

(hygiene) do not, by themselves, motivate satisfaction, but their absence will cause dissatisfaction. The other group are determinants of job satisfaction, which are believed to result in improved performance and are termed “motivators.” Thus, the technical skills/ knowledge attributes will be expected to have been gained through the academic process, that is, the “hygiene factors” in terms of Herzberg’s motivation theory, while the more highly rated attributes represent “motivators” because they are determinants of job satisfaction which are assumed to lead to superior performance. Both studies ranked the same competencies in the top three; however, their ranking in the national study are reversed as compared to the Queensland study. This may possibly be attributed to the difference in the composition of the sample population. The Queensland study used members of the Australian Information Industries Association (AIIA), while the national study used members of the Australian Computer Society (ACS). The participants of the national study included organisations who had their head office in the more densely populated southern states of Australia while the Queensland study used only participants whose head office was in Brisbane, Queensland or in regional areas of the state. Three of the attributes had a difference in ranking between the national study and the Queensland study of 5 or more. The attribute of, value the ethics of the Information Technology profession was significantly more highly rated in the national study (ranked 12) than in the Queensland study (ranked 18) (Snoke & Underwood, 1998b). Time management skills and the attribute of embracing change and being obliged to keep up-to-date were more highly rated in the Queensland study (ranked 8 and 9 versus 13 and 17). The competencies of possess coherent, extensive, theoretical and practical knowledge of IS and possess theoretical and practical knowledge in at least one reference discipline were ranked 14 and 18, respectively, in the national study, while they were ranked 15 and 22, respectively, in the Queensland study. This difference in ranking may be due in part to the difference in the sample size of the two studies. This Australian study surveyed 105 academics and 53 industry representatives, while the earlier Queensland study had equal participation from industry and academia, namely, 50 industry representatives and 50 academics.

Industry versus Academic Views The results of the industry and academic views of the relative importance of the attributes are shown in Table 5 in order of importance as identified by industry. From the data it should be noted that 13 of the 29 attributes listed have a difference in ranking of 5 or more. Academics ranked the attributes of interpersonal skills, teamwork and possess coherent, extensive, theoretical and practical knowledge of the information systems discipline and information systems reference disciplines significantly higher than the industry respondents. There is general agreement on the importance of oral communication skills. However, industry places a significantly lower importance on the written communication attribute than academics. This may reflect the use of written assignments as a means of assessment in academia and an apparent reduced emphasis on writing in industry as a means of communication. Industry ranked the individual competencies of self-motivation and the ability to learn independently significantly higher than academics. This may be due to the tendency of group assignments being used for assessment in tertiary institutions. Also, industry comments have indicated that they require an individual to be productive in the workplace from the first day. This requires a high degree of self-motivation by the individual. Academics ranked the attribute of teamwork as being of extreme importance. Industry and academics both ranked

Generic Attributes of IS Graduates 379

Table 5: Industry and academic comparison of generic attributes Competency Industry Mean StDev Rank Self motivation 6.22 0.82 1 Retrieve, evaluate and use relevant 6.00 1.19 2 information Be able to participate in continued 5.99 0.97 3 learning and intellectual development and develop critical, reflective and creative thinking. Analyse, synthesise and evaluate the 5.88 0.93 4 various solutions Confidence about their ability to learn 5.88 0.90 4 independently Consider the quality of the solution and its 5.85 1.13 6 timeliness Embrace change and be obliged to engage 5.84 0.92 7 in incremental improvement to keep up with the rapid change in technology Work as part of a team in a productive 5.83 1.32 8 and cooperative manner With respect to the IS discipline be 5.78 1.08 9 technologically competent (the person is able to use the current technology competently) Value the ethics of the Information 5.77 1.28 10 Technology profession Oral communication skills 5.75 0.94 11 Define problems in a systematic way 5.75 0.99 11 Interpersonal skills 5.71 1.02 13 Work independently 5.63 1.07 14 Written communication skills 5.53 1.46 15 5.48 1.15 16 With respect to the IS discipline possess coherent, extensive, theoretical and practical knowledge Ability to reflect on own strengths and 5.48 0.93 16 weaknesses Participate in on-going professional 5.47 1.10 18 development Possess a sense of basic curiosity about 5.43 0.84 19 technology Time management skills 5.40 1.18 20 Sensitivity to differences in gender, 5.29 1.19 21 culture and customs Research skills 5.23 0.99 22 Demonstrate practical knowledge and 5.22 1.53 23 understanding in at least one computer language

Academic Mean StDev Rank 5.87 0.82 9 6.22 0.86 3 6.28

1.05

2

5.95

0.97

8

5.61

1.01

15

5.72

1.01

11

5.67

0.99

14

6.30

0.76

1

5.71

0.94

12

5.70

1.27

13

6.11 6.17 6.02 5.47 6.09 5.80

0.82 0.75 0.84 0.92 0.80 0.92

5 4 7 18 6 10

5.33

1.08

23

5.38

1.20

19

5.21

1.11

24

5.51 5.37

1.04 1.35

17 20

4.76 5.37

1.08 1.45

28 20

380 Snoke & Underwood

Table 5: Industry and academic comparison of generic attributes With respect to the IS discipline possess 5.15 1.08 24 theoretical and practical knowledge in at least one reference discipline. Adapt to unfamiliar cultures and operate 5.10 1.22 25 in a socially and culturally diverse environment Knowledge of how a business operates, is 4.98 1.48 26 structured or is orientated Understand the profit motive of business 4.88 1.18 27 With respect to the IS discipline possess 4.69 1.05 28 the theoretical and practical knowledge of related disciplines. Project Management Skills 4.58 1.22 29

(continued) 5.58 1.01

16

5.14

0.97

26

5.36

1.00

22

4.70 5.16

1.16 0.91

29 25

4.88

1.32

27

Participate in continued learning and intellectual development and develop critical, reflective and creative thinking as very important (3 and 2 respectively). This indicates that the industry and academics both require individuals to keep up with the continual changes in technology and to gain new and diverse skills.

Public Sector Compared to Private Sector The data suggests there are significant differences between the public sector and the private sector views of the importance of generic attributes. The public sector and private sector rankings are listed in Table 6. From the data in the above table it should be noted that the public sector ranks the attributes of embracing change and working independently significantly higher than the private sector. The private sector places more emphasis on the attributes of quality, analysing, synthesizing and evaluating a solution and problem solving than the public sector. This is not to imply that these are considered unimportant by the public sector. The disparity between the public and private sector may be a reflection of the different environments within which they operate. Care should be taken when interpreting the above results due to the relatively small sample size and the difference in the sample populations. The above indicates a common preference for life-long attributes in IS graduates by industry and academe alike; however, industry ranks the life-long competencies more highly than academics. Life-long attributes are those that are common to any role a person takes in life. Increasingly, however, the clients of tertiary institutions, viz., graduands, expect that completion of a tertiary course of study will lead to a field that utilities the competencies developed during the course. Nevertheless, students should also be prepared for continued life-long learning and to be positive contributors to society in a general sense.

CONCLUSIONS The study showed that the more generic interpersonal attributes involving teamwork, interpersonal skills, and oral and written communication are consistently more highly rated (a difference in ranking of 5 or more) by academics than industry. Industry consistently rated the individual motivational attributes (Ability to reflect on own strengths and weaknesses,

Generic Attributes of IS Graduates 381

Table 6: Public sector versus private sector rankings Overall Rank Attribute 16 Self-motivation Retrieve, evaluate and use relevant 5 information Be able to participate in continued learning and intellectual development and develop 10 critical, reflective and creative thinking. Consider the quality of the solution and its 8 timeliness Analyse, synthesise and evaluate the 7 various solutions Confidence about their ability to learn 15 independently Work as part of a team in a productive and 21 cooperative manner 6 Define problems in a systematic way With respect to the IS discipline be technologically competent (the person is able to use the current technology 2 competently) 23 Oral communication skills 27 Interpersonal skills Value the ethics of the Information 18 Technology profession Embrace change and be obliged to engage in incremental improvement to keep up 26 with the rapid change in technology 22 Written communication skills 17 Work independently 11 Time management skills Ability to reflect on own strengths and 14 weaknesses Sensitivity to differences in gender, culture 19 and customs Participate in on-going professional 25 development Possess a sense of basic curiosity about 20 technology With respect to the IS discipline possess coherent, extensive, theoretical and 1 practical knowledge 24 Research skills Adapt to unfamiliar cultures and operate in a socially and culturally diverse 28 environment

Public Sector Private Sector Rank Mean St Dev Rank Mean St Dev 1 6.27 0.80 1 6.22 0.84 4

5.67 1.59

2

6.13

0.99

4

5.67 1.23

3

6.12

0.83

20 5.13 1.60

4

6.05

0.77

14 5.40 1.24

5

6.03

0.72

3

5.80 1.01

6

5.97

0.85

7 5.60 1.30 16 5.33 1.18

6 8

5.97 5.89

1.33 0.80

11 5.47 1.51 7 5.60 1.18 11 5.47 1.06

9 10 10

5.86 5.84 5.84

0.86 0.92 1.00

7

5.60 1.18

12

5.82

1.33

2 26 4 21

6.00 4.60 5.67 5.07

0.85 2.20 0.82 1.03

13 14 15 16

5.78 5.72 5.68 5.53

0.95 0.91 1.16 1.22

10 5.53 0.74

17

5.50

1.01

22 4.93 1.22

17

5.50

1.16

11 5.47 1.30

19

5.49

1.03

18 5.27 1.03

19

5.49

0.76

14 5.40 1.30 23 4.87 1.06

21 22

5.47 5.45

1.11 0.92

23 4.87 1.60

23

5.29

1.04

382 Snoke & Underwood

Confidence about their ability to learn independently; Self-motivation; and Possess a sense of basic curiosity about technology) higher than academics. Technical knowledge competencies (With respect to the IS discipline possess coherent, extensive, theoretical and practical knowledge; With respect to the IS discipline possess theoretical and practical knowledge in at least one reference discipline which include behavioral science, computer science, decision theory, information theory, organizational theory, management theory, and Define problems in a systematic way) were significantly more highly rated by academics. This may suggest that academics are concerned with the graduate actually being able to do a specific task in a business environment, which involves working with others. This implies that the assessment in IS units of study should contain more groupwork than individual work. The high ranking of written and oral communication skill implies a need for a significant amount of written assignment and oral presentations in IS units. The higher ranking of oral communications suggests that more oral presentation should form part of the IS curriculum. Finally, the overall strong correlation with the previous Queensland study (Snoke & Underwood, 1998b) reinforces the significance of the results reported in this study. The disparity of results between academic and industry reinforces the view that academics need to interact more closely with industry in the development and maintenance of IS course syllabi. The three lowest ranking attributes, from an industry perspective, of research skills, project management, and understanding the profit motive of business are the attributes that are often considered to be the characteristics that distinguish between IS graduates and graduates from other information technology (IT) disciplines, such as computer science. Knowledge of business and how it operates, including understanding the profit motive in business, is rated very low. A recent study by ACNielsen Research Services (2000) and anecdotal evidence suggests that the most important competency that they desire in an employee is an understanding of the profit motive of business and how the business operates.

FUTURE RESEARCH As identified above, a further focus group study to further examine the disparity between academics and industry will be conducted to identify the underlying competencies and the reasons for the relative importance of each. The sample for this focus study will be industry representatives. This study will be further extended to investigate the amount of treatment that each attribute receives in undergraduate IS curricula. Further analysis will be conducted to attempt to identify the relationship of the attribute rankings to the type of institution, whether it be a regional or capital city institution. An expanded study involving students, academics, and employers will be undertaken to identify any trends that may emerge over time. This further study will be followed by an international comparative study of the importance of the identified competencies.

REFERENCES ACNielsen Research Services. (2000). Employer Satisfaction with Graduate Skills: Research Report, 71. Canberra, Department of Education, Training and Youth Affairs: 71. Australian Bureau of Statistics. (1993). Business Operations and Industry Performance. Australia: Belconnen. Australian Computer Society. (1998). Industry Classifications.

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Ball, L. and R. Harris (1982). SMIS members: A membership analysis. MIS Quarterly, 6(1), 19-38. Bradley, D. (1997). The Qualities of a University of South Australia graduate Information for External Members of University Committees, Denise Bradley. Brancheau, J. and Wetherbe, J. C. (1987). Key issues in information systems–1986. MIS Quarterly, 11(1), 23-46. Brancheau, J. C. and Janz, B. D. (1996). Key Issues in Information Systems Management: A Shift Toward Technology Infrastructure. Available on the World Wide Web: http:// www.colorado.edu/infs/jcb/key/us94wp.html. Crebert, G. (1995). Implementing Generic Attributes. Brisbane. Delbecq, A. L. and van de Ven, A. (1986). Group Techniques for Program Planning: A Guide To Nominal Group and Delphi Processes. Middleton, WI: Green Briar Press. Dickson, G. W. and Leitheiser, R. L. (1984). Key information systems issues for the 1980’s. MIS Quarterly, 8(3), 135-159. Doyle, K. (1996). Framework for the Development of National Competencies for the IT Industry. Hartog, C. and Herbert, M. (1986). 1985 Opinion survey of MIS managers: Key issues. MIS Quarterly, 10(4), 351-362. Herzberg, F. (1968). One more time: How do you motivate employees? Harvard Business Review(January-February), 53-62. Miller, G. A. (1956). The magical number seven, plus or minus two: Some limits on our capacity for processing information. The Psychological Review, 63(2), 81-97. Morgado, E. M. and Reinhard, N. (1994). Extending the Analysis of Key Issues in Information Technology Management, 1-19. Moss, J., Jr. and Liang, T. (1990). Leadership, Leadership Development, and the National Center for Research in Vocational Education. Berkeley: National Center for Research in Vocational Education. Niederman, F. and Brancheau, J. C. (1991). Information systems management issues for the 1990’s. MIS Quarterly, 15(4), 475-502. Pervan, G. (1996). Results from a study of key issues in Australasian IS management–1996. 7th Australasian Conference on Information Systems, Hobart, Tasmania, Department of Computer Science, University of Tasmania. Pervan, G. P. (1993). Results From A Study of Key Issues in Australian IS Management. 4th Australian Conference on Information Systems, Brisbane, Queensland Australia, Department of Commerce, The University of Queensland. Sandberg, J. (1994). Human Competence at Work. Goteborg, BAS. Sandberg, J. (1997). Competence, Lecture, QUT, 19 June, 1997. Snoke, R. (1996). A Technique for Mapping Tertiary Information Systems Education and Training onto Current and Predicted Industry Needs. Hobart, University of Tasmania. Snoke, R. and Underwood, A. (1998a). Generic attributes of IS graduates: An Australian study. European Conference on Information Systems, AIX, France. Snoke, R. and Underwood, A. (1998b). Generic attributes of IS graduates: A Queensland study. Australian Conference on Information Systems, University of New South Wales, Sydney, New South Wales. Snoke, R. and Underwood, A. (1999). Generic attributes of IS graduates: An Australian IS academic study. 10th Australian Conference on Information Systems, Victoria University of Wellington.

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About the Authors 385

About the Authors

Felix B Tan is a Senior Lecturer in Information Systems at the University of Auckland, New Zealand. He serves as the Editor-in-Chief of the Journal of Global Information Management. He is also the Vice President of Research for the Information Resources Management Association, the Editor of the ISWorld Net’s EndNote Resources page, and editor of the book series “Advanced Topics in Global Information Management.” He has held visiting positions with the Department of Information Systems, National University of Singapore and Richard Ivey School of Business, University of Western Ontario. Dr. Tan’s current research interests are in business-IT alignment, global information management, management of IT, national information policy issues and cognitive mapping methods. He recently published a book on IT Diffusion in the Asia Pacific and another on Global IT Cases. Dr. Tan has 20 years experience in information systems management and consulting with large multinationals, as well as university teaching and research in Singapore, Canada and New Zealand. *** Adel M. Aladwani is an Assistant Professor of Information Systems at Kuwait University. He received his B.A., M.B.A., and D.B.A. from Kuwait University, The George Washington University, and Southern Illinois University at Carbondale, respectively. His current research interests focus on the performance of IS projects, the system development process, individual and organizational impacts of IT, and IT in developing countries. Bridget Allgood is a Senior Lecturer at University College, Northampton. Her research interests focus on e-commerce applications and associated security issues. She can be contacted via email at [email protected]. Christy M. K. Cheung is currently pursuing her M.Phil. degree at the Department of Information Systems at the City University of Hong Kong. She received her Bachelor’s degree in Management Sciences from City University of Hong Kong in 1998. Her current research interests include electronic commerce and technology-based learning. She can be contacted via email at [email protected]. Gurpreet S. Dhillon, B.Sc. (Hons), M.B.A., M.Sc. (Econ), Ph.D. (MIS) is a MIS professor at the University of Nevada, Las Vegas. Previously he has been on the faculties of Cranfield School of Management (UK) and City University of Hong Kong. He is a graduate of the London School of Economics (University of London). His research interests lie at the interface of strategic management and IS/IT use. The application domain of his research has covered information security, computer crime, and fraud. His research has been widely published in numerous journals, including Communications of the ACM, Computers & Security, Information Systems Journal, European Journal of Information Systems,

Copyright © 2002, Idea Group Publishing.

386 About the Authors

International Journal of Information Management, Journal of End User Computing, International Journal of Public Sector Management, Topics in Health Information Management, among others. He is the author of the books Managing Information System Security (Macmillan, 1997) and Information Security Management: Global Challenges in the New Millennium (Idea Group, 2001). He also serves as Vice President, publications, for the Information Resources Management Association and North American Regional Editor of International Journal of Information Management. Vanessa Dirksen is a Lecturer at the Department of Information Management at the Faculty of Economics and Econometrics of the Universiteit van Amsterdam. She holds a MA in Cultural Anthropology from the Universiteit van Amsterdam and her research interest include information society issues and evolving ICTs. Nancy Bogucki Duncan is an Assistant Professor of Information Systems and the Associate Director of the Ohio Institute for Information Research and Management at Kent State University. Her research interests include the strategic value of information technology infrastructure in organizations, information technology outsourcing, and information resource management. She actively conducts research on IT infrastructure and develops collaborative relationships with industry and regional development boards in Northeast Ohio. Robert D. Galliers ([email protected]) is Professor of Information Systems at the London School of Economics and former Dean of Warwick Business School, UK. He was previously Foundation Professor and Head of the School of Information Systems at Curtin University, Perth, Western Australia. He has a B.A. degree in Economics from Harvard University, a Master’s degree in Management Systems from Lancaster University, and a Ph.D. in Information Systems Strategy from LSE. In 1995, he was awarded an Honorary Doctor of Science degree by Tuku School of Economics & Business Administration, Finland. He is Program Co-Chair of ICIS 2002, Barcelona, Spain and is Editor-in-Chief of the Journal of Strategic Information Systems. His research centers on the strategic, managerial, and organizational issues associated with IT. Aryya Gangopadhyay is an Assistant Professor of Information Systems at the University of Maryland Baltimore County (USA). He has a BTech from the Indian Institute of Technology, M.S. in Computer Science from New Jersey Institute of Technology, and a Ph.D. in Computer Information Systems from Rutgers University. His research interests include electronic commerce, multimedia databases, data warehousing and mining, geographic information systems, and database security. He has authored and co-authored two books, many book chapters, and numerous papers in journals such as IEEE Computer, IEEE Transactions on Knowledge and Data Engineering, Journal of Management Information Systems, Journal of Global Information Management, Electronic Markets-The International Journal of Electronic Commerce & Business Media, Decision Support Systems, AI in Engineering and Topics in Health Information Management, as well as presented papers in many national and international conferences. He can be reached at [email protected]. Petter Gottschalk is an Associate Professor in Information Management at the Norwegian School of Management. He has been CEO of ABB Datacables and CEO of the Norwegian Computing Center. His D.B.A. is from Henley Management College, Brunel University, and his M.Sc. is from Thayer School of Engineering, Dartmouth College. He has published in

About the Authors 387

Information & Management, European Journal of Information Systems, Long Range Planning, Journal of Global Information Technology Management, Scandinavian Journal of Information Systems, Journal of Information Technology, Journal of Knowledge Management, Journal of Information Law & Technology, and International Journal of Information Management. Frank H. Gregory is an independent consultant currently residing in Chiang Mai, Northern Thailand. He received his Ph.D. in Information Systems from Warwick Business School, The University of Warwick in 1994. From 1994 to 1998 he was an Assistant Professor in the Department of Information Systems, City University of Hong Kong. He has published widely on the issues of system development methodologies, including a number of papers on Soft Systems Methodology and his own method of Logico-Linguistic Modeling in journals such as the Journal of the Operational Research Society. Ray Hackney is Director of Business Information Technology Research and Acting Head of Department within the Manchester Metropolitan University, UK. He has taught on a number of M.B.A. programs including MMU, Manchester Business School, and the Open University. He leads the organising committee for the annual BIT and BITWorld Conference series and is a member of the Strategic Management Society and Association of Information Systems. Dr Hackney currently serves on the Board of the UK Academy for Information Systems and is also the Vice President Research for IRMA (USA) and Associate Editor of the JGIM, JEUC, JLIM and ACITM. He is also a reviewer for a number of publishers, journals, and conferences and was an Associate Editor for ICIS’99. His main research interest is the strategic management of information systems within a variety of organisational contexts. Zhensen Huang is currently a Ph.D. student in the Information Systems Department at the University of Maryland, Baltimore County. His research interests include electronic commerce, online communities, human computer interaction, and knowledge management. He can be reached at [email protected]. Luiz Antonio Joia is an Associate Professor of the Brazilian School of Public Administration– Getulio Vargas Foundation, Rio de Janeiro, Brazil and a World Bank consultant in Human Capital. He has written a book, Reengineering and Information Technology and several chapters, as well as articles published in journals like Internet Research, Journal of Workplace Learning, Information Strategy: The Executive’s Journal, International Journal of Information Management, Journal of Intellectual Capital, Journal of Knowledge Management, Journal of Global Information Management, Journal of Technology and Teacher Education, just to name a few. He is a member of the Editorial Board of the Journal of Intellectual Capital, MCB University Press. He holds a B.Sc. in Civil Engineering from the Military Institute of Engineering, Brazil, and a M.Sc. and D.Sc. in Production Engineering from the Federal University of Rio de Janeiro. He also holds a M.Sc. in Management Studies from the Oxford University, UK. Jeffrey D. Katz is an Assistant Professor in the Department of Management and the Payless ShoeSource Professor of Business at Kansas State University where he conducts research and teaches strategic management and international management. Dr. Katz received his doctor of philosophy in strategic management from the University of Florida’s Graduate School of Business Administration.

388 About the Authors

G. Roland Kaye is currently Dean of the Open University Business School. He is the Royal Insurance Professor of Information Management, Head of the Centre for Information and Innovation, and Director of the Management of Knowledge and Innovation Research Unit (MKIRU). He is also a member of the Research Lead Body, Vice Chair of the Board of Accreditation for Accountancy Educational Courses, Adviser to the Chartered Insurance Industry, and Chair of the Chartered Institute of Management Accountants Education Group. As the founding Chair in Information Management, he was actively involved with developing the curriculum to incorporate information technology, both in the content and delivery of business school courses. Previous research interests involved the justification and evaluation of investments in information technology. Thomas Kern is Assistant Professor for Information Management at the Rotterdam School of Management. He received his M.Sc. (Economics) in information systems management from the London School of Economics and his D.Phil. in the same area from the Said Business School, University of Oxford. He is also a research affiliate with the Oxford Institute of Information Management at Templeton College. He was the 1996-1998 Lloyds of London Tercentenary Foundation Business Scholar and received together with Dr. Leslie Willcocks, Templeton College, a best paper prize at the 5th European Conference on Information Systems in 1997. He has published papers at the European and International Conference on Information Systems and in the European Journal of Information Systems. He can be contacted by mail at Erasmus University Rotterdam, Dept. of Information and Decision Sciences, Postbus 1738, Rotterdam 3000 DR, The Netherlands and by email under [email protected]. John Kidd is a Lecturer in Information Systems at Aston Business School, Birmingham, UK, where he also studies intercultural management issues, especially those arising between Oriental and Occidental managers. Previously educated as a metallurgist, he worked for several major steel manufacturers as well as a power supply utility before returning to academe to teach and to research—initially in Birmingham University and now at Aston University. He has written and presented widely on his research and has held visiting professorships in France, Belgium, and China. Mary Cecelia Lacity is an Associate Professor of MIS at the University of Missouri-St. Louis and a Research Affiliate at Templeton College, Oxford University. Her research interests focus on IT management practices in the areas of sourcing, IT privatization, benchmarking, IT metrics, and client/server development. She has conducted case studies in over 75 organizations and has surveyed both US and European IT managers on their management practices. In addition to three books, her articles have appeared in the Harvard Business Review, Sloan Management Review, MIS Quarterly, and many other academic and practitioner outlets. Matthew K. O. Lee is Associate Dean of Research in the School of Business at City University of Hong Kong. He was formerly Head and Associate Professor of the Department of Information Systems. Prior to joining the City University, Dr. Lee taught at the University of London and worked as a research scientist at British Petroleum Research International in the UK. He holds a Ph.D. from the University of Manchester, UK and is professionally qualified as a barrister-at-law and a Chartered Information Systems Engineer in the UK. Dr. Lee has

About the Authors 389

a research and professional interest in information technology adoption and diffusion (focusing on systems implementation management issues), electronic commerce, and the legal, ethical, and policy aspects of information technology. His publications have appeared in the CACM, Electronic Market, Journal of Information Science, Information Systems Frontiers, and the International Journal of Technology Management among others. Dr Lee is also a member of the IT Projects Vetting Committee of the Innovation and Technology Commission in Hong Kong, advising the government commission on the funding of key innovative R & D projects in the area of IT. He is a member of the editorial board of the Information Systems Journal. He can be contacted via email at [email protected]. Stephen Little is Senior Lecturer in Knowledge Management at the Open University Business School. Following professional practice as an architect, his doctoral studies at the Department of Design Research, Royal College of Art (awarded 1983) examined the organizational dynamics of innovation in computer-aided architectural design. He spent eleven years in Australia based at Griffith University, Brisbane, and the University of Wollongong NSW, followed by three years in the Department of Business Information Technology at Manchester Metropolitan University. He has also held visiting fellowships at the Australian National University, Canberra, and the Australian Graduate School of Management, University of N.S.W. He is currently a member of IFIP Working Group 8.2: Information Systems and the Organization and Working Group 8.6: Diffusion, Adoption & Implementation of Information Technology and a member of the Design Research Society Council. Yogesh Malhotra is holding a tenure-track professorial appointment in the Information Technology and Operations Management department of Florida Atlantic University while teaching on the faculty of executive programs at Kellogg Graduate School of Management, Carnegie Mellon University, and University of Pittsburgh. He is the lead author of two books: Knowledge Management and Virtual Organizations, and Knowledge Management and Business Model Innovation; Editor and reviewer for several leading journals on ebusiness and knowledge management; and author of more than thirty refereed leading journal articles, book chapters, and peer-reviewed top-tier conference papers. His current interest in defining new knowledge-based e-business models is backed by 18 years experience as top executive advisor and e-business strategist; technology strategist and management consultant; and information systems designer and engineer for think tanks, hi-tech firms, multinationals, and governments. He has served on knowledge management advisory panels for Arthur Andersen managing partners, the government of The Netherlands, and U.S. federal government’s Inter-Agency Benchmarking & Best Practices Council. He has delivered invited keynotes to top executives of Silicon Valley-based organizations, U.S. Baldrige Award-winning corporations, and top 600 information technology executives in the government of Mexico. He served as a founding member and invited contributing editor for Ziff Davis’ GII Standard for Internet Commerce that represented the leading world-scale standardization initiative for e-Business. He is a Certified Computing Professional of the Institute for Certification of Computing Professionals, a Chartered Engineer and life member of The Institution of Engineers, and award-winning member of the Academy of Management. His credentials include Bachelor of Engineering with high distinction, M.B.A. with top honors, and Ph.D. in Information Systems and Knowledge Management from the University of Pittsburgh Katz Graduate School of Business. Dr. Malhotra is the founder of @Brint.com, the globally-branded worldwide sponsor of e-business and knowledge management activities,

390 About the Authors

whose client roster includes IBM, Ogilvy One, Frost & Sullivan, ITWorld.com, Information Week, and high-profile Silicon Valley-based B2B dot com enterprises. He is profiled in the Marquis’ 2000 Millennium edition of Who’s Who in the World. He may be contacted at [email protected]. Paul Mantelaers is Associate Professor of Information Management at Delft University of Technology, Department of IT and Systems. He holds a degree in Business Administration from Tilburg University. In 1995 he completed his doctoral thesis about the design of the organization of the IS-function. He teaches information strategy planning and information systems design. His research interests include organizational and economic aspects of information management and transnational systems development. Lars Mathiassen (www.cs.auc.dk/~larsm) is Professor at the Department of Computer Science at Aalborg University, Denmark. He has published several books and papers on systems development, object-orientation, management of information technology, and the philosophy and practice of computing. With Bo Dahlbom he has co-authored Computers in Context–The Philosophy and Practice of Systems Design (Blackwell, 1993). With Morten Kyng he has co-edited Computers and Design in Context (The MIT Press, 1997). Peter Nelson Meso is a doctoral student and tutorial fellow at Kent State University. His research interests are in information infrastructure, innovation and knowledge creation infrastructure, and electronic commerce. Trevor T. Moores is an Associate Professor in the Division of Accounting and Computer Information Systems, Emporia State University. He received his Ph.D. in Information Systems from Aston Business School, The University of Aston in Birmingham in 1993. Previously he was an Assistant Professor in the Department of Information Systems, City University of Hong Kong, from 1993 to 1998. Dr. Moores has published widely in the area of software metrics and issues of systems’ development in journals such as IEEE Transactions on Knowledge and Data Engineering, Information & Management and the European Journal of Information Systems. Sue Newell ([email protected]) was Professor of Innovation and Organizational Analysis at Nottingham Business School, Nottingham Trent University. She has previously worked at Portsmouth, Aston, Birmingham and most recently Warwick Universities. She graduated in Psychology from Cardiff University, where she stayed to complete her Ph.D. Her main research interests now focus on innovation and knowledge management, and she publishes her work in both information systems and organizational behavior journals. She is currently Professor in the Management School at the Royal Holloway College, University of London. Alain Pinsonneault is the Imasco Professor of Information Systems in the Faculty of Management at McGill University. His current research interests include the organizational and individual impacts of information technology, electronic commerce, the strategic alignment of information technology, group support systems, and the management of IT department. He has published papers in Management Science, Management Information Systems Quarterly, Information Systems Research, the Journal of Management Information Systems, Decision Support Systems, and the European Journal of Operational Research.

About the Authors 391

Helana Scheepers is a Guest Researcher in Information Systems at Aalborg University, Denmark, where she is currently completing her Ph.D. Her current research includes socioeconomic development, risk management, project management, and the use and implementation of information systems in multi-cultural environments. She is on study leave from her position as Senior Lecturer at the University of Pretoria, South Africa. She holds a M.Com. (Informatics) and a B.Sc. (Hons.) in Computer Science. Her URL is http:// www.cs.auc.dk/~helana, and her e-mail address is [email protected]. Robert Snoke is the Principal Lecturer, Information Technology, at the Moreton Institute of Technical and Further Education and has been involved in teaching Information Systems for over 15 years. Bob is a member of the Australian Computer Society (ACS). He received his Bachelor of Science Degree from the University of Minnesota in 1971, Graduate Diploma in Information Processing from the University of Southern Queensland in 1990, and his Master’s degree in Information Technology at the Queensland University of Technology in 1996. His current research interests are in information systems education and the generic attributes required of entry-level employees. Bob has taught in high schools in Braham, Minnesota, New South Wales, and Queensland for 18 years, and has held a lecturing position at Queensland University of Technology and Griffith University. Bob supervised the publication of the second edition of the Asia Pacific Directory of Information Systems Researchers. Daniel Tomiuk is a Ph.D. student in information systems at McGill University. His current research interests include electronic commerce, self-service technologies, and issues relating to relationship marketing over channels other than face-to-face. He has presented his research at the Americas Conference on Information Systems (AIS 2000–California) and at the Conference de l’Association Française du Marketing (AFM 2000–Montreal). He has also published in INFOR. Alan Underwood, Ph.D., is Head of School and Associate Professor in Information Systems at QUT and Education Coordinator of the Co-operative Research Centre in Enterprise Distributed Systems Technology in Brisbane. He is a past National President and Vice President of the Australian Computer Society (ACS) and a past Chairman of the ACS (Qld) Branch. His contributions to the information technology industry in Australia have been recognised with his election as a Fellow of the ACS in 1993 and Honorary Life Member in 1994. He chairs an ACS committee which maintains the body of knowledge used as the basis for accreditation of IT courses in the tertiary sector. He is the Assistant Secretary General of the South East Asian Regional Computer Confederation (SEARCC), a foundation member of SEARCC’s Special Regional Interest Group in Professional Standards and the Chair of the Special Regional Interest Group in Software Engineering Education and Practice. He consults regularly to industry, and his research interests include professional certification, safety critical systems, management information systems, and process engineering. Abel Usoro is in the Computing and Information Systems Department of the University of Paisley, UK. He has a business management background with a B.Sc. (Hons) in Banking and Finance and an M.B.A. in Strategic Management earned in 1983 and 1986, respectively. He

392 About the Authors

began teaching at the university level in February 1988 and in September 1988 accepted an EEC scholarship to study for an M.Sc. in Business Systems Analysis and Design at City University, London. Dr. Usoro’s Ph.D. qualification in 1995 plus his lecturing and industrial consultancy experience earned him a full-time lecturing position in the Computing and Information Systems Department of the University of Paisley in 1996. In addition to lecturing, he coordinates all the M.Sc. projects in the department. His current research interest is in the strategic use of information and communication technology, especially in global planning. Wander van den Berg is Associate Professor at the School of Systems Engineering, Policy Analysis, and Management of Delft University of Technology, the Netherlands. A physics graduate from the Kamerlingh Onnes Laboratory of Leiden University, he worked in digital design, computer architecture, software engineering, and information systems at Delft University. During some years he served as a consultant for information planning and IS implementation. His current research interests include software engineering standardization, IS quality assessment, and business process engineering. J. Christopher Westland is Department Head and Professor at the Hong Kong University of Science and Technology. Previously he was Associate Professor of Information and Systems Management, University of Southern California from 1988-1996. He received a PhD in 1987 from the University of Michigan in Computers and Information Systems and is a Certified Public Accountant. Leslie P. Willcocks is the Arthur Andersen Professor of Information Management and eBusiness at Warwick Business School. He was formerly a Fellow in Management Studies at Templeton College, University of Oxford and Professor in Information Management at Erasmus Universiteit, Rotterdam. He is editor-in-chief of the Journal of Information Technology. He is also Professorial Associate of the University of Melbourne and Freehill, Hollingdale and Page Distinguished Visitor at Australian Graduate School of Management. He is co-author of 14 books on information systems and management, including Beyond The IT Productivity Paradox (Wiley, 1999), Strategic Sourcing of Information Systems (Wiley, 1997), and Global IT Outsourcing (forthcoming). He has published over 130 refereed papers in journals such as Harvard Business Review, Sloan Management Review, Journal of Management Studies, MIS Quarterly, and Long Range Planning. He is retained adviser to several major corporations and government institutions, and in 1997 was expert witness to the U.S. Congressional Commission on Restructuring the U.S. Internal Revenue Service. Tessa Yuk Lan Yau is a professional marketer and a member of the Chartered Institute of Marketing. She was educated at the Tsing Yi Technical College of Hong Kong and completed her M.B.A. at the Aston Business School in 1999. Before going to Aston, she worked as a marketing executive for a trading firm in Hong Kong. Her handling of various OEM projects (focused on electronic items) developed her interest in exploring the relationship of IT applications and their use in multinational corporations (MNCs). Thus her MBA research report (which is concerned with Japanese firms and which comprises the main data for this paper) was a first step to investigating the MNCs’ control and communication with their headquarters.

Index 393

Index A academic participants 373 actual target 351 affective antecedents 350 alternative wealth creation systems 92 attrition 162 automated voice query service 109 B B2C e-commerce 346 bargaining power 69 basic design 263 behavioral dispositions 350 bilingual users 5 BOOT (build-own-operate-transfer) 261 broker benefits 64 browsing mode 3 bulletin board 108 business enterprises 332 business strategy 47 C card authentication 128 cardholder verification 128 cashless ambulatory payments 126 CATWOE analysis 76 central trade union 273 ceteris paribus 114 change control 233 change leader 306, 312 chief architect 306, 312 chief operating strategist 306, 313 Chipknip 127 CIO function 315 coach 306, 313 cognitive loyalty 351 communally oriented 346 competitive environment 47 computerized transit system 124 conceptual framework 42 confidentiality clauses 170 contact points 241

content providers 7 contract accomplishment 262 contract duration 183 contract negotiators 183 contract provisions 183 controlling 244 coordination 50 credit card 127 CSCW (computer supported collaborative work) 255 cultural construction 150 customer capital 334 customer heterogeneity 356 D data mining technology 258 day trading 67 de facto limitation 107 dealer quotes 116 decentralization 49 decision sponsors 183 decisional role 305, 310 degree of range 252 degree of reach 252 degree of structuring 252 delegation 56 Delphi study 371 detailing 263 development capital 334 deviation 374 digital thinking 256, 257 direct order 108 division of work 49 documentation 14 dollar exchange rate 336 “double-loop” learning 322 E e-commerce 98 e-loyalty 356 early termination provisions 170 economic growth 210 Copyright © 2002, Idea Group Publishing.

394 Index electronic auction markets 112 electronic catalog 2 electronic commerce 1, 2, 12 electronic trading 70, 109 empirical research 290 empirical verification 57 encryption technique 70, 128 enterprise conception 263 enterprise engineering 263 enterprise resource planning (ERP) 191 equipment supply 263 equity trading 104 Eurocheque 126 Europas 126 exchange commissions 99 exchange oriented 346 executive design 263 executive information system (EIS) 75 expected benefits 183 expert system 257 external debt 336 external environment 29, 55 F favoring the house 106 federal structure 162 feeling states 350 financial capital 335 financial control 232, 238 financial exchanges 232 financial information 65 force major clause 170 formal planning 292 formalization 50 front-running 106 functional structure 50 G GAAP (generally agreed accounting principles) 201 generic attributes 371 global competition 70 global economy 150 global electronic village 342 global investing 66 global market revenues 161 global Markets 66 global planning 136 globalization 12, 88, 320 globalization paradox 150 gross domestic product (GDP) 336 group debates 78

group discussions 74 H hierarchical barriers 13 high context cultures 87 horizontal coordination 292 human attributes 376 human capital 334 human interaction 358 hygiene factors 378 I increasing returns 330 information and communication technology (ICT) 83 information infrastructure 214 information sharing 48 information systems (IS) 54, 74, 86, 290, 304, 370 information technology (IT) 43, 51, 142, 195, 227, 252, 269, 305, 382 informational role 305, 310 informational society 154 instrument testing 30 intellectual assets 331 intellectual capital 330, 334 intellectual property right clauses 170 intelligent machine 258 inter-linked economy (ILE) 324 Internet auction markets 97 Internet-based share brokers 64 Internet-based share trading 68 Internet shopping 25 interpersonal role 305, 311 interviews 14 investor benefits 64 IT knowledge 278 IT-development ideas 272 IT-use ideas 272 item creation 30 J job autonomy 56 joint application design (JAD) 78 K key vendor personnel 233 knowledge assets 330 knowledge capital 331 knowledge management (KM) 203 knowledge-based computer system 258 kurtosis level 296

Index 395 L

O

language support 7 language translator 8 leadership role 309 learning organization 322 least developed countries (LDCs) 207 legal framework (LF) 29 liability and indemnity 170 limit orders 64 linking pin 132 liquid market 112 list of competencies 373 localization 87 logico-linguistic modeling (LLM) 76 low context cultures 87 loyalty 348 loyalty programs 349

online retail 347 on-site observation 14 ontology 8 open outcry 108 open-ended statement 373 order placement security 102 organization 48 organizational capital 334 organizational infrastructure 55 organizational learning (OL) 203 organizational mapping 76 organizational structure 50 outsourcing contract 229 outsourcing market 160

M

participation 292 penalty clauses 170 penalty payments 239 perceived competence (PC) 28 perceived Integrity (PI) 28 perceived privacy control (PPC) 28 perceived security control (PSC) 28 personal finance programs 66 post-contract management 243 power distance 45 price manipulation 106 price matching 116 private sector 380 problem owner 272 process capital 334 product developer 306, 312 product life cycle 85 production macro-process 262 propensity to trust (PTT) 29 public sector 380

magnetic card system 102 management researchers 57 managerial work 305 manufacturer 7 market capital 334 market exchanges 97 market transparency 108 matching mode 3 matrix organization 322 matrix structure 50 metabusiness 251 mixed/matrix structure 162 monitoring 232 motivation 349 motivational attributes 380 motivators 378 multi-disciplinary research 123 multilingual electronic commerce 1 multilingual interfaces 7 N named contract managers 170 national culture 44 national information infrastructures (NII) 207 networked organization 321 networked systems 342 newspaper circulation 214 nominal group technique (NGT) 78 normal probability plots 296

P

Q qualitative methods 13 quasi-firm 251 questionnaire 194, 373 R radio density 214 redundancy 162 rejecting outsourcing 184 relational phenomenon 352 relative attitude 349 reminder notices 375 reporting level 308

396 Index research agenda 48 research flogging 106 revenue 162 reverse technology transfer 201 S S-curve 85 scale development 30 searching mode 3 security cards 98 selective outsourcing 164 self-service information technologies (SSIT) 346 service enforcement 232 service environments 347 service level agreements 170 share-dealing service 63 shopping cart 5 single administrative document (SAD) 124 “single-loop” learning 322 skewness level 296 small and medium enterprises (SMEs) 84 social development index (SDI) 211, 215 soft issues 342 soft systems methodology (SSM) 75 specialization 49 staff turnover 74 stakeholders 80 stock brokering 63, 67 stock market automation 111 strategic alignment model 48 strategic intent 138 strategy formulation 58 strategy implementation 58 structural capital 334 structural equation modeling (SEM) 32 subsidiary issues 84 supplier ratings 184 system architecture 9 systems development 124 T tacit-explicit dichotomy 252 technical attributes 376 technical knowledge competencies 380 technology provocateur 306, 312 telephone density 214 television density 214 thinking states 349 third party recognition (TPR) 29

total insourcing 164 total outsourcing 164 trade union 273 trading system 100 transit procedure 124 transnational information systems (TIS) 120 trust 26 turn-key projects 261 turnover 162 U uncertainty avoidance 45 unified content model 2 unit structure 50 universality 88 users 7 V virtual team network 323 voucher funds 104 W warranty clauses 170 Web-based trading 67 weltanschauung 76, 272 workgroup systems 255