Posted: June 19th, 2022

case study

Case study 8-1:
1. What is likely to have led to increased trust for the IT organization?
2. What might explain an item that is seemingly quite unrelated to IT (costs per kilometer flown) decreased as a result of the new CIO structure?
3. What maturity level did KLM appear to exhibit (a) in 2000 and (b) in 2011? Why?
4. Why do you think that KLM requires its employees to use a standard business case template when they want to make an investment?
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skills and knowledge that are relevant to the dot-com business. Their processes must support the dot-com strategy.
Imagine what would happen if the order process for their services was not Internet based. It seems silly to even
consider a dot-com that would insist that orders be placed in person or even by telephone. The dot-com processes
are aligned with companies’ on-line-based business strategy. Further, their IS strategy must also be aligned with
their processes. It would be equally silly to expect information to be based on paper files rather than electronic files.
A classic, widely used model developed by Michael Porter still frames most discussions of business strategy. In
the next section, we review Porter’s generic strategies framework as well as dynamic environment strategies.5 We
then share questions that a general manager must answer to understand the business’ strategy.
The Generic Strategies Framework
Companies sell their products and services in a marketplace populated with competitors. Michael Porter’s frame-
work helps managers understand the strategies they may choose to build a competitive advantage. In his book
Competitive Advantage, Porter claims that the “fundamental basis of above-average performance in the long run is
sustainable competitive advantage.”6 Porter identified three primary strategies for achieving competitive advantage:
(1) cost leadership, (2) differentiation, and (3) focus. These advantages derive from the company’s relative position
5 Another popular model by Michael Porter. the value chain, provides a useful model for discussing internal operations of an organization. Some find it a
useful model for understanding how to link two firms. This framework is used in Chapter 5 to examine business process design. For further information,
see M. Porter, Competitive Advantage, I st ed. (New York: The Free Press, 1985).
6 M. Porter. Competitive Advantage: Creating and Sustaining Superior Pe,formance, 2nd ed. (New York: The Free Press, 1998).
fil The Information Systems Strategy Triangle
Strategic Advantage
Q) \ Uniqueness perceived by customer Low-cost position e>
i!! ···-··-·

u lndustrywide Differentiation Cost leadership ·rn
~ Particular segment only Focus ci5 !
FIGURE 1.3 Three strategies for achieving competitive advantage.
Source: Adapted from M. Porter, Competitive Advantage, 1st ed. (New York: The Free Press, 1985) and Competitive Advantage:
Creating and Sustaining Superior Performance, 2nd ed. (New York: The Free Press, 1998).
in the marketplace, and they depend on the strategies and tactics used by competitors. See Figure 1.3 for a summary
of these three strategies for achieving competitive advantage.
Cost leadership results when the organization aims to be the lowest-cost producer in the marketplace. The
organization enjoys above-average performance by minimizing costs. The product or service offered must be
comparable in quality to those offered by others in the industry so that customers perceive its relative value. Typ-
ically, only one cost leader exists within an industry. If more than one organization seeks an advantage with this
strategy, a price war ensues, which eventually may drive the organization with the higher cost structure out of the
marketplace. Through mass distribution, economies of scale, and IS to generate operating efficiencies, Walmart
epitomizes the cost-leadership strategy.
Through differentiation, the organization offers its product or service in a way that appears unique in the mar-
ketplace. The organization identifies which qualitative dimensions are most important to its customers and then
finds ways to add value along one or more of those dimensions. For this strategy to work, the price charged cus-
tomers for the differentiator must seem fair relative to the price charged by competitors. Typically, multiple firms ‘flll/lJ
in any given market employ this strategy. Progressive Insurance is able to differentiate itself from other automobile
insurance companies.
In its earlier days, Progressive Insurance’s service was unique. Representatives responded to accident claims
24-7, arriving at the scene of the accident with powerful laptops and software that enabled them to settle claims and
cut a check on the spot. More recently, Progressive was the first to offer a usage-based insurance product, called
Snapshot, that bases insurance rates on the miles driven by customers. These innovations enabled a strategy that
spurred Progressive’s growth and widened its profit margins. Apple Inc. is another example of a company that com-
petes in its markets on its ability to differentiate its products. Apple’s various innovations in its operating system,
laptop design, iPads, iPhones, iPods, iTunes and iWatches have created a strategy based on the uniqueness of its
products and services.
Focus allows an organization to limit its scope to a narrower segment of the market and tailor its offerings
to that group of customers. This strategy has two variants: (1) cost focus, in which the organization seeks a cost
advantage within its segment and (2) differentiation focus, in which it seeks to distinguish its products or services
within the segment. This strategy allows the organization to achieve a local competitive advantage even if it does
not achieve competitive advantage in the marketplace overall. Porter explains how the focuser can achieve compet-
itive advantage by focusing exclusively on certain market segments:
Breadth of target is clearly a matter of degree, but the essence of focus is the exploitation of a narrow target’s differ-
ences from the balance of the industry. Narrow focus in and of itself is not sufficient for above-average performance.7
Marriott International demonstrates both types of focus with two of its hotel chains: Marriott has a cost focus,
and Ritz-Carlton has a differentiation focus. To better serve its business travelers and cut operational expenses,
Marriott properties have check-in kiosks that interface with their Marriott Rewards loyalty program. A guest can
swipe a credit card or Marriott Rewards card at the kiosk in the lobby and receive a room assignment and keycard
7 Porter. Competitive Advantage: Creating and Sustaining.
Brief Overview of Business Strategy Frameworks m
from the machine. She can also print airline boarding passes at the kiosks. Further, the kiosks help the Marriott
chain implement its cost focus by cutting down on the personnel needed in at the front desk. The kiosk system is
integrated with other systems such as billing and customer relationship management (CRM) to generate operating
efficiencies and enhanced corporate standardization.
In contrast, stand-alone kiosks in the lobby would destroy the feeling that the Ritz-Carlton chain, acquired by
Marriott in 1995, creates. To the Ritz-Carlton chain, CRM means capturing and using information about guests,
such as their preference for wines, a hometown newspaper, or a sunny room. Each Ritz-Carlton employee is
expected to promote personalized service by identifying and recording individual guest preferences. To demon-
strate how this rule could be implemented, a waiter, after hearing a guest exclaim that she loves tulips, could log the
guest’s comments into the Ritz-Carlton CRM system called “Class.” On her next visit to a Ritz-Carlton hotel, tulips
could be placed in the guest’s room after querying Class to learn more about her as her visit approaches. The CRM
is instrumental in implementing the differentiation-focus strategy of the Ritz-Carlton chain. 8 Its strategy allows the
Ritz-Carlton chain to live up to its unique motto which emphasizes that its staff members are distinguished people
with distinguished customers.
Airline JetBlue adopted a differentiation strategy based on low costs coupled with unique customer experience.
It might be called a “value-based strategy.” It is not the lowest cost carrier in the airline industry; at 12.3 cents per
passenger seat mile, JetBlue has one of the lowest costs, but Virgin America, Spirit, and Allegiant had even lower
per seat mile costs in 2013. But JetBlue manages its operational costs carefully, making decisions that keep its per
passenger costs among the lowest in the business, such as a limited number of airplane models in its fleet, gates at
less congested airports, paperless cockpit and many other operations, and snacks instead of meals on flights. Jet-
Blue has one of the longest stage length averages (the length of the average flight) in the industry, and the longer
the flight, the lower the unit costs. Competing network carriers, who are more well known and established, may
have different pay scales because they’ve been in the business longer and have a different composition of staff.
These carriers also have higher maintenance costs for their older, more diverse fleets. If it could realize its plans for
growth while maintaining its low cost structure, JetBlue could move from its cost focus based on serving a limited,
but growing, number of market segments to a cost leadership strategy.9
While sustaining a cost focus, JetBlue’s chairman believes that JetBlue can compete on more than price, which
is part of its unique differentiation strategy. It is why the airline continually strives to keep customers satisfied with
frills such as extra leg room, leather seats, prompt baggage delivery, DirectTV, and movies. It has been recognized
with many awards for customer satisfaction in the North American airline industry.
Dynamic Environment Strategies
Porter’s generic strategies model is useful for diagnostics, for understanding how a business seeks to profit in
its chosen marketplace, and for prescriptions, or building new opportunities for advantage. It reflects a careful
balancing of countervailing competitive forces posed by buyers, suppliers, competitors, new entrants, and substitute
products and services within an industry. As is the case with many models, dynamic environment strategies offer
managers useful tools for thinking about strategy.
However, the Porter model was developed at a time when competitive advantage was sustainable because the
rate of change in any given industry was relatively slow and manageable. Since the late 1980s, when this frame-
work was at the height of its popularity, newer models have been developed to take into account the increasing
turbulence and velocity of the marketplace. Organizations need to be able to respond instantly and change rapidly,
which requires dynamic structures and processes. One example of this type of approach is the hypercompetition
framework. Discussions of hypercompetition take a perspective different from that of the previous framework. Por-
ter’s framework focuses on creating competitive advantage in relatively stable markets, whereas hypercompetition
frameworks suggest that the speed and aggressiveness of the moves and countermoves in a highly competitive and
8 Scott Berinato, “Room for Two, .. C/ (May 15, 2002), l 502/two_content.html.
9 / Airline _Economic_Analysis_Screen_ OW _Nov _2014.pdf (accessed
March 23, 2015).
fl’I The Information Systems Strategy Triangle
turbulent market create an environment in which advantages are rapidly created and eroded. In a hypercompetitive
market, trying to sustain a specific competitive advantage can be a deadly distraction because the environment and
the marketplace change rapidly. To manage the rapid speed of change, firms value agility and focus on quickly
adjusting their organizational resources to gain competitive advantage. Successful concepts in hypercompetitive
markets include dynamic capabilities, creative destruction, and blue ocean strategy. 10
Dynamic capabilities are means of orchestrating a firm’s resources in the face of turbulent environments. In
particular, the dynamic capabilities framework focuses on the ways a firm can integrate, build, and reconfigure
internal and external capabilities, or abilities, to address rapidly changing environments. These capabilities are
built rather than bought. They are embedded in firm-specific routines, processes, and asset positions. Thus,
they are difficult for rivals to imitate. In sum, they help determine the speed and degree to which the firm can
marshal and align its resources and competences to match the opportunities and requirements of the business
environment. 11
Since the 1990s, a competitive practice, called creative destruction, has emerged. First predicted over 60 years
ago by the economist Joseph Schumpeter, it was made popular more recently by Harvard Professor Clay Christensen.
Coincidentally (or maybe not), the accelerated competition has occurred concomitantly with sharp increases in the
quality and quantity of information technology (IT) investment. The changes in competitive dynamics are particu-
larly striking in sectors that spend the most on IT. 12
One example of using dynamic models was implemented by leadership guru Jack Welch at General Electric
(GE). Often nicknamed “Neutron Jack” because of the way businesses were radically changed, Welch’s approach
to creative destruction was termed destroy your business (DYB). Welch recognized that GE could sustain its com-
petitive advantage only for a limited time as competitors attempted to outmaneuver the company. He knew that
if GE did not identify its weaknesses, its competitors would relish doing so. DYB is an approach that places GE
employees in the shoes of their competitors. 13 Through the DYB lenses, GE employees develop strategies to destroy
the company’s competitive advantage. Then, in light of their revelations, they apply the grow your business (GYB)
strategy to find fresh ways to reach new customers and better serve existing ones. This allows GE to protect its .,,,,
business from its competitors and sustain its position in the marketplace over the long run.
A similar strategy of cannibalizing its own products was used by Apple. Steve Jobs, Apple’s founder and former
CEO, felt strongly that if a company was not willing to cannibalize its own products, someone else would come
along and do it for them. That was evident in the way Apple introduced the iPhone while iPod sales were brisk and
the iPad while its Macintosh sales were strong. 14 Apple continues to exhibit this strategy with subsequent releases
of new models of all of its products.
Most discussions of strategy focus on gaining competitive advantage in currently existing industries and mar-
ketplaces, which are referred to by Kim and Mauborgne as red ocean strategy. Using a red ocean strategy, firms
fiercely compete to earn a larger share of existing demand. Kim and Mauborgne recommend a better approach:
Firms adopt a blue ocean strategy in which they create new demand in untapped marketspaces where they have the
“water” to themselves. When applying the blue ocean strategy, the goal is not to beat the competition but to make
it irrelevant. This is what Dell did when it challenged current industry logic by changing the computer purchasing
and delivery experiences of its customers. “With its direct sales to customers, Dell was able to sell its PCs for
40 percent less than IBM dealers while still making money.” 15 Dell also introduced into unchartered seas an unprec-
edented delivery process that allowed buyers to receive their new computers within four days of ordering them as
compared to the red ocean process, which typically required 10 weeks.
1° For more information. please see Don Goeltz. “Hypercompetition,” vol. I of The Encyclopedia of Management Theory, ed. Eric Kessler (Los Angeles:
Sage, 2013), 359-60.
11 D. J. Teece. G. Pisano. and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18 (1997), 509-33; David
Teece, “Dynamic Capabilities,” vol. 1 of The Encyclopedia of Management Theory, ed. Eric Kessler (Los Angeles: Sage, 2013), 221-24.
12 Andrew McAfee and Erik Brynjolfsson. “Investing in the IT That Makes a Competitive Difference,” Har\'(/rd Business Review (July-August 2008).
13 M. Levinson, “GE Uses the Internet to Grow Business,” C/0 (October 15, 2001 ).
GE_Uses_the_Intemet_to_Grow_Business_ (accessed May 5, 2012).
14 Walter Isaacson, Steve Jobs (New York: Simon and Shuster. 2011 ).
15 W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy (Cambridge, MA: Harvard Business School, 2005), 202. …Iii
Brief Overview of Organizational Strategies m
Strategic Approach Key Idea Application to Information Systems
• Firms achieve competitive advantage I Understanding which strategy is chosen
through cost leadership, differentiation, by a firm is critical to choosing IS to
Porter’s generic strategies
or focus.
complement the strategy.
Dynamic environme-n·-t-st .. r.a····t···e … g … i.e-·s····· ·~··Speed, agility, and aggressive moves The speed of change is too fast for
: and countermoves by a firm create l manual response, making IS critical to
_· _co_m_p_e_ti_tiv_e_ad_va_n_t_ag_e_. ______ ~[_a_c_h_ie_v_in_g_b_u_s_ine_ss_g_o_a_l_s. ______ ~
FIGURE 1.4 Summary of strategic approaches and IT applications.
Why Are Strategic Advantage Models Essential to Planning
for Information Systems?
A general manager who relies solely on IS personnel to make IS decisions may not only give up any authority over
IS strategy but also hamper crucial future business decisions. In fact, business strategy should drive IS decision
making, and changes in business strategy should entail reassessments of IS. Moreover, changes in IS potential
should trigger reassessments of business strategy-as in the case of the Internet when companies that understood
or even considered its implications for the marketplace quickly outpaced their competitors who failed to do so.
For the purposes of our model, the Information Systems Strategy Triangle, understanding business strategy means
answering the following questions:
1. What is the business goal or objective?
2. What is the plan for achieving it? What is the role of IS in this plan?
3. Who are the crucial competitors and partners, and what is required of a successful player in this
4. What are the industry forces in this marketplace?
Porter’s generic strategies framework and the dynamic frameworks (summarized in Figure 1.4) are revisited in
the next few chapters. They are especially helpful in discussing the role of IS in building and sustaining competitive
advantages (Chapter 2) and for incorporating IS into business strategy. The next section of this chapter establishes
a foundation for understanding organizational strategies.
Brief Overview of Organizational Strategies
Organizational strategy includes the organization’s design as well as the choices it makes to define, set up, coor-
dinate, and control its work processes. How a manager designs the organization impacts every aspect of opera-
tions from dealing with innovation to relationships with customers, suppliers, and employees. The organizational
strategy is a plan that answers the question: “How will the company organize to achieve its goals and implement
its business strategy?”
A useful framework for organizational design can be found in the book Building the Information Age Orga-
nization by Cash, Eccles, Nohria, and Nolan. 16 This framework (Figure 1.5) suggests that the successful execu-
tion of a company’s organizational strategy comprises the best combination of organizational, control, and cultural
variables. Organizational variables include decision rights, business processes, formal reporting relationships, and
informal networks. Control variables include the availability of data, nature and quality of planning, effectiveness
of performance measurement and evaluation systems, and incentives to do good work. Cultural variables comprise
the values of the organization. These organizational, control, and cultural variables are managerial levers used by
decision makers to effect changes in their organizations. These managerial levers are discussed in detail in Chapter 3.
4-., ” James I. Cash, Robert G. Eccles, Ni tin Nohria, and Richard L Nolan, Building the /nfonnation Age Organization (Homewood, IL: Richard D. Irwin, 1994).
m The Information Systems Strategy Triangle
FIGURE 1.5 Managerial Levers model.
Source: J. Cash, R. G. Eccles, N. Nohria, and R. L. Nolan, Building the Information Age Organization (Homewood, IL: Richard D.
Irwin, 1994).
Our objective is to give the manager a framework to use in evaluating various aspects of organizational design.
In this way, the manager can review the current organization and assess which components may be missing and
what future options are available. Understanding organizational design means answering the following questions:
1. What are the important structures and reporting relationships within the organization?
2. Who holds the decision rights to critical decisions?
3. What are the important people-based networks (social and informational), and how can we use them to get
work done better?
4. What are the characteristics, experiences, and skill levels of the people within the organization?
5. What are the key business processes?
6. What control systems (management and measurement systems) are in place?
7. What are the culture, values, and beliefs of the organization?
The answers to these questions inform the assessment of the organization’s use of IS. Chapters 3, 4, and 5 use
the Managerial Levers model to assess the impact of information systems (IS) on the firm. Chapters 8 and 9 use this
same list to understand the business and governance of the IS organization.
Brief Overview of Information Systems Strategy
IS strategy is the plan an organization uses to provide information services. IS allow a company to implement its
business strategy. JetBlue’s former Vice President for People explains it nicely: “We define what the business needs
and then go find the technology to support that.” 17
Business strategy is a function of competition (What does the customer want and what does the competition
do?), positioning (In what way does the firm want to compete?), and capabilities (What can the firm do?). IS help
17 Hogue et al., Winning the 3-Legged Race, I 11.
Brief Overview of Information Systems Strategy 1fi1
Hardware The physical devices of the system
Software The programs, applications, and
· utilities
Networking / The way hardware is connected to
\ other hardware, to the Internet, and
: to other outside networks
) System users and managers
i System users and managers;
I company that provides the
: service
Data i Bits of information stored in the
FIGURE 1.6 IS strategy matrix.
i Owners of data; data
; administrators
. The hardware it resides on and
physical location of that hardware
Where the nodes, the wires, and
other transport media are located
Where the information resides
determine the company’s capabilities. An entire chapter is devoted to understanding key issues facing general man-
agers concerning IT architecture, but for now a more basic framework is used to understand the decisions related
to IS that an organization must make.
The purpose of the matrix in Figure 1.6 is to give the manager a high-level view of the relation between the
four IS infrastructure components and the other resource considerations that are keys to IS strategy. Infrastructure
= Social Business Lens: Building a Social Business Strategy
Some companies use social IT as point solutions for business opportunities, but others build a social business
strategy that considers the application of social IT tools and capabilities to solve business opportunities holisti-
cally. A social business strategy is a plan of how the firm will use social IT that is aligned with its organizational strat-
egy and IS strategy. Social business strategy includes a vision of how the business would operate if it seamlessly
and thoroughly incorporated social and collaborative capabilities throughout the business model. It answers the
same type of questions of what, how, and who, as do many other business strategies.
Social businesses infuse social capabilities into their business processes. Most of the social business opportu-
nities fall into one of three categories:
Collaboration-using social IT to extend the reach of stakeholders, both employees and those outside the
enterprise walls. Social IT such as social networks enable individuals to find and connect with each other to
share ideas, information, and expertise.
Engagement-using social IT to involve stakeholders in the traditional business of the enterprise. Social IT such as
communities and blogs provide a platform for individuals to join in conversations, create new conversations,
and offer support to each other and other activities that create a deeper feeling of connection to the company,
brand, or enterprise.
Innovation-using social IT to identify, describe, prioritize, and create new ideas for the enterprise. Social IT offers
community members a “super idea box” where individuals suggest new ideas, comment on other ideas, and
vote for their favorite idea, giving managers a new way to generate and decide on products and services.
National Instruments ( is an example of a company that has embraced social IT and created a social
business strategy. Managers developed a branded community consisting of a number of social IT tools like Face-
book, Twitter, blogs, forums, and more. By thinking holistically about all the ways that customers and employees
might interact with one another, the branded community has become the hub of collaboration, engagement, and
idea generation.
Source: Aclapt1·d fro111 Kni l’<'arl,on. "K illPr Apps for a Social Bus in,.,;· (Fl'I ,rnan· 1 ?. 1011 ). hi Ip:/ /i11sta111h.,-,·spo11,in·. wordpress. rnm/:Wl l/Ol/l?/killPr-apps-for-a-,ocial-liu,i,11·"/ (a,·,·,·,sl'd \larch 19. ~01.'i). For mon· i11for111atio11 on \atio11al l11stnt11H'll1'. ,Pt· 1 larnml Bttsirwss school cast· slu,h 81."lOOl. "'\a1io11al l11,lrn11w11h .. ll\· L,11da \pplt'/!'ttt·. Kni Pt•arlson. and ' How expensive’>” Fast Company (March 2002),
technology-how-much-how-fast-how-revolutionary-how-expensive (accessed August 21, 2015).
ll!I The Information Systems Strategy Triangle
• CASE STUDY 1-1 Lego
Lego has long been an industry leader in children’s toys with its simple yet unique building block-style products. A Danish
carpenter whose family still owns Lego today founded the privately held company in 1932. But by 2004, the company found
itself close to extinction, losing$ I million a day. A new CEO was brought in, and within five years sales were strong, profits
were up, and naysayers who felt the new strategy was going to fail were proved wrong. In fact, sales, revenues and profits
continued to be strong. Revenues grew from 16 billion Danish krone (DKK) in 2010 to over 28 billion DKK in 2014, and in
the same period, profit almost doubled from 3.7 billion DKK to 7 billion DKK.
With the advent of high-tech forms of entertainment, such as the iPod and PlayStation, Lego found itself more antique
than cutting edge in the toy world. When new CEO Jorgen Vig Knudstorp, a father and former McKinsey consultant, took
over, the company was struggling with poor performance, missed deadlines, long development times, and a poor delivery
record. The most popular toys frequently would be out of stock, and the company was unable to ship enough products or
manage the production of its more complicated sets. Retail stores were frustrated, and that translated into reduced shelf
space and ultimately to business losses.
Knudstorp changed all of that. He reached out to top retailers, cut costs, and added missing links to the supply chain. For
example, prior to the new strategy, 90% of the components were used in just one design. Designers were encouraged to reuse
components in their new products, which resulted in a reduction from about 13,000 different Lego components to 7,000.
Because each component’s mold could cost up to 50,000 euros on average to create, this reduction saved significant expense.
Lego was known for its traditional blocks and components that would allow children to build just about anything their
imagination could create. The new strategy broadened the products, targeting new customer segments. Lego managers cre-
ated products based on themes of popular movies, such as Star Wars and the Indiana Jones series. The company moved
into video games, which featured animated Lego characters sometimes based on movies. The company created a product
strategy for adults and engaged the communities who had already set up thousands of Web sites and biogs featuring Lego
creations. It embraced the community who thought of Lego as a way to create art rather than simply as a building toy. And
the company designed a line of Legos aimed at girls because the majority of its products had primarily targeted boys.
The culture of Lego changed to one that refused to accept nonperformance. The company’s past showed a tendency to
focus on innovation and creativity, often at the expense of profits. But that changed. “Knudstorp … made it clear that results,
not simply feeling good about making the best toys, would be essential if Lego was to succeed …. Its business may still be
fun and games, but working here isn’t,”20 describes the current culture at Lego.
Some of the most drastic changes came from within the Lego organization structure. After its massive losses in 2004,
Lego switched its employee pay structure, offering incentives for appropriate product innovation and sales. Key performance
indicators encourage product innovation that catalyzes sales while decreasing costs. Development time dropped by 50%, and
some manufacturing and distribution functions were moved to less expensive locations, but the focus on quality remained.
The creation of reusable parts alleviated some of the strain on Lego’s supply chain, which in tum helped its bottom line.
Lego also expanded into the virtual world, extending into video gaming and virtual-interaction games on the Internet.
Thinking outside the company’s previous product concepts cut costs while encouraging real-time feedback from customers
across a global market. Additionally, Lego created brand ambassadors who organized conventions across the world to dis-
cuss product innovation and to build communities of fellow customers. With increased revenue, Lego managers considered
entering the movie-making business-a risky proposition for a toy company. However, Lego’s success with Hollywood-type
action figures fueled its interest in a movie-making endeavor.
The growth put strains on the IS supporting the business. Order management and fulfillment were particularly affected,
resulting in the inability to meet customer demand. Employee management systems were stretched as new employees were
added to support the growth and additional locations. Product design and development, especially the virtual and video
games, required new technology, too.
To solve some of these problems, Lego managers used the same approach they used for their blocks. They created a
modularized and standardized architecture for their IS, making it possible to expand more quickly and add capacity and
functionality as it was needed. They implemented an integrated enterprise system that gave them new applications for
human capital management, operations support, product life cycle management, and data management. The new systems
and services, purchased from vendors such as SAP and IBM, simplified the IT architecture and the management processes
needed to oversee the IS.
10 Nelson D. Schwartz, “Turning to Tie-Ins, Lego Thinks Beyond the Brick,” The New York Times. September 5, 2009, http://www.nytimes.
com/2009/09/06/business/global/061ego.htmJOpagewanted=all&_r=0 (accessed August 21, 2015).
Case Study IJI
One manager at Lego summed it up nicely, “The toy world moves onwards constantly, and Lego needs to re-invent itself
continuously. Significant corporate re-shaping introduced new energy to the company.” 21 He went on to say that simplifying
Lego’s IT systems and implementing an efficient product development process that was able to maintain quality and cost
favorably positioned Lego to respond to the fast changing pace of the toy industry.
Discussion Questions
1. How did the information systems and the organization design changes implemented by Knudstorp align with the changes
in business strategy?
2. Which of the generic strategies does Lego appear to be using based on this case? Provide support for your choice.
3. Are the changes implemented by Knudstorp an indication of hypercompetition? Defend your position.
4. What advice would you give Knudstorp to keep Lego competitive, growing, and relevant?
Sources: Adapted from (accessed August 21, 2015); Brad Wieners,
“Lego Is for Girls” (December 19, 2011}, 6S-73; information from Lego’s 2012 annual report,
room/2013/february/annual-result-2012 (accessed March 29, 2015); and “Lego Case Study,” (accessed
March 29, 2015).
• CASE STUDY 1-2 Google
Started in the late 1990s, Google grew rapidly to become one of the leading companies in the world. Its mission is “to
organize the world’s information and make it universally accessible and useful.” It is operating on a simple but innovative
business model of attracting Internet users to its free search services and earning revenue from targeted advertising. In the
winner-takes-all business of Internet search, Google has captured considerably more market share than its next highest rival,
Yahoo. This has turned Google’s Web pages into the Web’s most valuable real (virtual) estate. Through its two flagship pro-
grams, AdWords and AdSense, Google has capitalized on this leadership position in searching to capture the lion’s share in
advertisement spending. AdWords enables businesses to place ads on Google and its network of publishing partners using
an auction-engine algorithm to decide which ad will appear on a given page. On the other hand, Google uses AdSense to
push advertisements on publishing partners’ Web sites targeting a specific audience and share ad revenue with the publishing
partner. This creates a win-win situation for both advertisers and publishers; Google makes more than 90% of its revenue
from ads.
Even as a large company, Google continues to take risks and expand into new markets. Innovation is at the core of their
enterprise. Sergey Brin and Larry Page, the founders, declared in Google’s IPO prospectus, “We would fund projects that
have a 10% chance of earning a billion dollars over the long term … We place smaller bets in areas that seem very specula-
tive or even strange. As the ratio of reward to risk increases, we will accept projects further outside our normal areas.” They
add that they are especially likely to fund new types of projects when the initial investment is small.
Google promotes a culture of creativity and innovation in a number of ways. It encourages innovation in all employees
by allowing them to spend 20% of their time on a project of their own choosing. In addition, the company offers benefits
such as free meals, on-site gym, on-site dentist, and even washing machines at the company for busy employees.
Despite an open and free work culture, a rigid and procedure-filled structure is imposed for making timely decisions and
executing plans. For example, when designing new features, the team and senior managers meet in a large conference room.
They use the right side of the conference room walls to digitally project new features and the left side to project any tran-
scribed critique with a timer clock giving everyone 10 minutes to lay out ideas and finalize features. Thus, Google utilizes
rigorous, data-driven procedures for evaluating new ideas in the midst of a chaotic innovation process.
Nine notions of innovations are embedded in the organizational culture, processes, and structure of Google: 22
1. “Innovation Comes from Anywhere”: All Google employees can innovate.
2. “Focus on the User”: When focus is on the user, the money and all else will follow.
21 (accessed September 11, 2015).
22 Kathy Chin Long, “Google Reveals its Nine Principles of Innovations,” Fast Company,
at-everything/googles-nine-principles-of-innovation (accessed March 30, 2015).
lfl The Information Systems Strategy Triangle
3. “Aim to be Ten Times Better”: To get radical and revolutionary innovation, think IO times improvement to force
out-of-the-box thinking.
4. “Bet on Technical Insights”: Trust your organization’s unique insights and bet on them for major innovation.
5. “Ship and Iterate”: Do not wait for perfection; let users help you to “iterate.”
6. “Give Employees 20 Percent Time”: Employees will delight you with their creative thinking. Give them 20 percent
of their work time to pursue projects they are passionate about.
7. “Default to Open Processes”: Make processes open to all to tap into the collective energy of the user base to find
great ideas.
8. “Fail Well”: Do not attach stigma to failure. If you do not fail often, you are not trying hard enough. Let people and
projects fail with pride.
9. “Have a Mission That Matters”: Google believes that its work has a positive impact on millions of people and that
this is motivating its people every day.
Keeping up with the organizational strategy of Google, its IT department provides free and open access to IT for all
employees. Rather than keeping tight control, Google allows employees to choose from several options for computer and
operating systems, download software themselves, and maintain official and unofficial blog sites. Google’s intranet provides
employees information about every piece of work at any part of the company. In this way, employees can find and join hands
with others working on similar technologies or features.
In building the necessary IT infrastructure, Google’s IT department balances buying and making its own software depend-
ing on its needs and off-the-shelf availability. Google thinks of every IT decision “at Web Scale” to make sure its technology
works well for its customers. Given the nature of business, security of information resources is critical for Google. For
instance, its master search algorithm is considered a more valuable secret formula than Coca-Cola’s. However, rather than
improving IT security by stifling freedom through preventive policy controls, Google puts security in the infrastructure and
focuses more on detective and corrective controls. Its network management software tools combined with a team of security
engineers constantly look for viruses and spyware as well as strange network traffic patterns associated with intrusion.
Discussion Questions
1. How is Google’s mission statement related to its business strategy?
2. How does Google’s information systems strategy support its business strategy?
3. How does Google’s organizational strategy support its business strategy?
4. Which of Porter’s three generic strategies does Google appear to be using based on this case? Provide a rationale for
your response.
5. Analyze Google’s strategy and the type of market disruption it has created using a dynamic environment perspective.
Sources: Adapted from Michelle Colin, “Champions of Innovation,” Businessweek 3989 (June 18, 2006), 18–26,
com/bw/stories/2006-06-18/champions-of-innovation; Vauhini Vara, “Pleasing Google’s Tech-Savvy Staff” (March 18, 2008), 86; Jason
Bloomberg, “Google’s Three-Pronged Enterprise Strategy,” Forbes Online (December 12, 2014); and Connor Forrest, “Four Ways
Google Makes Money,” TechRepub/ic (January 16, 2015),
outside-of-advertising/ (accessed August 21, 2015).
Strategic Use of
Information Resources
This chapter introduces the concept of building competitive advantage using information
systems-based applications. It begins with a discussion of a set of eras that describe the use
of information resources historically. It then presents information resources as strategic tools,
discussing information technology (IT) assets and IT capabilities. Michael Porter’s Five Com-
petitive Forces model then provides a framework for discussing strategic advantage, and
his Value Chain model addresses tactical ways organizations link their business processes
to create strategic partnerships. We then introduce the Piccoli and Ive’s model to show how
strategic advantage may be sustained in light of competitive barriers while the Resource-
Based View focuses on gaining and maintaining strategic advantage through information
and other resources of the firm. The chapter concludes with a brief discussion of strategic
alliances, co-opetition, risks of strategic use of IT, and cocreating IT and business strategy.
Just as a note: this chapter uses the terms competitive advantage and strategic advantage
Zara, a global retail and apparel manufacturer based in Arteixo, Spain, needed a dynamic business
model to keep up with the ever-changing demands of its customers and industry. At the heart of its
model was a set of business processes and an information system that linked demand to manufactur-
ing and manufacturing to distribution. The strategy at Zara stores was simply to have a continuous
flow of new products that were typically in limited supply. As a result, regular customers visited
their stores often-an average of 17 times a year whereas many retail stores averaged only four
times a year. When customers saw something they liked, they bought it on the spot because they
knew it would probably be gone the next time they visited the store. The result was a very loyal and
satisfied customer base and a wildly profitable business model.
How did Zara do it? It was possible in part because the company aligned its information system
strategy with its business strategy. Its corporate Web site gave some insight:
Zara’s approach to design is closely linked to our customers. A non-stop flow of information from
stores conveys shoppers’ desires and demands, inspiring our 200-person strong creative team.1
The entire process from factory to shop floor is coordinated from Zara’s headquarters by using
information systems. The point-of-sale (POS) system on the shop floor records the information from
each sale, and the information is transmitted to headquarters at the end of each business day. Using
a handheld device, the Zara shop managers also report daily to the designers at headquarters to let
them know what has sold and what the customers wanted but couldn’t find. The information is used
to determine which product lines and colors should be kept and which should be altered or dropped.
‘ Inditex Web site, we_are/concepts/zara (accessed February 20, 2012); http://www.rnarinabaysands.
com/shopping/zara.htrnl (accessed May 2, 2015).
Ill Strategic Use of Information Resources
The designers communicate directly with the production staff to plan for the incredible number of designs-more
than 30,000-that will be manufactured every year. 2
The shop managers have the option to order new designs twice a week using handheld computers. Before order-
ing, they can use these devices to check out the new designs. Once an order is received at the manufacturing plant at
headquarters, a large computer-controlled piece of equipment calculates how to position patterns to minimize scrap
and cut up to 100 layers of fabric at a time. The cut fabric is then sent from Zara factories to external workshops for
sewing. The completed products are sent to distribution centers where miles of automated conveyor belts are used
to sort the garments and recombine them into shipments for each store. Zara’s Information Systems (IS) department
wrote the applications controlling the conveyors, often in collaboration with vendors of the conveyor equipment.
As the Zara example illustrates, innovative use of a firm’s information resources can provide it substantial
and sustainable advantages over competitors. Every business depends on IS, making its use a necessary resource
every manager must consider. IS also can create a strategic advantage for firms who bring creativity, vision, and
innovation to their IS use. The Zara case is an example. This chapter uses the business strategy foundation from
Chapter 1 to help general managers visualize how to use information resources for competitive advantage. This
chapter highlights the difference between simply using IS and using IS strategically. It also explores the use of
information resources to support the strategic goals of an organization.
The material in this chapter can enable a general manager to understand the linkages between business strategy
and information strategy on the Information Systems Strategy Triangle. General managers want to find answers to
questions such as: Does using information resources provide a sustainable and defendable competitive advantage?
What tools are available to help shape strategic use of information? What are the risks of using information resources
to gain strategic advantage?
Evolution of Information Resources
The Eras model (Figure 2.1) summarizes the evolution of information resources over the past six decades. To think
strategically about how to use information resources now and in the future within the firm, a manager must under-
stand how the company arrived at where it is today. This model provides a good overview of trends and uses that
have gotten the company from simple automation of tasks to extending relationships and managing their business
ecosystems to where it is today.
IS strategy from the 1960s to the 1990s was driven by internal organizational needs. First came the need to
lower existing transaction costs. Next was the need to provide support for managers by collecting and distributing
information followed by the need to redesign business processes. As competitors built similar systems, organi-
zations lost any advantages they had derived from their IS, and competition within a given industry once again
was driven by forces that existed prior to the new technology. Most recently, enterprises have found that social IT
platforms and capabilities drive a new evolution of applications, processes, and strategic opportunities that often
involve an ecosystems of partners rather than a list of suppliers. Business ecosystems are collections of interacting
participants, including vendors, customers, and other related parties, acting in concert to do business. 3
In Eras I through III, the value of information was tied to physical delivery mechanisms. In these eras, value was
derived from scarcity reflected in the cost to produce the information. Information, like diamonds, gold, and MBA
degrees, was more valuable because it was found in limited quantities. However, the networked economy beginning
in Era IV drove a new model of value-value from plenitude. Network effects offered a reason for value derived
from plenitude; the value of a network node to a person or organization in the network increased when others joined
the network. For example, an e-mail account has no value without at least one other e-mail account with which to
communicate. As e-mail accounts become relatively ubiquitous, the value of having an e-mail account increases
as its potential for use increases. Further, copying additional people on an e-mail is done at a very low cost (virtu-
ally zero), and the information does not wear out (although it can become obsolete). As the cost of producing an
‘ Shenay Kentish, Zara (October 18, 2011 ), (accessed April I 0, 2012).
-‘ For further discussion of business ecosystems, please refer to Nicholas Yitalari and Hayden Shaughnessy. The Elastic Enterprise (Longboat Key, FL:
Telemachus Press, 2012).
Primary Role
of IT
Evolution of Information Resources Ill
Era 11960s Era 111970s I Era 1111980s I Era IV 1990s I Era V 2000s \ Era VI 2010+
·-·–· -··· ——. –… ——-·——-‘ ···—·-·—-t——·-··J_ ______________________ …;
Efficiency Effectiveness [ Strategy j Strategy I Valu~ I Value extension
i A~t~ma~;– .. , S~l~;- . — ·– . tl~crease —- ·4Tr~nsfor;- -+~::::n Tc-re_a_t_e _____ C_o_n_n_e_c-ti_n_g__,
existing I problems ·1 individual and I industry/ I collaborative I community intelligent
I paper-based and create group I organization \ partnerships I and social devices
1—–__J_!:~~cesses op….!:~_rlunities , effectiveness , I business
Justify IT : Return on Tncrease in I Competitive I Competitive I Added value 1
Creation of
Expenditures investment I ~·;oductivity I position I position I relationships information
I I I ‘
and better
. i I exchange
j decision j i I
~i~:’ … i O~~;,~io~ lg;;;~;;;u;~; 1 ~;~~;r -1~;:=., ·· 1 ~~EJ~Jit~;- ~~~’:~
lnf~rm~~i-;n Application ····r·. Data driven. –rus~r driven —-·1 Business —-.. t Knowledge -t:::::tem .. Data
Models specific I I driven I driven I driven (or exchange
I, I I ·1· relationship driven
Basis of
I ii b, I I driven)
Minicompu~ I Microcomputer, Client server, 1· Internet, I Social Intelligent
mostly I “decentralized “distributed global I platforms, devices,
“centralized .
intelligence” intelligence”
“ubiquitous : social sensors,
intelligence” i intelligence” I networks, electronics
i I
1 mobile, cloud
-···-·I —- –·-·· ··—~·-····–····-·–·-·——·-·1·-·——-·—- ————
·1 Scarcity Plenitude I Plenitude I Hyperplenitude
, I
i Mainframe,
‘ “centralized
I intelligence”
Scarcity Scarcity
Economics of Economics of Economics of Economics of Economics of Economics of Economics of
information information information information information relationships information
bundled with bundled with bundled with separated separated bundled with bundled with
economics of economics of economics of from from economics of economics of
things things things economics economics information things
of things of things
FIGURE 2.1 Eras of information usage in organizations.
additional copy of an information product within a network becomes trivial, the value of that network increases.
Therefore, rather than using production costs to guide the determination of price, information products might be
priced to reflect their value to the buyer. 4
As each era begins, organizations adopt a strategic role for IS to address not only the firm’s internal circum-
stances but also its external circumstances. Thus, in the value-creation era (Era V), companies seek those appli-
cations that again provide them an advantage over their competition and keep them from being outgunned by
start-ups with innovative business models or traditional companies entering new markets. For example, companies
like Microsoft, Google, Apple, and Facebook have created and maintained a competitive advantage by building
technical platforms and organizational competencies that allow them to bring in partners as necessary to create
new products and services for their customers. Their business ecosystems give them agility as well as access to
talent and knowledge, extending the capabilities of their internal staff. Other firms simply try to solve all customer
requests themselves.
Era VI has brought another paradigm shift in the use of information with an era of hyperplenitude: seem-
ingly unlimited availability of information resources such as the Internet and processing and storage through
‘ Adapted from M. Broadbent, P. Weill, and D. Clair. “The Implications of Information Technology Infrastructure for Business Process Redesign,” MIS
Quarterly 23, no. 2 ( 1999), 163.
Ill Strategic Use of Information Resources
cloud computing sparked new value sources such as community and social business and the Internet of Things
(connecting intelligent devices, sensors, and other electronics).
The Information System Strategy Triangle introduced in Chapter 1 reflects the linkages between a firm’s IS strat-
egy, organizational strategy, and business strategy. A link between IS strategy and business strategy focuses on the
firm’s external requirements whereas a link between IS strategy and organizational strategy fulfills and enhances
internal requirements of the firm. Maximizing the effectiveness of the firm’s business strategy requires that the
general manager be able both to identify and use information resources. This chapter describes how information
resources can be used strategically by general managers.
Information Resources as Strategic Tools
Crafting a strategic advantage requires the general manager to cleverly combine all the firm’s resources, includ-
ing financial, production, human, and information, and to consider external resources such as the Internet and
opportunities in the global arena. Information resources are more than just the infrastructure. This generic term,
information resources, is defined as the available data, technology, people, and processes within an organization
to be used by the manager to perform business processes and tasks. Information resources can either be assets or
capabilities. An IT asset is any thing, tangible or intangible, that can be used by a firm to create, produce, and/or
offer its products (goods or services). Examples of IT assets include a firm’s Web site, data files, or computer equip-
ment. An IT capability is something that is learned or developed over time for the firm to create, produce, or offer
its products. An IT capability makes it possible for a firm to use its IT assets effectively. 5 The ability and knowledge
to create a Web site, work with data files, and take advantage of IT equipment are examples of capabilities.
An IS infrastructure (a concept that is discussed in detail in Chapter 6) is an IT asset. It includes each of an
information resource’s constituent components (i.e., data, technology, people, and processes). The infrastructure
provides the foundation for the delivery of a firm’s products or services. Another IT asset is an information repos-
itory, which is logically related data captured, organized, and retrieved by the firm. Some information repositories
are filled with internally oriented information designed to improve the firm’s efficiency. Other repositories tap the
external environment and contain significant knowledge about the industry, the competitors, and the customers.
Although most firms have these types of information repositories, not all firms use them effectively.
In the continually expanding Web space, the view of IT assets is broadening to include potential resources that
are available to the firm but that are not necessarily owned by it. These additional information resources are often
available as a service rather than as a system to be procured and implemented internally. For example, Internet-
based software (also called software as a service, or SMS), such as, offers managers the opportu-
nity to find new ways to manage their customer information with an externally based IT resource. Social networking
systems such as Facebook and Linkedin offer managers the opportunity to find expertise or an entire network of
individuals ready to participate in the corporate innovation processes using relatively little capital or expense.
The three major categories of IT capabilities are technical skills, IT management skills, and relationship skills.
Technical skills are applied to designing, developing, and implementing information systems. IT management skills
are critical for managing the IS department and IS projects. They include an understanding of business processes,
the ability to oversee the development and maintenance of systems to support these processes effectively, and the
ability to plan and work with the business units in undertaking change. Relationship skills can be focused either
externally or internally. An externally focused relationship skill includes the ability to respond to the firm’s market
and to work with customers and suppliers. The internal relationship between a firm’s IS managers and its business
managers is a spanning relationship skill and includes the ability of IS to manage partnerships with the business
units. Even though it focuses on relationships in the firm, it requires spanning beyond the IS department. Rela-
tionship skills develop over time and require mutual respect and trust. They, like the other information resources,
can create a unique advantage for a firm. Figure 2.2 summarizes the different types of information resources and
provides examples of each.
‘ G. Piccoli and B. Ives. “IT-Dependent Strategic Initiatives and Sustained Competitive Advantage: A Review and Synthesis of the Literature,” MIS
Quarterly 29, no. 4 (2003), 747-76.
IT Assets
IT Infrastructure
• Hardware
• Software and company apps
• Network
• Data
• Web site
Information Repository
• Customer information
• Employee information
• Marketplace information
• Vendor information
FIGURE 2.2 Information resources.
How Can Information Resources Be Used Strategically? lfl
IT Capabilities
Technical Skills
• Proficiency in systems analysis
• Programming and Web design skills
• Data analysis/data scientist skills
• Network design and implementation skills
IT Management Skills
• Business process knowledge
• Ability to evaluate technology options
• Project management skills
• Envisioning innovative IT solutions
Relationship Skills
• Spanning skills such as business-IT
relationship management
• External skills such as vendor management
Source: Adapted from G. Piccoli and B. Ives, “IT-Dependent Strategic Initiatives and Sustained Competitive Advantage: A Review
and Synthesis of the Literature,” MIS Quarterly 29, no. 4 (2005), 755.
Information resources exist in a company alongside other resources. The general manager is responsible for
organizing all resources so that business goals are met. Understanding the nature of the resources at hand is a pre-
requisite to using them effectively. By aligning IS strategy with business strategy, the general manager maximizes
the company’s profit potential. To ensure that information resources being deployed for strategic advantage are used
wisely, the general manager must identify what makes the information resource valuable (and the Eras model may
provide some direction) and sustainable. Meanwhile, the firm’s competitors are working to do the same. In this
competitive environment, how should the information resources be organized and applied to enable the organiza-
tion to compete most effectively?
How Can Information Resources Be Used Strategically?
The general manager confronts many elements that influence the competitive environment of his or her enterprise.
Overlooking a single element can bring about disastrous results for the firm. This slim tolerance for error requires
the manager to take multiple views of the strategic landscape. Three such views can help a general manager align
IS strategy with business strategy. The first view uses the five competitive forces model by Michael Porter to look
at the major influences on a firm’s competitive environment. Information resources should be directed strategically
to alter the competitive forces to benefit the firm’s position in the industry. The second view uses Porter’s value
chain model to assess the internal operations of the organization and partners in its supply chain. Information
resources should be directed at altering the value-creating or value-supporting activities of the firm. We extend this
view further to consider the value chain of an entire industry to identify opportunities for the organization to gain
competitive advantage. The third view specifically focuses on the types of IS resources needed to gain and sustain
competitive advantage. These three views provide a general manager with varied perspectives from which to iden-
tify strategic opportunities to apply the firm’s information resources.
Using Information Resources to Influence Competitive Forces
Porter provides the general manager a classic view of the major forces that shape the competitive environment of an
industry, which affects firms within the industry. These five competitive forces are shown in Figure 2.3 along with
some examples of how information resources can be applied to influence each force. This view reminds the general
• Strategic Use of Information Resources
Strategic use
• Cost effectiveness
• Market access
• Differentiation of
product or service
Bargaining Power
of Suppliers
Strategic use
Selection of supplier
• Threat of backward
Potential Threat of
New Entrants
Industry Competitors
Threat of Substitute
Strategic use
• Switching costs
Access to distribution
Economies of scale
Bargaining Power
of Buyers
Strategic use
• Buyer selection
Switching costs
• Differentiation
Strategic use
• Redefine products and
• Improve price/performance
FIGURE 2.3 Five competitive forces with potential strategic use of information resources.
Sources: Adapted from M. Porter, Competitive Strategy (New York: The Free Press, 1998); and Lynda M. Applegate, F. Warren
McFarlan, and James L. McKenney, Corporate Information Systems Management: The Issues Facing Senior Executives, 4th ed.
(Homewood, IL: Irwin, 1996).
manager that competitive forces result from more than just the actions of direct competitors. We explore each force
in detail from an IS perspective.
Potential Threat of New Entrants
Existing firms within an industry often try to reduce the threat of new entrants to the marketplace by erecting bar-
riers to entry. New entrants seem to come out of nowhere; established firms can diversify their business models and
begin to compete in the space occupied by existing firms, or an enterprising entrepreneur can create a new business
that changes the game for existing firms. Barriers to entry- including a firm’s controlled access to limited distribu-
tion channels, public image of a firm, unique relationships with customers, and an understanding of their industry’s
government regulations-help the firm create a stronghold by offering products or services that are difficult to dis-
place in the eyes of customers based on apparently unique features. Information resources also can be used to build
barriers that discourage competitors from entering an industry. For example, Google’s search algorithm is a source
of competitive advantage for the search company, and it’s a barrier of entry for new entrants that would have to cre-
ate something better to compete against Google. New entrants have failed to erode Google’s market share, which
holds fast at 65% in the United States and at over 90% in Europe.6 Walmart, another example, effectively blocks
competition with its inventory control system, which helps it drive down expenses and ultimately offer lower costs
to customers. Any company entering Walmart’s marketplace would have to spend millions of dollars to build the
inventory control system and IS required to provide its operations with the same capabilities. Therefore, the system
at Walmart may be a barrier to entry for new companies.
Search engine optimization (actions that a firm can take to improve its prominence in search results) has served
as a barrier to entry for some businesses. Consider the Web site that has the number one position in a user’s search.
There is only one number one position, making it an advantage for the company enjoying that position and a barrier
for all other Web sites seeking that position.
6 “Viewed as a Monopoly in Europe, Google Takes on Role as a Wireless Trust-Buster in U.S.,” New York Times (May 8, 2015), Bl, B6.
How Can Information Resources Be Used Strategically? lfl
Bargaining Power of Buyers
Customers often have substantial power to affect the competitive environment. This power can take the form of
easy consumer access to several retail outlets to purchase the same product or the opportunity to purchase in large
volumes at superstores like Walmart. Information resources can be used to build switching costs that make it less
attractive for customers to purchase from competitors. Switching costs can be any aspect of a buyer’s purchas-
ing decision that decreases the likelihood of “switching” his or her purchase to a competitor. Such an approach
requires a deep understanding of how a customer obtains the product or service. For example, ‘s
patented One Click option encourages return purchases by making buying easier. stores buyer
information, including a default credit card number, shipping method, and “ship-to” address so that purchases
can be made with one click, saving consumers the effort of data reentry and further repetitive choices. Similarly,
Apple’s iTunes simple-to-use interface and proprietary software for downloading and listening to music makes
it difficult for customers to use other formats and technologies, effectively reducing the power of the buyers, the
Bargaining Power of Suppliers
Suppliers’ bargaining power can reduce a firm’s options and ultimately its profitability. Suppliers often strive to
“lock in” customers through the use of systems (and other mechanisms). For example, there are many options for
individuals to back up their laptop data, including many “cloud” options. The power of any one supplier is low
because there are a number of options. But Apple’s operating system enables easy creation of backups and increases
Apple’s bargaining power. Millions of customers find it easy to use the iCloud, and they do.
The force of bargaining power is strongest when a firm has few suppliers from which to choose, the quality of
supplier inputs is crucial to the finished product, or the volume of purchases is insignificant to the supplier. For
example, steel firms lost some of their bargaining power over the automobile industry because car manufacturers
developed technologically advanced quality control systems for evaluating the steel they purchase. Manufacturers
can now reject steel from suppliers when it does not meet the required quality levels.
Through the Internet, firms continue to provide information for free as they attempt to increase their share of
visitors to their Web sites and gather information about them. This decision reduces the power of information sup-
pliers and necessitates finding new ways for content providers to develop and distribute information. Many Internet
firms are integrating backward or sideways within the industry, that is, creating their own information supply and
reselling it to other Internet sites. Well-funded firms simply acquire these content providers, which is often quicker
than building the capability from scratch. One example of this was Amazon.corn’s purchase of Zappos, the shoe
retailer. More recently, in 2015 Linkedin acquired online learning company to add a capability to offer
professional development to the company’s business of networking, recruitment, and advertising.
Threat of Substitute Products
The potential of a substitute product in the marketplace depends on the buyers’ willingness to substitute, the
relative price-to-performance ratio of the substitute, and the level of switching costs a buyer faces. Information
resources can create advantages by reducing the threat of substitution. Substitutes that cause a threat come from
many sources. Internal innovations can cannibalize existing revenue streams for a firm. For example, new iPhones
motivate current customers to upgrade, essentially cannibalizing the older product line revenue. Of course, this is
also a preemptive move to keep customers in the iPhone product family rather than to switch to another competi-
tor’s product. The threat might come from potentially new innovations that make the previous product obsolete.
Tablets have reduced the market for laptops and personal computers. GPS systems have become substitutes for
paper maps, digital cameras have made film and film cameras obsolete, and MP3 music has sharply reduced the
market for vinyl records, record players, CDs, and CD players. Free Web-based applications are a threat to soft-
ware vendors who charge for their products and who do not have Web-based delivery. Revolutions of many kinds
and levels of maturity seem to be lurking everywhere. Cloud services are a substitute for data centers. Uber offers a
substitute for taxicabs. Managers must watch for potential substitutes from many different sources to fully manage
this competitive threat.
El Strategic Use of Information Resources
Industry Competitors
Rivalry among the firms competing within an industry is high when it is expensive for a firm to leave the industry,
the growth rate of the industry is declining, or products have lost differentiation. Under these circumstances, the
firm must focus on the competitive actions of rivals to protect its own market share. Intense rivalry in an industry
ensures that competitors respond quickly to any strategic actions. Facebook enjoys a competitive advantage in the
social networking industry. Other sites have tried to compete with Facebook by offering a different focus, either a
different type of interface or additional ways to network. Competition is fierce and many start-ups hope to “be the
next Facebook.” However, Facebook continues to lead the industry, in part by continued innovation and in part by
its huge customer base, which continues to raise the bar for competitors.
The processes that firms use to manage their operations and to lower costs or increase efficiencies can provide
an advantage for cost-focus firms. However, as firms within an industry begin to implement standard business
processes and technologies-often using enterprisewide systems such as those of SAP and Oracle-the industry
becomes more attractive to consolidation through acquisition. Standardizing IS lowers the coordination costs of
merging two enterprises and can result in a less competitive environment in the industry.
One way competitors differentiate themselves with an otherwise undifferentiated product is through creative use
of IS. Information provides advantages in such competition when added to an existing product. For example, the
iPod, iPhone, iPad, and iWatch are differentiated in part because of the iTunes store and the applications available
only to users of these devices. Competitors offer some of the same information services, but Apple was able to take
an early lead by using information systems to differentiate their products. Credit card companies normally compete
on financial services such as interest rate, fees, and payment period. But Capital One differentiated its credit cards
by adding information to its services; it provided customers their credit scores.
Each of the competitive forces identified by Porter’s model is acting on firms at all times, but perhaps to a greater
or lesser degree. There are forces from potential new entrants, buyers, sellers, substitutes, and competitors at all
times, but their threat varies. Consider Zara, the case discussed in at the beginning of this chapter. See Figure 2.4
for a summary of these five forces working simultaneously at the retailer and manufacturer. “1flll
General managers can use the five competitive forces model to identify the key forces currently affecting compe-
tition, to recognize uses of information resources to influence forces, and to consider likely changes in these forces
I IT Influence on Competitive Force ·—·———~
: Competitive Force
J Threat of New Entrant l Zara’s IT supports its tightly knit group of designers, market specialists,
I production managers, and production planners. New entrants are unlikely to
I i be able to provide IT to support such relationships that have been built over
: ! time at Zara. Further, it has a rich information repository about customers that
i I would be hard to replicate.
1—-·-··———·-·——·-···-·····-···—·-····-··· ···-··
I Bargaining Power of Buyers i Recently, Zara has employed laser technology to measure 10,000 women
I , volunteers so that it can add the measurements of “real” customers into its
I i information repositories. This means that the new products will be more likely
1 to fit Zara customers. I
ning Power of Suppliers I .• ‘ .. Its comp-ute;~ont~;”it~d-~-utting machin~ cuts up to 1,000 l~y~~s at a ti~; — –1
! A large number of sellers are available for the simple task of sewing the 1
———-+-! _P_ie_c_e __ s_t_o_g_e_th_e_r._Z_a_r_a_ha~g__r:cJ_l_!lE:~i_t>ili!Y_in_:_h_c><:i!~~t~E: se""'.ing cori:ii'ani_:::__~ , Industry Competitors i Zara tracks breaking trends and focuses on meeting customer preferences for j I j ~rendy, lov:,--cost fashion. Th~_result is the highest sales p~~ square foot in its I , · industry, virtually no advert1s1ng, only 10% of stock remaining unsold, very low / I inventory levels, new products offered in 15 days from idea to shelves, and i I i extremely efficient manufacturing and distribution operations. ____j Threat of Substitute Products I IT helps Zara offer extremely fashionable lines that are expected to _last for, _. J I approximately 10 wears. IT enables Zara to offer trendy, appealing apparel at I hard-to-beat prices, making substitutes difficult. ~-------------~--------------------- ·---·- FIGURE 2.4 Application of five competitive forces model for Zara. How Can Information Resources Be Used Strategically? m over time. The changing forces drive both the business strategy and IS strategy, and this model provides a way to think about how information resources can create competitive advantage for a business unit and, even more broadly, for the firm. The forces also can reshape an entire industry-compelling general managers to take actions to help their firm gain or sustain competitive advantage. Using Information Resources to Alter the Value Chain A second lens for describing the strategic use of information systems is Porter's value chain. The value chain model addresses the activities that create, deliver, and support a company's product or service. Porter divided these activ- ities into two broad categories (Figure 2.5): support and primary activities. Primary activities relate directly to the value created in a product or service whereas support activities make it possible for the primary activities to exist and remain coordinated. Each activity may affect how other activities are performed, suggesting that information resources should not be applied in isolation. For example, more efficient IS for repairing a product may increase the possible number of repairs per week, but the customer does not receive any value unless his or her product is repaired, which requires that the spare parts be available. Changing the rate of repair also affects the rate of spare parts ordering. If information resources are focused too narrowly on a specific activity, then the expected value may not be realized because other parts of the chain have not adjusted. The value chain framework suggests that competition stems from two sources: lowering the cost to perform activities and adding value to a product or service so that buyers will pay more. To achieve true competitive advantage, a firm requires accurate information on elements outside itself. Lowering activity costs achieves an advantage only if the firm possesses information about its competitors' cost structures. Even though reducing isolated costs can improve profits temporarily, it does not provide a clear competitive advantage unless the firm can lower its costs below a competitor's. Doing so enables the firm to lower its prices as a way to grow its market share. For example, many Web sites sell memory to upgrade laptops. But some sites, such as, have an option that automates the process prior to the sales process. These sites have the "Crucial System Scanner Tool," which scans the customer's laptop, identifies the current configuration and the capacity, and then suggests com- patible memory upgrade kits. The customer uses the scanner, which identifies the configuration of the laptop, and automatically opens a Web page with the appropriate memory upgrades. The customer does not have to figure out the configuration or requirements; it's done automatically. By combining a software program like its configurator with the sales process, has added value to the customer's experience by automating a key process. gi ""-:;:; Organization ""- ·s: 1---------~ ~ Human Resources ~ g_ Technology ~ j ~ V, Purchasing ~ u, Inbound Operations Outbound Marketing ~ ·s; Logistics Logistics and Sales :;:; (.J Materials Manufacturing Order Product , handling Assembly processing Pricing
:a Delivery Shipping Promotion
E Place ·c
FIGURE 2.5 Value chain of the firm.
Source: Adapted from Michael Porter and Victor Millar, “How Information Gives You Competitive Advantage,” Harvard Business
Review(July-August 1985), reprint no. 85415.
m Strategic Use of Information Resources
FIGURE 2.6 The value system, Interconnecting relationships between organizations.
Although the value chain framework emphasizes the activities of the individual firm, it can be extended, as
in Figure 2.6, to include the firm in a larger value system. This value system is a collection of firm value chains
connected through a business relationship and through technology. From this perspective, a variety of strategic
opportunities exist to use information resources to gain a competitive advantage. Understanding how information is
used within each value chain of the system can lead to new opportunities to change the information component of
value-added activities. It can also lead to shakeouts within the industry as firms that fail to provide value are forced
out and as surviving firms adopt new business models.
Opportunity also exists in the transfer of information across value chains. For example, sales forecasts gener-
ated by a manufacturer, such as a computer or automotive company, and linked to supplier systems create orders
for the manufacture of the necessary components for the computer or vehicle. Often this coupling is repeated from
manufacturing company to vendor/supplier for several layers, linking the value chains of multiple organizations. In
this way, each member of the supply chain adds value by directly linking the elements of its value chains to others.
Optimizing a company’s internal processes, such as its supply chain, operations, and customer relationship
processes, can be another source of competitive advantage. Tools are routinely used to automate the internal oper-
ations of a firm’s value chain, such as supply chain management (SCM) to source materials for operations,
enterprise resource planning (ERP) systems to automate functions of the operations activities of the value chain,
and customer relationship management (CRM) systems to optimize the processing of customer information.
These systems are discussed in more detail in Chapter 5.
In an application of the value chain model to the Zara example discussed earlier, Figure 2. 7 describes the value
added to Zara’s primary and support activities provided by information systems. The focus in Figure 2.7 is on
value added to Zara’s processes, but suppliers and customers in its supply chain also realize the value added by
information systems. Most notably, the customer is better served as a result of the systems. For example, the stores
place orders twice a week over personal digital assistants (PDAs). Each night, managers use their PDAs to learn
about newly available garments. The orders are received and promptly processed and delivered. In this way, Zara
can be very timely in responding to customer preferences.
Unlike the five competitive forces model, which focuses on industry dynamics, the focus of the value chain is
on the firm’s activities. Yet, using the value chain as a lens for understanding strategic use of information resources
affects competitive forces because technology innovations add value to suppliers, customers, or even competitors
and potential new entrants.
Primary Activities
Inbound Logistics
Marketing and Sales
Human Resources
Sustaining Competitive Advantage m
Zara’s Value Chain
: IT-enabled just-in-time (JIT) strategy results in inventory being received when needed. Most
i dyes are purchased from its own subsidiaries to better support JIT strategy and reduce
i costs. Many suppliers are located near its production facilities.
——-··–·—–··-·—···· ·—·—–·–·————1
Information systems support decisions about the fabric, cut, and price points. Cloth is ironed 1
and products are packed on hangers so they don’t need ironing when they arrive at stores.
Price tags are already on the products. Zara produces 60% of its merchandise in house.
· Fabric is cut and dyed by robots in 23 highly automated Spanish factories.
Clothes move on miles of automated conveyor belts at distribution centers and reach stores
within 48 hours of the order.
; Limited inventory allows low percentage of unsold inventory (10%); POS at stores linked
to headquarters track how items are selling; customers ask for what they want, and this
information is transmitted daily from stores to designers over handheld computers.
~ – -·-·
1 IT supports tightly knit collaboration among designers, store managers, market specialists,
production managers, and production planners.
Managers are trained to understand what’s selling and report data to designers every day.
The manager is key to making customers feel listened to and to communicating with head-
quarters to keep each store and the entire Zara clothing line at the cutting edge of fashion.
– –
: Technology is integrated to support all primary activities. Zara’s IT staff works with vendors
to develop automated conveyors to distribution activities.
integration reduces amount of
FIGURE 2.7 Application of value chain model to Zara.
Sustaining Competitive Advantage
It might seem obvious that a firm would try to sustain its competitive advantage. After all, the firm might have
worked very hard to create advantages, such as those previously discussed. However, there is some controversy
about trying to sustain a competitive advantage.
On one side are those who warn of hypercompetition as discussed in Chapter l. 7 In an industry facing hyper-
competition, recall that trying to sustain an advantage can be a deadly distraction. Consider the banking industry as
a good example that has undergone much change over the past five decades. In the l 960s, people needed to visit a
physical bank for all transactions, including withdrawing from or depositing to their accounts and transferring among
accounts. In the l970s, some banks took a chance and invested in automated teller machines (ATMs) and were
among the innovators in the industry. In the l 980s, some banks pioneered “bank-by-phone” services that enabled
customers to pay bills by phone, attempting to establish competitive advantage with technology. In the late l990s,
Web sites served to augment banking services, and “bank-by-web” was the new, exciting way to compete. Most
recently, many banks are providing mobile banking, enabling customers to make deposits by using their smartphone
camera to take photos of checks that previously needed to be turned in physically. Then the checks can be destroyed.
The obvious picture to paint here is that competitors caught up with the leaders very quickly, and competitive
advantage was brief. When ATMs were introduced, it did not take long for others to adopt the same technology.
Even small banks found that they could band together with competitors and invest in the same technologies. The
same imitation game took place with “bank by phone,” “bank by Web,” and mobile banking.
More interestingly, what sounds like an exciting way to show off the power of technology can also be interpreted
as a way to increase the cost of doing business. Although some investments, such as using ATMs to replace tellers,
lowered costs, other investments raised costs (such as needing to offer phone, Web, and mobile banking options to
‘-‘————–7 Don Goeltz, “Hypercompetition,” vol. 1 of The Encyclopedia of Management Theorr. ed. Eric Kessler (Los Angeles: Sage, 2013), 359-60.
m Strategic Use of Information Resources
~ ~;::;ect barrier i~:~~l~:-~ -~ la~g~ undertaking-~;~– ; ~:;:~~~-; l;rge -~~~~t;;,~~ — – ~
II I competitor to build the system to copy • Requires a long time to build
the capability. • Complicated to build ______ –·””i
I IT assets and capabilities barrier ompetitors might lack the IT resources • Database of customers that cannot
I copy the capability. be copied
I ~ i • Expert developers or project k managers
I Complementary resources barrier The firm has other resources that create , • Respected brand __________ _
I r a synergy with the IT that provides ; • Partnership agreements
I J competitive advantage. I • Exclusivity arrangements
i • Good location
Preemption barrier The firm “got there first.” • Loyal customer base built at the I
• Firm known as “the” source –~I
FIGURE 2.8 Barriers to competition and building sustainability.
Rather than arguing that sustaining a competitive advantage is a deadly distraction, Piccoli and Ives8 provide
a framework that outlines the ways in which a firm can provide barriers to competitors, which would build sus-
tainability. The framework outlines four types of barriers: IT project barrier, IT resources and capabilities barrier,
complementary resources barrier, and preemption barrier. See Figure 2.8 for a brief definition and a few examples
of each.
So, should a firm focus attention on building barriers to the competition, or should it just give up on the
established competitive advantage and focus on seeking the next revolution? Given that some technologies can be
copied quickly, or even just purchased from the same well-known vendor who supplied it to the leader, it seems .,,,,J
prudent to spend some time to explore each technological option in the Piccoli and Ives’ framework and determine
where the firm can increase sustainability. If the project is rather small, then the firm should focus on the other
three barriers. If the firm can build loyalty with customers who appreciate innovation, a two-month competitive
advantage might turn into a two-year or longer advantage (thus building a preemption barrier). If a firm can capture
valuable data right at the beginning, a copycat firm may fall further behind. Also, building partnerships or securing
exclusive rights to some of the technologies can further slow down a competitor.
It would not be wise to stop there, however. The firm should continue to seek ways in which IT can improve
offerings or service to customers. And the firm should go beyond those steps, focusing on how it might change
its entire industry. One example is the way in which Netflix continued to speed its DVD delivery service while
focusing on movie streaming, a technology that will someday make the delivery service obsolete. Netflix was more
than aware that its revenue was falling every quarter, but it expected and embraced the shortfall with its strategic
move into streaming.9 Given that other services such as Amazon and many cable companies had begun streaming,
Netflix has created original series offerings such as House of Cards and Orange Is the New Black.
Therefore, a firm might ( l) seek ways to build sustainability by looking into each of the four potential barriers
to identify promising ways to block the competition and at the same time (2) continue to innovate and change the
industry. Netflix has done both by building a dependable and efficient mailing business and creating new business
models such as streaming and series production. Focusing only on building sustainability has the potential effect of
fighting a losing battle, and focusing only on new business models might be too risky as the sole source of growth.
The last strategic framework, resource-based view, is more general and emphasizes ways in which to exploit its
many potential resources. The framework, described next, can be helpful for sustaining and creating competitive
8 Piccoli and Ives, “IT-Dependent Strategic Initiatives and Sustained Competitive Advantage,” 755.
9 Greg Sandoval, “Netflix CEO, DVD Subscribers to Decline Now and Forever,” CNET,
decline-now-and-forever (accessed August 19, 2015). ..,,,,J
Sustaining Competitive Advantage m
Using the Resource-Based View (RBV)
A fourth framework, the resource-based view (RBV}, 10 is useful for determining whether a firm’s strategy has
created value by using IT. Like the value chain model, the RBV concentrates on areas that add value to the firm.
Whereas the value chain model focuses on a firm’s activities, the resource-based view focuses on the resources that
it can manage strategically in a rapidly changing competitive environment. Like the Piccoli and Ives framework,
the RBV focuses on sustaining competitive advantage but through use of resources rather than by raising compet-
itive barriers.
The RBV has been applied in the area of IS to help identify two types of information resources: those that enable
a firm to attain competitive advantage and those that enable a firm to sustain the advantage over the long term.
From the IS perspective, 11 some types of resources are better than others for creating attributes that enable a firm to
attain competitive advantage (i.e., value, rarity) whereas other resources are better for creating attributes to sustain
competitive value (e.g., low substitutability, low mobility, low imitability).
Resources to Attain Competitive Advantage
Valuable and rare resources that firms must leverage to establish a superior resource position help companies attain
competitive advantage. A resource is considered valuable when it enables the firm to become more efficient, effec-
tive, or innovative. It is a rare resource when other firms do not possess it. For example, many banks today would
not think of doing business without a mobile banking app. Mobile banking apps are very valuable to the banks in
terms of their operations. A bank’s customers expect it to provide a mobile banking app that can be used on any
mobile device. However, because many other banks also have mobile banking apps, they are not a rare resource,
and they do not offer a strategic advantage. Some call them table stakes or resources required just to be in the
business. Many systems in Eras I and II, and especially Era III, were justified on their ability to provide a rare and
“-, valuable resource. In some cases these very systems have become table stakes.
Resources to Sustain Competitive Advantage
Many firms that invested in systems learned that gaining a competitive advantage does not automatically mean that
they could sustain it over the long term. The only way to do that is to continue to innovate and to protect against
resource imitation, substitution, or transfer. For example, Walmart’s complex logistics management is deeply
embedded in both its own and its suppliers’ operations so that imitations by other firms is unlikely. The Oakland
Athletics’ use of information systems propelled it to victory, as depicted in the movie Moneyball, but as soon as
other teams learned about the secret behind the success Oakland was having with analytics and information sys-
tems, they, too began to use similar techniques, reducing the advantage Oakland initially enjoyed. Finally, to sustain
competitive advantage, resources must be difficult to transfer or replicate, or relatively immobile. Some information
resources can be easily bought. However, technical knowledge—especially that which relates to a firm’s opera-
tion-an aggressive and opportunistic company culture, deep relationships with customers, and managerial experi-
ence in the firm’s environment is less easy to obtain and, hence, considered harder to transfer to other firms.
Some IT management skills are general enough in nature to make them easier to transfer and imitate. Although
it clearly is important for IS executives to manage internally oriented resources such as IS infrastructure, systems
development, and running cost-effective IS operations, these skills can be acquired in many different forms. They
are basic IT management skills possessed by virtually all good IS managers. Other skills, however, are unique to a
firm and require considerable time and resources to develop. For example, it takes time to learn how the firm oper-
ates and to understand its critical processes and socially complex working relationships. However, the message sug-
gested by the RBV is that IS executives must look beyond their own IS shop and concentrate on cultivating resources
10 The resource-based view was originally proposed by management researchers, most prominently Jay Barney, “Firm Resources and Sustained Compet-
itive Advantage,” Journal of Management 17, no. I ( 1991 ). 99-120 and “Is the Resource-Based ‘View’ a Useful Perspective for Strategic Management
Research” Yes,” Academy of Management Reviell’ 26. no. 1 (200 I). 41-56; M. Wade and J. Hulland, “Review: The Resource-Based View and Information
Systems Research: Review, Extension and Suggestions for Future Research,” MIS Quarterly 28, no. I (2004), 107-42. This article reviewed the resource-
£ based view’s application in the MIS literature and derived a framework to better understand its application to IS resources .
11 85.html (accessed January I, 2012).
m Strategic Use of Information Resources
that help the firm understand changing business environments and allow it to work well with all its external stake-
holders. Even when considering internally oriented information resources, there are differences in the extent to
which these resources add value. Many argue that IS personnel are willing to move, especially when offered higher
salaries by firms needing these skills. Yet, some technical skills, such as knowledge of a firm’s use of technology to
support business processes, and technology integration skills are not easily exported to, or imported from, another
firm. Further, hardware and many software applications can be purchased or outsourced, making them highly imita-
ble and transferrable. Because it is unlikely that two firms have exactly the same strategic alternatives, resources at
one firm might have only moderate substitutability in the other firm.
Zara and RBV
Figure 2.9 indicates the extent to which the attributes of each information resource may add value to Zara, the
company discussed earlier in the chapter. Zara’s advantage did not come from the specific hardware or software
technologies it employed. Its management spent five to ten times less on technology than its rivals. In contrast,
Resource/ Attribute : Value
IT Infrastructure
, Information
Technical Skills
IT Management
Moderate because of its skillful use
of the POS equipment, handheld
computers, automated conveyors,
and computer-controlled equipment
to cut patterns, but similar
technology could be purchased
and used by competitors
High value and rarity because of
its information about customers’
preferences and body types, which
, Zara leverages strategically; well
integrated with Zara’s operations
and personnel; retail information
analyzed by designers to identify
future products
· Low value/rarity because IS
professionals could be hired
relatively easily to perform the
technical work
i High value/rarity because they were
acquired over time
High value from relationships with
European manufacturers
Moderate rarity because other
. companies also have relationships
with manufacturers although required
time to develop the relationship
High rarity of spanning
Value Sustainability
,;:,,~~–._-___ -. __ -__ -_~r-s_u_b_s-tit.ution -· Trransfer
Easy to imitate and transfer its infrastructure
Moderate for substitution of infrastructure (automated
Difficult to imitate and transfer
Extremely difficult to substitute because of the volume
and nature of the data
Moderately difficult to imitate, substitute, or transfer;
some sustainability results because the skills are used to
integrate across a range of systems
Difficult to imitate, substitute, or transfer; resources
1 leveraged well _J__ __________ _
I Difficult to imitate, substitute, or transfer; turnaround time
of under 5 weeks from conception to distribution
Difficult to imitate, substitute, or transfer spanning; unusual
tight-knit teams at headquarters not easy to imitate or
purchase in the marketplace, allowing the ability to
—-···-··—- _________________ —-~~rrectly interpret and quickly respond to customer needs
FIGURE 2.9 Information resources at Zara. by attribute.
Source: Based on M. Wade and J. Hulland, “The Resource-Based View and Information Systems Research: Review, Extension and
Suggestions for Future Research,” MIS Ouarterly28, no. 1 (2004), 107-42. ..,,;
Strategic Alliances El
= Social Business Lens: Social Capital
A management theory that is gaining in popularity as a tool in understanding a social business is the social capital
theory. Social capital is the sum of the actual and potential resources embedded within, available through, and
derived from the network of relationships possessed by an individual or social unit. Relationships associated with
networks have the potential of being a valuable resource for businesses. The theory’s focus is not on managing
individuals but on managing relationships.
The value from networks may be derived in one of three interrelated ways: structural, relational, and cognitive.
The structural dimension is concerned with the pattern of relationships in the network-who is connected to whom.
The relational dimension looks at the nature of relationships among members in the network (i.e., respect, friend-
ship)-how the connected people interact. The third cognitive dimension looks at the way people think about
things in the network, in particular whether they have a shared language, system of meanings or interpretations-
how the connected people think. The unusual thing about social capital is that no one person owns it. Rather, the
people in the relationship own it jointly. Thus, it can’t be traded easily, but it can be used to do certain things more
easily. In particular, in social business applications, social capital may make it easier to get the information needed
to perform a task or connect with certain key people. In IS development teams, social capital may improve the
willingness and ability of team members to coordinate their tasks in completing a project.
SonrcP: .I. :\aliapil’t and S. Chosal. “Social Capital. Intellectual Capilal and the Orl,(anizational Value. ··.·lrndf”mF of M,mt1f(Plllf”nt
UCl’i1·n. :n. 110. 2 ( 1998). 2-t2-6Ci.
Zara has created considerable value from the other information asset-its valuable information repository with cus-
tomers’ preferences and body types.
In terms of information capability, much of Zara’s value creation is from its valuable and rare IT management
skills. Zara’s relationship skills also serve as a tool for value creation and sustainability. Overall, Zara is able to
create high value from its IT management and relationship skills. It would be moderately to extremely difficult to
substitute, imitate, or transfer them.
The resource-based theory, although highly cited, has received its share of criticism. 12 The major criticism is that
it doesn’t clearly distinguish between value and strategic competitive advantage. Another criticism of the original
theory is that it doesn’t consider different types of resources. However, IS researchers addressed this concern when
they categorized resources into assets and capabilities and then provided examples of each. In applying the theory,
it is important to recognize that it is focused on internal sources of a firm’s competitive advantage and, thus, does
not thoroughly take into account the environment in which the firm is embedded, especially when the environment
is quite dynamic.
Most firms don’t really have a choice of creating competitive advantage by manipulating industry forces either
through their use of information resources or IT-enhanced activities. Yet, like Zara, they can leverage the IT
resources they do have to create and sustain strategic value for their firms.
Strategic Alliances
The value chain helps a firm focus on adding value to the areas of most value to its partners. The resource-based
view suggests adding value using externally oriented relationship skills. The Eras framework emphasizes the
importance of collaborative partnerships and relationships. The increasing number of Web applications focused on
collaboration and social networking only foreshadow even more emphasis on alliances. These relationships can
take many forms, including joint ventures, joint projects, trade associations, buyer-supplier partnerships, or car-
tels. Often such partnerships use information technologies to support strategic alliances and integrate data across
.. ” For an excellent discussion of criticisms of the resource-based view. see J. Kraaijenbrink, J-C Spender, and A. J. Groen “The Resource-Based View:
.., A Review and Assessment of Its Critiques,” Journal of Management, 36, no. I, (20 l 0), 349-72.
l!I Strategic Use of Information Resources
partners’ information systems. A strategic alliance is an interorganizational relationship that affords one or more
companies in the relationship a strategic advantage. An example is the strategic alliance between game maker
Zynga and Facebook. As documented in Facebook’s IPO filing in January 2012, the relationship is a mutually
beneficial one. Zynga developed some of the most popular games found on Facebook, including Mafia Wars,
Farmville, and Words WithFriends. Face book has exclusive rights to Zynga’s games, many of which have generated
thousands of new members for Facebook. It also gained access to Zynga’s customer database. The alliance gen-
erates significant revenue for both parties because players of these games purchase virtual goods with real money
and Zynga purchases significant advertising space from Facebook to promote its games. Zynga benefits from the
revenue resulting from its gamers on Facebook community. 13
Business ecosystems are often groups of strategic alliances in which a number of partners provide important ser-
vices to each other and jointly create value for customers. The Facebook ecosystem could be said to include many
of the companies that use that platform to deliver their apps, that allow customers to post directly on their Facebook
page from the app, or that allow customers to log on to their site using their Facebook account. This adds value
for customers by providing greater convenience, and by offering the ability to automatically update their activity
stream with information from the app, and both Facebook and the app provider benefit from their alliance.
IS often provides the platform upon which a strategic alliance functions. Technology can help produce the prod-
uct developed by the alliance, share information resources across the partners’ existing value systems, or facilitate
communication and coordination among the partners. Because many services are information based today, an IS
platform is used to deliver these services to customers. The Facebook- Zynga alliance is an example of this type of
IS platform. Further, linking value chains through supply chain management (SCM) is another way that firms build
an IT-facilitated strategic alliance.
Clearly, not all strategic alliances are formed with suppliers or customers as partners. Rather, co-opetition is an ..,,,j
increasingly popular alternative model. As defined by Brandenburg and Nalebuff in their book of the same name,
co-opetition is a strategy whereby companies cooperate and compete at the same time with companies in their
value net. 14 The value net includes a company and its competitors and complementors as well as its customers and
suppliers and the interactions among all of them. A complementor is a company whose product or service is used in
conjunction with a particular product or service to make a more useful set for the customer. For example, Goodyear
is a complementor to Ford and GM because tires are a complementary product to vehicles. Likewise, Amazon is a
complementor to Apple in part because the Amazon reading application, the Kindle, the reading tablet that Amazon
sells, is one of the most popular apps for the iPad. Finally, a cellular service is a complementor to Google’s search
engine because the service allows more consumers to use Google’s search function.
Co-opetition, then, is the strategy for creating the best possible outcome for a business by optimally combining
competition and cooperation. It can also be used as a strategy for sourcing as discussed in Chapter 10. It fre-
quently creates competitive advantage by giving power in the form of information to other organizations or groups.
For example, hosts the auto industry’s e-marketplace, which grew out of a consortium of compet-
itors, including General Motors, Ford, DaimlerChrysler, Nissan, and Renault. By addressing multiple automo-
tive functional needs across the entire product life cycle, Covisint offers support for collaboration, supply chain
management, procurement, and quality management. has extended this business-to-partner platform
to other industries including health care, manufacturing, life sciences, food and beverage, and oil and gas. Thus,
co-opetition as demonstrated by Covisint not only streamlines the internal operations of its backers but also has the
potential to transform an industry.
13 Adapted from N. Wingfield. “Virtual Products, Real Profits” The Wall Street Journal (September 9, 2011), Al, 16; L.B. Baker, “Zynga’s Sales Soar
on Facebook Connection,” Reuters News (February 2, 2012),
(accessed September 14, 2015); Jackie Cohen, “So Much for the Facebook Effect: Zynga Sees $978.6 Million Loss In 2011 ,” Yahoo News (February 14,
2012), (accessed February 20, 2012).
14 A. Brandenburg and B. Nalebuff, Co-opetition (New York: Doubleday, 1996). ..,
Risks m
As demonstrated throughout this chapter, information resources may be used to gain strategic advantage even if that
advantage is fleeting. When information systems are chosen as the tool to outpace a firm’s competitors, executives
should be aware of the many risks that may surface. Some of these risks include the following:
• Awakening a sleeping giant: A firm can implement IS to gain competitive advantage only to find that it
nudged a larger competitor with deeper pockets into implementing an IS with even better features. FedEx
offered its customers the ability to trace the transit and delivery of their packages online. FedEx’s much
larger competitor, UPS, rose to the challenge. UPS not only implemented the same services but also added
a new set of features eroding some of the advantages FedEx enjoyed, causing FedEx to update its offerings.
Both the UPS and FedEx sites passed through multiple Web site iterations as the dueling delivery companies
continue to struggle for competitive advantage.
• Demonstrating bad timing: Sometimes customers are not ready to use the technology designed to gain
strategic advantage. For example, Grid Systems created the GRiDPAD in 1989. It was a tablet computer
designed for businesses to use in the field and was well reviewed at that time. But it didn’t get traction.
Three decades later, in 2010, Apple introduced the iPad, and tablet computing took off.
• Implementing IS poorly: Stories abound of information systems that fail because they are poorly imple-
mented. Typically, these systems are complex and often global in their reach. An implementation fiasco took
place at Hershey Foods when it attempted to implement its supply and inventory system. Hershey devel-
opers brought the complex system up too quickly and then failed to test it adequately. Related systems prob-
lems crippled shipments during the critical Halloween shopping season, resulting in large declines in sales
and net income. More recently, in 2012, more than 100,000 Austin Energy customers received incorrect util-
ity bills due to problems with the company’s vendor-supplied bill collection system. Some customers went
months without a bill, and others were incorrectly billed. Some businesses that owed $3,000 were billed
$300,000. Still others tried to pay their bill online only to be told that the payment had not recorded when it
had been. The utility calculated that the problems cost it more than $8 million. 15
• Failing to deliver what users want: Systems that do not meet the needs of the firm’s target market are likely
to fail. For example, in 2011, Netflix leadership divided the company into two, calling the DVD-rental
business Qwikster and keeping the streaming business under Netflix. But customers complained, and worse,
closed their accounts, and less than a month later, Qwikster was gone. Netflix reunited both businesses
under the Netflix name. 16
• Running qfoul of the law: Using IS strategically may promote litigation if the IS results in the violation of
laws or regulations. Years ago, American Airlines’ reservation system, Sabre, was challenged by the airline’s
competitors on the grounds that it violated antitrust laws. More recently, in 2010, Google said it was no
longer willing to adhere to Chinese censorship. The Chinese government responded by banning searching
via all Google search sites (not only but all language versions, e.g.,,
including Google Mobile. Google then created an automatic redirect to Google Hong Kong, which stopped
June 30, 2010, so that Google would not lose its license to operate in China. Today, Google, Inc. is acting
in compliance with the Chinese government’s censorship laws and Chinese users of Google.en see filtered
results as before. More recently, European antitrust officials claimed that Google’s search engine unfairly
generates results that favor its shopping sites over those of its competitors and that its Android mobile phone
operating system unfairly features Google as the default search engine.17
” Marty Toohey. “More Than I 00,000 Austin Energy Customers Hit by Billing Errors from $55 Million IBM System,” Statesman (February 18, 2012), OO-OOO-austin-energy-customers-hit-2185031.html (accessed February 20, 2012).
I,_ 16 Qwikster = Gonester (October 10, 2011), (accessed February 20, 2012) .
17 “Viewed as a Monopoly in Europe. Google Takes on Role as a Wireless Trust-Buster in U.S.,” The New York Times (May 8, 2015), Bl, B6.
m Strategic Use of Information Resources
= Geographic Box: Mobile-Only Internet Users Dominate Emerging Countries
More than 25% of mobile Web users in emerging markets connect to the Internet solely through mobile devices.
This is the case for 70% of mobile Web users in Egypt, 59% in India, and 50% in Nigeria but only for 25% of U.S. and
22% of U.K. mobile Web users. Malaysia is emerging as a test case for a mobile-only Internet. It has rolled out a
next-generation, high-speed broadband network that covers most of its population. This infrastructure makes it
possible to make video calls with Apple’s Face Time application in locations throughout the country using a tiny
pocket router that accesses a WiMAX wireless-broadband network set up by a local conglomerate, YTL Corp.
Bhd. To further encourage the spread of Internet, Malaysia’s leaders have pledged not to censor the Internet.
Sources: C. Dunaway. “‘.\1obilP-0nly Internet l ‘sprs Dominate Enwrginµ- \lark,·ts” (October 2-t.2011 ), http://\nnuulotas.
corn/201 wl/1 O/mobile-only-intPrrwt·nsPrs-dorninatc·t’IlH’l’/!illµ-·11111rkets/ ( acc,·ss,·d .\11µ-ust 1 CJ. 201’:i ): .I. l loobrny. “Broadband in
thr Tropics.” 1111• Ifill/ StreN ./ounwl (Sqiternlwr 21. 2011 ). Bi>.
Every business decision has risks associated with it. However, with the large expenditure of IT resources needed
to create sustainable, strategic advantages, the manager should carefully identify and then design a mitigation strat-
egy to manage the associated risks.
Co-Creating IT and Business Strategy
This chapter has discussed the alignment of IT strategy with business strategy. Certainly, the two strategies must
be carefully choreographed to ensure receiving maximum value from IT investments and obtaining the maximum
opportunity to achieve the business strategy. However, in the fast-paced business environment where information
is increasingly a core component of the product or service offered by the firm, managers must co-create IT and ‘ffflllll
business strategy. That is to say that IT strategy is business strategy; one cannot be created independently of the
other. In many cases, they are now one in the same.
For companies whose main product is information, such as financial services companies, it’s clear that information
management is the core of the business strategy itself. How an investment firm manages the clients’ accounts, how
its clients interact with the company, and how investments are made are all done through the management of
information. A financial services company must co-create business and IT strategy.
But consider a company like FedEx, most well known as the package delivery company. Are customers paying
to have a package delivered or to have information about that package’s delivery route and timetable? One could
argue that they are one in the same and that increasingly the company’s business strategy is its IS strategy. Certainly,
there are components of the operation that are more than just information. There are actual packages to be loaded
on actual trucks and planes, which are then actually delivered to their destinations. However, to make it all work,
the company must rely on IS. Should the IS stop working or have a serious failure, FedEx would be unable to do
business. A company like this must co-create IT strategy and business strategy.
This was not true a few years ago. Companies could often separate IS strategy from business strategy in part
because their products or services did not have a large information component. For example, a few years ago,
should the IS of a trucking company stop working, the trucks would still be able to take their shipments to their
destination and pick up new ones. It might be slower or a bit more chaotic, but the business wouldn’t stop. Today,
that’s not the case. Complicated logistics are the norm, and IS are the foundation of the business as seen at FedEx.
With the increasing number of IS applications on the Web and on mobile devices, firms increasingly need to
co-create business and IT strategy. Managers who think they can build a business model without considering the
opportunities and impact of information systems, using both the resources owned by the firm and those available on
the Web, will find they have significant difficulties creating business opportunities as well as sustainable advantage
in their marketplace.
Discussion Questions ID
• Information resources include data, technology, people, and processes within an organization. Information resources can
be either assets or capabilities.
• IT infrastructure and information repositories are IT assets. Three major categories of IT capabilities are technical skills,
IT management skills, and relationship skills.
• Using IS for strategic advantage requires an awareness of the many relationships that affect both competitive business
and information strategies.
• The five competitive forces model implies that more than just the local competitors influence the reality of the business
situation. Analyzing the five competitive forces-threat of new entrants, buyers’ bargaining power, suppliers’ bargaining
power, industry competitors, and threat of substitute products-from both a business view and an information systems
view helps general managers use information resources to minimize the effect of these forces on the organization.
• The value chain highlights how information systems add value to the primary and support activities of a firm’s internal
operations as well as to the activities of its customers and of other components of its supply chain.
• The resource-based view (RBV) helps a firm understand the value created by its strategy. RBV maintains that compet-
itive advantage comes from a firm’s information resources. Resources enable a firm to attain and sustain competitive
• IT can facilitate strategic alliances. Ecosystems are groups of strategic alliances working together to deliver goods and
services. Supply chain management (SCM) is a mechanism that may be used for creating strategic alliances.
• Co-opetition is the complex arrangement through which companies cooperate and compete at the same time with other
companies in their value net.
• Numerous risks are associated with using information systems to gain strategic advantage: awaking a sleeping giant,
demonstrating bad timing, implementing poorly, failing to deliver what customers want, avoiding mobile-based alterna-
tives, and running afoul of the law.
business ecosystem (p. 34)
co-opetition (p. 48)
customer relationship management
(CRM) (p. 42)
enterprise resource planning
(ERP) (p. 42)
information resources (p. 36)
IT asset (p. 36)
IT capability (p. 36)
network effects (p. 34)
resource-based view (RBV) (p. 45)
strategic alliance (p. 48)
social capital (p. 47)
supply chain management
(SCM) (p. 42)
1. How can information itself provide a competitive advantage to an organization? Give two or three examples. For each
example, describe its associated risks.
2. Use the five competitive forces model as described in this chapter to describe how information technology might be used to
provide a winning position for each of these businesses:
a. A global advertising agency
b. A local restaurant
c. A mobile applications provider
d. An insurance company
e. A Web-based audio book service
m Strategic Use of Information Resources
3. Using the value chain model, describe how information technology might be used to provide a winning position for each of
these businesses:
a. A global advertising agency
b. A local restaurant
c. A mobile applications provider
d. An insurance company
e. A Web-based audio book service
4. Use the resource-based view as described in this chapter to describe how information technology might be used to provide
and sustain a winning position for each of these businesses:
a. A global advertising agency
b. A local restaurant
c. A mobile applications provider
d. An insurance company
e. A Web-based audio book service
5. Some claim that the only sustainable competitive advantage for an organization is its relationships with its customers. All
other advantages eventually erode. Do you agree or disagree? How can information systems play a role in maintaining the
organization’s relationship with its customers? Defend your position.
6. Cisco Systems has a network of component suppliers, distributors, and contract manufacturers that are linked through
Cisco’s extranet. When a customer orders a Cisco product at its Web site, the order triggers contracts to manufacturers of
printed circuit board assemblies when appropriate and alerts distributors and component suppliers. Cisco’s contract manu-
facturers are aware of the order because they can log on to its extranet and link with Cisco’s own manufacturing execution
systems. What are the advantages of Cisco’s strategic alliances? What are the risks to Cisco? To the suppliers?
• CASE STUDY 2-1 Groupon
Groupon, Inc. raised $700 million at its IPO in the fall of 2011, instantly providing a valuation of almost $13 billion for a
company that was only three years old at the time. Some question the value, claiming Groupon has no sustainable compet-
itive advantage. Others see Groupon as an innovative company with high potential.
Groupon sells Internet coupons for events, services, and other popular items that customers might want to buy. Customers
sign up for daily e-mails targeted to their local market. The daily deal, offered for one-day only and only if a predetermined
minimum number of customers buy it, gives customers 50% off the “retail” price. For example, a$ I 00 three-month health
club membership would sell for $50 on Groupon. The customer pays $50 to Groupon and prints a certificate to redeem at the
health club. Groupon keeps 50% of the revenue, or $25 in this case, and gives the rest to the health club. Effectively, retailers
are offering 75% off with the customer saving 50% and Groupon taking the rest.
Groupon pays the retailer when the coupon is redeemed, making money both on the float between the time revenue is
collected and the time the retailer is paid and on the certificates that are never redeemed at all, which the industry calls break-
age. Retailers make money in the long run by introducing customers to their products, selling them additional products and
services when they come in to redeem their coupons, and turning them into repeat customers. And retailers benefit from the
buzz created when their business is on Groupon.
In August 2010, Groupon launched its first national deal, a coupon worth $50 of Gap apparel and accessories for $25.
It sold over 440,000 coupons, netting Groupon and the Gap close to $11 million. But not all vendors are the size of the
Gap, and smaller vendors have been overwhelmed with too many coupons. One local business owner said the company lost
$8,000 on its Groupon promotion when too many coupons were issued. In fact, a study of 150 retailers showed that only
66% found their deals profitable.
Around the time of the IPO, analysts and observers alike claimed that Groupon ‘s business model was not sustainable. In
addition to the large number of retailers who found their deals unprofitable, observers noted that Groupon does not produce
anything of value, and it isn’t adding value to the retailers. Further, there are no barriers to entry to stop competitors. In May
2011, more than 450 competitors offering discounts and deals included LivingSocial, another daily deal site;,
a site for restaurant gift certificates at a deep discount; and and, sites offering discounted merchan-
dise, not to mention deep-pocketed competitors like
CaseStudy m
But Groupon added to its business strategy with mobile capability and new services. In February 2012, it purchased
Kima Labs, a mobile payment specialist, and Hyperpublic, a company that builds databases of local information. In May
2011, in a few cities, the company launched Groupon Now, a time-based local application that gives customers instant deals
at merchants nearby using location-based software. CEO Andrew Mason told Wall Street analysts in February 2012 that he
saw significant growth potential, including working on new features that will help customers personalize offers and avoid
deals they don’t want.
Discussion Questions
1. How does information technology help Groupon compete?
2. Do you agree or disagree with the statement that “Groupon has no sustainable competitive advantage?” Please explain
your point of view.
3. How does Groupon add value to the companies whose offers are sold on the site?
4. What impact, if any, will Groupon Now have on Groupon’s competitive position? Explain.
5. What would you advise Groupon leaders to consider as their next application?
6. Analyze the business model of Groupon using Porter’s five forces model.
Sources: Adapted from (accessed February 21, 2012);
petercohan/2011/06/06/memo-to-sec-groupon-has-no-competitive-advantage-stop-its-ipo/ (accessed February 21, 2012); http://blogs. (accessed February 21, 2012); http://articles.
(accessed February 21, 2012); 820120209 (accessed February 21,
• CASE STUDY 2-2 Zipcar
Zipcar is an answer for customers who want to rent a car for a few hours in their home city rather than for a few days from
a traditional rental agency. Car reservations are for a specific pick-up time and location around the city, often in neighbor-
hoods so the customers need only to walk to pick up their reserved car. Customers apply for a Zipcard, which enables them
to reserve a car online and unlock their car when they arrive at its location.
The company operates with a very small staff compared to traditional rental agencies. Very little human interaction is
required between the customer and Zipcar for a transaction. A customer reserves a car online, enters into the reserved car by
waving the RHO-enabled Zipcard against the card reader mounted behind the driver’s side windshield, returns the car to the
same location, and is billed on the credit card already on file. The customer can check all rental records and print receipts
from the online reservation system. The system also has a color-coded time chart showing the availability and location of all
rental cars in the vicinity. This transparent information exchange allows a customer to pick the car he or she wants, if avail-
able, or delay the reservation until that car is returned by another customer. Zipcar also created and installed a GPS-enabled
wireless device in each car, which allows members to find and reserve a vehicle nearby using a cell phone. Customers also
can use an iPhone or Android app on their iPhone or Android mobile device to find and reserve a Zipcar on a 24/7 basis.
Zipcar sends text alerts near the end of the rental period, and customers can text back if they want to extend their rental time.
All cars were outfitted with patented wireless technology. Zipcar’s proprietary IT platform carries information flow bet-
ween customers, vehicles, and the company. It is used to monitor car security, fulfill reservations, record hourly usage, and
-· maintain mileage information. The platform also relays vital technical information such as battery voltage and fuel level. It
even informs the central system if a customer forgot to tum off headlights, which can quickly drain battery power.
This business model provides unique advantages over traditional car rentals. Customers do not have to stand in line or
fill out papers to rent a car. They know exactly which make and model they will be getting. Unlike most off-airport rental
agency locations, which are open only during business hours, Zipcar locations are open 24 hours. The company’s rates also
include the cost of gas and insurance as well as reserved parking spots at some locations.
Additionally, the company uses social networking technologies to develop an online community of Zipcar members-
Zipsters. It encourages Zipsters to talk about their Ziptrips (i.e., share their personal experiences with Zipcar).
Thus, information technology is not only the key enabler of this business model but also a facilitator in creating a
buzz and encouraging community development around the concept. Zipcar changed the rules of the rental car industry by
ID Strategic Use of Information Resources
bringing the new Web 2.0 mind-set of focusing on automation, customer empowerment, transparency, and community.
Zipcar is very successful; as of August 2015, its Website boasts over 900,000 paying members and renting over 10,000
vehicles in 30 major metro markets in the United States, Canada, and the United Kingdom, as well as 400 college cam-
puses and 50 airports.
Discussion Questions
I. Apply the resource-based view to Zipcar’s business model to show how information resources may be used to gain and
sustain competitive advantage.
2. Discuss the synergy between the business strategy of Zipcar and information technology.
3. What network effects are part of Zipcar’s strategy? How do they add value?
4. As the CEO of Zipcar, what is your most threatening competition? What would you do to sustain a competitive
Sources: Adapted from Paul Boutin, “A Self-Service Rental Car,” Businessweek (May 3, 2006),
stories/2006-05-03/a-self-service-rental-car (accessed August 19, 2015); Mary K. Pratt, “RFID: A Ticket to Ride,” Computerworld (Decem-
ber 18, 2006), (accessed August 19, 2015);
“Zipcar: Our Technology Downloaded,”; Zipcar: “Zipcar Overview,”
press/overview (accessed August 19, 2015).
Organizational Strategy
and Information Systems
In order for information systems (IS} to support an organization in achieving its goals, the
organization must reflect the business strategy and be coordinated with the organizational
strategy. This chapter focuses on linking and coordinating the IS strategy with the three
components of organizational strategy:
• Organizational design (decision rights, formal reporting relationships and structure,
informal networks)
• Management control systems (planning, data collection, performance measurement,
evaluation, incentives, and rewards}
• Internal culture (values, locus of control}
After 20 years of fast growth, in 2014 Cognizant Technology Solutions was a company with $8.84
billion in revenues from providing IS outsourcing services. However, growing at such a breakneck
speed, it had to reinvent its organizational structure many times to make sure that it facilitated the
flow of information. Initially, its India-centric structure located managers of each group in India
along with software engineers. Employees at customer locations worldwide reported to the man-
agers. As the company grew and its focus shifted from simple, cost-based solutions to complex,
relationship-based solutions, this structure had to be changed to be more customer oriented. Under
the redesigned reporting structure, managers were moved to customer locations but software engi-
neers remained in India. This change improved customer relations but brought about new headaches
on the technical side. Under the new arrangement, managers had to spend their days with cus-
tomers and unexpectedly ended up spending their nights with software engineers to clarify customer ,
requirements and fix bugs. This created a tremendous strain on managers, who threatened to quit.
It also hampered the company’s business of systems development. Thus, neither of these organiza-
tional structures was working well. Neither structure was well aligned with the business strategy
and the IS strategy.
However, Cognizant found that despite these problems, some work teams were working and ,
performing well. Upon an extensive analysis of those groups, the company decided to adopt a matrix
structure of comanagement throughout the company. In this matrix structure, each project has two 1
managers equally responsible for the project in a location. One manager is in India and the other
is at the client site. They work out among themselves how and when to deal with issues. And both
managers are equally responsible for customer satisfaction, project deadlines, and group revenue.
The new structure (Figure 3.1) enables Cognizant to work more closely with its clients to focus on
improving operations. That is, the new matrix structure makes it possible to build IS that the cus-
tomers wanted.
During the same time period in 2008, the largest outsourcing company and software exporter 1
in India, Tata Consultancy Services (TCS), also found that growth led to problems. “As we scale
up over 100,000 employees, TCS needs a structure that allows us to build a nimble organization to
lfl Organizational Strategy and Information Systems

Vertical Functions ~ I l:::
Software Engineer Database Manager
Business Manager
Customer 1 USA
Business Manager
Customer 2 UK
Business Manager
Customer 3 China
FIGURE 3.1 Example of possible cognizant matrix structure.
~mu~ ecialist
Source: Adapted from “The Issue: For Cognizant, Two’s Company,” Businessweek (January 17, 2008),
com/bw /stories/2008-01-17 /the-issue-for-cognizant-twos-companybusinessweek-business-news-stock-market-and-financial-advice
(accessed August 20, 2015).
capture new growth opportunities,” said then TCS CEO and Managing Director S. Ramadorai. 1 Growth led to a
high volume of issues that needed the attention of the CEO and COO, and eventually it was difficult to keep up.
At the same time, there was a need to spend significantly more time investigating new potential markets and new
strategic initiatives than the CEO/COO could spare. In 2011, the new TCS CEO N. Chandrasekaran modified the
structure and added a new layer of leaders to oversee the businesses and free up their time to work on strategy (see
Figure 3.2). The new layer focuses on customers and aims to boost revenue growth. 2
While both Cognizant and TCS are large Indian outsourcing companies that found they needed to reorganize
to respond to problems resulting from growth, their problems were profoundly different. Cognizant’s main prob-
lem was its lack of necessary information flows between the software engineers in India and the customer service
managers on the client location. Its complex problems resulted in a c01Tespondingly complex matrix structure. It
focused on the delivery of information systems that reflect refined technical solutions to their problems to its cus-
tomers. Its new organization structure both improves customer responsiveness and necessary information flows.
It focuses on system development and delivery and seeks to address the information flow problem that Cognizant
previously experienced in building systems.
In contrast, TCS’s organization chart reflects a focus not only on current customers but also on future markets.
That is why it added major units called “New Growth Markets” and “Strategic Initiative Unit.” The Business Pro-
cess Outsourcing and Small and Medium Enterprise solutions in this latter major unit indicate the strategic direc-
tions that TCS wants to take. The organizational structure is designed to emphasize these new growth areas and
facilitate information flows along these lines in the organization. Its focus is on building an ever bigger market for
its IS and the IS services that it provides.
1 “Reinvented Blog by Prashanth Rai” (March 19, 2008), (accessed
December 19, 2011).
2 N. Shivapriya, “TCS CEO N Chandrasekaran Creates New Layer to Oversee Verticals” (May 25, 20 l l ), http://articles.economictimes.indiatimes.
com/20 l l-05-25/news/2958 ! 999 _1_tcs-ceo-n-chandrasekaran-tcs-spokesperson-structure (accessed December 19, 2011 ).
Director, New
FIGURE 3.2 Tata Consultancy Services.
Organizational Strategy and Information Systems Iii
Chief Executive
Chief Operating ,__ _______ __,
Solutions Unit
Director, Director,
Major Strategic
Markets Initiative Unit
Europe Process
Multiple units ….. _ _… __ ….,
Source: “TCS Plans New Organizational Structure” (February 12, 2008),
K1ktXSN/TCS-plans-new-organisational-structure.html (accessed August 20, 2015).
Cognizant and TCS are both in the same business but chose different organizational structures to carry out
their objectives. The point is that different organizational structures reflect different organizational strategies
that are used to implement business strategies and accomplish organizational goals. These organizational strat-
egies need to be aligned with IS strategies. When used appropriately, IS leverage human resources, capital, and
materials to create an organization that optimizes performance. Companies that design organizational strategy
without considering IS strategies run into problems like those Cognizant experienced. A synergy results from
designing organizations with IS strategy in mind-a synergy that cannot be achieved when IS strategy is just
added on.
Chapter 1 introduced a simple framework for understanding the role of IS in organizations. The Information
Systems Strategy Triangle relates business strategy with IS strategy and organizational strategy. In an organization
that operates successfully, an overriding business strategy drives both organizational strategy and information strat-
egy. The most effective businesses optimize the interrelationships between the organization and its IS, maximizing
efficiency and productivity.
Organizational strategy includes the organization’s design, as well as the managerial choices that define, set
up, coordinate, and control its work processes. As discussed in Chapter 1, many models of organizational strategy
are available. One is the managerial levers framework that includes the complementary design variables shown
in Figure 3.3. Optimized organizational designs support optimal business processes, and they, in turn, reflect the
firm’s values and culture. Organizational strategy may be considered as the coordinated set of actions that lever-
ages the use of organizational design, management control systems, and organizational culture to make the orga-
nization effective by achieving its objectives. The organizational strategy works best when it meshes well with
the IS strategy.
This chapter builds on the managerial levers model. Of primary concern is how IS impact the three types of
managerial levers: organizational, control, and cultural. This chapter looks at organizational designs that incorpo-
rate IS to define the flow of information throughout the organization, explores how IS can facilitate management
control at the organizational and individual levels, and concludes with some ideas about how culture impacts IS
and organizational performance. It focuses on organizational-level issues related to strategy. The next two chapters
complement these concepts with a discussion of new approaches to work and organizational processes.
m Organizational Strategy and Information Systems
Organizational variables
Decision rights The authority to initiate, approve, implement, and control various types
of decisions to plan and run the business
The set of ordered tasks needed to complete key objectives of the
: business
I Business processes
1 Formal reporting relationships
l :ocm~=two: –
Control variables
······-·–···— –
The structure set up to ensure coordination among all units within the
organization; reflects allocation of decision rights
Mechanisms, such as ad hoc groups, which work to coordinate and
transfer information outside the formal reporting relationships
The facts collected, stored, and used by the organization
The processes by which future direction is established, communicated,
and implemented
Performance measurement and evaluation The set of measures that are used to assess success in the execution of
plans and the processes by which such measures are used to improve
the quality of work
Cultural variables
J Values
The monetary and nonmonetary devices used to motivate behavior
within an organization
The set of implicit and explicit beliefs that underlies decisions made and
, actions taken; reflects aspirations about the way things should be done
j Locus j The span of the culture, i.e., local, national, regional ~
FIGURE 3.3 Organizational design variables.
Source: Adapted from James I. Cash, Robert G. Eccles, Nitin Nohria, and Richard L. Nolan, Building the Information Age Organiza-
tion (Homewood, IL: Richard D. Irwin, 1994).
Information Systems and Organizational Design
Organizations must be designed in a way that enables them to perform effectively. Different designs accomplish
different goals. This section examines organizational variables. It focuses on how IS are designed in conjunction
with an organization’s structure. Ideally, an organizational structure is designed to facilitate the communication
and work processes necessary for it to accomplish the organization’s goals, and the use of IS is often the way
coordination and workflow are done. The organizational structures of Cognizant and TCS, while very different,
reflect and support the goals of each company. Perhaps intuitively, organizational designers at those companies used
organizational variables described in Figure 3.3 to build their structures. Those variables include decision rights
that underlie formal structures, formal reporting relationships, and informal networks. Organizational processes are
another important design component discussed in more detail in Chapter 5.
Decision Rights
Decision rights indicate who in the organization has the responsibility to initiate, supply information for, approve,
implement, and control various types of decisions. Ideally, the individual who has the most information about a
decision and who is in the best position to understand all of the relevant issues should be the person who has its
decision rights. But this may not happen, especially in organizations in which senior leaders make most of the
important decisions. Much of the discussion of IT governance and accountability in Chapter 9 is based upon who
has the decision rights for critical IS decisions. When talking about accountability, one has to start with the person
who is responsible for the decision-that is, the person who has the decision rights. Organizational design is all
about making sure that decision rights are properly assigned-and reflected in the structure of formal reporting .,,,,,;
Information Systems and Organizational Design m
relationships. IS support decision rights by getting the right information to the decision maker at the right time and
then transmitting the decision to those who are affected. In some cases, IS enables a centralized decision maker
to pass information that has been gathered from operations and stored centrally down through the organization. If
information systems fail to deliver the right information, or worse, deliver the wrong information to the decision
maker, poor decisions are bound to be made.
Consider the case of Zara from the last chapter. Each of its 1,000 stores orders clothes in the same way, using the
same type of handheld devices, and follows a rigid weekly timetable for ordering, which provides the headquarters
commercial team with the information needed to manage fulfillment. Many other large retailers make the decision
centrally about what to send to their stores, using forecasting and inventory control models. However, at Zara, store
managers have decision rights for ordering, enabling each store to reflect the tastes and preferences of customers
in its localized area. But, the store managers do not have decision rights for order fulfillment because they have no
way of knowing the consolidated demand of stores in their area. The decision rights for order fulfillment lie with the
commercial team in headquarters because it is the team that knows about overall demand, overall supply, and store
performance in their assigned areas. The information from the commercial team then flows directly to designers
and production, allowing them to respond quickly to customer preferences. 3
Formal Reporting Relationships and Organizational Structures
Organizational structure is the design element that ensures that decision rights are correctly allocated. The structure
of reporting relationships typically reflects the flow of communication and decision making throughout the orga-
nization. Traditional organizational structures are hierarchical, flat, or matrix. The networked structure is a newer
organizational form. A comparison of these four types of organizational structures may be found in Figure 3.4.
Hierarchical Organizational Structure
As business organizations entered the 20th century, their growth prompted a need for systems for processing and
storing information. A new class of worker-the clerical worker-flourished. From 1870 to 1920 alone, the number
of U.S. clerical workers mushroomed from 74,200 to more than a quarter of a million. 4
i-Type of Environment
i Best Supported
i Basis of Structuring
Bureaucratic form
with defined levels
of management
Division of labor,
: specialization, unity
of command,
, formalization
Stable, certain
Primarily function
Decision making
pushed down to the
lowest level in the
Informal roles,
: planning, and control;
f often small and young
Dynamic uncertain
Very loose
L——-·—- –,—···· -·–·——-···. ——········-·-
! Power Structure \ Centralized recentralized
FIGURE 3.4 Comparison of organizational structures.
Workers assigned to
multiple supervisors
in an effort to
promote integration
Dual reporting
relationships based
on function and
Dynamic uncertain
Function and
purpose (i.e.,
location, product,
Distributed (matrix
·-··-·-····- – – -·-·–·–···· .. ········-·-·- —·-·—–·-
Formal and informal
communication networks
that connect all parts of
Known for flexibility and
Distributed (network)
‘ Andrew McAfee and Erik Brynjolfsson, “Investing in the IT That Makes a Competitive Difference,
PDF-ENG (accessed August 20, 2015); James Surowiecki, The Wisdom of Crowds (New York: Anchor Books, 2005).
4 Frances Cairncross, The Company ,,r the Future (London: Profile Books, 2002).
m Organizational Strategy and Information Systems
Factories and offices structured themselves using the model that Max Weber observed when studying the
Catholic Church and the German army. This model, called a bureaucracy, was based on a hierarchical organiza-
tional structure.
Hierarchical organizational structure is an organizational form based on the concepts of division of labor,
specialization, span of control, and unity of command. Decision rights are highly specified and centralized. When
work needs to be done, orders typically come from the top and work is subjected to the division of labor. That
means it is segmented into smaller and smaller pieces until it reaches the level of the business in which it will be
done. Middle managers do the primary information processing and communicating, telling their subordinates what
to do and telling senior managers the outcome of what was done. Jobs within the enterprise are specialized and
often organized around particular functions, such as marketing, accounting, manufacturing, and so on. Span of
control indicates the number of direct reports. The new TCS CEO, N. Chandrasekaran, revised the organizational
structure to lower his span of control by inserting a new layer with only a few leaders reporting directly to him.
Unity of command means that each person has a single supervisor. Rules and policies are established to handle the
routine work performed by employees of the organization. When in doubt about how to complete a task, employees
tum to the rules. If a rule doesn’t exist to handle the situation, employees tum to a supervisor in the hierarchy for the
decision. Key decisions are made at the top and filter down through the organization in a centralized fashion. Hier-
archical structures, which are sometimes called vertical structures, are most suited to relatively stable, certain envi-
ronments in which the top-level executives are in command of the information needed to make critical decisions.
This allows them to make decisions quickly.
IS are typically used to store and communicate information and to support the information needs of managers
throughout the hierarchy. IS convey the decisions of top managers downward and data from operations are sent
upward through the hierarchy using IS. Hierarchical structures are also very compatible with efforts to organize
and manage data centrally. The data from operations that have been captured at lower levels and conveyed through
IS increasingly need to be consolidated, managed, and made secure at a high level. The data are integrated into
databases that are designed so that employees at all levels of the organization can see the information that they need .,J
when they need it. Often there is an information dashboard for executives, a system that provides a summary of key
performance indicators (KPls). Each level of KPI has additional detail behind it and executives can drill down into
the details as necessary. For example, a KPI revealing lower profitability might have been caused by higher costs
or lower sales, and managers would need to drill down through additional levels of information to understand why
the KPI changed. Managers throughout the hierarchy often have similar dashboards with the KPis for their organi-
zation so that up and down the hierarchy, managers are looking at the same information consolidated for their level
of decision making.
Flat Organizational Structure
In contrast to the hierarchical structure, the flat, or horizontal, organizational structure has a less well-defined
chain of command. You often don’t see an actual organization chart for a flat organization because the relationships
are fluid and the jobs are loosely defined. That is, drawing an organization chart for a flat organization is like trying
to tie a ribbon around a puddle. In flat organizations, everyone does whatever needs to be done to conduct business.
There are very few “middle managers.” For this reason, flat organizations can respond quickly to dynamic, uncer-
tain environments. Entrepreneurial organizations, as well as smaller organizations, often use this structure because
they typically have fewer employees, and even when they grow, they initially build on the premise that everyone
must do whatever is needed. Teamwork is important in flat organizations. To increase flexibility and innovation,
decision rights may not be clearly defined. Hence, the decision making is often decentralized because it is spread
across the organization to where the decisions are made. It is also time consuming. As the work grows, new indi-
viduals are added to the organization, and eventually a hierarchy is formed where divisions are responsible for
segments of the work processes. Many companies strive to keep the “entrepreneurial spirit,” but in reality, work is
done in much the same way as with the hierarchy described previously. Flat organizations often use IS to off-load
certain routine work in order to avoid hiring additional employees. As a hierarchy develops, the IS become the glue
tying together parts of the organization that otherwise would not communicate. IS also enable flat organizations to
respond quickly to their environment. ‘f//////111
Information Systems and Organizational Design El
Matrix Organizational Structure
The third popular form, which Cognizant ultimately adopted, is the matrix organizational structure. It typically
assigns employees to two or more supervisors in an effort to make sure multiple dimensions of the business are
integrated. Each supervisor directs a different aspect of the employee’s work. For example, a member of a matrix
team from marketing would have a supervisor for marketing decisions and a different supervisor for a specific
product line. The team member would report to both, and both would be responsible in some measure for that mem-
ber’s performance and development. That is, the marketing manager would oversee the employee’s development of
marketing skills and the product manager would make sure that the employee develops skills related to the product.
Thus, decision rights are shared between the managers. The matrix structure allows organizations to concentrate
on both functions and purpose. The matrix structure allows the flexible sharing of human resources and achieves
the coordination necessary to meet dual sets of organizational demands. It is suited for complex decision making
and dynamic and uncertain environments. IS reduce the operating complexity of matrix organizations by allowing
information sharing among the different managerial functions. For example, a saleswoman’s sales would be entered
into the information system and appear in the results of all managers to whom she reports.
Cognizant might have moved to the matrix structure (see Figure 3. l) from a hierarchical structure because the
complexity of its projects had increased. “As part of the structure of a Cognizant engagement, we always pair our
technologists with people who have business context experience,” says Raj Mamodia, who was then the Assistant
Vice President of Cognizant’s Consumer Goods business unit. The purpose of these formally structured relation-
ships is to meet the customer’s needs, and not just focus on “how beautiful the technology is in and of itself.”5
The matrix organizational structure carries its own set of weaknesses. Although theoretically each boss has a
well-defined area of authority, the employees often find the matrix organizational structure frustrating and confus-
ing because they are frequently subjected to two authorities with conflicting opinions. Consequently, working in
a matrix organizational structure can be time consuming because confusion must be dealt with through frequent
meetings and conflict resolution sessions. Matrix organizations often make it difficult for managers to achieve their
business strategies because they flood managers with more information than they can process.
Networked Organizational Structure
Made possible by advances in IT, a fourth type of organizational structure emerged: the networked organiza-
tional structure. Networked organizations characteristically feel flat and hierarchical at the same time. An article
published in the Harvard Business Review describes this type of organization: “Rigid hierarchies are replaced by
formal and informal communication networks that connect all parts of the company …. [This type of organiza-
tional structure] is well known for its flexibility and adaptiveness.”6 It is particularly suited to dynamic, unstable
Networked organizational structures are those that rely on highly decentralized decision rights and utilize distrib-
uted information and communication systems to replace inflexible hierarchical controls with controls based in IS.
Networked organizations are defined by their ability to promote creativity and flexibility while maintaining opera-
tional process control. Because networked structures are distributed, many employees throughout the organization
can share their knowledge and experience and participate in making key organizational decisions. IS are fundamental
to process design; they improve process efficiency, effectiveness, and flexibility. As part of the execution of these
processes, data are gathered and stored in centralized data warehouses for use in analysis and decision making. In
theory at least, decision making is more timely and accurate because data are collected and stored instantly. The
extensive use of communication technologies and networks also renders it easier to coordinate across functional
boundaries. In short, the networked organization is one in which IT ties together people, processes, and units.
The organization feels flat when IT is used primarily as a communication vehicle. Traditional hierarchical lines
of authority are used for tasks other than communication when everyone can communicate with everyone else, at
5 Cognizant Computer Goods Technology. “Creating a Culture of Innovation: lO Steps to Transform the Consumer Goods Enterprise” (October 2009),
6, Whitepapers/Cognizant_Innovation.pdf (accessed August 20, 2015).
6 L. M. Applegate, J. I. Cash, and D. Q. Mills. ”Information Technology and Tomorrow’s Manager,” Han•ard Business Review (November-December
1988), 128-36.
lfl Organizational Strategy and Information Systems
least in theory. The term used is technological leveling because the technology enables individuals from all parts of
the organization to reach all of its other parts.
Portions of Zara’s organizational structure appear networked. Being networked enables the store managers to
use technology to communicate directly with designers. Zara uses the technology-supported structure to coordinate
the actions and decisions of tens of thousands of its employees so that they can focus their attention on the same
goal of making and selling clothes that people want to buy.
Other Organizational Structures
An organization is seldom a pure form of one of the four structures described here. It is much more common to see
a hybrid structure in which different parts of the organization use different structures depending on the information
needs and desired work processes. For example, the IS department may use a hierarchical structure that allows
more control over data warehouses and hardware, whereas the research and development (R&D) department may
employ a networked structure to capitalize on knowledge sharing. In the hierarchical IS department, information
flows from top to bottom, whereas in the networked R&D department, all researchers may be connected to one
Further, IS are enabling even more advanced organization forms such as the adaptive organization, the zero
time organization,7 and the elastic enterprise. 8 Common to these advanced forms is the idea of agile, responsive
organizations that can configure resources and people quickly. These organizations are flexible enough to sense
and respond to changing demands. Elastic enterprises, for example, have a core competency of adding partners
as necessary to quickly respond to customer needs. They do this by creating a platform and common interfaces
to reduce the effort and friction of partnering. Building in the capability to respond instantly means designing the
organization so that each of the key structural elements is able to respond instantly.
Informal Networks
The organization chart reflects the authority derived from formal reporting relationships in the organization’s for-
mal structure. However, informal relationships also exist and can play an important role in an organization’s func-
tioning. Informal networks, in addition to formal structures, are important for alignment with the organization’s
business strategy.
Sometimes, management designs some of the informal relationships or networks. For example, when working
on a special project, an employee might be asked to let the manager in another department know what is going
on. This is considered an informal reporting relationship. Or a company may have a job rotation program that
provides employees with broad-based training by allowing them to work a short time in a variety of areas. Long
after they have moved on to another job, employees on job rotations may keep in touch informally with former
colleagues, or call upon their past co-workers when a situation arises that their input may be helpful. Hewlett Pack-
ard’s Decision Support and Analytics Services unit encouraged the development of work-related informal networks
when it established focused interest group/forums known as Domain Excellence Platforms (DEPs). An IT-enabled
DEP allows at least five people who hold a common interest related to the business to form a team to share their
knowledge on a topic (e.g., cloud computing, Web analytics). For nonbusiness related topics, the employees can
join conferences to talk about the topic and get to know one another better. The hope is that they will start thinking
beyond their work silos. 9
However, not all informal relationships are a consequence of a plan by management. Some networks unintended
by management develop for a variety of other factors including work proximity, friendship, shared interests, family
ties, and so on. The employees can make friends with employees in another department when they play together on
7 For more infonnation on zero time organizations, see R. Yeh, K. Pearlson, and G. Kozmetsky, Zero Time: Providing Instant Customer Value Every Time,
All the Time (Hoboken, NJ: John Wiley, 2000).
8 For more information on elastic enterprises, see N. Vitalari and H. Shaughnessy, The Elastic Enterprise (Longboat Key, FL: Telemachus Press, 2012).
9 T. S. H. Teo, R. Nishant, M. Goh, and S. Agarwal, “Leveraging Collaborative Technologies to Build a Knowledge Sharing Culture at HP Analytics,”
MIS Quarterly Executive I 0, no. I (March 2011 ). 1-18. ..J
Information Systems and Management Control Systems m
= Social Business Lens: Social Networks
Social networks are a form of informal networks. They even have begun to supplement and possibly replace
organization charts in enterprises. A social network is an IT-enabled network that links individuals together in
ways that enable them to find experts, get to know colleagues, and see who has relevant experience for pro-
jects across traditional organization lines. Much like the networked organization, a social network provides an IT
backbone linking all individuals in the enterprise, regardless of their formal title or position. Some might regard a
social network as a “super-directory” that provides not only the names of the individuals but also their role in the
company, their title, their contact information, and their location. It might even list details such as their supervisor
(and their direct reports and peers), the project(s) they are currently working on, and personal information specific
to the enterprise.
What differentiates a social network from previous IT solutions to connect individuals is that it is integrated with
the work processes themselves. Conversations can take place, work activities can be recorded, and information
repositories can be linked or merely represented within the structure of the social network.
IBM has a good example of how a social network permeates an organization, changing its culture, structure,
and collaboration processes. With over 400,000 employees, the company has a flurry of social activity embod-
ied in more than 17,000 individual biogs, 1 million daily page views of internal wikis and Web sites, and 400,000
employee profiles on IBM Connections. Its social network allows employees to share status updates, collaborate
on internal systems, and share files. There have been 15 million downloads of employee-generated videos and
podcasts so far.
Source: http:/ / si tes/haydnshaugh1iessy/2011 / 12/09/is-social-husincss-t he- samc-as-social-111e, lia/ ( w·,·essi·, I -\ I ,ril
:;_ 2012).
the company softball team, share the same lunch period in the company cafeteria, or see one another at social gath-
erings. Informal networks can also arise for political reasons. Employees can cross over departmental, functional,
or divisional lines in an effort to create political coalitions to further their goals. Some informal networks even cross
organizational boundaries. As computer and information technologies facilitate collaboration across distances,
social networks and virtual communities are formed. Many of these prove useful in getting a job done, even if not
all of the members of the network belong to the same organization. Linkedln is an example of a tool that enables
large, global informal networks.
Information Systems and Management Control Systems
Controls are the second type of managerial lever. Not only does IS change the way organizations are structured, but
also it profoundly affects the way managers control their organizations. Management control is concerned with how
planning is performed in organizations and how people and processes are monitored, evaluated, and compensated or
rewarded. Ultimately, it means that senior leaders make sure the things that are supposed to happen actually happen.
Management control systems are similar to room thermostats. Thermostats register the desired temperature.
A sensing device within the thermostat determines whether the temperature in the room is within a specified range
of the one desired. If the temperature is beyond the desired range, a mechanism is activated to adjust the temper-
ature. For instance, if the thermostat is set at 70 degrees and the temperature in the room is 69, then the heater
can be activated (if it is winter) or the air conditioning can be turned off (if it is summer). Similarly, management
control systems must respond to the goals established through planning. Measurements are taken periodically and
if the variance is too great, adjustments are made to organizational processes or practices. For example, operating
processes might need to be changed to achieve the desired goals.
IS offer new opportunities for collecting and organizing data for three management control processes:
1. Data collection: IS enable the collection of information that helps managers determine whether they are
satisfactorily progressing toward realizing the organization’s mission as reflected in its stated goals.
m Organizational Strategy and Information Systems
2. Evaluation: IS facilitate the comparison of actual performance with the desired performance that is
established as a result of planning.
3. Communication: IS speed the flow of information from where it is generated to where it is needed. This
allows an analysis of the situation and a determination about what can be done to correct for problematic
When managers need to control work, IS can play a crucial role. IS provide decision models for scenario
planning and evaluation. For example, the airlines routinely use decision models to study the effects of changing
routes or schedules. IS collect and analyze information from automated processes, and they can make automatic
adjustments to the processes. For example, a paper mill uses IS to monitor the mixing of ingredients in a batch of
paper and to add more ingredients or change the temperature of the boiler as necessary. IS collect, evaluate, and
communicate information, leaving managers with time to make more strategic decisions.
Planning and Information Systems
In the first chapter, the importance of aligning organizational strategy with the business strategy was discussed.
An output of the strategizing process is a plan to guide in achieving the strategic objectives. IS can play a role in
planning in four ways:
• IS can provide the necessary data to develop the strategic plan. They can be especially useful in collecting
data from organizational units and integrating the data to transform those data into information for the stra-
tegic decision makers.
• IS can provide scenario and sensitivity analysis through simulation and data analysis.
• IS can be a major component of the planning process.
• In some instances, an information system is a major component of a strategic plan. That is, as discussed in
Chapters 1 and 2, information systems can be used to gain strategic advantage.
Data and Information Systems
In addition to focusing on organizational-level planning and control, managers use information systems to build
controls for individuals. An important part of management control lies in making sure that individuals perform
appropriately. At the individual level, IS can streamline the process of data collection (usually through monitoring
and analytical processes that use the collected data, as Chapter 4 discusses) and support performance measurement
and evaluation as well as compensation through salaries, incentives, and rewards.
Monitoring work can take on a completely new meaning with the use of information technologies. IS make it
possible to collect such data as the number of keystrokes, the precise time spent on a task, exactly who was con-
tacted, and the specific data that passed through the process. The data collected from operations creates large data
stores that can be analyzed for trends. For example, a call center that handles customer service telephone calls is
typically monitored by an information system that collects data on the number of calls each representative received
and the length of time each representative took to answer each call and then to respond to the question or request for
service. Managers at call centers can easily and nonintrusively collect data on virtually any part of the process. The
organizational design challenge in data collection is twofold: (1) to embed monitoring tasks within everyday work
and (2) to reduce the negative impacts to employees being monitored. Workers perceive their regular tasks as value
adding but have difficulty in seeing how value is added by tasks designed to provide information for management
control. Research has found that monitoring does not always increase stress of the employee, especially when it fits
the task and is automatic and nonintrusive. 10 But employees often avoid activities aimed at monitoring their work
10 D. Galletta and R. Grant, “Silicon Supervisors and Stress: Merging New Evidence from the Field,” Accounting, Management and Information Tech-
nology 5, no. 3 (1995), 163-83. .,,,
Information Systems and Management Control Systems m
or worse, find ways to ensure that data recorded are inaccurate, falsified, or untimely. Collecting monitoring data
directly from work tasks—or embedding the creation and storage of performance information into software used to
perform work-renders the data more reliable.
A large number of software products are available for companies to monitor employees. Software monitoring
products are installed by companies to get specific data about what employees are doing. This information can help
ensure that work is being performed correctly. It can also be used to avoid barriers to employee productivity from
“cyberslacking” and “cyberslouching.” 11 The intention may seem both ethical and in the best interest of business,
but in practice, the reverse may actually be true. In many cases, employees are not informed that they are being
monitored or that the information gleaned is being used to measure their productivity. In these cases, monitoring
violates both privacy and personal freedoms. Managers need to take into account employee privacy rights and try to
balance their right to privacy against the needs of the business to have surveillance mechanisms in place.
Performance Measurement. Evaluation. and Information Systems
IS make it possible to evaluate actual performance data against reams of standard and historical data, often by using
models and simulations. Analytics and big data tools have changed the way many companies use data to make
decisions. Managers can more easily and completely understand work progress and performance. In fact, the ready
availability of so much information catches some managers in “analysis paralysis”: analyzing too much or too long.
In our example of the call center, a manager can compare an employee’s output to that of colleagues, to earlier
output, and to historical outputs reflecting similar work conditions at other times. Even though evaluation consti-
tutes an important use of IS, how the information is used has significant organizational consequences. Information
collected for evaluation may be used to provide feedback so that the employee can improve personal performance;
it also can be used to determine rewards and compensation. The former use-for improvement in performance-is
nonthreatening and generally welcomed.
Using the same information for determining compensation or rewards, however, can be threatening. Suppose a
call center manager is evaluating the number and duration of calls that service representatives answer on a given
day. The manager’s goal is to make sure all calls are answered quickly, and he communicates that goal to his staff.
Now think about how the evaluation information is used.
If the manager simply provides the employees with information, then the evaluation is not threatening. If han-
dled this way, employees might respond by improving their call numbers and duration. A discussion may even
occur in which the service representative highlights other important considerations, such as customer satisfaction
and quality. Perhaps the representative takes longer than average on each call because she believes that the attention
devoted to the customer would result in higher customer satisfaction.
On the other hand, some managers use the same information to rank employees so that top-ranked employees
are rewarded and those lower ranked are, in some way, punished or reprimanded. This may cause employees to
feel threatened and respond accordingly. The representative who is not on the top of the list might shorten calls or
deliver less quality, consequently decreasing customer satisfaction, while increasing the values of the metrics that
are measured. The lesson for managers is to pay attention to what is monitored and how the information is used.
Metrics for performance must be meaningful in terms of the organization’s broader goals, and measured, managed,
and communicated appropriately.
How feedback is communicated in the organization plays a role in affecting behavior. Some feedback can be
communicated via IS themselves. A simple example is the feedback built into an electronic form that will not allow
it to be submitted until it is properly filled out. For more complex feedback, IS may not be the appropriate vehi-
cle. For example, no one would want to be told she or he was doing a poor job via e-mail or voice mail. Negative
feedback of significant consequence often is best delivered in person.
IS can allow for feedback from a variety of participants who otherwise could not be involved. Many companies
provide “360-degree” feedback in which the individual’s supervisors, subordinates, and co-workers all provide
11 Bernd Carsten Stahl. “‘The Impact of the UK Human Rights Act 1998 on Privacy Protection in the Workplace,” Computer Security, Privacy and
Politics: Current Issues, Challenges and Solutions (Hershey, PA: Idea Group Publishing, 2008), 55-68.
m Organizational Strategy and Information Systems
formal input. Social tools are making inroads in evaluation, too. For example, a “thumbs up” or “1-5 stars” evalu-
ation system makes it easy and fast to provide informal feedback and evaluate activities. Because that feedback is
received more quickly, improvements can be made faster.
Incentives and Rewards and Information Systems
Incentives and rewards are the ways organizations encourage good performance. A clever reward system can make
employees feel good without paying them more money. IS can affect these processes, too. Some organizations use
their Web sites to recognize high performers, giving them electronic badges that are displayed on the social network
to identify them as award recipients. Others reward them with new technology. At one organization, top performers
get new computers every year, while lower performers get the “hand-me-downs.”
IS make it easier to design complex incentive systems, such as shared or team-based incentives. IS make it eas-
ier to keep track of contributions of team members and, in conjunction with qualitative inputs, allocate rewards
according to complex formulas. For example, in a call center, agents can be motivated to perform better by providing
rewards based on tracking metrics, such as average time per call, number of calls answered, and customer satis-
faction. Information systems can provide measures of all of these on a real-time basis-even customer satisfaction
through automated audio or Web site questionnaires after a customer interaction.
When specifying reward metrics, managers must be careful because they tend to drive the behavior they specify.
For example, call center agents who know they will be evaluated only by the volume of calls they process may rush
callers and provide poorer service in order to maximize their performance according to the narrow metric. Those
measured only by customer satisfaction might spend more time than necessary on each call and perhaps try end-
lessly to solve problems that should be routed to more technical personnel.
Information Systems and Culture
The third managerial lever of organizational strategy is culture. Culture plays an increasingly important role in
information system management and use. Because information systems management and use are complicated
by human factors, it is important to consider culture’s impact. Culture is defined as the set of “shared values and
beliefs” that a group holds and that determines how the group perceives, thinks about, and appropriately reacts to
its various environments. 12
A “collective programming of the mind” distinguishes not only societies ( or nations) but also industries, profes-
sions, and organizations. 13 Beliefs are the perceptions that people hold about how things are done in their community
whereas values reflect the community’s aspirations about the way things should be done. Culture is something of a
moving target because it evolves over time as the group solves problems adapting to the environment and internal
Culture has been compared to an iceberg because, like an iceberg, only part of the culture is visible from the
surface. In fact, it is necessary to look below the surface to understand the deep-rooted aspects of culture that are
not visible. That is, culture may be thought of in terms of layers: observable artifacts, values, and assumptions.
Observable artifacts are the most visible level. They include such physical manifestations as type of dress, sym-
bols in art, acronyms, awards, myths and stories told about the group, rituals, and ceremonies. Espoused values
are the explicitly stated preferred organizational values. Ideally, they should be consistent with the enacted values,
which are the values and norms that are actually exhibited or displayed in employee behavior. For example, if
an organization says that it believes in a good work-life balance for its employees but actually requires them to
work 12-hour days and on weekends, the enacted values don’t match with the espoused ones. The deepest layer of
culture is the underlying assumption layer, or the fundamental part of every culture that helps discern what is real
12 A. Kinicki, Organiwtional Behavior: Core Concepts (Boston, MA: McGraw-Hill Irwin, 2008), 183.
” G. J. Hofstede, Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations Across Nations, 2nd ed. (Thousand Oaks, CA:
Sage Publications, 200 I). .,,,.J
Information Systems and Culture llfl
and important to the group. Assumptions are unobservable because they reflect organizational values that have
become taken for granted to such an extent that they guide organizational behavior without any group members
thinking about them. 14
Levels of Culture and IT
Culture can vary depending upon which group you are studying. Countries, organizations, and subgroups in orga-
nizations all have a culture. IS management and use can be impacted by culture at all these levels. IS can even play
a role in promoting it. For instance, Cognizant used IT to implement “10/10/10,” a program designed to keep its
associates focused on innovation. On the tenth workday of each month at 10 A.M., everyone’s computer screen is
frozen, allowing the entire Cognizant workforce to spend 10 minutes thinking about and sharing innovative ideas. 15
With the growth of analytics and the availability of large stores of data, many organizations are adopting a data-
driven culture in which virtually all decisions are made with the support of analytics. In a data-driven culture, man-
agers are typically expected to provide data to support their recommendations and to back up decisions. Information
is often freely shared in this culture, and IS take on the important role of collecting, storing, analyzing, and deliver-
ing data and information to all levels of the organization. Dell, Procter and Gamble, GE, Google, and Facebook are
examples of companies that are known to have a data-driven culture. Sometimes the employees in these companies
are said to “speak the language of data” as part of their culture.
When IS developers have values that differ from the clients in the same organization for whom they are devel-
oping systems, cultures can clash. For example, clients may favor computer-based development practices that
encourage reusability of components to enable flexibility and fast turnaround. Developers, on the other hand, may
prefer a development approach that favors stability and control but tends to be slower. Both national and organiza-
tional cultures can affect IT management and usage and vice versa. National culture may affect IT in a variety of
ways, impacting information systems development, technology adoption and diffusion, system use and outcomes,
and management and strategy. These relationships are shown in Figure 3.5 and described next. The model and the
discussion of the impact of culture on IT issues draws heavily from the work of Leidner and Kayworth. 16
FIGURE 3.5 Levels of culture.
National Values
Organizational Values
IT Adoption
and Diffusion
(Entire Organization and within Organization)
Source: Adapted from D. Leidner and T. Kayworth, “A Review of Culture in Information Systems Research: Toward a Theory of
Information Technology Culture Conflict,” MIS Quarterly 30, no. 2 (2006), 372, Figure 1.
14 E. Schein, Organizational Change and Leadership, 4th ed. (San Francisco, CA: Jossey-Bass, 2010).
15 Cognizant Computer Goods Technology, “Creating a Culture of Innovation,” 1-6.
16 D. Leidner and T. Kayworth, “A Review of Culture in Information Systems Research: Toward a Theory of Information Technology Culture Conflict,”
MIS Quarterly 30, no. 2 (2006), 357-99.
m Organizational Strategy and Information Systems
Culture and Information Systems Development
Variation across national cultures may lead to differing perceptions and approaches to IS development. In particular,
systems designers may have different perceptions of the end users and how the systems would be used. For example,
Danish designers who had more socialist values were more concerned about people-related issues when compared
to Canadian designers with more capitalist values. The Canadian designers were more interested in technical issues.
National culture may also affect the perceptions of project risk and risk management behaviors. At the organiza-
tional level, cultural values can affect the features of new software and the way it is implemented.
Culture and Information Technology Adoption and Diffusion
National cultures that are more willing to accept risk appear to be more likely to adopt new technologies. Those
cultures that are less concerned about power differences among people (i.e., have low power distance) are more
likely to adopt technologies that help promote equality. People are more likely to adopt a new technology if they
think that the technology’s embedded values match those of their national culture. Further, if a technology is to be
successfully implemented into an organization, either the technology must fit with the organization’s culture or the
culture must be shaped to fit the behavioral requirements of the technology. For example, a dashboard that shares
analytics and key performance indicators to all employees would reduce the “power” of leaders in a hierarchical
organization in which only the senior managers have access to the data. In such organizations, implementation of
such an information system would likely be very slow or rejected altogether because the culture would not support
broad information sharing.
Culture and Information Technology Use and Outcomes
Research has shown that differences in culture result in differences in the use and outcomes of IT. At the orga-
nizational level, cultural values are often related to satisfied users, successful IS implementations or knowledge
management successes. At the national level, e-mail adoption was much slower in Japan than in the United States.
Japanese prefer richer forms of communication such as meeting face-to-face. The lean e-mail can’t accommodate
the symbols in their language as easily as a fax. Further, in countries that are more likely to avoid uncertainty like
Japan and Brazil, IT is used often for planning and forecasting, whereas in countries that are less concerned about
risk and uncertainty, IT is more often used for maintaining flexibility. Furthermore, some things are acceptable in
one country but not another. For example, Ditch Witch could not use its logo globally because a witch is offensive
in some countries.
Culture and Information Technology Management and Strategy
National and organizational culture affects planning, governance, and perceptions of service quality. For example,
having planning cultures at the top levels of an organization typically signal that strategic systems investment is
important. At Adidas, a multinational sports apparel company headquartered in Germany, national culture played
a role in its multisourcing strategy. Adidas’ managers selected an Eastern European vendor because they were
looking for a provider whose culture was similar to their own. They thought that vendor’s employees were more
likely to question system requirements and to make creative, innovative contributions than the Indian vendors they
had hired. 17
National Cultural Dimensions and Their Application
One of the best-known (and prolific) researchers in the area of differences in the values across national cultures
is Geert Hofstede. Most studies about the impact of national cultures on IS have used Hofstede’s dimensions
of national culture. Hofstede 18 originally identified four major dimensions of national culture: power distance,
17 Martin Wiener and Carol Saunders, “Forced Coopetition in IT Multi-Sourcing,” Journal of Strategic /11formatio11 Systems 23, no. 3 (2014), 210-25.
“‘ G. Hofstede, Culture’s Consequences: /ntemational Differences in Work-Related Values (London: Sage, 1980). ..,,,;
Information Systems and Culture m
uncertainty avoidance, individualism-collectivism, and masculinity-femininity. 19 To correct for a possible bias
toward Western values, a new dimension, Confucian work dynamism, also referred to “short-term vs. long-term
orientation,” was added. 20 Many others have used, built upon, or tried to correct problems related to Hofst-
ede’s four dimensions. One notable project is the Global Leadership and Organizational Behavior Effectiveness
(GLOBE) research program, which is a team of 150 researchers who have collected data on cultural values and
practices and leadership attributes from over 18,000 managers in 62 countries. The GLOBE project has uncov-
ered nine cultural dimensions, six of which have their origins in Hofstede’s pioneering work. The Hofstede
dimensions and their relationship to the GLOBE dimensions are summarized in Figure 3.6.
Hofstede Dimensions (Related i Description• ‘ Examples of Effect on l’fb
GLOBE Dimensions)
-· — —–··· — ——-·
Uncertainty Avoidance (Uncertainty Extent to which a society tolerates Countries with high uncertainty
Avoidance) uncertainty and ambiguity; extent to avoidance are less likely to adopt
which members of an organization or new IT and have higher perceptions
society strive to avoid uncertainty by of project risk than countries with low
, reliance on social norms, rituals, and uncertainty avoidance.
i bureaucratic practices to alleviate the
l unpredictability of future events.
Power Distance (Power Distance) · Degree to which members of an Individuals from high power distance
organization or society expect and countries are found to be less
agree that power should be equally innovative and less trusting of
shared. technology than individuals from
tow power distance countries.
lndivid ualism/Collectivism ( Societal Degree to which individuals are ‘ Individualistic cultures are more
and In-Group CoUectivism) integrated into groups; extent to predisposed than collectivistic
which organizational and societal cultures to report bad news about
institutional practices encourage troubled IT projects; companies in
and reward collective distribution of collectivist societies are more likely
resources and collective action. than individualistic societies to fill an
IS position from within the company.
Masculinity /Femininity ( General Degree to which emotional roles are Australian groups (high masculinity)
Egalitarianism and Assertiveness) distributed between the genders; generated more conflict and relied
extent to which an organization or less on conflict resolution strategies
society minimizes gender role than Singaporean groups (low
differences and gender masculinity).
discrimination; often focuses on
caring and assertive behaviors.
Confucian Work Dynamism (Future Extent to which society rewards When considering future orientation,
Orientation) behaviors related to long- or studies found differences in the use
short-term orientations; degree to of Executive Information Systems
which individuals in organizations or and the evaluation of service quality
societies engage in future-oriented across countries.
behaviors such as planning, investing
in the future, and delaying
‘Adapted from R. House, M. Javidan, P. Hanges, and P. Dorfman, “Understanding Cultures and Implicit Leadership Theories across the Globe: An Introduction to
Project GLOBE,” Journal of World Business 37, no. 1 (2002), 3-10; and G. Hofstede and G. J. Hofstede, Dimensions of National Culture, hnp://www.geerthofstede.
nVdimensions-of-nationakultures.aspx (accessed August 20, 2015).
‘Examples were provided in D. Leidner and T. Kayworth, “A Review of Culture in Information Systems Research: Toward a Theory of Information Technology
Culture ConfLict,” MIS Quarterly 30, no. 2 (2006), 357-99.
FIGURE 3.6 National cultural dimensions.
19 Ibid.
20 G. Hofstede and M. H. Bond, “The Confucius Connection: From Cultural Roots to Economic Growth,” Organizational Dynamics 16 (1988), 4021.
lliil Organizational Strategy and Information Systems
= Geographic Lens: Does National Culture Affect Firm Investment in IS Training?
In a massive study of 6,000 firms in 21 countries, Hilla Peretz and Zehava Rosenblatt found that differences along
Hofstede’s cultural dimensions do affect employee training. In particular, firms in countries that embrace low
power distance (i.e., Germanic countries, Anglo-American countries, the Netherlands, and Israel} tend to invest
more in training than firms in countries with high power distance (i.e., some Asian, Latin America, and Middle
Eastern countries).
Why might this be the case? Perhaps firms in high power distance societies view investment in training as less
favorable because it might narrow the power gaps by making a higher level of skills available across all levels of
the organization. Those in power might not want to see a leveling of power throughout the organization.
Peretz and Rosenblatt also discovered that firms in countries that had a strong orientation toward the future
(i.e., some Asian countries) were more likely to invest in training than firms in countries with a shorter-term orien-
tation (i.e., some Anglo-American countries). The researchers think this might be so because training is all about
helping employees develop so that they can perform better in the future. Better-trained employees help the
firm’s competitive prospects down the line.
Finally, the researchers found that firms in countries with high uncertainty avoidance (i.e., some Hispanic cul-
tures, Japan, South Korea, Israel, and Russia) spend more on training than countries with low uncertainty avoid-
ance (i.e., the United Kingdom, Ireland, Hong Kong, and Singapore)-maybe because employee training may be
seen as a way to reduce uncertainty.
Although the study was about training in general, the findings are even more likely to hold for IS training.
Because IS change so quickly, IS professionals need considerable training to stay current and do their jobs well.
Source: 11. Peretz and Z. Rosenblatt. “The Role of Societal Cultural Practices in Organizational Investment in Training: A Comparatin·
Study in 21 Countries:· ./mmwl of Cross-C11lt11rnl Psycho/010· 42. no.;; (2011), 817-:11.
Even though the world may be becoming “flatter,” cultural differences have not totally disappeared. But some
leadership traits, such as being trustworthy, just, and honest; having foresight and planning ahead; being positive,
dynamic, encouraging, and motivational; and being communicative and informed are seen as universally acceptable
across cultures. 21
The generally accepted view is that the national culture predisposes citizens of a nation to act in a certain way
along a Hofstede or GLOBE dimension, such as in an individualistic way in England or in a collectivist way in
China. Yet, the extent of the influence of a national culture may vary among individuals, and culturally based idi-
osyncrasies may surface based upon the experiences that shape each person’s ultimate orientation on a dimension.
Having an understanding and appreciation for cultural values, practices, and subtleties can help in smoothing the
challenges that occur in dealing with these idiosyncrasies. An awareness of the Hofstede or GLOBE dimensions
may help to improve communications and reduce conflict.
Effective communication means listening, framing the message in a way that is understandable to the receiver,
and responding to feedback. Effective cross-cultural communication involves each of these plus searching for an
integrated solution that can be accepted and implemented by members of diverse cultures. This may not be as
simple as it sounds. For instance, typical American managers, noted for their high-performance orientation, pre-
fer direct and explicit language full of facts and figures. However, managers in lower performance-oriented coun-
tries like Russia or Greece tend to prefer indirect and vague language that encourages the exploration of ideas. 22
Communication differences surfaced when one of this book’s authors was designing a database in Malaysia. She
asked questions that required a “yes” or “no” response. In trying to reconcile the strange set of responses she
received, the author learned that Malaysians are hesitant to ever say “no.” Communication in meetings is also
subject to cultural differences. In countries with high levels of uncertainty avoidance such as Switzerland and
21 Mansour Javidan and R. J. House, “Cultural Acumen for the Global Manager,” Organizational Dynamics 29, no. 4 (2001 ), 289-305.
22 Ibid.
Discussion Questions ..
Austria, meetings should be planned in advance with a clear agenda. The managers in Greece or Russia who come
from a low uncertainty avoidance culture often shy away from agendas or planned meetings.
Knowing that a society tends to score high or low on certain dimensions helps a manager anticipate how a per-
son from that society might react. However, this provides only a starting point because each person is different.
Importantly, without being aware of cultural differences, a company is unlikely to develop IS or to use it effectively.
• Organizational strategy reflects the use of the managerial levers of an organization’s design, organizational culture, and
management control systems that coordinate and control work processes.
• Organizational designers today must have a working knowledge of what information systems can do and how the choice
of information system will affect the organization itself.
• Organizational structures can facilitate or inhibit information flows.
• Organizational design should take into account decision rights, organizational structure, and informal networks.
• Structures such as flat, hierarchical, matrix and, networked organizations are being enhanced by information technology.
Increasingly information technology enables and supports networked organizations that can better respond to dynamic,
uncertain organizational environments.
• Information technology affects managerial control mechanisms: planning, data, performance measurement and evalua-
tion, incentives and rewards.
• Management control at the individual level is concerned with monitoring (i.e., data collection), evaluating, providing
feedback, compensating, and rewarding. It is the job of the manager to ensure that the proper control mechanisms are
in place and the interactions between the organization and the information systems do not undermine the managerial
• Organizational and national culture should be taken into account when designing, managing, and using IS.
assumptions (p. 67)
beliefs ( p. 66)
bureaucracy (p. 60)
culture (p. 66)
decision rights (p. 58)
enacted values (p. 66)
espoused values (p. 66)
flat organizational structure (p. 60)
hierarchical organizational
structure (p. 60)
matrix organizational
structure (p. 61)
networked organizational
structure (p. 61)
1. How might IS change a manager’s job?
observable artifacts (p. 66)
organizational strategy (p. 57)
social network (p. 63)
span of control (p. 60)
unity of command (p. 60)
values (p. 66)
2. Is monitoring an employee’s work on a computer a desirable or undesirable activity from a manager’s perspective? From the
employee’s perspective? How does the organization’s culture impact your position? Defend your position.
3. Consider the brief description of the elastic enterprise. What is an example of a control system that would be critical to man-
age for success in elastic enterprise? Why?
4. Mary Kay, Inc. sells facial skin care products and cosmetics around the globe. The business model is to provide one-on-one,
highly personalized service. More than 500,000 Independent Beauty Consultants (IBCs) sell in 43 markets worldwide. Each
IBC runs his or her own business by developing a client base and then providing services and products for sale to those
clients. The IBCs were offered support through an e-commerce system with two major components: and Mary
lfll Organizational Strategy and Information Systems
Kay InTouch. allows IBCs to create instant online sites where customers can shop anytime directly with their
personal IBC. Mary Kay InTouch streamlines the ordering process by automatically calculating discounts, detecting pro-
motion eligibility, allowing the IBCs to access up-to-date product catalogs, and providing a faster way to transact business
with the company.23
a. How would the organizational strategy need to change to respond to Mary Kay’s new business strategy and information
b. What changes would you suggest Mary Kay, Inc. managers make in their management systems in order to realize the
intended benefits of the new systems? Specifically, what types of changes would you expect to make in the evaluation
systems, the reward systems, and feedback systems?
• CASE STUDY 3-1 The Merger of Airtran by Southwest Airlines: Will the Organizational Cultures Merge?24
Southwest Airlines’ merger with AirTran Airlines, valued at over US$3 billion, made Southwest the largest domestic car-
rier based on number of passengers flown. 25 The merger increases Southwest’s presence in a number of major cities, most
notably New York (LaGuardia) and Washington D.C. (Ronald Reagan National Airport). Thanks to AirTran, Southwest now
flies into the coveted Atlanta’s Hartsfield-Jackson Atlanta International, the world’s busiest airport, along with a number
of international vacation destinations such as Aruba, Puerto Rico, and the Bahamas. In all, 21 new cities were added, 7 of
which were in the international market, positioning Southwest to expand in Central and South America. The result was a
significant increase in profitability for Southwest, growing from $178 million in 2011 to $1.1 billion in 2014. 26
Southwest has grown organically, acquiring only two other smaller carriers-Morris Air and Muse Air-in the 1980s.
This has made it easier to maintain its quirky identity. On the other hand, AirTran was created from several airlines, includ-
ing the former ValuJet, about 15 years ago. It is known mostly as a low-cost, on-time carrier. The Company Culture page
on AirTran’s Web site prior to the merger claimed that “loyal crew members keep AirTran airways customers soaring” and
who have a “timely and accommodating demeanor.” AirTran’s values included a total commitment to safety, technical ex-
cellence, continuous learning, fun, and profit.27 ..,,J
Southwest, headquartered at Love Field in Dallas, uses the ticker symbol LUY and uses all kinds of ways to show that
“Luv” to their customers. Southwest has cultivated a corporate culture that focuses on employees and customers having a
good time while flying. The company carefully selects its employees using interviews that involve creative activities and
even asking the recruits to wear tutus. Southwest’s training program with karaoke and amusing challenges is designed
to socialize the new recruits into the airline’s fun-loving culture. According to its Web site, its cultural values include
“A Warrior Spirit, A Servant’s Heart, A Fun-Luving Attitude.”28
Wharton management professor Peter Cappelli commented just after the merger was announced in 2010 that “South-
west’s whole business model is built on a particular approach to managing employees. It’s a big bet they are making that
they can swallow AirTran …. This is a very different approach, taking thousands of AirTran employees, dumping them
into the system and hoping it works. It’s a pretty risky move.” Cappelli adds that airline mergers are always difficult because
integration has to take place while a carrier continues to carry out complex operations. Thousands of employees can’t easily
be put through an orientation program in the merger’s short time frame, and the information systems supporting the complex
operations of two airlines can’t be easily changed.29
03 Adapted from “Mary Kay, Inc.,” Fortune (Microsoft supplement, November 8. 1999).
24 An earlier version of this case was written by Parul Acharya.
” “What Has AirTran Done for Southwest Airlines,” Forbes (December 11, 2014), l/what-has-
airtran-done-for-southwest-airlines/ (accessed April 27, 2015).
” Charisse Jones, “Southwest Scores Record Profit-Again” USA Today (January 22, 2015),
southwest-sees-record-profits-in-2014/22166225/ (accessed August 20, 2015).
27 (accessed April 2011).
28 Southwest Airlines, (accessed January 27, 2012).
29 “By Acquiring AirTran, Will Southwest Continue to Spread the LUY?” Knowledge@Wharton (October 13, 2010), http://knowledge.wharton.upenn.
edu/article.cfm?articleid=2614 (accessed August 20, 2015); and B. Snyder, “How the Southwest-AirTran Merger Creates a Labor Problem,” CBS
Money (October 5, 20 I 0), l -505123 _ 162-43642550/how-the-southwest-airtran-merger-creates-a-labor-problem/ ( accessed
April 12, 2012).
CaseStudy Iii
In November 2011, Southwest Airlines’ more than 6,000 pilots and AirTran Airways’ 1,700 pilots overwhelmingly
approved a plan to combine the seniority lists of the two carriers with five of six pilots voting in favor. 30 The personnel sys-
tems had to be modified to reflect the new seniority and pay systems.
The disparate cultures of Southwest and AirTran also posed problems for the merger of their online reservation systems
and their frequent-flyer programs. Southwest switched from Sabre to Amadeus system to better accommodate merchandis-
ing and international flights. AirTran’s reservations system vendor was Navitaire. 31 AirTran and Southwest had diametrically
opposed views on distribution through online travel agencies. Southwest usually sold its tickets via telephone or through its
Web site whereas AirTran preferred online reservation systems such as Orbitz and Expedia. 32 It took several years after to
figure out how to blend the two different reservations systems. The Southwest frequent-flyer program was the last system
to be updated to include the top customers of AirTran. In December 2014, the new merged airline was just finishing up the
integration. Will the cultures of Southwest and AirTran come together? People are optimistic, but the real answer lies in the
Discussion Questions
1. Discuss the layers of culture that are evident in this case. Why do you think Southwest has preferred to grow organically
over its history?
2. What are the similarities and dissimilarities between the cultures, values, and beliefs of Southwest and AirTran airlines?
Where would you expect the differences to be most difficult to manage? Why?
3. What problems could arise due to the different perspectives of both airlines toward online reservation systems? What do
you recommend the managers do to solve these problems?
4. What would you recommend managers to do ensure a smooth integration of the information systems given the culture
4.., • CASE STUDY 3-2 The FBI
The Federal Bureau of Investigation of the U.S. government, the FBI, was forced to scrap its $170 million virtual case file
(VCF) management system. Official reports blamed numerous delays, cost overruns, and incompatible software. But a deep-
er examination of the cause of this failure uncovered issues of control, culture, and incompatible organizational systems.
Among its many duties, the FBI is charged with the responsibility to fight crime and terrorism. To do so requires a
large number of agents located within the United States and around the world. That means agents must be able to share
information among themselves within the bureau and with other federal, state, and local law enforcement agencies. But
sharing information has never been standard operating procedure for this agency. According to one source, “agents are accus-
tomed to holding information close to their bulletproof vests and scorn the idea of sharing information.” This turned out to
be a real problem in an investigation of DarkMarket, an Internet forum that connected buyers and sellers so that they could
exchange stolen information such as bank details and credit card numbers. When both the FBI and Secret Service agents were
investigating each other as criminals, it took their British colleagues, who knew the secrets of both agencies, to avert a crisis.
Enter the FBI’s efforts to modernize its infrastructure, codenamed “Trilogy.” The efforts included providing agents with
30,000 desktop PCs, high-bandwidth networks to connect FBI locations around the world, and the VCF project to facilitate
sharing of case information worldwide. The FBI Director explained to Congress that VCF would provide “an electronic
means for agents to globally send field notes, documents, pieces of intelligence and other evidence so they could hopefully
act faster on leads.” It was designed to replace a paper-intensive process with an electronic, Web-based process. With such
a reasonable goal, why didn’t it work?
30 T. Maxon, “Southwest Airlines, AirTran Pilots Overwhelming Approve Plan to Combine Seniority Lists,” Aviationblog, Dallas News (November 7,
2011), (accessed November 7, 2011); Snyder, “How the Southwest-AirTran Merger
Creates a Labor Problem.”
31 D. Schall, “Distribution Questions Loom Following US Approval of Southwest-AirTran Merger,” (April, 27, 2011), http://www.tnooz.
com/2011/04/27 /news/distribution-questions-loom-following-us-approval-of-southwest-airtran-merger/ ( accessed April 12, 2012).
32 J. Brancatelli, “The Fight Stuff: Why the Airlines Are Fighting Travel Sites,” (January 5, 2011),
travel/20 l 1/0 l/05/why-legacy-airlines-are-warring-with-expedia-and-orbitz/ (accessed November 7, 20 l l ).
Ill Organizational Strategy and Information Systems
The CIO of the FBI offered one explanation. He claimed that the FBI needed to change its culture. “If the Bureau is ever
going to get the high-tech analysis and surveillance tools it needs to … fight terrorism, we must move from a decentralized
amalgam of 56 field offices … to a seamlessly integrated global intelligence operation capable of sharing information and
preventing crimes in real-time.” He added that the Bureau personnel were also very distrustful of the technology, as well as
others not only in other organizations but also within the FBI.
A former project manager at the FBI further explained, “They work under the idea that everything needs to be kept secret.
But everything doesn’t have to be kept secret. To do this right, you have to share information.”
The VCF system has been shut down, but the CIO is working on a new approach. He is busy trying to win buy-in from
agents in the field so that the next case management system will work. In addition, he is working to establish a portfolio
management plan that will cover all of the FBI’s IT projects, even those begun in decentralized offices. His team has been
designing an enterprise architecture that will lay out standards for a bureauwide information system. The Director of the
FBI has helped too. He reorganized the governance of IT, taking its budget control away from the districts and giving total
IT budget authority to the CIO.
The FBI is building a new case management system called Sentinel in four phases. The first two phases have been de-
ployed and, according to the Federal IT dashboard, the project is on schedule and on budget. The new system, according to
the CIO, will include workflow, document management, record management, audit trails, access control, and single sign-on.
It will provide enhanced information sharing, search, and analysis capabilities to FBI agents and facilitate information
sharing with members of the law enforcement and intelligence communities. To manage the expectations of the agents, the
CIO plans to communicate often and significantly increase the training program for the new system. The CIO commented,
“We want to automate those things that are the most manually cumbersome for the agents so they can see that technology
can actually enhance their productivity. That is how to change their attitudes.”
The FBI also has a billion-dollar Next Generation Identification (NGI) system with 52 million searchable facial images
–· and 100 million individual fingerprint records as well as millions of palm prints, DNA samples, and iris scans. NGI can scan
mug shots for a match and pick out suspects from a crowd scanned by a security camera or in a photograph on the Internet.
The information can be exchanged with 18,000 law enforcement agencies 24 hours a day, 365 days a year. 33 When combined
with Sentinel, NGI will further enhance the effectiveness of the FBI’s antiterror efforts.
Discussion Que~tions
1. What do you think were the real reasons why the VCF system failed?
2. What were the points of alignment and misalignment between the information systems strategy and the FBI
3. What do you think of the CIO’s final comment about how to change attitudes? Do you think it will work? Why or
why not?
4. If you were the CIO, what would you do to help the FBI modernize and make better use of information technology?
Sources: Adapted from Allan Holmes, “Why the G-Men Aren’t IT Men” C/0 (June 15, 2005), 42-45; IT Dashboard, “FBI Sentinel,” http://; Marc Goodman, Future Crimes (Toronto, Canada: Random House, 2015).
” Federal Bureau of Investigation, “FBI Announces Full Operational Capability of the Next Generation Identification System” (September 15, 2014 ),
h tips:// www .fbi . gov/ news/ press rel/ press-releases/fb i-an nounces-f ull -operational -ca pab iii ty-of -the-next -generation-iden ti fication-s ystem ( accessed
August 20, 2015). ..,,J
Digital Systems and the
Design of Work
New approaches to work such as workplace flexibility and remote work combined with
newer collaboration and social technologies, mobile technologies, and cloud computing
have drastically changed the way we work. This chapter explores the impact technology has
on the nature and design of work. A Work Design Framework is used to explore how digital
technology can be used effectively to support these changes and help make employees
more effective. In particular, this chapter discusses technologies to support communication
and collaboration, new types of work, new ways of doing traditional work, new challenges
in managing employees, and issues in working remotely and on virtual teams. It concludes
with a section on change management.
Consumer financial services powerhouse American Express viewed workplace flexibility as a stra-
tegic lever. Its award-winning BlueWork program was a good example of turning strategic intent
into action. In addition to receiving the Chairman’s Award for Innovation-Top Innovators Prize, the
BlueWork program enabled increased employee productivity and more than $10 million in annual
savings from reduced cost of office space. 1 Blue Work was Amex’s term for arrangements for flexi-
bility in workspace. Integrated into the company’s human resource policies, the flexibility included
staggered working hours, off-site work areas such as home/virtual office arrangements, shared office
space, touch-down (laptop-focused, temporary) space, and telecommuting. The corporate focus is on
results rather than on hours clocked in the office and face-to-face time. But Blue Work also supported
the sustainability and corporate social responsibility objectives. According to the Amex Web site,
Our sustainable facilities story is also woven into the fabric of our employees’ daily routine. BlueWork,
our flexible workplace program, allows American Express employees to better utilize company work
space and work remotely. The installation of 63 telepresence studios in 46 office locations encourages
virtual meetings, reduces the need for travel, and contributes positively to our carbon reduction target. 2
Employees are assigned to a type of work arrangement based on their role. Hub employees
require a fixed desk because they work in the office every day. Club employees can share time bet-
ween the office and other locations because their roles involve both face-to-face and virtual meet-
ings. Home employees work from home at least three days a week. Roam employees are on the road
or at customer sites. Susan Chapman, SVP at American Express commented on the importance of
1 Christopher Palafax, “American Express\ New Design Team,” American Builders Quarterly (April/May/June 2014). http:// (accessed August 25, 2015 ):
kit/tkl_l3_2a.html (accessed August 25, 2015); Monak Mitra, “Best Companies to Work for 2012,” The Economic Times. http:// l 6/news/32698433 _ l_employee-benefits-jyoti-rai-american-express-india ( accessed
August 25, 2015); Jeanne Meister, “Flexible Workspaces: Employee Perk or Business Tool to Recruit Top Talent?” forbes (April 1.
2013 ), http://www. for bes .com/sites/jeannemeister/20 1 3/04/0 1 /flexible-workspaces-another-workplace-perk -or -a-must-have-to-attract-
top-talent/ (accessed August 25, 2015).
/.. ‘ American Express Corporate Social Responsibility Report, Quarter 3 2014 Update,
.., q3.aspx (accessed August 25, 2015).
Ill Digital Systems and the Design of Work
technology’s role in alternative work arrangements, “Technology drives workplace flexibility …. Technology has
become a strategic competency that drives revenue growth. It’s not just about enabling productivity.”3
How has Blue Work impacted the staff? In addition to the productivity improvements and savings in office expense,
overall employee satisfaction is up. American Express managers are happy with these arrangements too. They have
found employees to be more engaged while working, more committed to the company, and better able to drive needed
results. 4 American Express has clearly adopted one of the most accommodating approaches to work hours, but many
employers allow their employees some flexibility in their work schedule. A third or more of IBM, Aetna, and AT&T
employees have no official desks at the company. Communications giant Cisco, which has over 75,000 employees on
six continents, uses technology-enabled flexible work practices such as telecommuting, remote work, and flex time. 5
Sun Microsystems Inc. calculates that it has saved over $400 million in real estate costs by allowing nearly half of
its employees to work anywhere they want. 6 Even the U.S. Government has a flexible work program, Flexiwork, that
enables eligible employees to do their job under alternative work arrangements such as work from home.7
The American Express example illustrates how the nature of work has changed-and information technology is
supporting, if not propelling, the changes. In preindustrial societies, work was seamlessly interwoven into everyday
life. Activities all revolved around nature’s cyclical rhythms (i.e., the season, day, and night; the pangs of hunger)
and the necessities of living. The Industrial Revolution changed this. With the practice of dividing time into mea-
surable, homogeneous units for which they could be paid, people started to separate work from other spheres of life.
Their workday was distinguished from family, community, and leisure time by punching a time clock or responding
to the blast of a factory whistle. Work was also separated into space as well as time as people went to a particular
place to work. 8
Technology and new work arrangements have once again enabled an integration of work activities into every-
day life. Technologies have made it possible for employees to do their work in their own homes, on the road, or
at an alternative work space at times that accommodate home life and leisure activities. 9 Paradoxically, however,
employees often want to create a sense of belonging within the space where they work. That is, they wish to create a
sense of “place,” which is a bounded domain in space that structures their experiences and interactions with objects .J
that they use and other people that they meet in their work “place.” People learn to identify with these “places,” or
locations in space, based on a personal sharing of experiences with others within the space. Over time, visitors to
the place associate it with a set of appropriate behaviors. 10 Increasingly “places” are being constructed in space with
Web tools that encourage collaboration, allowing people to easily communicate on an ongoing basis, once again
changing the nature of where work is done.
The Information Systems Strategy Triangle, discussed in Chapter 1, suggests that changing information sys-
tems (IS) results in altered organizational characteristics. Significant changes in IS and the work environments in
which they function are bound to coincide with significant changes in the way that companies are structured and
how people experience work in their daily lives. Chapter 3 explores how information technology (IT) influences
organizational design. This chapter moves the focus to the way IT is changing the nature of work, the rise of new
work environments, and IT’s impact on different types of employees, where and when they do their work, and how
they collaborate. This chapter looks at how IT enables and facilitates a shift toward collaborative and virtual work.
The terms IS and IT are used interchangeably in this chapter, and only basic details are provided on technologies
used. The point of this chapter is to look at the impact of IT on the way work is done by individuals and teams.
This chapter should help managers understand the challenges in designing technology-intensive work and develop
a sense of how to address these challenges and overcome resistance to IT in our rapidly changing world.
3 Gensler. Dialog 22, (accessed August 25, 2015).
‘ (accessed May 30, 2015).
6 “Smashing the Clock,” Bloomberg News (December 10, 2006), l 0/smashing-the-clock ( accessed May
29. 2015).
7 The IRS is one example of these U.S. government programs. For more information, see (accessed
May 29, 2015).
‘ S. Barley and G. Kunda, “Bringing Work Back In,” Organizational Science 12, no. I (2001), 76-95.
” S. Harrison and P. Dourish. “Re-Place-ing Space: The Roles of Place and Space in Collaborative Systems.'” Proceedings of the 1996 ACM Conference
on Computer Supported Cooperative Work (1996), 67-76.
‘” C. Saunders, A. F. Rutkowski, M. Genuchten. D. Vogel, and J.M. Orrega. “Virtual Space and Place: Theory and Test.” MIS Quarterly 35, no. 4 (2011), ,.,,J
Work Design Framework Iii
Work Design Framework
As the place and time of work becomes less distinguishable from other aspects of people’s lives, the concept of
“jobs” is changing and being replaced by the concept of work. Prior to the Industrial Revolution, a job meant a
discrete task of a short duration with a clear beginning and end. 11 By the mid-20th century, the concept of job
had evolved into an ongoing, often unending stream of meaningful activities that allowed the worker to fulfill a
distinct role. More recently, organizations are moving away from organization structures built around particular
jobs to a setting in which a person’s work is defined in terms of what needs to be done. 12 In many organizations,
it is no longer appropriate for people to establish their turfs and narrowly define their jobs to address only specific
functions. Yet, as jobs “disappear,” IT can enable employees to better perform their roles in tomorrow’s workplace;
that is, IT can help employees function and collaborate in accomplishing work that more broadly encompasses all
the tasks that need to be done.
In this chapter, a simple framework is used to assess how emerging technologies may affect work. As is suggested
by the Information Systems Strategy Triangle (in Chapter 1), this framework links the organizational strategy with
IS decisions. This framework is useful in designing characteristics of work by asking key questions and helping
identify where IS can affect how the work is done.
Consider the following questions:
• What work will be pe,formed? Understanding what tasks are needed to complete the process being done
by the employee requires an assessment of specific desired outcomes, inputs, and transformation needed to
turn inputs into outcomes. Many types of work are based upon recurring operations such as those found in
manufacturing plants or service industries. The value chain helps in understanding the workflow for key tasks
that are performed (i.e., purchasing, materials handling, manufacturing, customer service, repair). Increas-
ingly, much work is done at a keyboard and involves managing knowledge, information, or data. Each type
of work has a unique set of characteristics and tasks that needs to be supported by information technology.
• Who is going to do the work? Sometimes the work can be automated. However, if a person is going to do the
work, who should that person be? What skills are needed? From what part of the organization should that
person come? If a team is going to do the work, many of these same questions need to be asked. However, they
are asked within the context of the team: Who should be on the team? What skills do the team members need?
What parts of the organization need to be represented by the team? Will the team members be dispersed?
• Where will the work be pe,formed? With the increasing availability of networks, Web tools, apps, mobile
devices, cloud-based computing, and the Internet in general, managers can now design work for employees
who come to the office or who work remotely. Does the work need to be performed locally at a company
office? Can it be done remotely at home? On the road?
• When will the work be pe,formed? Traditionally, work was done during “normal business hours,” which
meant 9 A.M. to 5 P.M. In many parts of the world, a job between the hours of 9 and 5 is an anomaly. Tech-
nologies also make it easier to work whenever necessary. The reality of modern technologies is that they
often tether employees to a schedule of 24 hours a day, seven days a week (24/7) when they are always
accessible to calls or other communications through their mobile devices.
• How can the acceptance of IT-induced change be increased? In this text, the overarching questions are
how to leverage IT to help improve work and how to keep IT from inhibiting work. Sometimes this means
automating certain tasks. For example, computers are much better at keeping track of inventory, calculating
compensation, and many other repetitious tasks that are opportunities for human error. On the other hand,
technologies provide increasing support for tasks at which humans excel, such as decision making, com-
munication, and collaboration tasks among employees. Using a structured change management approach to
manage IT-induced change will increase the probability of success.
6., II Will’
” Ibid.
Ill Digital Systems and the Design of Work
Who is going to do the
(e.g., individuals,
FIGURE 4.1 Framework for work design.
What work will be
(e.g., operations,
Where will the work be
(e.g., at the office,
at home,
on the road)
How can acceptance of IT-induced
change be increased?
(e.g., unfreeze-change-refreeze,
Kotter’s 8 steps to managing
change, technology
acceptance model)
When will the work be
(e.g., 9-5, 24/7,
flexible scheduling)
Figure 4.1 shows how these questions can be used in a framework to incorporate technologies into the design of
work. Although it is outside the scope of this chapter to discuss the current research on either work or job design,
you are encouraged to read these rich literatures.
How Information Technology Changes the Nature of Work
Advances in IT provide an expanding set of tools that make individual employees more productive and broaden
their capabilities. They transform the way work is performed-and the nature of the work itself. This section exam-
ines three ways in which new IT alters employee life: by creating new types of work, by enabling new ways to do
traditional work, and by supporting new ways to manage people.
Creating New Types of Work
IT often leads to the creation of new jobs or redefines existing ones. The high-tech field has emerged in its entirety
over the past 60 years and has created a wide range of positions in the IT sector, such as programmers, analysts,
managers, hardware assemblers, Web site designers, software sales personnel, social media specialists, and consul-
tants. A study based on the Bureau of Labor statistics places the number of IT employees in the United States at an
all-time high of 4.9 million. 13 Even within traditional non-IT organizations, the growing reliance on IS creates new
types of jobs, such as data scientists who mine for insights in the company’s data, community managers who man-
age the firm’s online communities, and communications managers who manage the use of communication technol-
ogies for the business. IS departments also employ individuals who help create and manage the technologies, such
” TechServe Alliance, “IT Employment Grows Modestly in April,” .J
MBR.pdf (accessed May 30, 2015). ..,,
How Information Technology Changes the Nature of Work fil
as systems analysts, database administrators, network administrators, and network security advisors. The Internet
has given rise to many other types of jobs, such as Web masters and site designers. Virtually every department in
every business has someone who “knows the information systems” as part of her or his job.
New Ways to Do Traditional Work
Changing the Way Work Is Done
IT has changed the way work is done. Many traditional jobs are now done by computers. For example, computers
can check spelling in documents, whereas traditionally that was the job of an editor or writer. Jobs once done by art
and skill are often greatly changed by the introduction of IT. Workers at one time needed an understanding of not
only what to do but also how to do it; now their main task often is to make sure the computer is working because the
computer does the task for them. Sadly, many cashiers no longer seem to be able to add, subtract, or take discounts
because they have grown up letting the computer in their point-of-sale (POS) terminal do the calculations for them.
Workers once were familiar with others in their organization because they passed work to them; now they may
never know those co-employees because the IT routes the work. In sum, the introduction of IT into an organization
can greatly change the day-to-day tasks performed by its employees.
In her landmark research, Shoshana Zuboff describes a paper mill in which papermakers’ jobs were radically
changed with the introduction of computers. 14 The papermakers mixed big vats of paper and knew when the paper
was ready by the smell, consistency, and other subjective attributes of the mixture. For example, one employee
could judge the amount of chlorine in the mixture by sniffing and squeezing the pulp. They were masters at their
craft, but they were not able to explicitly describe to anyone else exactly what was done to make paper. An appren-
ticeship was needed to train new generations of masters, and the process of learning how to smell and squeeze the
paper pulp was arduous. The company, in an effort to increase productivity in the papermaking process, installed
an information and control system. Instead of the employees looking at and personally testing the vats of paper,
the system continuously tested parameters and displayed the results on a panel located in the control room. The
papermakers sat in the control room, reading the numbers, and making decisions on how to make the paper.
Many found it much more difficult, if not impossible, to make the same quality paper when watching the control
panel instead of personally testing, smelling, and looking at the vats. The introduction of the information system
resulted in the need for different skills to make paper. Abstracting the entire process and displaying the results
on electronic readouts required skills to interpret the measurements, conditions, and data generated by the new
computer system.
In another example, sales and delivery people at a snack company have portable devices that not only keep
track of inventory but also help them in the selling function. Prior to the information system, the salespeople used
manual processes to keep track of inventory in their trucks. When visiting customers, it was possible only to tell
them what was missing from their shelves and to replenish any stock they wanted. With IT, the salespeople have
become more like marketing and sales consultants, helping the customers with models and data of previous sales,
floor layouts, and replenishment as well as forecasting demand based on analysis of the data histories stored in the
IS. The salespeople need to do more than be persuasive. They now must also do data analysis and floor plan design
in addition to using the computer. Thus, the skills needed by the salespeople as well as the workflow, have greatly
changed with the introduction of IT.
One of the biggest changes in workflow has been in the area of data entry. In the past, the workflow included
capturing the data, keying it into the system, rekeying it to check its accuracy, and then processing it. The workflow
has now changed to capture the data directly when it is entered by the user in a variety of ways such as from the
Web, with a GPS signal, or by reading the RFID code. A program may check its accuracy when it is captured and
then process it. Companies are moving way from entering sales data at all; customers enter it for them when they
place an order. As data entry tasks are eliminated, the steps in the workflow are drastically reduced, and the process
is much faster.
m Digital Systems and the Design of Work
A study by Frey and Osborn examined 702 occupations and noted that 47% of total U.S. employment is at
high risk of being automated in the next few years. Least likely to be automated are those jobs with nonroutine
tasks involving complex perception and manipulation as well as creative and social intelligence. 15 Even knowledge
employees, who once felt safe in their jobs because of the high degree of analysis and diagnosis they performed,
are at risk of automation as analytics and cognitive intelligence systems become increasingly more accurate in their
predictions and diagnoses.
The Internet enables changes in many types of work. For example, within minutes, financial analysts can down-
load an annual report from a corporate Web site to their smartphones and check what others have said about the
company’s growth prospects on social networks. Librarians can check the holdings of other libraries online and
request that particular volumes be routed to their own clients or download the articles from a growing number of
databases. Marketing professionals can pretest the reactions of consumers to potential products in virtual worlds.
Technical support agents diagnose and resolve problems on remote client computers using the Internet. The cost
and time required to access information has plummeted, increasing personal productivity and giving employees
new tools. It is hard to imagine a job today that doesn’t have a significant information systems component.
For those tasks that must be done by people, companies can use information technology to find willing employees
at what may seem like bargain rates. Amazon’s Mechanical Turk has created a marketplace site on which an orga-
nization can post tasks at specified rates. Willing employees can use this site to find those tasks. For example, a
company posted that it wanted employees to enter data from photos of cash register receipts. Another company
posted a task offer of transcribing a 25-second audiotape. Many of these task offers involve very small amounts,
often $.05 to $.25. Some tasks take a significant portion of an hour and pay up to $5 or more. Some of the employees
do very brief tasks at low pay so they can gain higher status and qualify for higher-paying tasks. Although this isn’t
automating a task inside an organization, from the manager’s perspective, it’s another way to use IT to change the
work done by the employees of the organization.
Changing Communication Patterns
All one has to do is observe people walking down a busy downtown street or a college campus to note changes in
communication patterns over a period as short as the last decade. Some people are talking on their cell phones, but
even more are texting or using apps for all kinds of reasons, such as checking out game scores, specials at nearby
restaurants, or movie times. Or observe what happens when a plane lands. It seems that over half the people on
the plane whip out their portable devices or cell phones as soon as the plane touches down. They are busy making
arrangements to meet the people who are picking them up at the airport or checking to see the calls or e-mails they
missed while in flight. Finally, consider meeting a friend at a busy subway station in Hong Kong. It is virtually
impossible without the aid of a cell phone to locate each other. Some may say that we are addicted to our mobile
technologies, unable to put them away even when driving or walking, unfortunately sometimes leading to dan-
gerous behaviors.
Applications (Apps) such as iMessage, Skype, Twitter, and Sina Weibo (Chinese Twitter) have changed how
people communicate. Traditionally, people found each other in person to have a conversation in the moment. With
the telephone, people called each other and both parties had to participate at the same time to have a conversation.
Along came e-mail, which rapidly became the communication technology of choice because it eliminated the need
for those involved in the conversation to participate at the same time. Today, people have an array of communica-
tions technologies, and, once again, IT is changing communication patterns. Some rely on texting, others on video
conferences, such as Facetime or Skype, and still others on social networks such as Facebook or Renren, for their
primary communications channel. The challenge created by the large number of choices is that individuals now
must have a presence on numerous platforms to ensure that they can be contacted. Further, one must know how
not only to contact someone but also to recognize that the person’s preferred medium might change during the day,
week, or month. For example, during normal business hours, an employee might prefer to receive e-mail or a phone
call. But after hours, he or she might prefer a text, and late at night, while surfing the Web, may prefer a message on
15 C. B. Frey and M. Osborn, “The Future of Employment: How Susceptible Are Jobs to Computerisation?” (September 17, 2013). http://www.oxfordmartin. (accessed August 25. 2015). ..,,J
How Information Technology Changes the Nature of Work IJII
Facebook Messenger or Skype. Without knowledge of the recipients’ preferences for how to receive the message,
the sender is likely to be unsuccessful in communicating with the recipients over the proper channel. A sender who
doesn’t know which medium the recipient prefers might use one medium (e.g., e-mail) to see whether the recipient
is open to using another medium (e.g., phone).
Similarly, IT is changing the communication patterns of employees. There are still some employees who do not
need to communicate with others for the bulk of their workday. For example, many truck drivers do not interact
with others in their organization while driving to their destination. But there are other ways communication tech-
nologies have changed the work done by truck drivers. Consider the example of a Walmart driver who picks up
goods dropped off by manufacturers at the Walmart distribution center and then delivers them in small batches to
one or more Walmart stores. Walmart has provided its drivers with radios and satellite systems so that, on short
notice, on their way back to the distribution center to load up for the next delivery, they can opportunistically pick
up goods from manufacturers and take them to the distribution center. In this way, the company saves the delivery
charges from that manufacturer and conserves energy in the process. Walmart office staff and drivers therefore use
IT to save money by enhancing their communications with suppliers. 16
Many changes in communication have been supported, if not propelled, by IT. Some communication technol-
ogies, such as social networking and microblogs, are rather new and unfamiliar, motivating managers in many orga-
nizations to understand how to apply them to work-related applications in a way that adds value to their business.
These and other communication tools help make large companies feel smaller by bringing together employees
from geographic disparate locations and from a variety of divisions and levels in the organization. Large companies
can feel smaller because communications technology enables individuals to find each other despite the organiza-
tion’s size. These tools also help small companies feel like large companies because, to some degree, they level the
playing field in the ways companies communicate and collaborate. Thomas Friedman, the author of the popular
The World Is Flat and other books, argues that collaboration is the way that small companies can “act big” and
flourish in today’s flat world. The key to success is for such companies “to take advantage of all the new tools for
collaboration to reach farther, faster, wider and deeper.” 17 For example, any company can have a Facebook page or
a Twitter feed, making it difficult to distinguish between small and large organizations simply by interacting over
these technologies.
Changing Organizational Decision Making and Information Processing
IT changes not only organizational decision-making processes but also the information used in making those
decisions. Data processed to create more accurate and timely information are being captured earlier in a process.
Analytics (see Chapter 12) have made it possible to mine data stores and identify insights, make predictions, and
even suggest decisions. Through information technologies, information that employees need to do their job can be
pushed to them in real time or saved and made available when they need it.
IT can change the amount and type of information available to employees. For example, salespeople can use
technology to get quick answers to customer questions. Further, IT-based tools allow salespeople to search for
best practices on a marketing topic over a social network and to benefit from biogs and wikis written by informed
employees in their company. Organizations now maintain large comprehensive business databases, called data
warehouses, that can be mined by using tools to analyze patterns, trends, and relationships. We discuss data
management in Chapter 12.
Modern devices with voice interfaces have assistants that further change decision-making processes. Apps such
as Siri, Cortana, and Google-Now allow users to talk to their devices, often mobile ones, to access information from
either their devices or the Internet. These types of interfaces are increasingly being built into enterprise systems to
supplement ways employees gather information, increasing employee efficiency.
In their classic 1958 Harvard Business Review article, Leavitt and Whisler boldly predicted that IT would
shrink the ranks of middle management by the I 980s. 18 Because of IT, top-level executives would have access
16 Thomas L. Friedman, The World is Flat (New York: Farrar, Straus and Giroux, 2005). 145.
I,. 17 Ibid .
18 Harold Leavitt and Thomas Whisler, “Management in the 1980s,” Harvard Business Review (November-December 1958), 41-48.
m Digital Systems and the Design of Work
to information and decision-making tools and models that would allow them to easily assume tasks previously
performed by middle managers. Other tasks clearly in the typical job description of middle managers at the time
would become so routinized and programmed because of IT that lower-level managers could perform them. As
Leavitt and Whisler predicted, the 1980s saw a shrinking in the ranks of middle managers. This trend was partly
attributable to widespread corporate downsizing, which forced many organizations to find alternatives to getting
the work done and IT solutions to proliferate to fill the gap. However, it was also attributable to changes in decision
making induced by IT. Since the 1980s, IT has become an even more commonly employed tool of executive
decision makers. IT has increased the flow of information to them and provided tools for filtering and analyzing
the information.
Changing Collaboration
IT helps make work more team oriented and collaborative. Technologies such as texting (SMS), instant messaging
(IM), Web logs (biogs), virtual worlds, groupware, wikis, social networking, and video teleconferencing are at the
heart of collaboration today. Groups can form and share documents with less effort using these platforms. Group
members can seek or provide information from or to each other much more easily than ever before. And groups can
connect by voice or with voice and video using these platforms.
Collaboration takes place in one of four ways. Teams are collocated and work together at the same time, they are
collocated but work at different times, they are not located in the same place but work at the same time, or they work
from different places at different times. Figure 4.2 summarizes these options and lists representative technologies
that facilitate collaboration for each type of team.
Consider the New York-based marketing firm CoActive Digital whose president decided to implement a wiki to
have a common place where 25 to 30 people could go to share a variety of documents ranging from large files to
meeting notes and PowerPoint presentations. 19 An added benefit was that the wiki was encrypted, protected, and
could be used only with a virtual private network (VPN). The president recognized that the challenge for imple- .,,.
menting the wiki would be to change a culture in which e-mail had long been the staple for communication. Conse- ._..
quently, he decided to work closely with the leader of the business development group. This group handles inquiries
from customers and coordinates the work (i.e., marketing campaigns) internally. The group needed to hold many
meetings and share much work. He populated the wiki site with the documents that had formerly been traded over
e-mail and asked the leader to encourage her group members to use the wikis. It took some effort, but eventually the
group learned to appreciate the benefits of the wiki for collaboration and to reduce members’ dependence on e-mail.
Verifone’s company culture is one that encourages information sharing. A story is told of a new salesperson who
was trying to close a particularly big deal. He was about to get a customer signature on the contract when he was
asked about the competition’s system. Being new to the company, he did not have an answer, but he knew he could
i Team Works at the Same Time
·- —~.~ .. —-·-··–······-··—··—···–
Team Works in the Same Place i Face-to-face meetings
Team Works at Different Time
Electronic bulletin boards
Document sharing systems (wikis)
Team Works in Different Places
Meeting room technologies
Document sharing systems (wikis)
Video conferencing
Chat rooms
. -·-······· ······- …. ···-······-···· ··· 1
Microblogs (e.g., Twitter)
Texting (SMS) and instant messaging (IM) Texting (SMS) and instant messaging (IM)
Document sharing systems (wikis) Document sharing systems (wikis)
F 16 URE 4. 2 Collaboration technologies matrix, Examples of key enabling technologies.
Source: Adapted from Geraldine DeSanctis and R. Brent Gallupe, “A Foundation for the Study of Group Decision Support
Systems,” Management Science 33, no. 5 (May 1987), 589-609.
19 C. G. Lynch, “How a Marketing Firm Implemented an Enterprise Wiki,” l 3063 (accessed July 9, 2008).
How Information Technology Changes the Nature of Work m
count on the company’s information network for help. He asked his customer for 24 hours to research the answer.
He then sent an e-mail to everyone in the company asking the questions posed by the customer. The next morning,
he had several responses from others around the company. He went to his client with the answers and closed the
deal. What is interesting about this example is that others around the world treated the “new guy” as a colleague
even though they did not know him personally. He was also able to collaborate with them instantaneously. It was
standard procedure, not panic time, because of the culture of collaboration in this company. With increased use of
social networks and other social tools, instantaneous collaboration is commonplace. 20
The Internet has greatly enhanced collaboration. Beyond sharing and conversing, teams can also use the Web
to create something together. An example of this is Wikipedia on which individuals who do not know each other
contribute to the information on a topic. At computer company Dell, a Web-based site named ldeaStorm has
been used since 2008 for idea generation, discussion, and prioritization between and among individuals in the
Dell community, including staff, executives, customers, and potential customers. Recent statistics show that over
23,000 ideas have been submitted, over 747,000 votes for ideas have been recorded, and over 100,000 comments
have been posted about the ideas suggested. Dell’s management has implemented over 500 of the ideas. Ideas
can range from small incremental improvements such as adding a port to an existing product to large sweeping
changes such as creating a new product line. Some ideas, such as how to change the retail experience or support
activities, are process oriented. Some ideas are about education, the environment, and other topics related to Dell’s
business. The company has since implemented an internal version of this system, Employee Storm, only open to
internal staff. Employee Storm invites ideas on company benefits, innovations, ways to work better, and other
company-focused issues. Many other companies have implemented similar platforms, including IBM’s Think-
Place, BestBuy’s BlueShirt Nation, and ESPN’s SportsNation.
Changing the Ways to Connect
Probably one of the biggest changes that people are experiencing as a result of new technologies is that they are
always connected. In fact, many feel tethered to their mobile phones, tablets, or laptops to such a large extent that
they must be available at all times so that they can respond to requests from their supervisors, colleagues, or cus-
tomers. As a result, the boundaries between work and play have become blurred, now causing people to struggle
even more with work-life balance.
Businesses are still trying to understand the technological advances that have become commonplace. Many in
the workforce find that their technology at home differs from that at work and prefer those at home. For example,
while although many use social media tools on their tablets, laptops, or smartphones during the weekend at home,
on Monday morning, they find themselves working on an older desktop system with slow access to the files and
Web-based systems they want to use for their work. 21 They find this quite bothersome. In fact, a Cisco Systems
survey of young professionals and college students found that one in three believes the Internet is as important as
air, water, food, and shelter. Two people in five say they would accept a lower-paying job that had more flexibility
with regard to device choice, social media access, and mobility over a higher-paying job with less flexibility. 22 In
commenting on the survey findings, Marie Hattar, vice president, Enterprise Marketing, Cisco, stated:
The results of the Cisco Connected World Technology Report should make businesses re-examine how they need to
evolve in order to attract talent and shape their business models. Without a doubt, our world is changing to be much
more Internet-focused, and becomes even more so with each new generation.
CIOs need to plan and scale their networks now to address the security and mobility demands that the next generation
workforce will put on their infrastructure, and they need to do this in conjunction with a proper assessment of corporate
policies. 23
20 Hossam Gala!. Donna Stoddard, Richard Nolan, and Jon Kao, “VeriFone: The Transaction Automation Company,” Harvard Business School Case
Study 195-088, July 1994.
” Cognizant, “The Future of Work Has Arrived: Time to Re-Focus IT” (February 2011 ), 1-15, _
Time_to_Refocus_IT.pdf (accessed August 25, 2015).
22 Cisco Connected World Technology Report, 2011 Findings, 1120/index.html#-2011 (accessed August 25, 2015).
‘-‘ “Air, Food, Water, Internet-Cisco Study Reveals Just How Important Internet and Networks Have Become as Fundamental Resources in Daily Life,” 74852 (accessed August 25, 2015).
m Digital Systems and the Design of Work
:: Social Business Lens: Activity Streams
An activity stream is a list of activities on a Web site that briefly highlight what the individuals connected to that
stream are doing. Activity streams can include posts by individuals who share what they are doing or thinking and
posts directly by other programs, which deposit an update about what an individual is doing. By collecting all of
these posts in a single feed, the activity stream gives a reader a good sense of what is happening in a community.
Examples of activity streams are Facebook’s news feed and’s Chatter. Companies that incor-
porate activity streams in their social business platform report that teams using that technology had fewer face-to-
face meetings, reduced e-mail, faster information flows, better collaboration, and increased responsiveness. An
activity stream can keep staff updated on the happenings around an organization. For example, SAS, the interna-
tional statistics and analytics software company, implemented an activity stream for its employees. Staff were able
to keep track of what others were working on over an activity stream that mimicked the news feed that Facebook
users see on their home page. Staff could share, comment on, or “like” pages and documents they found in their
systems or on the Web and those entries would show up in the activity stream.
Soun-<': DaYid F. Carr ... SAS C:rPatt's Internal Fan·hook with Sol'ialcas1·· (April :29. :2011). t hehrai11n1nl/11ews/ social_n,.twork i nµ:_printtt' _plat forms/:229-+0:2;'):2 7 / sas-i11sti tu H'·l'rt'ates-in t ernal-fan·hook-wi t h-sol'ia ll'as t (acl't'ssPd on April~. 2012). Consider IBM's SmallBlue-an opt-in social network analysis tool that maps the knowledge and the connec- tions of IBM employees. SmallBlue can be used to find employees with specific knowledge or skills, display employee networks on particular topics, validate a person's expertise based on her or his corporate profile, and display a visualization of an employees' personal social networks. IBM claims that SmallBlue has promoted inno- vation, effectiveness, and efficiency.24 The preceding examples show how technologies have become a key component in the design of work. IT has ..,,J greatly changed day-to-day tasks, which in tum has changed the skills needed by employees. The examples show how adding IT to a work environment can change the way that work is done. New Ways to Manage People New working arrangements create new challenges in how employees are supervised, evaluated, compensated, and even hired. When most work was performed individually in a central location, supervision and evaluation were relatively easy. A manager could directly observe the employee who spent much of his or her day in an office. It was fairly simple to determine whether or not the employee was present and productive. Modern organizations often face the challenge of managing a workforce that is spread across the world in iso- lation from direct supervision and working mostly in teams. Sales work is one area in which we see this. Rather than working in a central office, external salespeople work remotely, relying on laptop computers, smart phones, the Web and apps linking them to customers, office colleagues, sales support information, and other databases. The technical complexity of some products, such as enterprise software, necessitates a team-based sales approach combining the expertise of many individuals, and technologies connect the team together. Modern organizations must also choose among three types of formal controls to ensure that work is done properly. 25 Behavior controls involve direct monitoring and supervision of employee actions while the work is being done. Vivid depictions of behavior controls are provided in road construction projects that have one employee dig- ging and another watching, motionless with arms folded. On the other hand, outcome controls involve examining work outcomes rather than work actions. Finally, personnel controls represent a proper fit between the person and the job, often involving picking the right person for the task. 24 For additional information on Smal!Blue, see (accessed May 31, 2015). 25 L. J. Kirsch, "Portfolios of Control Modes and IS Project Management,"" Information Systems Research 8. no. 3 (1997), 215-239; W. G. Ouchi, "The Transmission of Control through Organizational Hierarchy," Academy of Management Journal 21, no. 2 (1978), 173-92; K. A. Merchant, Modem Management Control Systems, Text and Cases (Upper Saddle River, NJ: Prentice-Hall, 1998). ..,,J How Information Technology Changes the Nature of Work m It is important for a firm to choose the right type of control for each position being supervised. Behavior controls make the most sense for physical labor in which incorrect particular body movements might be inefficient or even dangerous. Programmers would consider it quite insulting to have a supervisor exercise action control and watch every keystroke whereas transcriptionists might understand the need to track each keystroke. Outcome controls make more sense not only for prorrammers but also for many other personnel, such as engineers, sales managers, and ad writers. However, personnel controls are more useful when it would take several years to evaluate the results of work, which is often the case when goals are indefinable, conflicting, or confusing and the stakes are high. For instance, when Apple was having difficulty defining a meaningful product line in the mid- l 990s, the firm resorted to personnel controls when it determined that the right way to redefine its mission was to bring back Steve Jobs. After two decades, hindsight shows that Jobs was the right choice. Personnel controls are useful for situations in which it is difficult not only when to expect results but also to define what results should even be expected. When the results of work are fairly well defined, technology can change dramatically how it is monitored. One technological solution, electronic employee monitoring (introduced in Chapter 3), can replace direct supervision and provide detailed behavior controls, automatically logging keystrokes, listing the Web sites visited, or even recording the contents of an employee's screen. Technology can also provide outcome controls by tracking the number of calls processed, e-mail messages sent, or time spent surfing the Web. When output is monitored digi- tally, pay-for-performance compensation strategies reward employees for deliverables produced or targets met as opposed to vague subjective factors such as "attitude" or "teamwork." Further, supervisors can spend time coaching, motivating, and planning rather than personally monitoring performance because they can utilize the information gathered from electronic monitoring systems for that task. The introduction of Blue Work at American Express illus- trates the need to change from an approach in which managers watch employees and count the hours they spend at their desks to one that focuses instead on the work they actually do. These changes are summarized in Figure 4.3. IT has also impacted the way employees are hired, becoming an essential part of that process for many firms. Open positions are posted on job Web sites, and applicants submit resumes over the Web, complete applications on line, and refer potential employers to their personal Web sites. When researching candidates, companies often look at their Facebook pages and do online searches of the candidates to see what pops up. Social networking provides a forum for informal introductions and casual conversations in cyberspace. Interviews can be arranged in virtual worlds or via teleconferencing to reduce travel costs. A face-to-face interview is usually eventually required, but recruiters can significantly and more effectively filter the applicant pool, reducing the number of expensive site visits. In addition, companies increasingly realize that hiring is changing and that recruiting efforts should reflect the new approaches people are using to look for jobs. Tech-savvy job applicants are now using business-oriented social networks such as Linkedin to seek contacts for jobs and online job search engines like and to find job listings. A Facebook app, BeKnown, provides a profile detailing an individual's work experience, a news feed for contact updates and actions, a search tool to locate people and connect with them, and .___ ________ li_raditional Approach: Subjective Observation Digital Approach: Objective Assessment I Supervision It is personal and informal. Manager is usually ' It is electronic or assessed by deliverables. As ' Evaluation Compensation and Rewards Hiring present or relies on others to ensure that the long as the employee is producing value, he or [ employee is present and productive. ___ :-5-~~~c:>-=~-~ need dire_~t_f_c:>_r_r:r1_al su~~_!:_~i~L<>~_:_ ______ j
is on process through direct observation. i output by deliverable (e.g., produce a report by
Behavior controls are predominant. Focus i Outcome controls are predominant. Focus is on I
‘ Manager sees how employee performs at I a certain date) or by target (e.g., meet a sales
work. Subjective (personal) factors are very i quota). Fewer subjective measures are used. I
important. i
It is often individually based. ‘ It is often team based or contractually spelled out.
· Hiring is done through meetings with HR
personnel with little concern for computer
I It is often electronic with recruiting Web sites and
i electronic testing for more information-based
i work that requires a higher level of IT skills.
4., FIGURE 4.3 Changes to supervision. evaluations. compensation. and hiring.
m Digital Systems and the Design of Work
a way to recommend other users or display badges earned for completing certain professional goals. The app also
is integrated with Monster.corn’s job listings. 26
Furthermore, the way an organization uses IT affects the array of technical and nontechnical skills needed in
its employees. For example many basic clerical tasks can be performed expeditiously with IT, so fewer employees
with those basic skills are required, making room for those with more targeted skills. Just to be sure employees are
IT savvy, too, the actual hiring process may require applicants to complete an assessment or perform other activities
online. In this way, hiring managers can raise the overall IT competency exhibited by employees in their businesses.
Employees who cannot keep pace with IT are increasingly unemployable.
The design of the work needed by an organization is a function of the skill mix required for its work processes
and of the flow of those processes themselves. Thus, a company that infuses technology effectively and employs
a workforce with a high level of IT skills designs itself differently from a company that does not. The skill mix
required by an IT-savvy firm reflects a high capacity for using the technology itself. For example, because many
clerical skills are now embedded in the technologies staff use, fewer clerical staff are needed and those who are
hired by the company often do specialized work that is not easily automated or subsumed by technology.
As workforce demographics shift, so do the IT needs and opportunities to change work. Digital natives-people
who have grown up using computers, social networking sites, texting, and the Web as a normal, integrated part of
their daily lives-are finding new and innovative ways to do their work. There are widely varying impacts from
the skills these employees bring to their work, including how to do their work in a new, and often more efficient,
IT has drastically changed the landscape of work today. As a result of IT, many new jobs have been created. In
the next section, we examine how IT can change where work is done, when it is done, and who does it.
Where Work Is Done and Who Does It: Mobile and Virtual
Work Arrangements
This section examines another important effect of IT on work: the ability of some employees to work anywhere
at any time. With WiFi virtually ubiquitous, individual employees can connect to the Web from almost anywhere.
And with powerful technologies available in the consumer space, employees often find the tools and apps they
have at home function as well as, or even better than, their workplace technologies. Research also suggests that
employees-especially those younger employees who have never known a world without ubiquitous access to
personal smart devices and the Web–prefer to have the work-life flexibility that remote and mobile work arrange-
ments provide. At the group level, virtual teams have become standard operating mechanisms to bring the best
individuals available to work together on a task. We explore remote work from the perspective of both individuals
and teams in the next section.
Remote Work and Virtual Teams
Flexible work arrangements, although not the norm for many organizations, have been gammg support as
technologies enable employees to be “virtually present” for their employers. The terms telecommuting, mo-
bile worker, and remote worker are often used to describe flexible work arrangements. Telecommuting, some-
times called teleworking, refers to employees working from home, at a customer site, or from other convenient
locations instead of coming into the corporate office. The word telecommute is derived from combining “tele-
communications” with “commuting,” indicating that these employees use telecommunications instead of driving,
or commuting, to the office. Mobile workers are those who work from wherever they are. They are outfitted
with the technology necessary for access to co-workers, company computers, intranets, and other information
sources. We use the term remote workers when we refer to both telecommuters and mobile workers.
” Kristin Burnham. “ Brings Professional Social Networking to Facebook.” (July 15. 2011).
(accessed February 2. 2012). ..,,,,,,j
Where Work Is Done and Who Does It: Mobile and Virtual Work Arrangements m
Phase Preparation , launch Performance
, Team Disbanding
) Development
Key Activities Mission statement
Personnel selection
Task design
Rewards system
selection and
: Kick-off meetings
I Getting acquainted
I Goal clarification
: Norm development
FIGURE 4.4 Key activities in the life cycle of teams.
Leadership 1 Assessment of Recognition o
I Communication : needs/deficits achievements i
i Individual
Conflict resolution : and/or team
I ..
Task accomplishment I training
Motivation j Evaluation of
. management
! Norm enforcement
‘ and shaping
! training effects
Trust building
Re-integration of I
team members !
Source: Adapted from Guido Hertel, Susanne Geister, and Udo Konradt, “Managing Virtual Teams: A Review of Current Empirical
Research,” Human Resource Management Review 15, no. 1 (2005), 69-95.
Such employees work not only on a remotely independent basis but also with remote members on virtual teams.
Virtual teams are defined as two or more people who ( 1) work together interdependently with mutual accountability
for achieving common goals, (2) do not work in either the same place and/or at the same time, and (3) must use
electronic communication and other digital technologies to communicate, coordinate their activities, and complete
their team’s tasks. Initially, virtual teams were seen as an alternative to conventional teams that meet face-to-face.
However, it is simplistic to view teams as either meeting totally face-to-face or totally virtually. Rather, teams may
reflect varying degrees of virtuality. Virtual team members may be in different locations, organizations, time zones,
or work shifts (day, evening, or overnight). Further, like most teams, virtual teams may have distinct, relatively
permanent membership, or they may be relatively fluid as they evolve to respond to changing task requirements and
as members leave and are replaced by new members.
Virtual teams are thought to have a life cycle like most teams. 27 Their lifecycle, shown in Figure 4.4, is note-
worthy because it the important activities in team development: Teams are formed; their work is completed; and,
the team is disbanded.
Factors Driving Use of Remote Work and Virtual Teams
Remote working has been around since the 1970s, but it has steadily been gaining popularity since the late 1990s.
One poll of 11,300 employees in 22 countries found that one 1 of 6 telecommute worldwide. 28 And as managers
move to build teams of the best talent available, they inevitably turn to virtual teams as the mechanism to bring
people together for a task. Several factors that drive these trends are shown in Figure 4.5.
The first factor is that work is increasingly knowledge based. The United States and many other world econ-
omies continue to shift from manufacturing to service industries. Equipped with the right IT, employees can create,
assimilate, and distribute knowledge as effectively from home as they can from an office. The shift to knowledge-
based work thus tends to minimize the need for a particular locus of activity.
The second factor is that remote workers and virtual team members often shift the time of their work to accom-
modate their lifestyles. For instance, parents modify their work schedules to allow time to take their children to
school and attend extracurricular activities. Telecommuting provides an attractive alternative for parents who might
otherwise decide to take leaves of absence from work for child rearing. Telecommuting also enables people who are
housebound by illness, disability, or the lack of access to transportation to join the workforce.
27 G. Hertel, S. Geister, and U. Konrad!, “Managing Virtual Teams: A Review of Current Empirical Research,” Human Resource Management Review
15, no. I (2005), 69-95.
28 The actual statistics for the number of telecommuters is hard to find. These figures were obtained from Smart Planet,
business-brains/one-sixth-of-the-worlds-employees-now-telecommute-survey/21616 (accessed June 19, 2015).
m Digital Systems and the Design of Work
= Geographic Lens: How Do People Around the World Feel About Working Remotely?
A recent survey by Cisco found marked national differences about how professionals viewed their ability to be
productive when working remotely. On average, 39% of the 1,303 professionals in 13 countries surveyed answered
“yes” when asked whether it was necessary for them to be in the office to make decisions more effectively and
efficiently (i.e., nothing replaces daily in-person interaction), but only 7% answered “yes” in India whereas 56%
and 57% answered “yes” in Japan and Germany, respectively. That is, a large percentage of people in Japan and
Germany thought they had to come into the physical office to be productive. This wasn’t the case at all in India.
A very small percentage of Indians felt they had to be tethered to a desk in a physical office. They could do their
work by staying connected to their workplaces through a variety of devices including their laptops, tablets, and
smart phones.
So11r<"e: ·ThP Ci,l"o Co1111,·,·tcd \\'orld lfrpon .. (O<"tolwr :2010). l1ttp://1ww,rn,1111.<"i,rn.,·0111/dll,/:.!010frkitshnH_fi11al.pdf (a,·cpssed Fd,rnan· -1. :201:2). Effect j Driver IShift-to_k_n_o_w_le_d_g_e--based work Eliminates requirement that c-;~~-i~ w~k b;_p_e_rf_o_r_m_e_d-in-a----1 I specific place , l°.':~~;;;:~:,::~::~~~::::,~eoces .. .. ~:~;;~;:;;;fv"p!~~;~:~;:~:: ;:::::::::~:~:ct~ve ..• i Reliance on Web Provides employees the ability to stay connected to · co-workers and customers and to access work-related apps, even on a 24/7 basis --- 1 Energy concerns Reduces the cost of commuting (for telecommuters), energy 1 costs associated with real estate (for companies) and travel L. costs (for companies and for people on virtual teams) ------------------------------------------------ --- . ----------------------------------------------- --~ FIGURE 4.5 Driving factors of remote work and virtual teams. Remote work also provides employees and virtual team members enormous geographic flexibility. The freedom to live where one wishes, even at a location remote from one's corporate office, can boost employee morale and job satisfaction. As a workplace policy, it may also lead to improved employee retention. For example, American Express employees use the Blue Work program as part of its recruiting pitch. Further, productivity and employee sat- isfaction for those on the Blue Work program are markedly higher, and voluntary turnover is down. Many employees can be more productive at home, and they actually work more hours than if they commuted to an office. Further- more, such impediments to productivity as traffic delays, canceled flights, bad weather, and mild illnesses become less significant. Companies enjoy this benefit, too. Those who build in remote work as a standard work practice are able to hire employees from a much larger talent pool than those companies that require geographical presence. The third driving factor is that the new technologies, which make work in remote locations viable, are becoming better, cheaper, and more widely available. Telecommunication and PC speeds are increasing exponentially at the same time that their costs are plummeting. The oft-cited time frame involved in this progression is a doubling of computer capabilities (such as speed) every 18 months. 29 The drastic increase in .capabilities of portable tech- nologies makes small devices more powerful than the computers of yesterday, enabling effective and productive mobile work. Applications also provide integration between applications. Virtual team members can use Skype, Webex, Zoom, or any number of video and audio conferencing technologies to work together. Cloud computing also has contributed to this trend because applications are moved from computers housed in company data centers to Web-based hosts such as Amazon Web Services (AWS), Rackspace, and other service providers. 29 Gordon Moore, head of Intel. observed that the capacity of microprocessors doubled roughly every 12 to 18 months. Even though this observation was made in 1965, it still holds true. Eventually. it became known in the industry as Moore's law. ""'1/IJ Where Work Is Done and Who Does It: Mobile and Virtual Work Arrangements m A fourth driving factor is the increasing reliance on Web-based technologies by all generations, especially younger generations, such as Generation Y and the Millennials. The younger generations are at ease with Web- based social relationships and are adept at using social networking tools to grow these relationships. Face-to-face work arrangements are not necessary for these employees to build productive connections. Web-based tools allow them to stay connected with their co-workers and customers. Further, as more and more organizations tum to flexible working hours in programs such as BlueWork implemented by American Express and as 24/7 becomes the norm in terms of service, the Web becomes the standard platform to allow employees to respond to work's increasing demands. A fifth factor is the increasing emphasis on energy conservation. As concerns about greenhouse gasses, carbon footprints, and even potential future gasoline price increases, employees are looking for ways to be more respon- sible and frugal at the same time. Telecommuting is quite appealing in such a scenario, especially when public transportation is not readily available. Companies can also experience lower energy usage and costs from telecom- muting. SAP reduced its global greenhouse footprint by encouraging employees to shift their commuting behavior. As a result of these ongoing efforts, emissions from employees' commutes dropped. In addition to telecommuting and encouraging the use of mass transit and carpooling, SAP also began providing employees information on their carbon footprint from commuting through a new internal dashboard aimed at ensuring greater transparency and accountability. 30 Many employees no longer need to be tied to official desks. Thus, the real estate needs of their employers are shrinking, and companies are saving costs by reducing the office space they own or rent. This reduction lowers their energy needs by no longer needing to heat, cool, or maintain these spaces. Companies are realizing that they can comply with the Clean Air Act and be praised for their "green computing" practices at the same time they are reaping considerable cost savings. Advantages and Disadvantages of Remote Work There are clearly advantages to remote work. Employees have greater flexibility in where they work. They can work from home or from just about any location as long as they have a laptop and a WiFi connection. Employees often find that they are more productive because they can work in the environment of their choosing without the distractions of the office. Homebound individuals can work for a company that embraces remote work. Employees also seem to have higher morale and lower absenteeism in part because they can work from wherever they are, wearing whatever clothes they want. A remote employee who has a cold may not want to go into the office and risk spreading the germs to others but can work from home. Employers find advantages of enabling remote work compelling, too. They are able to hire employees who do not live in the geographic area of the office. They don't have to monitor the employees the same way, freeing up their time to focus on exceptions and issues that require a = Geographic Lens: Who Telecommutes? A Look at Global Telecommuting Habits Flexible work arrangements have been around for decades, but as technologies enable new capabilities for work away from a traditional office, telework has been gaining popularity. In 2015, advisory services firm EV sur- veyed about 9,700 employees in the eight top economies across the globe-the United States, United Kingdom, India, Japan, China, Germany, Mexico, and Brazil. The firm found flexible work arrangements varied significantly by country. The report cited countries with the highest and lowest percentages of employees with flexible work schedules. Germany (70%), India (61%), and the United States (61%) had the highest percentage, and Japan (30%) and China (22%) had the lowest. Sou rel': .. E Y Clohal C,·11Prat io11s: \ Clohal St 11d, 011 \rork-Lif'P Challt'11/:t'.s Across (;prn·ratio11S:· Pu hlirnt ionfrw I J .\""' ,/E Y -gloha l-g,·11,· rat io11,-a-glohal-st 111 ly-on-work-1 ifP-c ha] l1·ngcs-across-generations/$Fl LE/E Y -glohal- µelu·rat io11s-a-µ;lolwl-...,t11dy-011-work-lif'c-d1allt·11µ:c·~-atTo~ . ...,-µpflpJ'ations.pc If ( WTt'ssPd .\11µ11:-;t :26. 2015 ). (>.
m Digital Systems and the Design of Work
supervisor. And employers often find that it is less expensive to provide a remote employee the tools needed than
to pay for the office space to house the employee.
Remote employees sometimes report that work-life balance often suffers. Because work can be done anyplace
and anytime, they sometimes find the option attractive because of the ability to work around the schedules of chil-
dren or other family members. Paradoxically, it is often difficult for them to separate work from their home life.
Consequently, they may work many more hours than the standard nine-to-five employee or experience the stress
of trying to separate work from play.
Remote work challenges managers to address performance evaluation and compensation. Managers of remote
workers must evaluate employee performance in terms of results or deliverables. Virtual offices make it more dif-
ficult for managers to appreciate the skills of the people reporting to them, which in tum makes it more difficult to
evaluate their performance. Managers must rely heavily on the remote worker’s self-discipline to ensure that work
is done. As a result, managers may feel they are losing control over their employees, and some remote employees
do, in fact, abuse their privileges. Managers accustomed to traditional work models in which they are able to exert
control more easily may strongly resist remote working. In fact, managers are often the biggest impediment to
implementing remote work programs.
Self-discipline is a key concern for many remote workers. Workers who go to an office or who must make
appearances at customer locations have a structure that gets them up and out of their home. But remote workers find
that working from home, in particular, is full of distractions such as personal phone calls, visitors, the television,
Facebook and other social networking sites, and inconvenient family disruptions. A remote worker must carefully
set up a home-work environment and develop strategies to enable quality time for the work task.
Remote work also requires managers to undertake special planning and communicating activities. In terms of
planning, business and support tasks must be designed to support remote workers. Managers must also work to
coordinate schedules, ensure adequate communication among all workers, establish policies to support communi-
cations, and build business processes to support remote workers.
Working remotely can disconnect employees from their company’s culture and make them feel isolated. The ..,j
casual, face-to-face encounters that take place in offices transmit extensive cultural, political, and other organiza-
tional information. These encounters are lost to an employee who seldom, if ever, works at the office. Consequently,
telecommuters need to undertake special efforts to stay connected. They must engage in forms of conversation to
replace “water cooler” talk. This could take the form of instant messaging or participating in telephone calls/con-
ferences, e-mail, social networking, biogs, or even video conferencing. The most successful remote work arrange-
ments do include regular visits to the office to solidify personal connections.
Not all jobs are suitable for remote work. Some jobs, such as server in a restaurant, a clerk in a grocery store,
and a facilities manager in a high-rise building, require the employee to be at the work location. Further, new
employees who need to be socialized into the organization’s practices and culture are not good candidates for
remote work. Finally, some organizations’ culture does not support remote workers. Notably, when Marissa Meyer
took over as President of Yahoo, one of her first decisions was to eliminate remote work and bring everyone back
into the home office. She felt that the culture had taken a wrong tum and the only way to fix it was to have everyone
in the same place.
Remote work also raises the specter of offshoring, or foreign outsourcing of jobs once performed internally in
the organization. Once a company establishes an infrastructure for remote work, it often can be performed abroad
as easily as domestically. U.S. immigration laws limit the number of foreigners who may work in the United States.
However, no such limitations exist on work performed outside this country by employees who transmit their work
to the United States electronically. Because such work is not subject to minimum wage controls, companies may
have a strong economic incentive to outsource work abroad. They find it particularly easy to outsource clerical work
related to electronic production, such as data processing and computer programming. Sourcing is further discussed
in Chapter 9. Benefits and potential problems associated with telecommuting are summarized in Figure 4.6.
Security is another issue for remote workers who might bring to the office an infected computer and plug it into
the network, posing a threat to other office computers. Further, as demonstrated by the Department of Veterans
Affairs (VA) employee whose laptop carrying unencrypted, sensitive personal information on more that 2.2 million
active-duty military personnel was stolen from the employee’s home, remote workers can be the source of security ..,,J
Where Work Is Done and Who Does It: Mobile and Virtual Work Arrangements IJII
Advantages of Remote Working
Reduced stress due to increased ability to meet
schedules and to have fewer work-related distractions
Higher morale; lower absenteeism
Geographic flexibility for worker; capitalization on
distant expertise for organization
Potential Problems
· Increased stress from inability to separate work life from
home life
Harder for managers to evaluate and communicate about
Employee may become disconnected from company culture
I Higher personal productivity Lack of suitability for all jobs or employees
f~n5=lusi~n of housE=~()_und individuals in the workf.:>~_e _ ” !.=.~co~_’.1:1_Llters more easily replaced by offshore workers
I Very informal dress is acceptable ___ , Harder to achieve high security
FIGURE 4.6 Some advantages and disadvantages of remote work.
breaches. 31 Organizational security mechanisms are continually increasing in effectiveness; however, it is impos-
sible for organizations to make remote workers totally secure. General managers need to get involved in assessing
the areas and severity of risk and take appropriate steps, via policies, education, and technology, to reduce the risks
and make remote workers as secure as possible. IS leaders are aware that even with the best policies and tools avail-
able, breaches occur. The IS organizations typically has many levels of security to sense and respond to threats. IT
security is discussed more fully in Chapter 7.
Advantages and Disadvantages of Virtual Teams
Virtual teams clearly offer advantages in terms of expanding the knowledge base through team membership. Thanks
to new and ever-emerging communication and information technologies, managers can draw team members with
needed skills or expertise from around the globe without having to commit to huge travel expenses. Further, virtual
teams can benefit from following the sun. One classic example of this can be found in software development.
London members of a virtual team of software developers at Tandem Services Corporation initially code a project
and transmit its code each evening to a U.S. team for testing. The U.S. team forwards the tested code to Tokyo for
debugging. London team members start their next day with the code debugged by the Japanese team, and another
cycle is initiated. 3″ Increasingly, growing pressure for faster turn around time for systems has resulted in systems
development by global virtual teams whose members are located around the world.
There are some clear disadvantages to virtual teams. For example, different time zones, although helpful when
following the sun, can work against virtual team members when they are forced to stay up late or work in the middle
of the night to communicate with team members in other time zones. There also are a considerable number of chal-
lenges that if not correctly managed could turn into disadvantages. A summary of these challenges in comparison
with more traditional teams can be found in Figure 4.7.
Managing Remote Workers and Virtual Teams
Managers cannot manage remote workers or virtual teams in the same way that they manage in-office workers or
traditional teams. The differences in management control activities are particularly pronounced because managers
cannot observe the actual behavior of remote workers or virtual team members. Thus, monitoring behavior is likely
to be more limited. As stated earlier, performance for both remote workers and virtual teams is more likely to be
evaluated through outcomes controls rather than behavior controls. Because team members and remote workers are
dispersed, providing feedback is especially important-not just at the end of a project, but throughout the workers’
employment and the team’s life.
” Robert Lemos, ··vA Data Theft Affects Most Soldiers” (June 7, 2006), (accessed May 7, 2012).
” M·rie-Claude Boudreau, Karen Loch, Daniel Robey, and Delmar Straub, “Going Global: Using Information Technology to Advance the Competitive-
ness i the Virtual Transnational Organization,” Academy of Management Executive 12, no. 4 ( 1998), 120-28.
m Digital Systems and the Design of Work
I Challenges
I Virtual Teams (VT) · Traditional Teams
– L_
• Difficulties in terms of scheduling meetings and interactions ‘ • Collocated in same time zone.
• Increased inefficiencies when passing work between time Scheduling is less difficult
zones • Use of richer communication
• Altered communication dynamics such as facial expressions, media, including face-to-face
— i
vocal inflections, verbal cues, and gestures , discussions i
!———+————————–····—- :.————– I
Technology • Need for proficiency across wide range of technologies ‘ • Support for face-to-face i
• Automatic creation of electronic repository to build interaction without replacing it
organizational memory • Electronic communication skills
• Need for ability to align group structure and technology not needed by team members
with the task environment · • Task technology fit less critical
>———+—————- -··—·—·—··–·-·—····-·—··-··-·—··~—- ·—– ·—- –i
• Harder to establish a group identity
I .
• Require better communication skills
More difficult to build trust, norms, and shared meanings
Team Diversity
I about roles because team members have fewer cues
I about their teammates’ performance
• Group identity easier to create
• Easier communication among
\, • More likely to have different perceptions about time and
deadlines i
~——-+— ·-·-···-··-·–·——·-···-·-···-·-·······–··-·-·—-~—··”‘-···-·–···-·———··—·-····-·-·-·—-·-)
FIGURE 4.7 Comparison of challenges facing virtual teams and traditional teams.
Compensation for virtual teams must be based heavily on the team’s performance and ability to reach its goal
rather than on individually measured performance. Compensating team members for individual performance may
result in “hot-rodding” or lack of cooperation among team members. Organizational reward systems must be
aligned with the accomplishment of desired team goals. This alignment is especially difficult when virtual team
members belong to different organizations, each with her or his own unique reward and compensation system, each
of which may affect individual performance in a different way. Managers need to be aware of differences and dis- .,,,,,;
cover ways to provide motivating rewards to all team members. Further, policies about the selection, evaluation,
and compensation of virtual team members may need to be enacted.
In addition to management control challenges, there are other challenges as included in Figure 4.7. The rest of
this section is devoted to managing the challenges.
Managing Communication Challenges
Because virtual teams and remote workers communicate differently than workers in the office, managers must
make sure the communications policies and practices support these work arrangements. For example, holding a
team meeting in the office and expecting remote members to listen in requires the manager to prepare differently
for the meeting. Any presentation slides to be used in the meeting must also be shared with the remote participants,
either over a video conference with meeting software or beforehand. When most of the co-workers are in the office
and only one or two are dialing in from other locations, the remote participants miss all the nonverbal communica-
tion that takes place in the meeting room. Soft-spoken individuals are often difficult to hear. Managers must make
sure key messages are being conveyed to the remote participants or the results of the meeting are sub-optimal.
Team leaders may decide to initiate or supplement a team’s virtual activity with a face-to-face meeting so that
the seeds of trust can be planted and team members feel as if they know one another on a more personal basis. Face-
to-face meetings indeed appear to contribute to successful global virtual teams. An in-depth study of three global
virtual teams found that the two effective teams created a rhythm organized around regularly scheduled face-to-face
meetings coupled with virtual meetings as needed. Before each face-to-face meeting, there was a flurry of com-
munication and activity as team members prepared for the meeting. After the meeting, there were many follow-up
messages and tasks. The ineffective team did not demonstrate a similar pattern.33 Because not all teams can meet
face-to-face, well-managed synchronous meetings using video teleconferencing or in a virtual world can activate
the rhythm and accelerate the workflow.
33 M. L. Maznevski and K. Chudoba, “Bridging Space Over Time: Global Virtual Team Dynamics and Effectiveness,” Organization Science 11, no. 5 …,,;
(2000), 373-92.
Where Work Is Done and Who Does It: Mobile and Virtual Work Arrangements m
Because team leaders cannot always see what their team members are doing or whether they are experiencing
any problems, frequent communications are important. If remote employee or team members are quiet, the team
leader must reach out to them to identify their participation and ensure that they feel their contributions are appre-
ciated. Further, team leaders can scrutinize the team’s asynchronous communications and its repository to evaluate
and give feedback about each team member’s contributions. Even when a majority of team members are in one
location, the team leader should rotate meeting times to alternate the convenience among team members. The rule
of thumb is that “more communication is better than less” because it is very difficult to “overcommunicate.” Man-
agers and team leaders with remote participants must make sure to think about how their remote colleagues are
receiving the information they need, not just how the managers are communicating it.
Managing Technology Challenges
Information and communication technologies are at the heart of the success of remote work and virtual team
accomplishments. However, managers must ensure that their remote colleagues have access to the technologies
and support they need. All team members must have the ability to connect to the information sources and com-
munications pathways used by the group. Well-designed Web-based conferencing applications make this easier
because any device connected to the Internet can access them. Managers must make sure meetings over video
or audio conference tools are well coordinated and all attendees have the right access codes and meeting times.
Time zone differences often confuse this issue, so it is critical to make sure everyone knows the right time for
a meeting.
Support processes for technologies must also be designed with remote employees in mind. If the only support
for them is in the office, they will find it difficult if not impossible to access the help they need. Bringing a laptop to
the office during normal business hours may not be possible if the remote worker is hundreds or thousands of miles
away. Processes must be designed to accommodate the remote employee or team member.
Managers must ensure that all employees and team members have the tools they need to do their jobs. That
might mean providing seamless telephone transfers, desktop support, network connectivity, and security support
to the remote workers. How and where information is stored must be considered because all workers must have
access to the files and applications they need to do their work. And, of course, the importance of security for remote
work cannot be overstated. A good rule of thumb is to design work processes so they work for remote workers,
and consider the office as just another location. If the process works for the remote workers, it most likely will
work for someone in the office, but the converse is not necessarily true. Unforeseen problems can develop for those
remotely located.
Further, managers must also provide the framework for using the technology. Policies and norms or unwritten
rules about how all employees should use the technology to work with one another must be established. 34 These
include norms about telephone, e-mail, and videoconferencing etiquette (i.e., how often to check for messages, the
maximum time to wait to return e-mails, and alerting team members about absences or national holidays), work to
be performed, and so on. Such norms are especially important when team members are not in the same office and
cannot see when team members are unavailable. For example, leaving a paper note on someone’s desk works fine if
that person is in the office, but that option does not exist for remote participants. Leaving an e-mail or sending texts
may be a better alternative because both work for everyone.
Managing Diversity Challenges
Managers may also seek to provide technologies to support diverse team member characteristics. For example,
team members from different parts of the globe may have different views of time. Team members from Anglo-
American cultures (i.e., United States, United Kingdom, Canada, Australia, New Zealand) may view time as a
continuum from past to present and future. For such team members, each unit of time is the same. These team
members are likely to be concerned with deadlines and often prefer to complete one task before starting another
(i.e., are monochronic). For team members who are conscious of deadlines, planning and scheduling software may
34 C. Saunders. C. Slyke. and D. R. Vogel, ‘”My Time or Yours’> Managing Time Visions in Global Virtual Teams;’ Academy of Management Executive
18. no. l (2004), 19-3!.
Ill Digital Systems and the Design of Work
be especially useful. In contrast, team members from India often have a cyclical view of time. They do not get
excited about deadlines and there is no hurry to make a decision because it is likely to cycle back-at which time
the team member may be in a better position to make the decision. Many people from India tend to be polychronic,
preferring to do several activities at one time. Team members who are polychronic may benefit from having instant
messaging or instant video chats available to them so that they can communicate with their teammates and still
work on other tasks. 35
In addition to providing the appropriate technologies, managers with team members who have different views
of time need to be aware of the differences and try to develop strategies to motivate those who are not concerned
with deadlines to deliver their assigned tasks on time. Or the managers may wish to assign these team members to
do tasks that are not sensitive to deadlines.
Of course, views of time are only one dimension of diversity. Although team diversity has been demonstrated
to lead to more creative solutions, it can also make it harder for team members to learn to communicate, to trust
one another, and to form a single group identity. Through open communications, managers may be able to uncover
and deal with other areas of diversity, such as culture, training, gender, personality, position, and language, that
positively or negatively affect the team. 36 Managers may establish an expertise directory at the start of the team’s
life or encourage other ways of getting team members to know more about one another. The rule of thumb here is
to not assume a team will work just because it has been created by management. Specific thought must be giving
to helping the team members function together and embrace, rather than reject, the differences diversity brings to
the table.
Gaining Acceptance for IT-Induced Change
The changes described in this chapter no doubt alter the frames of reference of organizational employees and may
be a major source of concern for them. Employees may resist the changes if they view the changes as negatively .,,,,,;
affecting them. In the case of a new information system that they do not fully understand or are not prepared to
operate, they may resist in several ways:
• They may deny that the system is up and running.
• They may sabotage the system by distorting or otherwise altering inputs.
• They may try to convince themselves, and others, that the new system really will not change the status quo.
• They may refuse to use the new system when its usage is voluntary.
Managing Change
To help avoid these resistance behaviors, John Kotter37 builds upon Kurt Lewin’s38 change model of unfreezing,
changing, and refreezing. Kotter recommends eight specific steps to bring about change. Kotter’s steps are related
to Lewin’s changes and listed in Figure 4.8.
Managers can keep these eight steps in mind as they introduce change into their workplaces. It is important for
managers to make clear why the change is being made before it is implemented, and they must follow the change
with reinforcement behaviors such as rewarding those employees who have successfully adopted new desired
” Ibid.
36 Terri R. Kurtzberg and Teresa M. Amabile, “From Guilford to Creative Synergy: Opening the Black Box of Team-Level Creativity,” Creativity
Research Journal 13, no. 3-4 (200 I). 285-94.
37 John Kotter, Leading Change (Boston, MA: Harvard Business School Press, 1996).
” Kurt Lewin, “Frontiers in Group Dynamics IL Channels of Group Life; Social Planning and Action Research,” Human Relations 1, no. 22 ( 1947),
143-53. ..,,,,;
Gaining Acceptance for IT-Induced Change m
Lewin’s Stage ; Unfreezing i Changing I Refreezing
!——–·- : —-·–·———-+–·——·—–···——·—.-+———··———-
Definition i Creating motivation to change : Providing stakeholders with new ! Reinforcing change by
Kotter’s Steps 1. Establish a sense of urgency:
Create a compelling reason
why change is needed.
2. Create the guiding coalition:
Select a team with enough
expertise and power to lead
the change.
3. Develop a vision and strategy:
Use the vision and strategic
plan to guide the change
J 4. Communicate the change
vision: Devise and implement
a communication strategy to
consistently convey the vision.
information, systems, products, or I integrating stakeholders’
services changed behaviors and
attitudes into new operations
resulting from change
5. Empower broad-based 8. Anchor new approaches
action: Encourage risk-taking in the culture: Reinforce
and creative problem solving change by highlighting
to overcome barriers to areas in which new
change. behaviors and processes
are linked to success.
6. Generate short-term wins:
Celebrate short-term
improvements and reward
contributions to change effort.
7. Consolidate gains and
produce more change: Use
credibility from short-term
wins to promote more change
so that change cascades I
throughout the organization. 1
FIGURE4.8 Stages and steps in change management.
Source: Adapted from John Kotter, Leading change (Boston, MA: Harvard Business School Press, 1996).
‘-,, Technology Acceptance Model and Its Variants
To avoid the negative consequences of resistance to change, those implementing change must actively manage
the change process and gain acceptance for new IS. To help explain how to gain acceptance for a new technology,
Professor Fred Davis and his colleagues developed the Technology Acceptance Model (TAM). Many variations of
TAM exist, but its most basic form is displayed on the right-hand side in Figure 4.9. TAM suggests that managers
( —————————————–,
Ease of Use
Technology Acceptance Model (TAM) _________________________________________ )
FIGURE4.9 Simplified technology acceptance model (TAM3).
Source: Viswanath Venkatesh and Hillol Bala, “Technology Acceptance Model 3 and a Research Agenda on Interventions,”
Decision Sciences 39, no. 2 (2008), 27 6.
11fZ1 Digital Systems and the Design of Work
cannot get employees to use a system until they want to use it. To convince employees to want to use the system,
managers may need to employ unfreezing tactics to change employee attitudes about the system. Attitudes may
change if employees believe that the system will allow them to do more or better work for the same amount of effort
(perceived usefulness), and that it is easy to use. Training, documentation, and user support consultants are external
variables that may help explain the usefulness of the system and make it easier to use.
The left-hand side of Figure 4.9 provides four categories of determinants of perceived usefulness and perceived
ease of use from the point of view of organizational users. Specifically, they are individual differences ( e.g., gender,
age), system characteristics (e.g., output quality and job relevance that help individuals develop favorable or unfa-
vorable views about the system), social influence (e.g., subjective norms), and facilitating conditions (e.g., top
management support). TAM assumes that system use is under the control of the individual users. When employees
are mandated to use the system, they may use it in the short run, but over the long run, negative consequences of
their resistance may surface. Thus, gaining acceptance of the system is important, even in those situations where
it is mandated.
• The nature of work is changing, and IT supports, if not propels, these changes.
• Communication and collaboration are vital for today’s work. Technology to support communication includes e-mail,
intranets, instant messaging (IM), video conferences, virtual private networks (VPN), and file transfer software. Tech-
nology to support collaboration includes social networking sites, Web logs (biogs), virtual worlds, wikis, teleconference
systems, groupware, microblogs and Internet sharing sites.
• IT affects work by creating new work, creating new working arrangements, and presenting new managerial challenges
in employee supervision, evaluation, compensation, and hiring.
• Newer approaches to management reflect increased use of computer and information technology in hiring and super-
vising employees, a more intense focus on output (compared to behavior), and an increased team orientation.
• The shift to knowledge-based work, changing demographics and lifestyle preferences, new technologies, growing reli-
ance on the Web, and energy concerns contribute to the increase in remote work and virtual teams.
• Companies find that building telecommuting capabilities can be an important tool for attracting and retaining
employees, increasing their productivity, providing flexibility to otherwise overworked individuals, reducing office
space and associated costs, responding to environmental concerns about energy consumption, and complying with the
Clean Air Act. Alternative work arrangements also promise employees potential benefits: schedule flexibility, higher
personal productivity, less commuting time and fewer expenses, and increased geographic flexibility.
• Disadvantages of remote work include increased stress from trying to maintain work-life balance; difficulties in
planning, communicating, and evaluating performance; feelings of isolation among employees; easier displacement of
employees by offshoring; and limitations of jobs and employees in its application.
• Virtual teams can be defined as two or more people who (I) work together interdependently with mutual account-
ability for achieving common goals, (2) do not work in either the same place and/or at the same time, and (3) must use
electronic communication technology to communicate, coordinate their activities, and complete their team’s tasks. They
are an increasingly common organizational phenomenon and must be managed differently than more traditional teams.
• Managers of remote workers and virtual teams must focus on overcoming the challenges of communication, technology,
and diversity of team members.
• To gain acceptance of a new technology, potential users must exhibit a favorable attitude toward the technology. In the
case of information systems, the users’ beliefs about its perceived usefulness and perceived ease of use color their atti-
tudes about the system. Kotter provides some suggested steps for change management that are related to Lewin’s three
stages of change: unfreezing, change, and refreezing.
CaseStudy m
behavior controls (p. 84)
mobile workers (p. 86)
offshoring (p. 90)
outcome controls (p. 84)
personnel controls (p. 84)
remote workers (p. 86)
telecommuting (p. 86)
virtual teams (p. 87)
1. Why might an employee resist the implementation of a new technology? What are some of the possible consequences of
asking an employee to use a computer or similar device in his or her job?
2. How can IT alter an individual’s work? How can a manager ensure that the impact is positive rather than negative?
3. What current technologies do you predict will show the most impact on the way work is done? Why?
4. Given the growth in telecommuting and other mobile work arrangements, how might offices physically change in the com-
ing years? Will offices as we think of them today exist by 2030? Why or why not?
5. How is working at an online retailer different from working at a brick-and-mortar retailer? What types of jobs are necessary
at each? What skills are important?
6. Paul Saffo, former director of the Institute for the Future, noted, “Telecommuting is a reality for many today, and will con-
tinue to be more so in the future. But beware, this doesn’t mean we will travel less. In fact, the more one uses electronics,
the more they are likely to travel.” 39 Do you agree with this statement? Why or why not?
7. The explosion of information-driven self-serve options in the consumer world is evident at the gas station where customers
pay, pump gas, and purchase a car wash without ever seeing an employee; in the retail store such as Walmart, Home Depot,
and the local grocery where self-service checkout stands mean that customers can purchase a basket of items without ever
speaking to a sales agent; at the airport where customers make reservations and pay for and print tickets without the help of
an agent; and at the bank, where ATMs have long replaced tellers for most transactions. But a backlash is coming, experts
predict. Some say that people are more isolated than they used to be in the days of face-to-face service, and they question
how much time people are really saving if they have to continually learn new processes, operate new machines, and over-
come new glitches. Labor-saving technologies were supposed to liberate people from mundane tasks, but it appears that
these technologies are actually shifting some tasks to the customer. On the other hand, many people like the convenience of
using these self-service systems, especially because it means customers can visit a bank for cash or order books or gifts from
an online retailer 24 hours a day. Does this mean the end of “doing business the old-fashioned way”? Will this put a burden
on the elderly or the poor when corporations begin charging for face-to-face services?40
• CASE STUDY 4-1 Trash and Waste Pickup Services. Inc.
Martin Andersen is responsible for 143 of Trash and Waste Pickup Services, Inc.’s (TWPS’s) garbage trucks. TWPS is a
commercial and household trash hauler. When a caller recently complained to Andersen that a brown and green Trash and
Waste Pickup Services truck was speeding down Farm Route 2244, Andersen turned to the company’s information system.
He learned that the driver of a company front-loader had been on that very road at 7:22 A.M., doing 51 miles per hour (mph)
in a 35 mph zone. The driver of that truck was in trouble!
The TWPS information system uses a global positioning system (GPS) not only to smooth its operations but also to
keep closer track of its employees, who may not always be doing what they are supposed to be doing during work hours.
Andersen pointed out, “If you’re not out there babysitting them, you don’t know how long it takes to do the route. The guy
could be driving around the world, he could be at his girlfriend’s house.”
39 “Online Forum: Companies of the Future,” (accessed June 11, 2002).
40 Stevenson Swanson, “Are Self-Serve Options a Disservice?” Chicago Tribune (May 8, 2005), Section H, Id.
m Digital Systems and the Design of Work
Before TWPS installed the GPS system, the drivers of his 37 front-loaders clocked in approximately 250 hours a week
of overtime at one and a half times pay. Once TWPS started monitoring the time they spent in the yard before and after
completing their routes and the time and location of stops that they made, the number of overtime hours plummeted to 70
per week. This translated to substantial savings for a company whose drivers earn about $20 an hour.
TWPS also installed GPS receivers in salesmen’s cars. Andersen was not surprised to learn that some of the company’s
salespeople frequented The Zone, a local bar, around 4 P.M. when they were supposed to be calling on customers. Andersen
decided to set digital boundaries around the bar.
Understandably, the drivers and salespeople aren’t entirely happy with the new GPS-based system. Ron Simon, a TWPS
driver, admits: “It’s kind of like Big Brother is watching a little bit. But it’s where we’re heading in this society …. I get testy
in the deli when I’m waiting in line for coffee, because it’s like, hey, they’re (managers) watching. I’ve got to go.”
Andersen counters that employers have a right to know what their employees are up to: “If you come to work here, and
I pay you and you ‘re driving one of my vehicles, I should have the right to know what you ‘re doing.”
Discussion Questions
1. What are the positive and negative aspects of Andersen’s use of the GPS-based system to monitor his drivers and sales-
2. What advice do you have for Andersen about the use of the system for supervising, evaluating, and compensating his
drivers and salespeople?
3. As more and more companies tum to IS to help them monitor their employees, what do you anticipate the impact will
be on employee privacy? Can anything be done to ensure employee privacy?
Source: This is a fictitious case. Any resemblance to an actual company is purely coincidental.
• CASE STUDY 4-2 Social Networking: How Does IBM Do It?
IBM’s award-winning developerWorks site was established in 2000 as a technical resource repository for the company’s
global development community. Designed to share knowledge and skills related to IBM products and other key technol-
ogies, it has been a solid success. The site attracts about 4 million unique visitors a month-including students, profes-
sionals, and developers from almost all the world’s countries-who search its library of 30,000 articles, demos, podcasts,
and tutorials. developerWorks is available in eight languages, including Russian, Chinese, and Spanish, and about 70% of
its visitors come from outside IBM.
My developerWorks, a social networking function, was added to the repository platform in 2009 to allow developers to
connect, communicate, and collaborate on projects. Soon the network had added more than 600,000 user profiles as well as
numerous biogs and forums. In addition to allowing established business, start-ups, and partners to collaborate, it has also
helped users find answers to support questions that would otherwise go to IBM’s call centers and help desks, thus saving
the company an estimated $100 million.
Alice Chou, Director of IBM developerWorks, carefully monitored the number of My developerWorks profiles and the
volume of traffic to the site. She looked at unique visitors, developer demographics, time spent on the site, and patterns of
page views. She created a reward and recognition framework so that when users contributed a highly regarded article or
blogpost to the site, “they got the kudos they deserve.”
Discussion Questions
1. How might My developerWorks leverage changes in the way people work?
2. Why do you think Alice Chou carefully monitors the My developerWorks site? What would be an example of an insight
she would gain from the data she’s collecting?
3. Why do you think Alice Chou thinks a rewards program is necessary for My developerWorks because so many profiles
have already been developed. Do you agree that a reward would be necessary?
Sources: IBM, (accessed April 17, 2012); Ellen Traudt and Richard Vancil, “Becoming a Social Business: The
IBM Story,” IDC White Paper #226706 (January 2011), 1-14 (quote on p. 6, developerWorks at ..,,,J
Information Systems and
Business Transformation
Transformation requires discontinuous thinking-recognizing and shedding outdated rules
and fundamental assumptions that underlie operations. Business processes, the cross-
functional sets of activities that turn inputs into outputs, are at the heart of how businesses
operate and how transformation takes place. This chapter discusses business processes
and the systems that support them. The chapter begins with a discussion of a functional (silo)
versus a process perspective of a firm, including agile and dynamic business processes.
The chapter then focuses on the way managers change business processes, including
incremental and radical approaches. Information systems (/S) including workflow and
business process management systems and enterprise systems that support and automate
business processes follow. The chapter concludes by examining when IS drive business
transformations and the complexities that arise when companies integrate systems.
Business strategy at Sloan Valve Company, 1 a family-owned global manufacturer of plumbing prod-
ucts, had executives launching a range of new products every year. The new product development
(NPD) process was both core and strategic for Sloan, but it was also complex and slow; over
16 functional units were involved, and it often took 18-24 months to bring a new product to
market. Sloan Valve’s process of initiating and screening new product ideas was broken. More
than 50% of the ideas that began the process didn’t make it through, resulting in wasted resources.
Further, no one was accountable for the process, making it difficult to get a handle on process
management and improvement. Information flow was blocked in part because of the structure of
the organization.
Management initially invested in an enterprise system to automate the company’s internal
processes, believing that IS would provide a common language, database, and platform. Despite
successful implementation, the communication and coordination problems continued. Further, the
new system did not provide an NPD process. Upon deeper analysis by a new CIO brought in to “fix
things,” management realized that the enterprise system was working fine, but the underlying pro-
cess was broken. Top management decided to redesign the NPD process.
The NPD process redesign team was led by an IT manager with considerable process experience
and involved members from manufacturing, engineering, IT, finance, marketing, operations, and
quality assurance. The director of design engineering was made process owner to provide oversight
for all changes. The team spent nine months assessing the current way of working and proposed a
new end-to-end NPD process. The reengineered NPD process included six subprocesses: ideation,
business case development, project portfolio management, product development, product and pro-
cess validation, and launch. The underlying information system was the enterprise system upgraded
to include newer modules, which supported product life cycle management.
1 Adapted from S. Balaji. C. Ranganathan. and T. Coleman, “‘IT-Led Process Reengineering: How Sloan Valve Redesigned Its New
Product Development Process,”‘ MIS Quarterly Exerntive l 0, no. 2 (June 201 l ), 81-92.
lllml Information Systems and Business Transformation
The quality, timing, and output of NPD greatly improved. The new NPD process reduced time-to-market to less
than 12 months. New product ideas that were unlikely to work were filtered out early, eliminating problems of wast-
ing resources. Synthesis of product and process information improved. Customer feedback was easier to access.
And accountability increased, smoothing out responsibilities and workflow.
Not all IS enterprise system implementations are as successful as that at Sloan Valve. There are hundreds of
stories of companies that ran into significant problems when automating and transforming their business processes,
especially when an information system is at the heart of the change. Overstock.corn’s order tracking system failed
for a full week when it rolled out a new enterprise system. By rushing to implement the new system, a glitch put
the enterprise system out of sync with the accounting system, causing the company to have to restate more than five
years of earnings, which showed lower revenue and higher losses. Clothing manufacturer Levi Strauss had simi-
lar problems with its new enterprise system, causing shipping errors and issues with its financial control systems.
The latter was blamed for the company’s 98% decrease in net income for the second quarter in 2008. Avis Europe
attempted to implement an enterprise system, but project delays and cost overruns caused the company to cancel
the project and write off £28 million on its books. With so much at risk, general managers must be informed and
involved in these types of complex information systems that change business processes. 2
IS can enable or impede business change. The right design coupled with the right technology can result in
changes such as those experienced by Sloan Valve. The wrong business process design or the wrong technology,
however, can force a company into operational, and sometimes financial, crisis as the, Levi Strauss,
and Avis Europe examples show.
To a manager in today’s business environment, an understanding of how IS enable business change is essential.
The terms management and change management are used almost synonymously in today’s business vocabulary:
To manage effectively means to manage change effectively. As IS become ever more prevalent and more power-
ful, the speed and magnitude of the changes that organizations must address to remain competitive continue to
increase. To be a successful manager, one must understand how IS enable change in a business; one must gain
a process perspective of business and must understand how to transform business processes effectively. This ..,,;
chapter provides managers a view of business process change. It provides tools for analyzing how a company
currently does business and for thinking about how to effectively manage the inevitable changes that result from
competition and the availability of IS. This chapter also describes an IT-based solution commonly known as
enterprise IS.
A brief word to the reader is needed. The term process is used extensively in this chapter. In some instances, it
is used to refer to the steps taken to change aspects of the business. At other times, it is used to refer to the part of
the business to be changed: the business process. The reader should be sensitive to the potentially confusing use of
the term process.
Silo Perspective versus Business Process Perspective
When effectively linked with improvements to business processes, advances in IS enable changes that make it pos-
sible to do business in a new way, one that is better and more competitive than before. On the other hand, IS can
also inhibit change, which occurs when managers fail to adapt business processes because they rely on inflexible
systems to support those processes. Finally, IS can also drive change for better or for worse. Examples abound of
industries that were fundamentally changed by advances in IS and of companies whose success or failure depended
on the ability of their managers to adapt. This chapter considers IS as an enabler of business transformation, a
partner in transforming business processes to achieve competitive advantages. We begin by comparing a process
view of the firm with a functional view.
Transformation requires discontinuous thinking-recognizing and shedding outdated rules and fundamental
assumptions that underlie operations. “Unless we change these rules, we are merely rearranging the deck chairs
on the Titanic. We cannot achieve breakthroughs in performance by cutting fat or automating existing processes.
2 Adapted from (accessed February 24, 2012).
Silo Perspective versus Business Process Perspective lllilll
Rather, we must challenge old assumptions and shed the old rules that made the business under perform in the
first place.”3
Functional (Silo) Perspective
Many think of business by imagining a hierarchical structure (described in Chapter 3) organized around a set of
functions. Looking at a traditional organization chart allows an understanding of what the business does to achieve
its goals. A typical hierarchical structure, organized by function, results in disconnected silos that might look like
the one in Figure 5.1.
When an organization has silos, departments are organized on the basis of their core competencies. Specialized
silos allow them to focus on what they do best. For example, the operations department focuses on operations, the
marketing department focuses on marketing, and so on. Each major function within the organization usually forms
a separate department to ensure that work is done by groups of experts in that function. This functional structure
is widespread in today’s organizations and is reinforced by business education curricula, which generally follow
functional structures, that is, students take courses in functions (i.e., marketing, management, accounting) and
major in functions and then are predisposed to think in terms of these same functions.
Even when companies use the perspective of the value chain model (as discussed in Chapter 2), they still focus on
functions that deliver their portion of the process and “throwing it over the wall” to the next group on the value chain.
These silos become self-contained functional units, which can be useful for several reasons. First, they allow an orga-
nization to optimize expertise and training. For example, all the marketing people can belong to the same department,
allowing them to informally network and learn from each other. Second, the silos allow the organization to avoid
redundancy in expertise by hiring one person who can be assigned to projects across functions on an as-needed basis
instead of hiring an expert in each function. Third, with a silo organization, it is easier to benchmark outside organi-
zations, utilize bodies of knowledge created for each function, and easily understand the role of each silo.
On the other hand, silo organizations can experience significant suboptimization. First, individual departments
often recreate information maintained by other departments. Second, communication gaps between departments
are often wide. Third, handoffs between silos are often a source of problems, such as finger-pointing and lost
information. Finally, silos tend to lose sight of the objective of the overall organization and operate in a way that
maximizes their local goals. The last point is illustrated by a production department that pushes the concept of a
small number of product sizes or options while the marketing department urges management to consider a larger
variety or highly customized products. Such conflicts do arise in many organizations, and it can be difficult to nego-
tiate to find a solution that is best, overall, for the firm.
A firm’s work changes over time. In a functionally organized silo business, each group is primarily concerned
with its own set of objectives. The executive officers jointly seek to ensure that these functions work together to
create value, but the task of providing the “big picture” to so many functionally oriented personnel can prove
extremely challenging. As time passes and business circumstances change, new work is created that relies on more
than one of the old functional departments. Departments that took different directions must now work together.
They negotiate the terms of any new work processes with their own functional interests in mind, and the “big
FIGURE 5.1 Hierarchical structure.
Typical Hierarchical Organization Structure
Executive Offices
Accounting Finance Administration
lllifJ Information Systems and Business Transformation
picture” optimum gets scrapped in favor of suboptimal compromises among the silos. These compromises then
become repeated processes; they become standard operating procedures.
Losing the big picture means losing business effectiveness. After all, a business’s main objective is to create as
much value as possible for its shareholders and other stakeholders by satisfying its customers to stimulate repeat
sales and positive word of mouth. When functional groups duplicate work, fail to communicate with one another, or
lose the big picture and establish suboptimal processes, the customers and stakeholders are not being well served.
Business Process Perspective
A manager can avoid such suboptimization-or begin to “fix” it-by managing from a business process perspec-
tive. A business process perspective, or more simply a process perspective, keeps the big picture in view and
allows the manager to concentrate on the work that must be done to ensure the optimal creation of value. A process
perspective helps the manager avoid or reduce duplicate work, facilitate cross-functional communication, optimize
business processes, and ultimately, best serve the customers and stakeholders.
In business, a process is defined as an interrelated, sequential set of activities and tasks that turns inputs into
outputs and includes the following:
• A beginning and an end
• Inputs and outputs
• A set of tasks (subprocesses or activities) that transform the inputs into outputs
• A set of metrics for measuring effectiveness
Metrics are important because they focus managers on the critical dimensions of the process. Metrics for a
business process are things like throughput, which is how many outputs can be produced per unit time, or cycle …,;
time, which is how long it takes for an entire process to execute. Examples of process measures are the number of
handoffs in the process or actual work versus total cycle time. Other metrics are based on the outputs themselves,
such as customer satisfaction, revenue per output, profit per output, and quality of the output.
Examples of business processes include customer order fulfillment, manufacturing planning and execution,
payroll, financial reporting, and procurement. A procurement process might look like the sample in Figure 5.2.
The process has a beginning and an end, inputs (requirements for goods or services) and outputs (receipt of goods,
vendor payment), and subprocesses (filling out a purchase order, verifying the invoice). Metrics of the success of
the process might include turnaround time and the number of paperwork errors.
The procurement process in Figure 5.2 cuts across the functional lines of a traditionally structured business.
For example, the requirements for goods might originate in the operations department based on guidelines from
the finance department. Paperwork would likely flow through the administration department, and the accounting
department would be responsible for paying the vendor.
Focusing on business processes ensures focusing on the business’s goals (the “big picture”) because each pro-
cess has an “endpoint” that is usually a deliverable to a customer, supplier, or other stakeholder. A business process
perspective recognizes that processes are often cross-functional. In the diagram in Figure 5.3, the vertical bars
represent functional departments within a business. The horizontal bars represent processes that flow across those
functional departments. A business process perspective requires an understanding that processes properly exist to
serve the larger goals of the business and that functional departments must work together to optimize processes in
regard to these goals.
Receive Create and
I—-+ Send — Receive I—-+ Verify — Pay for Goods/ Purchase Goods Invoice Vendor
Services Order
FIGURE 5.2 Sample procurement business process.
Silo Perspective versus Business Process Perspective lliil
Sample R K 0 N
Business A E u A s
Processes T T N N
0 N
s G I
Customer Support
FIGURE 5.3 Cross-functional nature of business processes.
For example, an order-fulfillment process might include payment, order delivery, product implementation, and
after-sales service tasks. This process would involve multiple functions, including operations, accounting, service,
and sales, making it a cross-functional business process. The “sales order” would be the input for this process. A sat-
isfied customer might be the output, and a number of metrics, such as a survey of the customer’s satisfaction, time to
complete the order fulfillment process, number of defects ( or other quality measure), can be used to measure success.
When managers take a business process perspective, they are able to optimize the value that customers and
‘-, stakeholders receive by managing the flow as well as the tasks. They begin to manage processes by:
• Identifying the customers of processes ( who receives the output of the process?)
• Identifying these customers’ requirements (what are the criteria for successful implementation of the process?)
• Clarifying the value that each process adds to the overall goals of the organization
• Sharing their perspective with other organizational members until the organization itself becomes more pro-
cess focused
The differences between the silo and business process perspectives are summarized in Figure 5.4. A silo
perspective refers to self-contained functional units such as marketing, operations, finance, and so on. Unlike a
Perspective I Business Process Perspective
i .
Self-contained functional units such as I Interrelated, sequential set of
marketing, operations, finance, and so on I activities and tasks that turns inputs into
Focus Function
Goal Accomplishment Goals optimized for the function, which I Goals optimized for the organization, or
i————–t-m_a_y_b_e_s_u_b_o_p_t_im_a_l f_o_r_th_e_organization – -~the ubig picture” –
Benefits Core competencies highlighted and ‘I Avoidance of work duplication and
developed; functional efficiencies , cross-functional communication gaps;
~h~~~~~~:~rh:f ~~:;::!~nn; ____________ Ji.;;;;~~~:~~;:~::~~:;;;~::~~::—
cross-functional inefficiencies; sophisticated software i
communication difficulties ! ______ …._ _________ —··-·-··-··-··-· ··········-····—-··—-··-·-·····———··············–···-·–·–·’
FIGURE 5.4 Comparison of silo perspective and business process perspective.
B Information Systems and Business Transformation
silo perspective, a business process perspective recognizes that businesses operate as a set of processes that flow
across functional departments. The business process perspective enables a manger to analyze the processes of the
business in regard to its larger goals in comparison to the functional orientation of the silo perspective. Finally, it
provides a manager with insights into how those processes might better serve these goals.
An example illustrates the problem. Using a silo perspective, a customer with a warranty issue would need to
explain a problem with a product to a customer service representative in the service department. If the problem is
technical, the call would be transferred to a technical support person (in a different department), and the customer
might need to explain the entire problem again. If the technical support representative determined that a part is
needed, the customer would be transferred to the sales department and would need to explain the issue yet another
time. Because the departments are not talking with one another, the customer might even need to provide proof of
purchase several times to avoid having to pay for a warranty problem.
In contrast, with a business process perspective, either one representative would work with the customer on all
problems or an enterprise system would enable the representative to transfer both the call and notes with the details
to any specialists who are needed along the way. Having one representative handle all problems is not always pos-
sible because it is often difficult to find staff able to handle an entire process for the same reasons that support the
functional hierarchical structure: People are normally trained in a function, such as marketing or accounting, not
in a process that requires many different skill sets. For example, individuals who excel at marketing may not also
possess the accounting skills needed to fix a billing problem.
Zara’s Cross-Functional Business Processes
Consider Spanish clothing retailer Zara (introduced in Chapter 2). With over 1,600 stores in 78 countries around
the world and a well-designed set of cross-functional business processes, Zara often is able to design, produce, and
deliver a garment within 15 days. For this to happen, its managers must regularly create and rapidly replenish small
batches of goods all over the world. Zara’s organization, operational procedures, performance measures, and even ,.,,,,,,J
its office layout are all designed to make information transfer easy.
Zara’s designers are colocated with the production team, including marketing, procurement, and production
planners. Prototypes are created nearby, facilitating easy discussion about the latest design. Large circular tables
in the middle of the production process encourage impromptu meetings where ideas are readily exchanged among
the designers, market specialists, and production planners. The speed and quality of the design process is greatly
enhanced by the colocation of the entire team because the designers can quickly check their ideas with others on
their cross-functional teams. For example, the market specialists can quickly respond to designs in terms of the
style, color, and fabric whereas the procurement and production planners can update these specialists about manu-
facturing costs and available capacity.
Zara’s information technology provides a platform but does not preclude informal face-to-face conversations.
Retail store managers are linked to marketing specialists through customized handheld computers but sometimes
use the telephone to share order data, sales trends, and customer reactions to a new style. Zara’s cross-functional
teams enable information sharing among everyone who “needs to know” and therefore creates the opportunity to
change directions quickly to respond to new market trends.
Building Agile and Dynamic Business Processes
To stay competitive and consistently meet changing customer demands, organizations build dynamic business
processes or agile business processes, processes that repeat through a constant renewal cycle of design, deliver,
evaluate, redesign, and so on. Agile business processes are designed to simplify redesign and reconfiguration. They
are designed to be flexible and easily adaptable to changes in the business environment and can be incrementally
changed with little effort. Dynamic business processes, on the other hand, reconfigure themselves as they “learn”
and the business utilizes them.
Changing Business Processes Im
To be agile or dynamic, a process necessitates a high degree of IT use. The more of the process that can be done
with software, the easier it is to change, and the more likely it can be designed to be agile or dynamic.
Examples of agile processes are often found in manufacturing operations, where production lines are reconfig-
ured regularly to accommodate new products and technologies. For example, automobile production lines produce
large numbers of vehicles, but very few are identical to the one made before or after it on the production line. Also,
vehicles are often built with space and wiring for options (such as a remote starter) that can be added by a dealer
quickly and with minimal labor. The design of the line is such that many changes in design, features, or options are
just incorporated into the assembly of the vehicle at hand.
Another common example is in software development. Agile software development methodologies underlie an
incremental and iterative development process that is often used to rapidly and collaboratively create working and
relevant software.
More recently, with the use of the Internet and social technologies, building agility into business processes is
increasingly common. Processes run entirely in the digital world. Some common examples are order management,
service/product provisioning, human resource support, and bill payment. The pervasiveness of the digital world has
necessitated rethinking many business processes; customers, employees, and other stakeholders expect to be able
to access processes on the Web and perform self-service.
In fact, many processes have been designed as an app, as described in the Introduction. Consider smart phones
or tablets. Each app loaded on these devices is, in reality, an automated business process. And because it’s an app,
it’s relatively easy for the developer to upgrade, fix, and enhance. Apps are good examples of software that supports
agile processes.
An example of a dynamic process is a network with a changing flow of data. The network could have sensors
built in to monitor the flow, and when flow is greater than the current network configuration can handle, the net-
work automatically redistributes or requisitions more capacity to handle the additional data and reconfigures itself
to balance the flow over the new channels. Another example, with a more physical configuration, would be a call
center. Call center systems are designed to monitor the flow of calls coming into a center and the time it takes for
agents to respond to them. These systems can automatically redistribute calls to or from other centers as volume
increases or decreases. The system might be sufficiently sophisticated so that it can add additional agents to the
schedule or alert a supervisor of an increase and route calls to standby agents. Enabling the system to redistribute
incoming calls to respond to changes in the center is an important capability.
Dynamic IT applications, a component of software defined architecture, described more fully in Chapter 6,
are required for dynamic business processes. When the underlying IT is not designed with this goal in mind,
the business process itself cannot adapt as necessary to changing requirements of the business environment. The
benefits of agile and dynamic business processes are operational efficiency gained by the ease of incrementally
improving the process as necessary and the ability to create game-changing innovative processes more quickly.
Sloan Valve’s NPD process is another example of a more flexible approach. Previously steeped in the old way of
doing things, and tied to legacy information systems, the redesigned NPD process was faster and enabled detection
of and reaction to customer feedback, process problems, and team misalignments.
Changing Business Processes
Sloan Valve decided to do a complete redesign of its NPD process. After trying to incrementally change it with a
new IS, and minor changes to the process, managers realized that a complete transformation was necessary.
Transforming a business today means redesigning business processes. Two techniques used to transform a static
business process are: (1) radical process redesign, which is sometimes called business process reengineering
(BPR) or simply reengineering and (2) incremental, continuous process improvement, which includes total quality
management (TQM) and Six Sigma. Radical and incremental improvement concepts are important; they continue
to be different tools a manager can use to effect change in the way his or her organization does business. The basis
of both approaches is viewing the business as a set of business processes rather than using a silo perspective.
B Information Systems and Business Transformation
Incremental Change
At one end of the continuum, managers use incremental change approaches to improve business processes through
small, incremental changes. This improvement process generally involves the following activities:
• Choosing a business process to improve
• Choosing a metric by which to measure the business process
• Enabling personnel to find ways to improve the business process based on the metric
Personnel often react favorably to incremental change because it gives them control and ownership of improve-
ments and, therefore, renders change less threatening. The improvements grow from their grassroots efforts. TQM
is one such approach that incorporates methods of continuous process improvement. At the core of the TQM
method is W. Edwards Deming’s “14 Points,” or key principles to transform business processes. The principles
outline a set of activities for increasing quality and improving productivity.4 TQM has lost some of its luster in the
United States, but it continues to be very popular in Europe and Asia.
Six Sigma is an incremental and data-driven quality management approach for eliminating defects from
a process. The term six sigma comes from the idea that if the quality of all output from a process were to be
mapped on a bell-shaped curve, the tail of the curve, six sigma (standard deviations) from the mean, would
represent less than 3.4 defects per million. Such a low rate of defects would be close to perfect. The Six Sigma
methodology is carried out by experts known as Green Belts and more experienced experts known as Black
Belts, who have taken special Six Sigma training and worked on numerous Six Sigma projects. Motorola was
one of the first companies in the United States to use Six Sigma, but GE made the method a part of its business
culture driving significant and continuous improvement throughout the corporation. The GE Web site states “Six
Sigma is a highly disciplined process that helps us focus on developing and delivering near-perfect products
and services.” 5
Radical Change
Incremental change approaches work well for tweaking existing processes. However, they tend to be less effec-
tive for addressing cross-functional processes. Major changes usually associated with cross-functional processes
require a different type of management tool. At the other end of the change continuum, radical change enables
the organization to attain aggressive improvement goals (again, as defined by a set of metrics). The goal of rad-
ical change is to make a rapid, breakthrough impact on key metrics. Some businesses even have made radical
process reconfiguration a core competency so that they can better serve customers whose demands are constantly
Sloan Valve is an example of a company that set aggressive impn,vement goals and reached them with a rad-
ical change approach. The company set out to dramatically improve new products’ time to market and was able to
reduce it from 18-24 months to 12 months.
The difference in the incremental and radical approaches over time is illustrated by the graph in Figure 5.5. The
vertical axis measures, in one sense, how well a business process meets its goals. Improvements are made either
incrementally or radically. The horizontal axis measures time.
Not surprisingly, radical change typically faces greater internal resistance than does incremental change. There-
fore, radical change processes should be carefully planned and used only when major change is needed in a short
time. Some examples of situations requiring radical change are when the company is in trouble, when it imminently
‘ For more information about TQM and Deming’s 14 Point approach to quality management, see the ASQ (Formerly known as the American Society
for Quality), a global community of experts on quality and the administrators of the Malcolm Baldrige National Quality Award program,
learn-about-quality/total-quality-management/overview/overview.html (accessed August 26, 2015).
‘ (accessed August 27, 2015).
a, 80
> 60 e
.s 40
FIGURE 5.5 Comparison of radical and incremental improvement.
Workflow and Mapping Processes llil
faces a major change in the operating environment, or when it must change significantly to outpace its competition.
Key aspects of radical change approaches include the following:
• Need for major change in a short amount of time
• Thinking from a cross-functional process perspective
• Challenge to old assumptions
• Networked (cross-functional) organization
• Empowerment of individuals in the process
‘-, • Measurement of success via metrics tied directly to business goals and the effectiveness of new processes
(e.g., production cost, cycle time, scrap and rework rates, customer satisfaction, revenues, and quality)
Workflow and Mapping Processes
Workflow in its most basic meaning is the series of connected tasks and activities performed by people and com-
puters that together form a business process. Consideration of workflow is a way to assess a cross-functional
process. But the term workfiow has come also to mean software products that document and automate processes.
Workflow software facilitates the design of business processes and creates a digital workflow diagram. workflow
software lets the manager diagram answers to questions such as how a process will work, who will do what, what
the information system will do, and what decisions will be made and by whom. When combined with business pro-
cess management modules, processes can be managed, monitored, and modified.
The tool used to understand a business process is a workflow diagram, which shows a picture, or map, of the
sequence and detail of each process step. More than 200 products are available for helping managers diagram the
workflow. The objective of process mapping is to understand and communicate the dimensions of the current pro-
cess. Typically, process engineers begin the process mapping procedure by defining the scope, mission, and bound-
aries of the business process. Next, engineers develop a high-level overview flowchart of the process and a detailed
flow diagram of everything that happens in the process. The diagram uses active verbs to describe activities and
identifies all process actors, inputs, and outputs. The engineers verify the detailed diagram for accuracy with the
actors in the process and adjust it accordingly.
Business Process Management (8PM)
Thinking about the business as a set of processes has become more common, but managing the business as a set of
6., processes is another story. Some claim that to have truly dynamic or agile business processes requires a well-defined
B Information Systems and Business Transformation
and optimized set of IT processes, tools, and skills called business process management (BPM). In the 1990s,
a class of systems to help manage workflows in the business emerged. The systems primmily helped track docu-
ment-based processes where people executed the steps of the workflow. 8PM systems go way beyond document
management capabilities and include features that manage person-to-person process steps, system-to-system steps,
and those processes that include a combination of them. Systems include process modeling, simulation, code gener-
ation, process execution, monitoring, and integration capabilities for both company-based and Web-based systems.
The tools allow an organization to actively manage and improve its processes from beginning to end.
Enterprise Rent-a-Car, one of the largest car rental companies in the world with 7,000 locations and more than
65,000 employees worldwide, used 8PM to model, manage, and streamline its IT-based processes. It used 8PM to
build Request Online, the system through which employees requested laptops, software and applications, system
access, reports, and other services available from the IS department. The prior system was mostly manual, not
scalable as volume increased, and not automatable. Not surprisingly, it was difficult to make improvements to that
system. Using a 8PM system, the IT staff developed a model that copied the way service requests were already
handled so the experience would be familiar and added features slowly to enhance the experience. The result was a
BPM-based system that provided better management capabilities and created a common platform for rapid change
and capacity for future growth. That proved critical when Enterprise acquired National Car Rental and Alamo Rent
A Car, creating much more demand for Request Online. Enterprise was able to shift development to less costly
IT staff who could make process modifications directly through the 8PM. Finally, the usability of the system was
increased as the 8PM facilitated the creation of customized interfaces based on characteristics of the specific users. 6
8PM systems provide a way to build, execute, and monitor automated processes that may go across organiza-
tional boundaries. Some of the functionality of a BPM may be found in enterprise applications such as enterprise
resource planning (ERP), customer relationship management (CRM), and financial software because these systems
also manage processes within a corporation. But 8PM systems go outside a specific application to help companies
manage across processes. Some 8PM systems manage front office applications that are often person-to-person
processes such as sales or ordering. These processes are people centric and incorporate social IT. Other BPM sys- ..,,,;
terns support back-office processes that often are more system-to-system oriented and possibly extend outside the
corporation to include Web-based components. See Figure 5.6 for a representative illustration of the components
of a 8PM system.
Enterprise’s Request Online used a 8PM system by Appian, which includes components to help a company
design, manage, and optimize core business processes. Appian offers sophisticated features that combine social
FIGURE 5.6 Sample 8PM architecture.
Source: Adapted from (accessed May 1, 2012).
0 Adapted from (accessed August 27, 2015).
Workflow and Mapping Processes m
IT capabilities with process modeling, content management, data management, and integration with existing
enterprise systems. Microsoft’s SharePoint, one of the most popular collaboration environments, can be managed
through Appian’s suite, creating a one-stop-shop for managing business processes in an enterprise.
Two other common vendors for BPM are IBM and SoftwareAG’s ARIS, which stands for architecture of
integrated information systems. ARIS has also come to mean an entire modeling approach. ARIS structures four
views of the enterprise, including an organizational view, a data view, a functional view, and a control view.
Using ARIS, managers can model the business, including its processes, using a common language and set of
= Integration versus Standardization
Processes are the ways organizations deliver goods and services to customers. Designing, building, and execut-
ing processes is one of the roles of management. Dr. Jeanne Ross, Principal Research Scientist at MIT’s Center for
Information Research, suggested that the level of integration and standardization of business processes, another
management decision, determines the role of IS. Ross pointed out that “Companies make two important choices
in the design of their operations: (1) how standardized their business processes should be across operational
units (business units, region, function, market segment) and (2) how integrated their business processes should
be across those units.” The resulting model defines important IT and business capabilities (see the following fig-
ure). The level of process integration and standardization defines the necessary IS capabilities and ultimately the
investment the firm will need to make in IS.
Process Integration versus Standardization
‘1. I
e .Q
a. iii
(/) ~
(/) Ol
a, a,
·- C (/)-
Business Process Standardization [
I Low .. . —Hi-gh _____ —————·-··-·—–· . )
I High ! Th~ business is f;cused on process integrati~~– . –Th~b-~~i~es;;-;:;as a ~;~;lized ·desig~-;ith-h-igh-1
f usually creating a single face to customers and needs for reliability, predictability, and sharing I
I suppliers but does not usually impose process data across business units, creating a single view ,
! standards on operating units. of the process. I
• Low ~· The business has a decentralized design with The business is focused on process standardiza-
which business units make local decisions on lion in which tasks are done the same way with
processes to meet customer needs. the same systems across business units, but the
_J___________ business units have little need to interact.
CEMEX, the multinational cement company based in Monterrey, Mexico, built a business high in process stan-
dardization and low in process integration. CEMEX standardized on eight information systems-based business
processes to cover logistics, manufacturing, accounting, planning, operations, procurement, finance, and HR. Each
operating unit uses the same processes and creates similar data, but each runs autonomously, rarely sharing data.
This approach provides a competitive advantage because it enables the company to grow quickly, easing the
assimilation of acquired companies.
Merrill Lynch’s Global Private Client business with high integration and low standardization provides a wide
range of financial services to clients across multiple channels such as financial advisory services, online services,
and help center support services. The key to the company’s success is integration across processes to provide
a single view of the customer, which can then be leveraged when new products and services are announced. At
the same time, the company does not expect standardization across processes; each operating unit can create
what it needs as long as it uses a standardized technology platform that supports the integrated design. That is,
the separate systems need to coordinate the various information resources among themselves.
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llliJ Information Systems and Business Transformation
Enterprise Systems
Information technology is a critical component of almost every business process today because information flow
is at its core. A class of IT applications called enterprise systems is a set of information systems tools that
many organizations use to enable this information flow within and between processes across the organization.
These tools help ensure integration and coordination across functions such as accounting, production, customer
management, and supplier management. Some are designed to support a particular industry such as health care,
retail, and manufacturing.
Computer systems in the 1960s and early 1970s were typically designed around a specific application. These
early systems were often not connected with each other and often had their own version of data. One of the authors
moved to another home in 1980 and visited the bank to change his address. He had to fill out a separate form for
his checking and savings account. It was lucky that the post office forwarded mail for a year after the move; four
months after moving, the bank sent a year-end auto loan summary document via his old address, requiring another
update of the address, and nearly a year later, the bank sent his safe deposit box renewal form via his old address
too. requiring yet another update. It was obvious that each system contained its own copy of redundant data and
existed in its own silo.
Organizational computing groups faced the challenge of linking and maintaining the patchwork of loosely over-
lapping, redundant systems. In the 1980s and 1990s, software companies in a number of countries, including the
United States, Germany, and the Netherlands, began developing integrated software packages that used a common
database and cut across organizational systems. Some of these packages were developed from administrative sys-
tems (e.g., finance and human resources), and others evolved from materials resource planning (MRP) in manu-
facturing. These comprehensive software packages that incorporate all modules needed to run the operations of
a business are called enterprise information systems (EIS) or simply enterprise systems. Enterprise systems
include ERP, supply chain management (SCM), CRM, and product life cycle management (PLM) systems (see
Figure 5.7). Some companies develop proprietary enterprise systems to support mission-critical processes when..,,,;
they believe these processes give them an advantage and using a vendor-supplied system would jeopardize that
advantage. Other enterprise systems may be developed specifically to integrate organizational processes. Figure 5.8
describes some examples of the processes supported by an enterprise system.
Two of the largest vendors of enterprise systems are German-based SAP and California-based Oracle. Initially,
SAP defined the ERP software space, and Oracle had the database system supporting it. But more recently, SAP
has moved to its own database system, and Oracle has acquired many other smaller vendors, creating their own
suite of enterprise software solutions.
Sloan Valve, the case introduced at the beginning of this chapter, used SAP. Initially, Sloan implemented the
ERP module, but as the design emerged for the NPD process, the PLM module was key. It enabled the process
owner to keep track of targets, look at efficiencies in the process, and understand process problems. It also helped
track and allocate resources for each new product idea and enabled coordination between all the cross-functional
team members.
Enterprise Resource Planning (ERP)
Enterprise resource planning (ERP) was designed to help large companies manage the fragmentation of
information stored in hundreds of individual desktop, department, and business unit computers across the organi-
zation. These modules offered the IS department in many large organizations an option for switching from under-
performing, obsolete mainframe systems to client-server environments designed to handle the changing business
demands of their operational counterparts. Many firms moved from their troubled systems in the late 1990s to avoid
the year 2000 (Y2K) problem7 and to standardize processes across their businesses.
” The Y2K problem was of great concern in the 1990s because many old systems used two digits instead of four digits to represent the year, making it
impossible to distinguish between years such as 2000 and 1900. …,,,J
Implements functions of order
placement, order scheduling,
shipping and invoicing.
Efficiently and sustainably manage
the entire asset lifecycle, improve
asset usage and cut costs with
powerful analytics.
Enterprise Systems IDI
Procurement (SRM)
Maximise cost savings with support ___ _
for the end-to-end procurem!Jflt and _ ., • .c
logistics processes. .,. · ·
and others …
II ERP II modules
FIGURE 5.7 Enterprise systems and the processes they automate.
Source: Adapted from Shing Hin Yeung, _Modules.png (accessed August 27, 2015).
[“Enterprise System
I E~t~;prise resource
I planning (ERP)
Customer relationship
management (CRM)
Supply chain
management (SCM)
Product life cycle
management (PLM)
i Sample Processes
–·—- —·-··· – –···-··——·-]
1 Financial management (accounting, financial close, invoice to pay process, receivable
management); human capital management (talent management, payrolls, succession
planning); operations management (procurement, logistics, requisition invoice payment,
parts inventory)
· Marketing (brand management, campaign management); lead management; loyalty
program management; sales planning and forecasting; territory and account management;
customer service and support (claims, returns, warranties)
Supply chain design; order fulfillment; warehouse management; demand planning,
forecasting; sales and operations planning; service parts planning; source-to-pay/
procurement process; supplier life cycle management; supply contract management
i Innovation management (strategy and planning, idea capture and management, program/
I project management); product development and management; product compliance
J management
–·–·-·–·-·–·–·- … ·——- ‘ ~–·-··——–·—————·—–·-·-···–·——-
FIGURE 5.8 Enterprise systems and examples of processes they support.
The next generation of enterprise system emerged: ERP II systems. Whereas an ERP makes company information
immediately available to all departments throughout the company, ERP II also makes company information
immediately available to external stakeholders, such as customers and partners. ERP II enables e-business by inte-
grating business processes between an enterprise and its trading partners. More recently, a move to better manage
information systems using the cloud has again called into question the design of some business processes.
llfJ Information Systems and Business Transformation
Today, ERP systems include all of the ERP II functionality plus social and collaboration features. A good example
is Chatter from,8 which includes an activity stream interface (similar to Facebook) for employees
with easy connections to the firm’s information in its ERP. SAP’s ERP solution includes SAP ERP Financials, SAP
ERP Human Capital Management, and SAP ERP Operations. Oracle’s ERP solution, EnterpriseOne, offers these
same functions. Both vendors have integrated their ERP solutions with their supply chain/logistics solutions, their
CRM solutions, and several other modules that make them a one-stop shop for software that provides the backbone
of an enterprise.
Characteristics of ERP Systems
ERP systems have several characteristics: 9
• Integration. ERP systems are designed to seamlessly integrate information flows throughout the company.
ERP systems are configured by installing various modules, such as:
• Manufacturing (materials management, inventory, plant maintenance, production planning, routing,
shipping, purchasing, etc.)
• Accounting (general ledger, accounts payable, accounts receivable, cash management, forecasting, cost
accounting, profitability analysis, etc.)
• Human resources ( employee data, position management, skills inventory, time accounting, payroll, travel
expenses, etc.)
• Sales (order entry, order management, delivery support, sales planning, pricing, etc.)
• Packages. ERP systems are usually commercial packages purchased from software vendors. Unlike many
packages, ERP systems usually require long-term relationships with software vendors because the complex
systems must typically be modified on a continuing basis to meet the organization’s needs. .J
• Best practices. ERP systems reflect industry best (or at least “very good”) practices for generic business
processes. To implement them, businesses often have to change their processes in some way to accommo-
date the software.
• Some assembly required. The ERP system is software that needs to be integrated with the organization’s
hardware, operating systems, databases, and network. Further, ERP systems often need to be integrated with
proprietary legacy systems. It often requires that middleware (software used to connect processes running in
one or more computers across a network) or “bolt-on” systems be used to make all the components opera-
tional. Vendor-supplied ERP systems have a number of configurable components, too, which need to be set
up to best fit with the organization. Rarely does an organization use an ERP system directly “out of the box”
without configuration.
• Evolving. ERP systems were designed first for mainframe systems, then for client-server architectures, and
now for Web-enabled or cloud-based delivery.
Integrating ERP packages with other software in a firm is often a major challenge. For example, integrating
internal ERP applications with supply chain management software seems to create issues. Making sure the link-
ages between the systems happen seamlessly is a challenge. One important problem in meeting this challenge is to
allow companies to be more flexible in sourcing from multiple (or alternative) suppliers while also increasing the
transparency in tightly coupled supply chains. A second problem is to integrate ERP’s transaction-driven focus into
a firm’s workflow. 10
8 See (accessed August 27, 2015).
9 M. Lynne Markus and Comelis Tanis, “The Enterprise System Experience-From Adoption to Success,” Framing the Domains of IT Management:
Projecting the Future Through the Past. ed. R. Zmud (Cincinnati, OH: Pinaflex Educational Resources, 2000), 176-79.
10 Amit Basu andAkhil Kumar, “Research Commentary: Workflow Management Issues in e-Business,” Information Systems Research 13, no. I (March
2002), 1-14.
Enterprise Systems 1111
Managing Customer Relationships
A type of software package that is increasingly considered an enterprise system is customer relationship management
systems. Customer relationship management (CRM) is a set of software programs that supports management
activities performed to obtain, enhance relationships with, and retain customers. They include sales, support, and
service processes. Today, CRM has come to mean the enterprise systems that support these processes, and the term
is used interchangeably with the set of activities.
CRM processes create ways to learn more about customers’ needs and behaviors with the objective of developing
stronger relationships. CRM systems consist of technological components as well as many pieces of information
about customers, sales, marketing effectiveness, responsiveness, and market trends. Optimized CRM processes and
systems can lead to better customer service, more efficient call centers, product cross-selling, simplified sales and
marketing efforts, more efficient sales transactions, and increased customer revenues. The goal of CRM is to pro-
vide more effective interaction with customers and bring together all information the company has on a customer.
The top-selling CRM systems are from, SAP, Oracle, and Microsoft Dynamics. 11 Oracle and
SAP have CRM systems that integrate with their other enterprise systems. Oracle’s CRM system includes mod-
ules for pricing, sales force automation, sales order management, support activities, customer self-service, and
= Geographic Lens: Global vs. Local ERPs
ERP systems are usually designed around best practices-but whose best practices? SAP and Oracle, the leading
vendors of ERP systems, have a Western bias. More specifically, best practices at the heart of their systems are
based upon business processes that are found in successful companies in Germany and North America. How-
ever, when these systems are transplanted into Asian companies, problematic “misfits” have been found to occur.
An example is the use of ERP systems designed for hospitals. Western health care models are decidedly dif-
ferent from those used in Singapore. In Western countries, insurance enables patients to pay a fraction of their
medical expenses themselves, and the government or private insurance covers the rest. Singapore has a com-
pletely different model. In Singapore, health care expenses are covered primarily by the individual. Government
subsidies and other community support is minimal.
How does this affect processes embedded in ERP systems in hospitals? When ERP systems are designed for
Western hospitals, they include modules that help manage the complexity of billing and collections that result
from claims submissions and insurance verification. When the primary payment is from individuals paying at the
time of service or in installments, the collections process is significantly different. Further, “bed class” is important
in Singapore where patients in public hospitals can choose from a variety of plans ranging from one bed to six or
more per room. The Western model is simpler because single-bed rooms are more common.
Because of differences and “misfits,” businesses in many non-Western companies are turning to local vendors that
have developed systems reflecting local best practices. For example, local ERP vendors in Taiwan have developed
ERP systems to support the majority of firms in the market space-small- to medium-sized Taiwanese companies with
sophisticated, adaptive logistic networks. The local ERP vendors have adopted a strategy of customization and are
more willing to modify their systems to satisfy local needs than are their large global competitors.
These examples suggest that another factor needs to be considered when designing and implementing and
ERP: It should not be implemented if the system is based on a cultural model that conflicts with the local customs
and that cannot easily be accommodated.
So11rr1·0: (:. Soh. S. K. Sia. a11cl .I. ‘lin-Yap. “(:111t11ral Fih ancl \li,fih: b EHi’ al ,ii,n,al Sol11tio11 … (‘011111111flirntiom of’tll<' 1('1/-t:l. 1111. -t (:WOO). -t:-.,1: I·:. T. C. \\a"i!· C. Kl,·i11;!, a11d .I . .I . .lia11;! ... ~:HI' \li,fi1: Co1111tn of Ori;!ill a11d 01w111izatio11al Fal'tors ... ./011m<1/ o/'.ll111111pJ·11w11t /11/i11·111atio11 :,i:,te111s :!:!. 111,. 1 (:!00(,). :!h:l-9:!. 11 Louis Columbus, "Gartner CRM Market Share Update: 41 % Of CRM Systems Are SaaS-based, Salesforce Dominating Market Growth," Forbes, I,. May 6. 2014, l -of-crm-systems-are-saas-based-with- .., salesforce-dominating-market-growth/ (accessed August 27, 2015). IJB Information Systems and Business Transformation service management. SAP's CRM system has similar modules plus marketing support such as resource and brand management, campaign management, real-time offer management, loyalty management, and e-marketing. There is also an e-commerce module that facilitates personalized interface and self-service applications for customers. is a different type of CRM. Whereas Oracle and SAP came from the enterprise systems space and then created a CRM module, started with a CRM solution. In addition, the products by Oracle and SAP grew from on-premise enterprise systems, and each company eventually built Web-based versions of its products, but started as a Web-based cloud system. Managers who seek a CRM system for their organizations should compare the features and delivery systems of these and other solutions provided by niche ven- dors who specialize in systems optimized for specific industry applications. Social IT is increasingly integrated into CRM solutions. Providing software or Web applications that extend the brand, engage customers, allow customers to interact with each other and with employees, and provide ser- vice options generates additional "touches" with customers. CRM systems record these touches. The information becomes an additional channel of data useful for building customer relationships. teamed with Dun & Bradstreet to use, a cloud-based storehouse of company and customer contact information for use in CRM systems. uses a crowd-sourcing model to collect up-to-date information with users of the server contributing data and helping to keep that data accurate. In Chapter I, we described the Ritz-Carlton's CRM, Class, which captures information about guest pref- erences and enables the chain to provide enhanced, customized service during future visits. Web sites collect information from customers who visit, make purchases, or request information. That information is stored in the company's CRM and used in many ways to better meet customer needs and enhance the customer experience. For example, movie site Netflix stores all the purchases and product reviews a customer makes in its CRM. Using that information, the site recommends additional films the customer might enjoy based on analysis of the data in the CRM. Managing Supply Chains Another type of enterprise system in common use is a supply chain management (SCM) system, which manages the integrated supply chain. Business processes are not just internal to a company. With the help of information technologies, many processes are linked across companies with a companion process at a customer or supplier, creating an integrated supply chain. Technology, especially Web-based technology, allows the supply chains of a company's customers and suppliers to be linked through a single network that optimizes costs and opportunities for all companies in the supply chain. By sharing information across the network, guesswork about order quan- tities for raw materials and products can be reduced, and suppliers can make sure they have enough on hand if demand for their products unexpectedly rises. The supply chain of a business is the process that begins with raw materials and ends with a product or service ready to be delivered ( or in some cases actually delivered) to a customer. It typically includes the procurement of materials or components, the activities to turn these materials into larger subsystems or final products, and the distribution of these final products to warehouses or customers. But with the increase in information systems use, the supply chain may also include product design, product planning, contract management, logistics, and sourcing. Globalization of business and ubiquity of communication networks and information technology have enabled businesses to use suppliers from almost anywhere in the world. At the same time, this has created an additional level of complexity for managing the supply chain. Supply chain integration is the approach of tech- nically linking supply chains of vendors and customers to streamline the process and to increase efficiency and accuracy. Without such linking, a temporary increase in demand from a retailer might become interpreted by its suppliers as permanent, and the changes can become magnified by each supplier up the chain when each supplier attempts to add another percent or two just to be "safe." Those erratic and wild changes are called the bullwhip effect. Linking synchronizes all suppliers to the same demand increase up and down the chain and prevents that effect. Enterprise Systems IIEI Integrated supply chains have several challenges, primarily resulting from different degrees of integration and coordination among supply chain members. 12 At the most basic level, there is the issue of information integration. Partners must agree on the type of information to share, the format of that information, the technological stan- dards they both use to share it, and the security they use to ensure that only authorized partners access it. Trust must be established so the partners can solve higher-level issues that may arise. At the next level is the issue of synchronized planning. At this level, the partners must agree on a joint system of planning, forecasting, and replen- ishment. The partners, having already agreed on what information to share, now have to agree on what to do with it. The third level can be described as workflow coordination-the coordination, integration, and automation of critical business processes between partners. For some supply chains, this might mean simply using a third party to link the procurement process to the preferred vendors or to communities of vendors who compete virtually for the business. For others, it might be a more complex process of integrating order processing and payment systems. Ultimately, supply chain integration leads to new business models as varied as the visionaries who think them up. These business models are based on new ideas of coordination and integration made possible by the Internet and information-based supply chains. In some cases, new services have been designed by the partnership between supplier and customer, such as new financial services offered when banks link up electronically with businesses to accept online payments for goods and services purchased by the businesses' customers. In other cases, a new business model for sourcing has resulted, such as one in which companies list their supply needs and vendors elec- tronically bid to be the supplier for that business. Demand-driven supply networks are the next step for companies with highly evolved supply chain capabilities. Kimberly Clark, the 135-year-old consumer products company, is one such example. Its vision is for a highly integrated suite of supply chain systems that provide end-to-end visibility of the supply processes in real time. Key processes in the company's demand-driven supply network are forecast to stock and order to cash. Using an integrated suite of systems allows the firm's users to share the same information as close to real time as possible and to use the data in their systems for continually updating their supply chain, category management, and consumer insight processes. IS have allowed managers to reduce the problems of handing off data from one system or process to another (because now everything is in one system), having employees work from different databases (because it's now one database), and working with old data (because it's as real time as possible). This has improved managers' ability to see what's going on in the marketplace and evaluate the impact of promotions, production, and inventory much more quickly. Integrated supply chains are truly global in nature. Thomas Friedman, in his book The World is Flat, describes how the Dell computer that he had ordered for writing his book was developed from the contributions of an integrated supply chain that involved about four hundred companies in North America, Europe, and, primarily, Asia. However, the globalization of integrated supply chains faces a growing challenge from skyrocketing trans- portation costs. For example, Tesla Motors, a pioneer in electric-power cars, had originally planned the production of a luxury roadster for the U.S. market based on an integrated global supply chain. The 1,000-pound battery packs for the cars were to be manufactured in Thailand, shipped to Britain for installation, and then shipped to the United States where they would be assembled into cars. However, because of the extensive costs associated with shipping the batteries more than 5,000 miles, Tesla decided to make the batteries and assemble the cars near its headquarters in California. Darryl Siry, Tesla's Senior Vice President of Global Sales, Marketing, and Service explains: "It was kind of a no-brain decision for us. A major reason was to avoid the transportation costs, which are terrible." Econ- omists warn managers to expect the "neighborhood effect" in which factories may be built closer to component suppliers and consumers to reduce transportation costs. This effect may apply not only to cars and steel but also to chickens and avocados and a wide range of other items. 13 " Hau Lee and Seungjin Whang, "E-Business and Supply Chain Integration," Stanford University Global Supply Chain Management Forum (November 2001). n Larry Rohter, "Shipping Costs Start to Crimp Globalization" The New York Times. I, 10, 03global.html (accessed August 27, 2015). 11B Information Systems and Business Transformation Dell continues to be not only a great example of an integrated supply chain but also of the neighborhood effect. Its "build-to-order" strategy of building computers as they are ordered rather than to mass-produce them for inventory requires an integrated supply chain. One of the authors of this textbook visited a Dell plant in Malaysia with several dozen students. An official there described how the plant's zero inventory goal was accomplished by ordering components only when computers were ordered, to arrive on the day of assembly. Also, suppliers were strategically located in adjacent buildings surrounding the plant with an airport practically in walking distance. In this way, suppliers are closely linked with the actual production process. Product Life Cycle Management (PLM) A less well-known type of enterprise system is a product life cycle management (PLM) system. PLM systems automate the steps that take ideas for products and tum them into actual products. PLM refers to the process that starts with the idea for a product and ends with the "end of life" of a product. It includes the innovation activities, new product development, and management, design, and product compliance (if necessary). PLM systems con- tain all the information about a product such as design, production, maintenance, components, vendors, customer feedback, and marketing. Advantages and Disadvantages of Enterprise Systems One major benefit of enterprise systems is that they represent a set of industry best practices. One confidential story relayed to the authors described a large university that had suffered for years with inconsistent, incomplete, and immature processes. The university's leader announced in advance that rather than customize a new ERP to fit those processes, the directive was to replace completely those poor processes provided by the ERP. As a result, the ERP's best practices dramatically improved the university's ability to provide information services to faculty, staff, and students and also to track the entire "life cycle" of people from initial inquiry to graduation .,,J and beyond. Another major benefit of an enterprise system is that all modules of the information system easily communi- cate with each other, offering enormous efficiencies over stand-alone systems. In business, information from one functional area is often needed by another area. For example, an inventory system stores information about vendors who supply specific parts. This same information is required by the accounts payable system, which pays vendors for their goods. It makes sense to integrate these two systems to have a single accurate record of vendors and to use an enterprise system to facilitate that integration. Because of the focus on integration, enterprise systems are useful tools for an organization seeking to centralize operations and decision making. As described earlier in the Integration versus Standardization box about the Ross framework, high integration allows units to coordinate easily and unify their data for global access. Redundant data entry and duplicate data may be eliminated; standards for numbering, naming, and coding may be enforced; and data and records can be cleaned up through standardization. Further, the enterprise system can reinforce the use of standard procedures across different locations. The obvious benefits notwithstanding, implementing an enterprise system represents an enormous amount of work. For example, if an organization has allowed both the manufacturing and the accounting departments to keep their own records of vendors, then most likely these records are kept in somewhat different forms ( one department may enter the vendor name as IBM, the other as International Business Machines or even IBM Corp., all of which make it difficult to integrate the databases). Making matters worse, a simple data item's name itself might be stored differently in different systems. In one system, it might be named Phone_No, but in another, it might be simply Phone. Such inconsistencies in data items and values must be recognized and fixed so that the enterprise system can provide optimal advantage. Moreover, even though enterprise systems are flexible and customizable to a point, most also require business processes to be redesigned to achieve optimal performance of the integrated modules. It is rare that an off-the- shelf system is perfectly harmonious with an existing business process; the software usually requires significant modification or customization to fit with the existing processes, or the processes must change to fit the software. ..,,,,,J Enterprise Systems Ill In most installations of enterprise systems, both take place. The system is usually customized when it is installed in a business by setting a number of parameters. Many ERP projects are massive undertakings, requiring formal, structured project management tools (as discussed in Chapter 11). All systems make assumptions about how the business processes work, and at some level, customization is not possible. For example, one major Fortune 500 company refused to implement a vendor's enterprise system because the company manufactured products in lots of "one," and the vendor's system would not handle the volume this company generated. If the company had decided to use the ERP, a complete overhaul of its manufacturing process in a way that executives were unwilling to do would have been necessary. Implementing enterprise systems requires organizations to make changes beyond just the processes, but also in their organization structure. Recall from Chapter 1 that the Information Systems Strategy Triangle suggests that implementing an information system must be accompanied with appropriate organizational changes to be effective. Implementing an enterprise system is no different; a 2014 Panorama report stated directly that only firms that allo- cate enough of the project budget to organizational change management will achieve the best results. 14 For example, who will now be responsible for entering the vendor information that was formerly kept in two locations? How will that information be entered into the enterprise system? The answer to such simple operational questions often requires managers minimally to modify business processes and more likely to redesign them completely to accom- modate the information system. Enterprise systems are also risky. The number of enterprise system horror stories demonstrates this risk. For example, Kmart wrote off its $130 million ERP investment. American Lafrance (ALF), the manufacturer of highly customized emergency vehicles, declared bankruptcy, blaming its IT vendor and its ERP implementation. The problems with the implementation kept ALF from being able to manufacture many preordered vehicles. 15 Two months after the installation of a new ERP system, the Fort Worth Police Officers Association complained that pay- checks were not being received correctly or on a timely basis by officers. Some officers had not been paid since the installation, and others were shortchanged in their paychecks because the new system was not able to handle odd hours and shift work. Furthermore, enterprise systems and the organizational changes they induce tend to come with a hefty price tag. In a study of the initial acquisition and implementation costs of ERP systems in primarily midsize companies (with $100 million to $1 billion in annual revenues), half of the responding 157 chief financial officers (CFOs) admitted spending more than $1 million for the license, service, and first year's maintenance on their current ERP systems. Nine of 10 respondents said they spent a minimum of $250,000. Unreported were additional hidden costs in the form of technical and business changes, likely to be necessary when implementing an enterprise system. These include project management, user training, and IT support costs. 16 Some surveys uncover negative impacts on performance. For instance, in 2014, overruns in costs were found to plague 54% of ERP projects, and 72% of the firms reporting encountered implementation delays. Perhaps more important were disruptions in service such as difficulties in shipping products, experienced by 51 % of the firms surveyed. 17 One of the reasons that ERP systems are so expensive is that they are sold as a suite, such as financials or manu- facturing, and not as individual modules. Because buying modules separately is difficult, companies implementing ERP software often find the price of modules they won't use hidden in the cost of the suite. Seventy percent of survey respondents report that they are satisfied with their ERP systems in spite of the large expense, overruns, delays, and disruptions experienced, largely due to the capabilities of ERP systems. However, only 63% considered the project a "success," perhaps due to overruns. 18 A set of advantages and disadvantages of enterprise systems is provided in Figure 5.9. 14 Panorama Consulting, "Organizational Issues Number One Reason for Extended Durations," panorama-consulting-solutions-releases-2014-erp-report/ (accessed February 26, 2015). 15 For additional examples of IT failures in general and enterprise systems failures in particular, please visit the blog written by Michael Krigsman, http:// 16 T. Wailgum, "Why CEOs and CFOs Hate It: ERP" (April 8, 2009), (accessed February 14, 2012). 17 Panorama Consulting 2014 Report. " Ibid. om Information Systems and Business Transformation i Advantages I • Represent "best practices" • Allow modules throughout the organization to communicate with each other • Enable centralized decision making • Eliminate redundant data entry • Enable standardized procedures in different locations Disadvantages • Require enormous amount of work • Require redesign of business practices for maximum benefit • Have very high cost • Are sold as a suite, not individual modules • Require organizational changes • Have risk of failure FIGURE 5.9 Advantages and disadvantages of enterprise systems. When the System Drives the Transformation When is it appropriate to use the enterprise system to drive transformation and business process redesign, and when is it appropriate to redesign the process first and then implement an enterprise system? Although it may seem like the process should be redesigned first and then the information system aligned to the new design, there are times when it is appropriate to let the enterprise system drive business process redesign. First, when an organization is just starting out and processes do not yet exist, it is appropriate to begin with an enterprise system as a way to structure operational business processes. After all, most processes embedded in the "plain vanilla" enterprise system from a top vendor are based on the best practices of corporations that have been in business for years. Second, when an organization does not rely on its operational business processes as a source of competitive advantage, then using an enterprise system to redesign these processes is appropriate. Third, it is reasonable when the current systems are in = Social Business Lens: Crowdsourcing Changes Innovation Processes One business process that has been radically changed by the use of social IT is the way innovation is managed 'tf////1/JJ using crowdsourcing. Enterprises have found ways to use a social IT platform to solicit, discuss, and prioritize new ideas. Anyone in the community can add an idea, and then the entire community can discuss, comment on, and rate the idea. Managers then have a wealth of ideas along with community input to use as input into the innova- tion process. One of the original examples of this is Dell's ldeastorm. Anyone in the community can access ldeastorm to view ideas posted by the community, post an idea for Dell products or services, vote on the ideas presented, and see what Dell managers have decided to do with the ideas presented. Ideas presented by the community range from suggestions for new features on existing systems to new products and services Dell might offer. By allowing the community to comment and vote on ideas, managers get a sense of the importance and viability of implementing the innovation. Similar social platforms have been implemented by numerous other companies including Starbucks' mystar- and Best Buy's ldeaX. Companies have also taken this idea inside the corporation to solicit ideas and innovations about processes, products, and other enterprise issues. Dell's EmployeeStorm and the City of New York's Simplicity are two social IT examples of soliciting ideas to improve processes and efficiencies from employees. Companies have also embraced the crowd for individual projects; Sam Adams, the beer company, used a Facebook application for crowdsourcing the next flavor of beer. The application let fans select the color, clar- ity, body, malt, hops, and yeast components of a recipe. For each component, the crowdsourcing application educated fans about the contribution each component made to the resulting beer. The company collected the crowd's preferences, sharing them along the way for comment and discussion. The results not only gave Sam Adams managers information about preferences of their fans but also prioritized ideas about the next product to create with a high probability that it will have a large fan base to get it started. :-io11n·,·s: litlps:/ /µ-iµ-ao111.co111/2011/01/19/rw\\·-york-city-crmnlso11rci11µ-/ (at'<'t'sst'd :\11;r11st '2.7. '2.01."i ): http://www.fncl' Sa11111,·l.\da111,',k=app_'2.<)()() 7 ()J J;):p;)t):l'}. (an·r·sst·d .la1111ary 19. '2.01'2.): http://w\\· (acct'sst·d 011 A11µ-11st :rn. '2.013;). ...,,,i Summary 1111 crisis and there is not enough time, resources, or knowledge in the firm to fix them. Even though it is not an optimal situation, managers must make tough decisions about how to fix the problems. A business must have working oper- ational processes; therefore, using an enterprise system as the basis for process design may be the only workable plan. It was precisely this situation that many companies faced with Y2K. Likewise, it is sometimes inappropriate to let an enterprise system drive business process change. When an organization derives a strategic advantage through its operational business processes, it is usually not advisable for it to buy a vendor's enterprise system. Using a standard, publicly available information system that both the company and its competitors can buy from a vendor may mean that any system-related competitive advantage is lost. For example, consider a major computer manufacturer that relied on its ability to process orders faster than its competitors to gain strategic advantage. Adopting an enterprise system's approach would result in a loss of that advantage. Furthermore, the manufacturer might find that relying on a third party as the provider of such a strategic system would be a mistake in the long run because any problems with the system due to bugs or changed business needs would require negotiating with the ERP vendor for the needed changes. With a system designed in house, the manufacturer was able to ensure complete control over the IS that drives its critical processes. Another situation in which it would be inappropriate to let an enterprise system drive business process change is when the features of available packages and the needs of the business do not fit. An organization may use spe- cialized processes that cannot be accommodated by the available enterprise systems. For example, many ERPs were developed for discrete part manufacturing and do not support some processes in paper, food, or other process industries. 19 A third situation would result from lack of top management support, company growth, a desire for strategic flex- ibility, or decentralized decision making that render the enterprise system inappropriate. For example, Dell stopped the full implementation of SAP R/3 after only the human resources module had been installed because the CIO did not think that the software would be able to keep pace with Dell's extraordinary growth. Enterprise systems were also viewed as culturally inappropriate at the highly decentralized Kraft Foods. Challenges for Integrating Enterprise Systems Between Companies With the widespread use of enterprise systems, the issue of linking supplier and customer systems to the business's systems brings many challenges. As with integrated supply chains, there are issues of deciding what to share, how to share it, and what to do with it when the sharing takes place. There are also issues of security and agreement on encryption or other measures to protect data integrity as well as to ensure that only authorized parties have access. Some companies have tried to reduce the complexity of this integration by insisting on standards either at the industry level or at the system level. An example of an industry-level standard is the bar coding used by all who do business in the consumer products industry. An example of a system-level standard is the use of SAP or Oracle to provide the ERP system used by both supplier and customer. And the increasing use of cloud-based systems with standard interfaces makes the integration easier. SUMMARY • Most business processes today have a significant information systems component to them. Either the process is com- pletely executed through software or an important information component complements the physical execution of the process. Transforming business, therefore, involves rethinking the information systems that support business processes. • IS can enable or impede business process change. IS enables change by providing both the tools to implement the change and the tools on which the change is based. IS can impede change, particularly when the process flow is mis- matched with the capabilities of the IS. • To understand the role IS plays in business transformation, one must take a business process rather than a functional (silo) perspective. Business processes are well-defined, ordered sets of tasks characterized by a beginning and an end, 16!1 Information Systems and Business Transformation sets of associated metrics. and cross-functional boundaries. Most businesses operate business processes even if their organization charts are structured by functions rather than by processes. • Agile business processes are processes that are designed to be easily reconfigurable. Dynamic processes are designed to automatically update themselves as conditions change. Both types of processes require a high degree of information systems, which makes the task of changing the process a software activity rather than a physical activity. • Making changes in business processes typically involves either incremental or radical change. Incremental change with TQM and Six Sigma implies an evolutionary approach. Radical change with a BPR approach, on the other hand, is more sudden. Either approach can be disruptive to the normal flow of the business; hence, strong project management skills are needed. • BPM systems are used to help managers design, control, and document business processes and ultimately the workflow in an organization. • An enterprise system is a large information system that provides the core functionality needed to run a business. These systems are typically implemented to help organizations share data between divisions. However, in some cases, enterprise systems are used to effect organizational transformation by imposing a set of assumptions on the business processes they manage. • An ERP system is a type of enterprise system used to manage resources including financial, human resources, and operations. • A CRM system is a type of enterprise system used to manage the processes related to customers and the relationships developed with customers. • An integrated supply chain is often managed using an SCM system, an enterprise system that crosses company bound- aries and connects vendors and suppliers with organizations to synchronize and streamline planning and deliver products to all members of the supply chain. • A PLM system is a type of enterprise system support product development from its first idea up through its end. • Information systems are useful as tools to both enable and manage business transformation. The general manager must take care to ensure that consequences of the tools themselves are well understood and well managed. KEY TERMS agile business processes (p. 104) business process management (BPM) (p. 107) business process perspective (p. I 02) business process reengineering (BPR) (p. 105) customer relationship management (CRM) (p. 113) cycle time (p. 102) dynamic business processes (p. 104) Enterprise Information Systems (EIS) (p. 110) enterprise resource planning (ERP) (p. 110) enterprise systems (p. 110) middleware (p. 112) process (p. 102) process perspective (p. 102) product life cycle management (PLM) (p. 116) silo perspective (p.103) DISCUSSION QUESTIONS Six Sigma (p. 105) supply chain management (SCM) (p. 114) throughput (p. 102) total quality management (TQM) (p. 105) workflow (p. I 07) workflow diagram (p. I 07) 1. Why was radical design of business processes embraced so quickly and so deeply by senior managers of so many com- panies? In your opinion, and using hindsight, was its popularity a benefit for businesses? Why or why not? 2. Off-the-shelf enterprise IS often forces an organization to redesign its business processes. What are the critical success factors to make sure the implementation of an enterprise system is successful? 3. ERP systems are usually designed around best practices. But whose best practices are the right ones? A Western bias is common; practices found in North America or Europe are often the foundation. When transferred to Asia, however, the Case Study lfJI resulting systems may be problematic. Why do you think this is the case? What might be different in the way different coun- tries use processes (besides the standard "language" difference)? 4. Have you been involved with a company doing a redesign of its business processes? If so, what were the key things that went right? What went wrong? What could have been done better to minimize the risk of failure? 5. What do you think the former CIO of Dell, Jerry Gregoire. meant when he said. "Don't automate broken business processes"?20 6. What might an integrated supply chain look like for a financial services company such as an insurance provider or a bank'l What are the components of the process? What would the customer relationship management process look like for this same firm? 7. Tesco, the U.K. retail grocery chain, used its CRM system to generate annual incremental sales of £100 million. Using a fre- quent shopper card, a customer got discounts at the time of purchase, and the company got information about the customer's purchases, creating a detailed database of customer preferences. Tesco then categorized customers and customized dis- counts and mailings, generating increased sales and identifying new products to expand the organization's offerings. At the individual stores, data showed which products must be priced below competitors, which products had fewer price-sensitive customers, and which products must have regular low prices to be successful. In some cases, prices were store specific, based on the customer information. The information system has enabled Tesco to expand beyond groceries to books, DVDs, consumer electronics, flowers, and wine. The chain also offers services such as loans, credit cards, savings accounts, and travel planning. What can Tesco management do now that the company has a CRM that it could not do prior to the CRM implementation? How does this system enable Tesco to increase the value provided to customers? • CASE STUDY 5-1 Santa Cruz Bicycles Bicycle enthusiasts not only love the ride their bikes provide but also are often willing to pay for newer technology, espe- cially when it will increase their speed or comfort. Innovating new technologies for bikes is only half the battle for bike manufacturers. Designing the process to manufacture the bikes is often the more daunting challenge. Consider the case of Santa Cruz Bicycles. It digitally designs and builds mountain bikes and tests them under the most extreme conditions to bring the best possible product to its customers. A few years back, the company designed and patented the Virtual Pivot Point (VPP) suspension system, a means to absorb the shocks that mountain bikers encounter when on the rough terrain of the off-road ride. One feature of the new design allowed the rear wheel to bounce IO inches without hitting the frame or seat, providing shock absorption without feeling like the rider was sitting on a coiled spring. The first few prototypes did not work well; in one case, the VPP joint's upper link snapped after a quick jump. The expe- rience was motivation for a complete overhaul of the design and engineering process to find a way to go from design to prototype faster. The 25-person company adopted a similar system used by large, global manufacturers: product life cycle management (PLM) software. The research and development team had been using computer-aided-design (CAD) software, but it took seven months to develop a new design, and if the design failed, starting over would be the only solution. This design approach was a drain not only on the company's time but also on its finances. The design team found a PLM system that helped members analyze and model capabilities in a much more robust manner. The team used simulation capabilities to watch the impact of the new designs on rough mountain terrain. The software tracks all the variables the designers and engineers need so they can quickly and easily make adjustments to the design. The new system allows the team to run a simulation in a few minutes, representing a very large improvement over their previous design software, which took seven hours to run a simulation. The software was just one component of the new process design. The company also hired a new master frame builder to build and test prototypes in house and invested in a van-size machine that can fabricate intricate parts for the prototypes, a process the company previously outsourced. The result was a significant decrease in its design-to-prototype process. What once averaged about 28 months from start of design to shipping of the new bike now takes 12 to 14 months. ' 0 "Technology: How Much" How Fast" How Revolutionary" How Expensive"" Fast Company 56, no. 62, fasttalk.html (accessed May 30, 2002). lf!I Information Systems and Business Transformation ·- Discussion Questions I. 2. 3. 4. Would you consider this transformation to be incremental or radical? Why? What, in your opinion, was the key factor in Santa Cruz Bicycles' successful process redesign? Why was that factor the key? What outside factors had to come together for Santa Cruz Bicycles to be able to make the changes it did? Why is this story more about change management than software implementation? Source: Adapted from Mel Duvall, "Santa Cruz Bicycles," (accessed February 24, 2008). • CASE STUDY 5-2 Boeing 787 Dreamliner The first Boeing 787 Dreamliner was delivered to Japan's ANA in the third quarter of 2011, more than three years after the initial planned delivery date. Its complicated, unique design (including a one-piece fuselage that eliminated the need for 1,500 aluminum sheets and 50,000 fasteners and reduced the resulting weight of the plane proportionally) promised both a reduction in out-of-service maintenance time and a 20% increase in fuel economy, but problems with early testing of the new design contributed to the giant project's troubles. Even after those delays, the 787 was grounded in January 2013 because the main battery had problems of overheating and subsequently burning. The problems were finally reported solved in December 2014. Delivery of Boeing's 787 Dreamliner project was delayed, in part, because of the company's global supply chain net- work, which was touted to reduce cost and development time. In reality, the network turned out to be a major cause for problems. Boeing decided to change the rules of the way large passenger aircraft were developed through its Dreamliner program; rather than simply relying on technological know-how, it decided to use collaboration as a competitive tool embed- ded in a new global supply chain process. With the Dreamliner project, Boeing not only attempted to create a new aircraft through the innovative design and new material but also radically changed the production process. It built an incredibly complex supply chain involving over 50 partners scattered in 103 locations all over the world. The goal was to reduce both the financial risks involved in a $10 billion-plus project for designing and developing a new aircraft and the new product development cycle time. Boeing tapped the expertise of various firms in different areas such as composite materials, aerodynamics, and IT infrastructure to create a network in which partners' skills complement each other. This changed the basis of competition to skill set rather than the traditional basis of low cost. In addition, this was the first time Boeing had outsourced the production on the two most critical parts of the plane-the wings and the fuselage. The first sign of problems showed up just six months into the trial production. Engineers discovered unexpected bubbles in the skin of the fuselage during baking of the composite material. This delayed the project a month. Boeing officials in- sisted that they could make up the time and all things were under control. But next to fail was the test version of the nose section. This time, a problem was found in the software programs, which were designed by various manufacturers. They failed to communicate with each other, leading to a breakdown in the integrated supply chain. Then problems popped up in the integration of electronics. The Dreamliner program entered the danger zone when Boeing declared that it was having - trouble getting enough permanent titanium fasteners to hold together various parts of the aircraft. The global supply network did not integrate well for Boeing and left it highly dependent on a few suppliers. The battery problems involved lithium-ion batteries that could not recover from a situation involving a rare but serious internal short circuit that would cause flames to spread from one cell to another. Lithium-ion batteries had not previously been used in an airplane and had not been tested under an assumption of a short circuit. This case clearly underscores the hazards in relying on an extensive supply chain, failing to expect the worst case with critical new parts, and encountering information exchange problems that caused long delays and seriously compromised a company's ability to carry out business as planned. Creating a radically different process can mean encountering unexpected problems. In some cases, it would put a company so far behind its competition that it was doomed to fail. However, in this case, the major competitor to the Dreamliner, the Airbus 380 program, was also using a global supply chain model, and its program was delayed by a couple of years. The result for Boeing was a much-anticipated plane with fuel economy and out- standing design that made the wait worth it. However, because of compromises in design, the Dreamliner holds only up to 250 passengers, compared to the A380, which has a seating capacity between 525 and 853. ..,,J Case Study Im Discussion Questions 1. Why did Boeing adopt the radical change approach for designing and developing the 787 Dreamliner? What were the risks? In your opinion, was it a good move? Defend your choice. 2. Using the silo perspective versus business process perspective, analyze the Dreamliner program. 3. What are your conclusions about the design of the integrated supply chain? Give some specific ideas about what could have been done to integrate it better. 4. If you were the program manager, what would you have done differently to avoid the problems faced by the Dreamliner program? Sources: Adapted from J. Lynn Lunsford, "Boeing Scrambles to Repair Problems with New Plane," The Wall Street Joumal(December 7, 2007), A1, 13; Stanley Holmes, "The 787 Encounters Turbulence," Businessweek (June 19, 2006), 38--40; Zach Honig, "Boeing 787 Review: ANA's Dreamliner Flies Across Japan, We Join for the Ride" (December 16, 2011), review-anas-dreamliner-flies-across-japan-we-join/ (accessed August 27, 2015); J. Mouawad, "Report on Boeing 787 Dream liner Battery Flaws Finds Lapses at Multiple Points," The New York Times (December 1, 2014), on-boeing-787-dreamliner-batteries-assigns-some-blame-for-flaws.html? 6 Architecture and Infrastructure This chapter provides managers with an overview of IT architecture and infrastructure issues and designs. It begins by translating a business into IT architecture and then from the architecture into infrastructure. The manager's role is then discussed, and an example of a ficti- tious company,, is used to show how strategy leads to infrastructure. The frame- work used to describe the basic components of architecture and infrastructure, introduced in Chapter 1, is revisited here, providing a language and structure for describing hardware, soft- ware, network, and data considerations. Common architectures are then presented, including centralized, decentralized and Web-based service-oriented architecture (SOA). Architectural principles are covered, followed by a discussion of enterprise architecture. Virtualization and cloud computing, two current architectural considerations, are reviewed. The chapter con- cludes with a discussion of managerial considerations that apply to any architecture. Mohawk, 1 a paper mill in upstate New York, was established in 1931. Contrary to a common assump- ...J tion that information technology is not critical to old technology industry players facing a declining market, the firm has not only embraced cloud computing but also has been able to transform its business because of the cloud in three ways: (I) moving from manufacturing as its primary focus to providing service, (2) shifting from a self-sufficient model to one of collaboration with a network of partners, and (3) ensuring that the partner network is flexible and its capabilities are integrated with those of Mohawk. Mohawk accomplished this flexibility by using service-oriented architecture (SOA) tools, which enable a firm to scale technology services (and expenses) up and down instanta- neously according to its needs. 2 Also, applications under SOA can be added or subtracted as needed. Mohawk's new envelope manufacturing facility serves as a vivid example to illustrate the ben- efits of flexibility. Along the way, the company learned of the anticipated bankruptcy of the largest envelope manufacturing firm in the United States and developed a list of six outsourced firms to turn its premium papers into envelopes. After six months of using those suppliers and investing in building its own in-house envelope manufacturing capabilities, Mohawk was able to shift to an insourcing model for 90% of its volume. The cloud services approach avoided the information sys- tems difficulties usually inherent in such a transformation. There are also benefits to internal flexibility as well. As processing volumes increase and decrease, sometimes on a seasonal basis and sometimes due to new or discontinued lines of business, Mohawk experiences corresponding increases and decreases in its requirements for space, servers, and processing. Its cloud approach allows the company to set up or dismantle servers quickly. ' Adapted from Paul J. Stamas. Michelle L. Kaarst-Brown, and Scott A. Bernard, "The Business Transformation Payoffs of Cloud Services at Mohawk," MIS Quarterly Execlllive 13, no. 4 (2014). ' Christopher Hale: "'Liaison Technologies to Deliver SOA-in-the-Cloud Services to Mohawk Papers," Business Wire (February 24, 20 I 0), I 00224006065/en/Liaison-Technologies-Deliver-SOA-in-the-Cloud-Services- ~ Mohawk-Papers#.VYFh_OZZWjs (accessed June 17, 2015). ..., From Vision to Implementation Im Mohawk's experience shows that cloud computing is not just a mechanism to avoid or reduce costs or to gain operational benefits. The cloud can enable transformation of the business itself. Mohawk's mission changed from "making paper" to "making connections," which involves being able to sell directly to consumers five times the number of products than in the pre-2011 period when it mainly sold a few lines of paper to l 0--15 large distributors. Partners now offer many of those products, and the system provides the capabilities to sell from Mohawk's own inventory or from the partners in a seamless way directly to many thousands of small businesses and consumers via its Web site. Mohawk was able to make the changes it believed were necessary by shifting from an electronic data interchange (EDI) approach to a simpler, more interchangeable format using XML and other tools. Liaison Technologies, its integration consulting firm, enabled these changes by first developing what it calls a cloud integration platform and building upon that platform in several stages to ultimately arrive at an enhanced Web services platform that enabled other organizations and customers to request information, inquire about freight charges and pricing, place orders, and pay for their orders through connections with banks. The platform enables designers to "mash up" (combine) applications as needed on Web sites that can be built rather quickly. Each feature "plugs in" using tools that make it easy to connect the Web sites to existing databases. Payoffs to Mohawk included: • Shaking the precloud annual earnings decreases of 2%-5% per year to tripling its earnings in two years • Automating its transaction processes, saving $1 million to $2 million annually in staff costs • Increasing its product variety fivefold • Increasing its customer base from l 0-15 distributors to I 00 business partners and many thousands of direct customers Not all firms can base their entire operations on a cloud platform that permits integration with other organiza- tions. Mohawk's experiences can be considered to be "cutting edge," and integration consulting is a rather new phenomenon. Further, even if firms use a cloud approach, they will need to estimate the extent of services they will need to purchase up front. The Mohawk story illustrates how infrastructure can enable the strategic objectives of a firm. However, building such an infrastructure cannot come first. Firms must begin by determining a strate- gic vision, determining the IS architecture needed to fulfill that vision, and then making it all tangible by putting together an IS infrastructure. This chapter examines the mechanisms by which business strategy is transformed into tangible IS architecture and infrastructure. The terms architecture and infrastructure are often used interchangeably in the context of IS. This chapter discusses how the two differ and the important role each plays in realizing a business strategy. Then this chapter examines some common architectural components for IS today. From Vision to Implementation As shown in Figure 6.1, architecture translates strategy into infrastructure. Building a house is similar: The owner has a vision of how the final product should look and function. The owner must decide on a strategy about where to live-in an apartment or in a house. The owner's strategy also includes deciding how to live in the house in terms of taking advantage of a beautiful view, having an open floor plan, or planning for special interests by designing such special areas as a game room, study, music room, or other amenities. The architect develops plans based on this vision. These plans, or blueprints, provide a guide-unchangeable in some areas but subject to interpretation in others-for the carpenters, plumbers, and electricians who actually construct the house. Guided by past experience and by industry standards, these builders select the materials and construction techniques best suited to the plan. The plan helps them determine where to put the plumbing and wiring, important parts of the home's infrastructure. When the process works, the completed house fulfills its owner's vision, even though he or she did not participate in the actual construction. An IT architecture provides a blueprint for translating business strategy into a plan for IS. An IT infrastructure is everything that supports the flow and processing of information in an organization, including hardware, software, data, and network components. It consists of components, chosen and assembled in a manner that best suits the Architecture and Infrastructure Owner's Vision Building Architect's Plans Builder's Implementation Abstract +-+--------;-------+-------+--+ Concrete Strategy Architecture Information Technology FIGURE 6.1 From the abstract to the concrete-building versus IT. Infrastructure plan and therefore best enables the overarching business strategy. 3 Infrastructure in an organization is similar to the beams, plumbing, and wiring in a house; it's the actual hardware, software, network, and data used to create the information system. The Manager's Role Even though he or she is not drawing up plans or pounding nails, the homeowner in this example needs to know what to reasonably expect from the architect and builders. The homeowner must know enough about architecture, specifically about styling and layout, to work effectively with the architect who draws up the plans. Similarly, the homeowner must know enough about construction details such as the benefits of various types of siding, windows, and insulation to set reasonable expectations for the builders. -..I Like the homeowner, managers must understand what to expect from IT architecture and infrastructure to be able to make full and realistic use of them. The manager must effectively communicate his or her business vision to IT architects and implementers and, if necessary, modify the plans if IT cannot realistically create or support those plans. Without the involvement of the manager, IT architects could inadvertently make decisions that limit the manager's business options in the future. For example, a sales manager for a large distribution company did not want to partake in discussions about providing sales force automation systems for his group. He felt that a standard package offered by a well-known vendor would work fine. After all, it worked for many other companies, he rationalized, so it would be fine for his company. No architecture was designed, and no long-range thought was given to how the application might support or inhibit the sales group. After implementation, it became clear that the application had limitations and did not support the type of sales process in use at this company. He approached the IT department for help, and in the discussions that ensued, he learned that earlier infrastructure decisions now made it prohibitively expensive to implement the capability he wanted. Involvement with earlier decisions and the ability to convey his vision of what the sales group wanted to do might have resulted in an IT infrastructure that provided a platform for the changes the manager now wanted to make. Instead, the infrastructure lacked an architecture that met the business objectives of the sales and marketing departments. The Leap from Strategy to Architecture to Infrastructure The huge number of IT choices available coupled with the incredible speed of technology advances makes the manager's task of designing an IT infrastructure seem nearly impossible. However, in this chapter, the task is bro- ken down into two major steps: first, translating strategy into architecture and second, translating architecture into J Gordon Hay and Rick Munoz. "Establishing an IT Architecture Strategy," Information Systems Management 14, no. 3 (Summer 1997), 67-69. The Leap from Strategy to Architecture to Infrastructure 1fJ1 infrastructure. This chapter describes a simple framework to help managers sort through IT issues. This framework stresses the need to consider business strategy when defining an organization's IT building blocks. Although this framework may not cover every possible architectural issue, it does highlight major issues associated with effec- tively defining IT architecture and infrastructure. From Strategy to Architecture The manager must start out with a strategy and then use the strategy to develop more specific goals as shown in Figure 6.2. Then detailed business requirements are derived from each goal. In the Mohawk case, the business strategy was to integrate its own product offerings with those from partners and to present the larger product line directly to a large number of customers as well as an expanded list of wholesalers. The business requirements were to integrate the disparate functionality into a modular, flexible system. By outlining the overarching business strategy and then fleshing out the business requirements associated with each goal, the manager can provide the architect with a clear picture of what IS must accomplish and the governance arrangements needed to ensure their smooth development, implementation, and use. The governance arrangements specify who in the company retains control of and responsibility for the IS. Preferably this is somebody in upper management. Of course, the manager's job is not finished here. Continuing with Figure 6.2, the manager must work with the IT architect to translate these business requirements into a more detailed view of the systems requirements, stan- dards, and processes that shape an IT architecture. This more detailed view, the architectural requirements, includes consideration of such things as data and process demands as well as security objectives. These are the architectural requirements. The IT architect takes the architectural requirements and designs the IT architecture. From Architecture to Infrastructure Mohawk's decision to use a service-oriented architecture led to the design of a number of services and composite applications. This illustrates the next step, translating the architecture into infrastructure. This task entails add- ing yet more detail to the architectural plan that emerged in the previous phase. Now the detail comprises actual hardware, data, networking, and software. Details extend to location of data and access procedures, location of firewalls, link specifications, interconnection design, and so on. This phase is also illustrated in Figure 6.2 where the architecture is translated into functional specifications. The functional specifications can be broken down into hardware specifications, software specifications, storage specifications, interface specifications, network specifica- tions, and so on. Then decisions are made about how to implement these specifications: what hardware, software, storage, interface, network, and so forth to use in the infrastructure. When we speak about infrastructure, we are referring to more than the components. Plumbing, electrical wiring, walls, and a roof do not make a house. Rather, these components must be assembled according to the blueprint to create a structure in which people can live. Similarly, hardware, software, data, and networks must be combined in a coherent pattern to have a viable infrastructure. This infrastructure can be considered at several levels. At the most global level, the term may be focused on the enterprise and refer to the infrastructure for the entire organi- zation. The term may also focus on the interorganizational level by laying the foundation for communicating with customers, suppliers, or other stakeholders across organizational boundaries. Sometimes infrastructure refers to those components needed for an individual application. When considering the structure of a particular application, it is important to consider databases and program components, as well as the devices and operating environments on which they run. Often when referring to an infrastructure, the underlying computer system is called the platform. The term has been used in a variety of ways: to identify the hardware and operating system of a computer, such as Microsoft Win- dows, Apple OSX, or Linux, or smartphone and tablet operating systems, such as Android and iOS. Vendors need to provide an entirely separate version of their software on each chosen platform, and they often have tools that allow their programs to produce, nearly automatically, versions that run on multiple platforms. A platform can also refer to a firm's collection of cloud-based, modular tools as the example from Mohawk illustrated. Such platforms use open standards for easy "plugging-in" of components, enabling "mashing-up" of a &I l Strategy ~Hardware. bSoftware. Goal Goal Goal • • • Architectural Requirement Architectural Requirement • • • ¢ ¢ ¢ ¢ ¢ FIGURE 6.2 From strategy to architecture to infrastructure. l ¢ Functional Spec Functional Spec • • • I Hw• I ~pee¢ - ;J¢ a-:..'. I.,,.. Data .---1'\. ...,. Ii, --:., Protocol '----v ~ I \ ~.---1'\. .M, • Spec l'----v' Infrastructure • • • ¢ (. The Leap from Strategy to Architecture to Infrastructure Im variety of resources at once. Google Maps is an excellent example of a standardized resource that can be accessed by any platform that provides the proper requests. Framework for the Infrastructure and Architecture Analysis When developing a framework for transforming business strategy into architecture and then into infrastructure, these basic components should be considered: • Hardware: The physical components that handle computation, storage, or transmission of data (e.g., personal computers, servers, mainframes, hard drives, RAM, fiber-optic cabling, modems, and telephone lines). • Software: The programs that run on the hardware to enable work to be performed (e.g., operating systems, databases, accounting packages, word processors, sales force automation, and enterprise resource planning systems). Software is usually divided into two groups: system software, such as Microsoft Windows, Apple OSX, and Linux, and applications, such as word processors, spreadsheets, and digital photo editors. Sys- tem software is often referred to as a platform because application software runs upon it, sometimes only on a particular version. • Network: Software and hardware components for local or long-distance networking. Local networking com- ponents include switches, hubs, and routers; long-distance networking components include cable, fiber, and microwave paths for communication and data sharing. All work according to a common protocol, most often Internet protocol (IP). Some networks are private, requiring credentials to connect. Others, like the Internet, are public. • Data: The electronic representation of the numbers and text. Here, the main concern is the quantity and format of data and how often it must be transferred from one piece of hardware to another or translated from one format to another. The framework that guides the analysis of these components was introduced in the first chapter in Figure 1.6 This framework is simplified to make the point that initially understanding an organization's infrastructure is not difficult. Understanding the technology behind each component of the infrastructure and the technical requirements of the architecture is a much more complex task. The main point is that the general manager must begin with an overview that is complete and that delivers a big picture. This framework asks three types of questions that must be answered for each infrastructure component: what, who, and where. The "what" questions are those most commonly asked and that identify the specific type of tech- nology. The "who" questions seek to understand what individuals, groups, and departments are involved. In most cases, the individual user is not the owner of the system or even the person who maintains it. In many cases, the systems are leased, not owned, by the company, making the owner a party completely outside the organization. In understanding the infrastructure, it is important to get a picture of the people involved. The third set of questions addresses "where" issues. With the proliferation of networks, many IS are designed and built with components in multiple locations, often even crossing oceans. Learning about infrastructure means understanding where every- thing is located. We can expand the use of this framework to also understand architecture. To illustrate the connections between strategy and systems, the table in Figure 6.3 has been populated with questions that typify those asked in addressing architecture and infrastructure issues associated with each component. The questions shown in Figure 6.3 are only representative of many that would need to be addressed; the specific questions depend on the business strategy the organizations are following. However, this framework can help IT staff ask managers to provide further information as they seek to translate business strategy into architecture and ul- timately into infrastructure in their organizations. The answers derived with IT architects and implementers should provide a robust picture of the IT environment. That means that the IT architecture includes plans for the data and information, the technology (the standards to be followed and the infrastructure that provides the foundation), and the applications to be accessed via the company's IT system. Architecture and Infrastructure Component I What I Who l Where I Ar-ch-i-te-c-tu-re-- I Infrastructure / Architecture ! Infrastructure I Architecture ----r Infrastructure -----·-----·-- -··-··-· :---- ·----- -'"······-·----\----·--· ---··--··----~--···---··-----·-·--- - --1.-.---·-···-··--···---·-----+-·-···---·-.-···-··---·- -- - -·-··+-·- Hardware i What type ! What size hard I Who knows Who will · Does our I What specific I of personal ! drives do we I the most about operate the architecture j computers will we · device will our I equip our I servers in our server? require : put in our Tokyo users use? i laptops with? I organization? centralized · data center? or distributed , ! servers? f--------:----·-·---·--·-·--·----+--·----·-·-·- -·-·--- : --··--·-·----.. ----·---+---- -------------+----- -----------------------+-----------------------; I Does fulfillment I Shall we go f Who is affected I Who will need Does our Can we use a Software Network Data ' of our strategy : with SAP or [ by a move to '1 SAP training? geographical cloud instance require ERP I SAP? , organization of Oracle for our software? J What data , do we need I for our sales I management I system? applications? require multiple - database I : instances? ----- ---- -l------ ------- -- ----+------ - ---- ------+- - --- - Will a particular ! Who needs a ! Who provides J Will we let each Cisco switch be I connection to I our wireless i user's phone be I the network? J network? ! a hotspot? ! ! What format Who needs Howwill Will backups be will we store access to authorized stored on-site or our data in? sensitive data? users identify off-site? 1 themselves? a cable or use satellite? Will data be in the cloud or in our data center? FIGURE 6.3 Infrastructure and architecture analysis framework with sample questions. Traditionally, there are three common configurations of IT architecture as shown in Figure 6.4. Enterprises sometimes like the idea of a centralized architecture with everything purchased, supported, and managed cen- trally, usually in a data center, to eliminate the difficulties that come with managing a distributed infrastructure. In addition, almost every sizable enterprise has a large data center with servers and/or large mainframe computers that support many simultaneous users. Because of that history, there are a significant number of legacy mainframe environments still in operation today. However, one large computer at the center of the IT architecture is not used as regularly today as it was in the past. Instead, many smaller computers are linked together to form a centralized IT core that operates very much like the mainframe, providing the bulk of IT services necessary for the business. A more common configuration is a decentralized architecture. The hardware, software, networking, and data are arranged in a way that distributes the processing and functionality between multiple small computers, servers, and devices, and they rely heavily on a network to connect them together. Typically, a decentralized architecture uses numerous servers, often located in different physical locations, at the backbone of the infrastructure, called a server-based architecture. A third increasingly common configuration is service-oriented architecture (SOA), the architecture that Mohawk, in this chapter's opening case, decided to use. An example of a service is an online employment form that, when completed, generates a file with the data for use in another service. Another example is a ticket-processing service that identifies available concert seats and allocates them. These relatively small chunks of functionality are available for many applications through reuse. The type of software used in an SOA architecture is often referred to as software-as-a-service, or SaaS. Another term for these applications when delivered over the Internet is Web services. A cutting-edge type of configuration is one that can allocate or remove resources by itself, referred to as a software-defined architecture.4 Two illustrations can provide an idea of this trend. The first is a true story of a 4 See K. Pearlson, "Software Defined Future: Instant Provisioning of IT Services," Connect-Converge (Fall 2014), issues/20 l 4_fall/A 1767E8395A03D54262BE6FOB892F986/Converge%20C2-2014-Fa1Lpdf (accessed August 27, 2015)_ The Leap from Strategy to Architecture to Infrastructure 1111 Architecture Description Other Terms When to Use? 1-----------------·+--·-·-···-··----···--·--·-··---------···--------·+--··--·-------------- ----,.-------------··--··------·---\ Centralized Architecture Decentralized Architecture • A large central computer Mainframe system runs all applications architecture and stores all data. • Typically, the computer is housed in a data center and managed directly by the IT department. • Networking allows users to access remotely . . -······-···-·-·····--··---·- • Computing power is spread Server-based out among a number of architecture devices in different locations. • Servers in different locations, personal computers, laptops, smartphones, and tablets are also included. • The "client" devices can perform many of the services needed with only occasional requests to central servers for data and services. 1----------······------------+-·-··----- . ·-·-·------- Service-Oriented Architecture (SOA) • Software is broken down into Cloud-based services "orchestrated" and architecture connected to each other. • Together those services form an application for an entire business process. • The services are often offered from multiple vendors on the Internet and are combined to form applications. • To make it easier to manage- all functionality is located in one place • When the business is highly centralized concerns about scalability • When the business is primarily decentralized • To be agile-reusability and componentization can create new apps • When the business is new and rapid app design is important -----+-- -----+ --+---· ········--·--·--·--··-·-·-------- Software-Defined Architecture • Infrastructure reconfigures Software-defined based on load or time of day. network, network • Infrastructure can be virtualization reconfigured autonomously based on rules. FIGURE 6.4 Common architectures. · • When resources need to be I,, • flexible and reconfigured often When usage varies I dramatically depending on time of day company selling 10 bird baths per month. It had a Web site for its small family business. For a while, the site was adequate for its needs. However, when Oprah Winfrey featured the company's high-quality designs on her show, the number of monthly orders jumped to 80,000. Fortunately, the firm's IT consultants were able to create a software- defined network that adapted to the increase in orders. It was able to sense a change in the volume of orders and allocate additional resources such as storage and processing power to keep the Web site working. A typical hosting provider would have treated a monthly 8,000-fold volume increase as an attack and would shut down the site to protect it. Also, a typical provider would not have enough storage allocated for the orders. The software-defined network saved thousands of sales (and hundreds of thousands of dollars) from being lost. Sometimes software-defined networks can even change the architecture on the fly. For example, many fast-food restaurants and coffee shops offer free WiFi to customers. This capability requires more than one connection to the Internet in very busy locations, and the shop itself needs its own secure, dedicated connection to record sales trans- actions and inventory updates from individual restaurant and shop operations. If that operation connection fails, a software-defined network could automatically reconfigure to switch one of the customer connections to become a substitute operations connection. Customers might find their WiFi connections to be a little slower until the 6., situation returns to normal, but the automatic reconfiguration prevents the restaurant or shop from having to close Architecture and Infrastructure or revert to a very clumsy manual system. Even without a catastrophe, customer traffic on the WiFi system and the need for operations capacity can fluctuate as well. After closing, the WiFi system for customers is not needed, but during busy times, it might be saturated. When software updates are performed or large volumes of transactions are transmitted, the operations connection might be overwhelmed. Shifting resources automatically from one separate architectural component to another is a powerful way to reduce costs. A manager must be aware of the trade-offs when considering architectural decisions. For example, decentralized architectures are more modular than centralized architectures, allowing other servers to be added with relative ease and provide increased flexibility for adding clients with specific functionality for specific users. Decentralized orga- nizational governance, such as that associated with the networked organization structure (discussed in Chapter 3), is consistent with decentralized architectures. In contrast, a centralized architecture is easier to manage in some ways because all functionality is centralized in the main computer instead of distributed throughout all the devices and servers. A centralized architecture tends to be a better match in companies with highly centralized governance, for example, those with hierarchical organization structures. SOA is increasingly popular because the design enables large units of functionality to be built almost entirely from existing software service components. SOA is useful for building applications quickly because it offers managers a modular and componentized design and, therefore, a more easily modifiable approach to building applications. Software-defined architectures are even easier to man- age because they self-manage many of their features. However, each self-managing feature must be imagined and defined; the systems are not autonomous beyond those features. An example of an organization making these trade-offs is the Veterans Health Administration (VHA), a part of the Department of Veterans Affairs of the U.S. federal government.5 The organization included 14 different business units that served various administrative and organizational needs. The primary objective of the organization was to provide health care for veterans and their families. In addition, the VHA was a major contributor to medical research, allowing medical students to train at VHA hospitals. The medical centers operated independently and sometimes competed against each other. When the U.S. Congress passed an act that enabled the VHA to restructure itself from a system of hospitals to a single health care system, the IT architecture was reconfigured from a very centralized ...J design, which enabled the Office of Data Management and Telecommunications to retain control, to a decentral- ized hospital-based architecture that gave local physicians and administrators the opportunity to deploy applications addressing local needs while ensuring that standards were developed across the different locations. The VA then introduced the "One-VA" architecture to unify the decentralized systems and "to provide an accessible source of con- sistent, reliable, accurate, useful, and secure information and knowledge to veterans and their families .... "6 Efforts were made to encrypt, secure, and account for every piece of computer hardware in the system, and a national and regional data warehouse initiative was launched to standardize business data storage and management. Technological advances such as peer-to-peer architecture and wireless or mobile infrastructure make possible a wide variety of options. These designs can either augment a firm's existing way of operating or become its main focus. For example, a peer-to-peer architecture allows networked computers to share resources without needing a central server to play a dominant role., the Web site for sharing music, movies, games, and more, and Skype, a site for teleconferencing, texting, and telephoning, are examples of businesses that use a peer-to-peer architecture. Wireless (mobile) infrastructures allow communication from remote locations using a variety of wireless technologies (e.g., fixed microwave links; wireless LANs; data over cellular networks; wireless WANs; satellite links; digital dispatch networks; one-way and two-way paging networks; diffuse infrared, laser-based com- munications; keyless car entry; and global positioning systems). Web-based and cloud architectures locate significant hardware, software, and possibly even data elements on the Internet. Web-based architectures offers greater flexibility when used as a source for capacity-on-demand, or the availability of additional processing capability for a fee. IT managers like the concept of capacity on demand to help manage peak processing periods when additional capacity is needed. It allows them to use the Web-available capacity as needed, rather than purchasing additional computers to handle the larger loads. ' Adapted from V. Venkatesh, H. Bala, S. Venkatraman, and J. Bates, "Enterprise Architecture Maturity: The Story of the Veterans Health Administration," MIS Quarterly Executive 6, no. 2 (June 2007).79-90; and J. Walters. "IBM Transformation Series, 2009."' transforming-information-technology-department-veterans-affairs (accessed August 27, 2015). ~ ' Venkatesh. Venkatraman, and Bates, "Enterprise Architecture Maturity," p. 86. ...,. From Strategy to Architecture to Infrastructure, An Example Im With the proliferation of smartphones and tablets, enterprises increasingly have employees who want to bring their own devices and connect to enterprise systems. Some call this Bring Your Own Device (BYOD), and it raises some important managerial considerations. When employees connect their own devices to the corporate network, issues such as capacity, security, and compatibility arise. For example, many corporate applications are not designed to function on the small screen of a smartphone. Redesigning them for personal devices may require significant investment to accommodate the smartphone platform. And not all smartphone platforms are the same. Designing for an iPhone is different than for an Android phone. Even if a system were redesigned for these two platforms, the resources required to maintain the system increase because each platform evolves at a different rate and the applications need to appear similar on each device. In some circles, the drive to port applications to personal devices and the ensuing issues to make them work is referred to as the consumerization of IT. Consumerization of IT is a growing phenomenon. Not only do employees want to use their own devices to access corporate systems but also customers increasingly expect to access company systems from their mobile devices. Making applications robust yet simple enough for customers to use from virtually any mobile device over the Web is a challenge for many information systems departments. Companies such as Good Technology have been created to provide services that allow enterprise employees to connect, communicate, and collaborate using their own devices, supplementing the IT organization's ability to meet this new demand. Websites are designed with the philosophy of "responsive design," permitting them to adapt to screens of any size. From Strategy to Architecture to Infrastructure: An Example This section7 considers a simple example to illustrate the process of converting strategy to architecture to infra- structure: We introduce, a fictitious competitor of Amazon and Wal-Mart, which sells a wide variety of products online. 6.,. Define the Strategic Goals The managers at recognize that they have a large amount of competition, so they have decided to try to provide outstanding customer service. In fact, their strategy is to become highly customer focused. Among their immediate strategic goals are the following: • To increase the period of a money-back guarantee from one week to a month • To provide cross-selling opportunities by temporarily discounting accessories or items that complement those purchased within the previous year • To provide a return shipping label with every purchase • To decrease out-of-stock occurrences by 20% • To answer emails within 24 hours Translate Strategic Goals to Business Requirements To keep things simple, consider more closely only the first two of's strategic goals: to increase the period of a money-back guarantee from one week to a month and to suggest goods that complement all those sold to a customer in the past year. How can's architecture enable this goal? Its goal must be translated into business requirements. A few of the business requirements that address these two goals are to track • At least a year's worth of sales for all customers • All refunds provided to customers 7 Only a few questions raised from the framework are provided; a comprehensive. detailed treatment of this situation would require more information than provided in this simple example. Architecture and Infrastructure • Return patterns by customer to detect excesses • Sales of complementary goods to provide advice for future potential purchasers Translate Business Requirements into Architecture To support the business requirements, architectural requirements are specified that dictate the architecture to be established. One major component of the architecture deals with how to obtain, store, and use data to support the business requirements. The database needs to store the sales data for all customers for more than an entire year. The data can be used for many purposes, including summarizing for an annual report and identifying whether customers who wish to return goods are within the 30-day period. It also provides the foundation for suggesting complementary goods when cou- pled with data pinpointing goods that are related. As customers use the Web site, the sales data can be very useful for their own decision making. Translate Architecture to Infrastructure With the architecture goals in hand, the framework presented in Figure 6.2 outlines how to build the infrastructure. The architecture outlines the functions needed by the infrastructure, enabling a functional specification to be cre- ated. Those specs are then translated into hardware, software, data protocols, interface designs, and other compo- nents that will make up the infrastructure. For's database, the functional specification would include details such as how big it should be, how fast data access should be, what the format of the data will be, and more. These functional specifications then help narrow the technical specifications, which answer these questions. For example, after considering the current customer base and forecasts for growth,'s database might need the following: • Sample functional specifications for a year's worth of activity • Space to fit transaction data for 22,500 customers who purchase 25 items a year on average with 30 facts (date, price, quantity, item number, customer number, address shipped, credit card billed, and so on) recorded for each. On average, each fact occupies 10 characters of storage. • Ability to insert 1,070 records per minute. One server can handle one update per second, or 60 per min- ute, suggesting the need for 18 servers to handle online sales. Accounting information will be placed on its own server. That totals 168,750,000,000 characters of storage for the year, indicating that 200 giga- bytes will be needed for this information alone. An analysis of vendors' products and pricing indicates that one terabyte is considered more than adequate for each server given that 18 will be purchased. • Software to do the required tracking for suggesting complementary goods because the current system does not have that functionality. • Hardware specifications • One terabyte RAID (redundant array) level 3 hard drive space. • Nineteen 3-gigahertz Core 2 duo servers. • Software specifications • Apache operating system. • My SQL database. Architectural Principles B Hardware 19 servers: J Software \ Network ----~ystem with modules for - I • Cable modem to ISP I • Sales I • Dial-up lines for backup , Database i • Sales • 18 for sales • 1 for accounting LaCie 10-GB Thunderbolt RAID hard drive storage system , • Accounting I • Ci~so routers, hubs, and I - • Inventory switches . 1 . . / • Firewalls from CheckPoint , Enterprise app 1cat1on integration (EAi) software Apache operating system MySOL database software : • Inventory i • Accounting i • Complementary items FIGURE 6.5 ·s infrastructure components. Additional technical specifications would be created until the entire infrastructure is designed. Then GiantCo. corn's IT department is ready to pick specific hardware, software, network, data, etc., to put into its infrastructure. Figure 6.5 lists possible infrastructure components needed by Architectural Principles Any good architecture is based on a set of principles, or fundamental beliefs about how the architecture should function. Architectural principles must be consistent with both the values of the enterprise as well as with the technology used in the infrastructure. The principles are designed by considering the key objectives of the orga- nization and then translated into principles to apply to the design of the IT architecture. The number of principles vary widely, and there is no set list of what must be included in a set of architectural principles. However, a guide- '-, line for developing architectural principles is to make sure they are directly related to the operating model of the enterprise and IS organization. Principles should define the desirable behaviors of the IT systems and the role of the organization(s) that support it. A sample of architectural principles is shown in Figure 6.6. Principle Ease of use ' Description of What the Architecture Should Promote Ease of use in building and supporting the architecture and solutions based on the architecture ,__ __________ ---+------------------~----·-----------·· ·-···--- ·--·--·-· Single point of view ··-·--·---··-··----···--..... -···-··--··-·--- Buy rather than build Speed and quality Flexibility and agility Innovation ,__ __________ _ Data security Common data vocabulary Data quality Data asset A consistent, integrated view of the business regardless of how it is accessed Purchase of applications, components, and enabling frameworks unless there is a competitive reason to develop them internally Acceleration of time to market for solutions while still maintaining required quality levels Flexibility to support changing business needs while enabling evolution of the architecture and the solutions built on it Incorporation of new technologies, facilitating innovation Data protection from unauthorized use and disclosure Consistent definitions of data throughout the enterprise, which are understandable and available to all users Accountability of each data element through a trustee responsible for data quality Management of data like other valuable assets 1------------~----------------------------------------------- --- FIGURE 6.6 Sample architectural principles. Source: Adapted from examples of IT architecture from IBM, The Open Group Architecture Framework, the U.S. Government, and the State of Wisconsin. DD Architecture and Infrastructure Enterprise Architecture Many companies apply even more complex and comprehensive frameworks than those described earlier for devel- oping an IT architecture and infrastructure than those described earlier. They employ an enterprise architecture (EA), or the "blueprint" for all IS and their interrelationships in the firm. EA is the term used for the organizing logic :or the entire organization. It often specifies how information technologies support business processes. EA differs from an IT architecture in its level of analysis, although it shares some design principles of the lower-level architectures. It identifies the core processes of the company and how they will work together, how the IT sys- tems will support the processes, the standard technical capabilities and activities for all parts of the enterprise, and guidelines for making choices. As experts Jeanne Ross, Peter Weill, and David Robertson describe in their book, Enterprise Architecture as Strategy, Top-performing companies define how they will do business (an operating model) and design the processes and infra- structure critical to their current and future operations (enterprise architecture) .... Then these smart companies exploit their foundation, embedding new initiatives and using it as a competitive weapon to seize new business opportunities. 8 The components of an enterprise architecture typically include four key elements: • Core business processes: The key enterprise processes that create the capabilities the company uses to exe- cute its operating model and create market opportunities • Shared data: The data that drive the core processes • Linking and automation technologies: The software, hardware, and networking technologies that provide the links between applications (applications themselves are part of the IT architecture, but the way applica- tions link together is part of the bigger picture of the enterprise architecture) • Customer groups: Key customers to be served by the architecture9 One example of an enterprise architecture framework is the TOGAF (The Open Group Architecture Frame- work).10 TOGAF includes a methodology and set of resources for developing an enterprise architecture. It is based on the idea of an open architecture, one whose specifications are public (as compared to a proprietary architecture whose specifications are not made public). It is based on the U.S. Department of Defense frameworks and has been developing and continuously evolving since the mid-1990s. It provides a practical, standardized methodology (called Architecture Development Methodology) to successfully implement an enterprise architecture for an organi- zation. Although there is no well-accepted standard for enterprise architecture, architects who understand and use TOGAF speak a common language and use the same basic framework and processes to build their company's IS architecture. TOGAF is designed to translate strategy into architecture and then into a detailed infrastructure; how- ever, it supports a much higher level of architecture that includes more components of the enterprise. 11 Another example of enterprise architecture frameworks is the Zachman framework, which determines archi- tectural requirements by providing a broad view that helps guide the analysis of the detailed view. This framework's perspectives range from the company's scope, to its critical models and, finally, to very detailed representations of the data, programs, networks, security, and so on. The models it uses are the conceptual business model, the logical system model, and the physical technical model. 12 Enterprise architectures mature as firms invest resources in technologies that support their strategy. Jeanne Ross 13 theorized that enterprise architecture moves from compartmentalized "silos" to standardized technologies to enterprisewide software to business modularity. A recent studyl 4 shows a dramatic increase in perceived IT effec- tiveness as the architecture matures through those four stages. ' Jeanne W. Ross. Peter Weill, and David C. Robertson, Enterprise Architecture as Strategy (Boston, MA: Harvard Business School Press. 2006). viii-ix. 9 Ibid .. 50--52. 10 The Open Group. " For more information on the TOGAF framework, visit the Open Group"s Web site at " For more information on the Zachman framework. visit Zachman International's Web site at " J. W. Ross, "Creating a Strategic IT Architecture Competency: Learning in Stages," MIS Quarterly Executive 2, no. I (2003), 31-43. 14 Randy V.Bradley, Renee M. E. Pratt, Terry Anthony Byrd, and Lakisha L. Simmons, "The Role of Enterprise Architecture in the Quest for IT Value," MIS Quarterly Executive IO, no. 2 (2011), 19-27. Virtualization and Cloud Computing Im Because enterprise architecture is more about how the company operates than how the technology is designed, building an EA is a joint exercise to be done with business leaders and IT leaders. IT leaders cannot and should not do this alone. Because virtually all business processes today involve some component of IT, the idea of trying to align IT with business processes would merely automate or update processes already in place. Instead, business processes are designed concurrently with IT systems. The Mohawk case at the beginning of this chapter illustrates this very well; if Mohawk had simply continued its existing business processes or had made them faster with newer technology, its profitability would have merely continued to decline. They company was able to reverse this trend only by redesigning or redirecting its business processes, an effort that was enabled by IT. As Mohawk found, building an enterprise architecture is more than just linking the business processes to IT. It starts with organizational clarity of vision and strategy and places a high value on consistency in approach as a means of optimal effectiveness. The consistency manifests itself as some level of standardization-standardization of processes, deliverables, roles, and/or data. Every EA has elements of all these types of standardization; however, the degree and proportion of each vary with organizational needs, making it dynamic. A good enterprise architect understands this and looks for the right blend for each activity the business undertakes. That means that because organizational groups and individuals are resources for business processes, the organizational design decisions should be part of the enterprise architecture. However, this is a sophisticated approach, and new enterprise archi- tects often seek to put more rigid standards in place and do not attempt to tackle the more complex organizational design issues. Barclay's Bank, 15 which services more than 48 million customers worldwide, had an IT architecture that included more than 2,000 applications and spent in excess of £1 billion annually on IT. The resulting complexity was managed with an EA that specified frameworks, tools, and processes that created a common language and for- mat. The EA governance model dictated that both business and technology executives sign off on projects to ensure accountability and ownership. Roadmaps helped clarify the enterprise architecture design and direction, which informed planning and portfolio management and created a common vision and a repeatable mechanism for future investments. The EA ensured appropriate linkages between IT investment and business needs. Virtualization and Cloud Computing Physical corporate data centers are rapidly being replaced by virtual infrastructure called virtualization. Virtual infrastructure originally meant one in which software replaced hardware in a way that a "virtual machine" or a "virtual desktop system" was accessible to provide computing power. Typically, computing capabilities, storage, and networking are provided by a third party or group of vendors, usually over the Internet or through a private network. In most virtual architectures, the five core components available virtually are servers, storage, backup, network, and disaster recovery. Virtualizing the desktop is a common virtualization application. In a virtual- ized desktop, the user's device locally accesses desktop software on a remote server, essentially separating the operating system from the applications. Virtualization is a useful way to design architecture because it enables resources to be shared and allocated as needed by the user and makes maintenance easier because resources are centralized. Cloud computing is another term used to describe an architecture based on services provided over the Internet. It is based on the concept of a virtual infrastructure. Entire computing infrastructures are available "in the cloud." Using the cloud to provide infrastructure means that the cloud is essentially a large cluster of virtual servers or storage devices. This is called infrastructure as a service (IaaS). In addition to IaaS, software as a service (Saas) and platform as a service (PaaS) are typical services found in cloud computing. These are described more fully in Chapter 10. Using the cloud for a platform means that the man- ager will use an environment with the basic software available, such as Web software, applications, database, and collaboration tools. Using the cloud for an entire application generally means that the software is custom designed or custom configured for the business but resides in the cloud. 15 Adapted from Phil LeClare and Eric Knorr. 'The 2010 Enterprise Architecture Awards" (September I 0, 2010), architecture/the-20 I O-enterprise-architecture-awards-823 (accessed August 27. 2015). Architecture and Infrastructure Consumers of cloud computing purchase capacity on demand and are not generally concerned with the under- lying technologies. It's the next step in utility computing, or purchasing any part of the consumers' storage or processing infrastructure they need when they need it. Much like the distribution of electricity, the vision of utility computing is that computing infrastructure would be available when needed in as much quantity as needed. When the lights and appliances are turned off in a home, the electricity is not consumed. Ultimately, the customer is billed only for what is used. In utility computing, a company uses a third-party infrastructure to do their processing or transactions and pay only for what they use. And as in the case of the electrical utility, the economies of scale enjoyed by the computing utility enable very attractive financial models for their customers. As the cost of connec- tivity falls, models of cloud computing emerge., Facebook, Gmail, Windows Azure, Apple iTunes, and Linkedln are examples of applications in the cloud. Users access Linkedln through the Web and build networks of business professionals on the site. But Linkedln provides additional services, such as linking a user's blog to her or his profile, sharing and storing doc- uments among group's members, and accessing applications such as GoodReads to see what network peers are reading and Tripit to learn about their travel plans. Benefits of virtualization and cloud computing are many. Businesses that embrace a virtual infrastructure can consolidate physical servers and possibly eliminate many of them, greatly reducing the physical costs of the data center. Fees can be based on transaction volumes rather than large up-front investments. There is no separate cost for upgrade, maintenance, and electricity. Nor is there a need to devote physical space or to guess how many storage servers are required. Typically, the network is much simpler, too, because the virtual infrastructure mainly requires Internet connections for all applications and devices. But the biggest benefit of virtualization and cloud computing is the speed at which additional capacity, or pro- visioning, can be done. In a traditional data center, additional capacity is often a matter of purchasing additional hardware, waiting for its delivery, physically installing it, and ensuring its compatibility with the existing systems. It can take weeks. In a virtual infrastructure, the nature of the architecture is dynamic by design, making adding capacity relatively easy and quick. ..,,J For example, The New York Times decided to make all public domain articles from 1851 to 1922 available on the Internet. To do that, the company decided to create PDF files of all the articles from the original papers in its archives. This required scanning each column of the story, creating a series of graphic pictures of the scanned image, and then cobbling them together to create the single PDF for each story. This was a lot of work and required significant computing power. Once this batch of articles was converted and added to the company's existing library, the 11 million New York Times stories from 1851 to 1989 were accessible on the Internet. The manager of this project had an idea to use the cloud. He selected a service offered by, Amazon EC2, wrote some code to do the project he envisioned, and tested it on the Amazon servers. He used his credit card to charge the $240 it cost him to do this conversion. He calculated it would have taken him at least a month to do the conversion if he used only the few servers available to him in The New York Times network. However, using the Amazon cloud services, he was able to use a virtual server cluster of 100 servers, and it took just under 24 hours to process the entire 11 million articles. 16 But managers considering virtualization and cloud computing must also understand the risks. First is the dependence on the third-party supplier. Building applications that work in the cloud may mean retooling exist- ing applications for the cloud's infrastructure. The dominant vendor, as of the writing of this text, is VMware, a company that offers software for workstations, virtual desktop infrastructures, and servers. However, because there are no standards for virtual infrastructure, applications running on one vendor's infrastructure may not port easily to another vendor's environment. Architectures are increasingly providing cloud computing and virtualization as alternatives to in-house infra- structures. As coordination costs drop and new platforms in the cloud are introduced, cloud computing utilization will increase. 16 Galen Gruman, "Early Experiments in Cloud Computing," Info World (April 7, 2008), early-experiments-in-cloud-computing.html (accessed July 28, 2015): Derek Gottfrid, ''Self-Service, Prorated Supercomputing Fun!" (November I, 2007), l/Ol/self-service-prorated-super-computing-fun/ (accessed July 28, 2015). Other Managerial Considerations 11D Other Managerial Considerations The infrastructure and architecture framework shown in Figure 6.3 guides the manager toward the design and implementation of an appropriate infrastructure. Defining an IT architecture that fulfills an organization's needs today is relatively simple; the problem is that by the time it is installed, those needs can change. The primary rea- son to base an architecture on an organization's strategic goals is to allow for inevitable future changes-changes in the business environment, organization, IT requirements, and technology itself. Considering future impacts should include analyzing the existing architecture, the strategic time frame, technological advances, and financial constraints. Understanding Existing Architecture At the beginning of any project, the first step is to assess the current situation. Understanding existing IT architecture allows the manager to evaluate the IT requirements of an evolving business strategy against current IT capacity. The architecture, rather than the infrastructure, is the basis for this evaluation because the specific technologies used to build the infrastructure are chosen based on the overall plan, or architecture. As previously discussed, these archi- tectural plans support the business strategy. Assuming that some overlap is found, the manager can then evaluate the associated infrastructure and the degree to which it can be utilized going forward. Relevant questions for managers to ask include the following: • What IT architecture is already in place? • Is the company developing the IT architecture from scratch? • Is the company replacing an existing architecture? • Does the company need to work within the confines of an existing architecture? • Is the company expanding an existing architecture? Starting from scratch allows the most flexibility in determining how architecture can enable a new business strat- egy, and a clean architectural slate generally translates into a clean infrastructure slate. However, planning effec- tively even when starting from scratch can be a challenge. For example, in a resource-starved start-up environment, it is far too easy to let effective IT planning fall by the wayside. Sometimes the problem is less a shortcoming in IT management and more one of poorly devised business strategy. A strong business strategy is a prerequisite for IT architecture design, which is in turn a prerequisite for infrastructure design. Of course, managers seldom enjoy the relative luxury of starting with a clean IT slate. More often, they must deal in some way with an existing architecture, infrastructure, and legacy systems already in place. In this case, they encounter both opportunity-to leverage the existing architecture and infrastructure and their attendant human resource experience pool-and the challenge of overcoming or working within the old system's shortcomings. By implementing the following steps, managers can derive the most value and suffer the least pain when working with legacy architectures and infrastructures. 1. Objectively analyze the existing architecture and infrastructure: Remember that architecture and infrastruc- ture are separate entities; managers must assess the capability, capacity, reliability, and expandability of each. 2. Objectively analyze the strategy served by the existing architecture: What were the strategic goals it was designed to attain? To what extent do those goals align with current strategic goals? 3. Objectively analyze the ability of the existing architecture and infrastructure to further the current strategic goals: In what areas is alignment present? What parts of the existing architecture or infrastructure must be modified? Replaced? g Architecture and Infrastructure Whether managers are facing a fresh start or an existing architecture, they must ensure that the architecture will satisfy their strategic requirements and that the associated infrastructure is modern and efficient. The following sections describe evaluation criteria including strategic time frame, technical issues (adaptability, scalability, stan- dardization, maintainability), and financial issues. Assessing Strategic Timeframe Understanding the life span of an IT infrastructure and architecture is critical. How far into the future does the strat- egy extend? How long can the architecture and its associated infrastructure fulfill strategic goals? What issues could arise and change these assumptions? Answers to these questions vary widely from industry to industry. Strategic time frames depend on indus- try-wide factors such as level of commitment to fixed resources, maturity of the industry, cyclicality, and barriers to entry. The competitive environment has increased the pace of change to the point that requires any strategic decision be viewed as temporary. Architectural longevity depends not only on the strategic planning horizon, but also on the nature of a man- ager's reliance on IT and on the specific rate of advances affecting the information technologies on which he or she depends. Today's architectures must be designed with maximum flexibility and scalability to ensure they can handle imminent business changes. Imagine the planning horizon for a dot-com company in an industry in which Internet technologies and applications are changing daily, if not more often. You might remember the importance of flexibility and agility to Mohawk's new business strategy and that the firm's IT architecture was created to support it. Assessing Technical Issues: Adaptability With the rapid pace of business, it is no longer possible to build a static information system to support businesses. ""11111 Instead, adaptability is a core design principle of every IT architecture and one reason why cloud computing and virtualization are increasingly popular. A manager may think of technological advances as primarily affecting IT infrastructure, but the architecture must be able to support any such advance. Can the architecture adapt to emerg- ing technologies? Can a manager delay the implementation of certain components until he or she can evaluate the potential of new technologies? At a minimum, the architecture should be able to handle expected technological advances, such as innovations in storage capacity and computing power. An exceptional architecture also has the capacity to absorb unexpected tech- nological leaps. Both hardware and software should be considered when promoting adaptability. For example, new Web-based applications that may benefit the corporation emerge daily. The architecture must be able to integrate these new technologies without violating the architecture principles or significantly disrupting business operations. The following are guidelines for planning adaptable IT architecture and infrastructure. At this point, these two terms are used together because in most IT planning, they are discussed together. These guidelines are derived from work by Meta Group. 17 • Plan for applications and systems that are independent and loosely coupled rather than monolithic: This approach allows managers to modify or replace only those applications affected by a change in the state of technology. • Set clear boundaries between infrastructure components: If one component changes, others are minimally affected, or if effects are unavoidable, the impact is easily identifiable and quantifiable. • When designing a network architecture, provide access to all users when it makes sense to do so (i.e., when security concerns allow it): A robust and consistent network architecture simplifies training and knowledge 17 Larry R. DeBoever and Richard D. Buchanan, 'Three Architectural Sins," C/0 (May I, 1997), 124, 126. Other Managerial Considerations Im sharing and provides some resource redundancy. An example is an architecture that allows employees to use a different server or printer if their local one goes down. Note that requirements concerning reliability may conflict with the need for technological adaptability under certain circumstances. If the architecture requires high reliability, a manager seldom is tempted by bleeding-edge technologies. The competitive advantage offered by bleeding-edge technologies is often eroded by downtime and problems resulting from pioneering efforts with the technology. Assessing Technical Issues: Scalability A large number of other technical issues should also be considered when selecting an architecture or infrastructure. A frequently used criterion is scalability. To be scalable refers to how well an infrastructure component can adapt to increased, or in some cases decreased, demands. A scalable network system, for instance, could start with just a few nodes but could easily be expanded to include thousands of nodes. Scalability is an important technical feature because it means that an investment can be made in an infrastructure or architecture with confidence that the firm will not outgrow it. What is the company's projected growth? What must the architecture do to support it? How will it respond if the company greatly exceeds its growth goals? What if the projected growth never materializes? These questions help define scalability needs. Consider a case in which capacity requirements were poorly anticipated. In early 2007, an ice storm on the East Coast of the United States forced JetBlue Airlines to scramble to take care of stranded customers, grounded planes, checked luggage, and canceled flights. In the aftermath, executives told investors that the computers didn't fail. Indeed, they did not fail, but the system failed to scale as needed. The system was set up to accommodate 650 agents and was able to be increased to 950 but no more. 18 It is unlikely that JetBlue or its software provider 4.., would have had to do any serious systems redesign to respond to the increase in demand; it simply needed to increase its infrastructure capacity. Ultimately, recovery from this planning failure cost JetBlue millions and even more in defending its image, which suffered severe negative word of mouth from the poor service that resulted. The company subsequently contracted with Verizon to manage its infrastructure as a way ofresponding to the scal- ability issue. JetBlue's plight underscores the importance of analyzing the impact of strategic business decisions on IT architecture and infrastructure and at least ensuring that a contingency plan exists for potential unexpected effects of a strategy change. Assessing Technical Issues: Standardization Another important feature deals with commonly used standards. Hardware and software that use a common stan- dard as opposed to a proprietary approach are easier to plug into an existing or future infrastructure or architecture because interfaces often accompany the standard. For example, many companies use Microsoft Office software, making it an almost de facto standard. Therefore, a number of additional packages come with translators to the sys- tems in the Office suite to make it easy to move data between systems. Assessing Technical Issues: Maintainability How easy is the infrastructure to maintain? Are replacement parts available? ls service available? Maintainability is a key technical consideration because the complexity of these systems increases the number of things that can go wrong, need fixing, or simply need replacing. In addition to availability of parts and service people, maintenance considerations include issues such as the length of time the system might be out of commission for maintenance, " Mel Duvall. '"What Really Happened to JetBlue."' 6.,- (April 5. 2007) (accessed August 27. 2015). Architecture and Infrastructure how expensive and how local the parts are, and obsolescence. Should a technology become obsolete, costs for parts and expertise skyrocket. Architectures have different inherent security profiles. Assessing Technical Issues: Security Securing assets in a highly centralized, mainframe architecture means building protection around the centralized core. Because data and software are stored and executed on the mainframe computer, methods of protecting these assets revolve around protecting the mainframe itself. Decentralized, server-based architecture is more difficult to secure due to the dispersion of servers. Security is a matter of protecting every server instead of one centralized system. A Web-based SOA architecture that utilizes SaaS and capacity on demand raises a whole new set of secu- rity issues. The data and applications not only reside on servers in the various vendor systems around the Web, but also the linking mechanism, the network that ties the Web together, introduces another level of security concerns. Security is discussed in more detail in Chapter 7. Assessing Financial and Managerial Issues Like any business investment, IT infrastructure components should be evaluated based on their expected finan- cial value. Unfortunately, payback from IT investments is often difficult to quantify; it can come in the form of increased productivity, increased interoperability with business partners, improved service for customers, or yet more abstract improvements. This suggests focusing on how IT investments enable business objectives rather than on their quantitative returns. Still, some effort can and should be made to quantify the return on infrastructure investments. This effort can be simplified if a manager works through the following steps with the IT staff. 1. Quantify costs: The easy part is costing out the proposed infrastructure components and estimating the total investment necessary. Work with the IT staff to identify cost trends in the equipment the company proposes to acquire. Don't forget to include installation and training costs in the total. 2. Determine the anticipated life cycles of system components: Experienced IT staff or consultants can help establish life cycle trends for both a company and an industry to estimate the useful life of various systems. 3. Quantify benefits: The hard part is getting input from all affected user groups as well as the IT group, which presumably knows most about the equipment's capabilities. If possible, form a team with representatives from each of these groups and work together to identify all potential areas in which the new IT system may bring value. 4. Quantify risks: Assess any risk that might be attributable to delaying acquisition as opposed to paying more to get the latest technology now. 5. Consider ongoing dollar costs and benefits: Examine how the new equipment affects maintenance and upgrade costs associated with the current infrastructure. Once this analysis is complete, the manager can calculate the company's preferred discounted cash flow (i.e., net present value or internal rate of return computation) and the payback period. Approaches to evaluating IT invest- ments are discussed in greater detail in Chapter 8. Applying these considerations to the fictitious company, the last task is to weigh the managerial considerations against the architectural goals that were used to determine infrastructure requirements. Figure 6.7 shows how these considerations could apply to's situation. Again, note that the criteria evaluated in Figure 6. 7 do not address every possible issue for, but this example shows a broad sample of the issues that will arise. ..,,,; Other Managerial Considerations Im Criteria Architecture Infrastructure ,- -· Strategic time frame Indefinite:'s strategic goal is to NA ! be able to respond to customer needs. Technology advances Database technology is fairly stable, but NA transaction capacity needs to be assessed and links with smaller suppliers and customers verified. Financial Issues I NPV of investment NA will analyze NPV of various I hardware and software solutions and -·-·-··-···· ·--····-······- - -··· ·····-··-··--·- -··-··--···· ---········---··--·-----·-··-·-··-·--··-----···-·--·------·-·- ongoing costs before investing. J -··-·-·-·------·-··--·-·------------·-··--·-·--·-·-··---- : Payback analysis expects the new architecture Specific options will be evaluated using i ! ! to pay for itself within three years. conservative sales growth projections to i I i see how they match the three-year goal. ~cidental investments The new architecture represents a moderate Training costs for each option will be I shift in the way does business analyzed. Redeployment costs for 1 and will require some training and workforce employees displaced by any outsourcing L adjustment. must also be considered. [ Growth requirements/ Outsourcing could provide more scalability The scalability required of various new I scalability than's current model, which is hardware and software components is not I constrained by IT capacity. New innovations significant, but options will be evaluated will be identified to provide scalability of based on their ability to meet scalability ! volume. requirements. ·-·------- ---·---i ------- -·--··· -----------------·--------- -····-·--- -·---- --·· Standardization NA will adopt the MySOL f standard and make it a requirement of all : developers for consistency. I Maintainability The new architecture raises some Various options will be evaluated for their i maintenance issues, and new product maintenance and repair costs. I I introductions will mandate constant updates to the rules of complementary goods. Staff experience The new model will require new skills and Current staff is not familiar with MySOL. expertise. Training and workforce adjustment will be needed. Some new staff will be hired. ·-·-·· Security will lock down resources for will adopt a Pulse Secure VPN traveling personnel. for securely connecting traveling personnel with network resources. FIGURE 6.7's managerial considerations. = Social Business Lens: Building Social Mobile Applications As companies adopt social IT, they are finding that it is closely intertwined with mobile platforms. Employees want, and in some cases expect, to be able to access their social IT from their smartphones, tablets, and more. As com- panies look globally, in some countries the mobile screen is the only screen used. In 2011, more than one-third of the U.S. population used the mobile Internet. In 2014, that number grew to such an extent that 52% of device owners consider smartphones and tablets the most important devices for Internet access, while only 46% consider desktops and laptops the most important devices. Tablets have surpassed all other devices in importance. Social business requires that companies extend their architecture to include mobile functions, called social mobile. Social mobile functions began to take off with the widespread adoption of smartphones. The first devices combined features of a personal digital assistant with a mobile phone, giving developers the opportunity to link applications to the Web instantly. RI M's BlackBerry was one of the first to give users mobile access to communication Architecture and Infrastructure tools such as their e-mail. More recent devices, such as Apple's iOS, Google's Android, Microsoft's Windows Phone, Nokia's Symbian, and RIM's BlackBerry OS, use a mobile operating system. Initial social mobile apps were social networks either ported to the mobile platform, like Linkedln and Facebook, or designed just for the mobile platform, like Foursquare and Gowalla, social network sites linking community members who "check in" at physical locations and sometimes earn virtual rewards for doing so. Social mobile applications have extended to many other types of applications as software designers realize the large market available to them if their applications run on mobile platforms and as device users demand increas- ing functionality for their mobile devices. Source: Amy Gahran ... Stl!TP\·: LS. \loliile W .. h AccPss Crowing Fast"· (July 8. 2010). mobile.intenwt .accPss.pew_l_,-pJl-phmw·usPJ"s·frat ure-phoncs-mohilP·intPrntet ( accessPcl August 27. 2013 ): Dauyl Bosomwnrth. ··.\lobik .\larketing Statistics :Wt.,:· Smart lns{dlfs (July 22. 201::i).!..-rnarketing/mobilP· marketing-analytics/mobilt··markPt ing·stal is tics/ ( H— -·-·-··–···-·-···· — ·-··–·—- —–·-··—·——-··–·———·– ..
Infrastructure IT leaders (CISO) In-depth technical knowledge and There is a misspecification of
expertise are needed. I ‘”‘”‘”” aod oetwo,k typologles o,
a misconfiguration of infrastructure.
Technical security control is
Security Policy I Shared: IT and Technical and security implications Security policies are written based
business leaders of behaviors and processes need to on theory and generic templates.
be analyzed, and trade-offs between They are unenforceable due to a
security and productivity need to be misfit with the company’s specific IT -·–·· -~ +- -~- made. The particulars of a company’s IT and users. infrastructure need to be known. -··-·······-· ·–·-·-·——··–·-·———–·—··– –·—·——
Security Education, Shared: IT and Business buy in and understanding are Users are insufficiently trained,
Training, and business leaders needed to design programs. Technical bypass security measures, or do
Awareness expertise and knowledge of critical not know how to react properly
security issues are needed to build them. when security breaches occur.
Investments Shared: IT and They require financial (quantitative) Under- or overinvestment in
business leaders and qualitative evaluation of business information security occurs.
impacts of security investments. The human or technical security
A business case has to be presented for resources are insufficient or
rivaling projects. Infrastructure impacts of wasted.
funding decisions need to be evaluated.
FIGURE 7.1 Key information security decisions.
Sources: Adapted from Yu Wu, “What Color is Your Archetype? Governance Patterns for Information Security,” (Ph.D. Dissertation,
University of Central Florida, 2007); Yu Wu and Carol Saunders, “Governing Information Security: Governance Domains and
Decision Rights Allocation Patterns,” Information Resources Management Journal 24, no. 1 (January-March 2011), 28-45.
8 Bill Whitaker, “What Happens When You Swipe Your Card?” 60 Minutes (November 30, 2014), transcript,
your-credit-card-and-hacking-and-cybercrime/ (accessed June 24, 2015).
& Security
1. Information security strategy: A company’s information security strategy is based on such IT principles as
protecting the confidentiality of customer information, strict compliance with regulations, and maintain-
ing a security baseline that is above the industry benchmark. Security strategy is not a technical decision.
Rather, it should reflect the company’s mission, overall strategy, business model, and business environment.
Deciding on the security strategy requires decision makers who are knowledgeable about the company’s
strategy and management systems. An organization’s information systems (IS) likely need to provide the
required technical input for supporting the decision.
2. Information security infrastructure: Information security infrastructure decisions involve selecting and
configuring the right tools. Common objectives are to achieve consistency in protection, economies of
scale, and synergy among the components. Top business executives typically lack the experience or exper-
tise to make these decisions. For these reasons, corporate IT typically is responsible for managing the
dedicated security mechanisms and general IT infrastructure, such as enterprise network devices. Thus,
corporate IT should take the lead and make sure that the technology tools in the infrastructure are correctly
specified and configured.
3. Information security policy: Security policies encourage standardization and integration. Following best
practices, they broadly define the scope of and overall expectations for the company’s information security
program. From these security policies, lower-level tactics are developed to control specific security areas
(e.g., Internet use, access control) and/or individual applications (e.g., payroll systems, telecom systems).
Policies must reflect the delicate balance between the enhanced information security gained from follow-
ing them versus productivity losses and user inconvenience. As security attacks become more sophisti-
cated, obeying security measures to deflect those attacks places cognitive demands on users. For example,
they may need a different password for every account, and these passwords must often be long and hard to
remember because they must have special characters. Productivity of users is often sacrificed when they
have to come up with new passwords every month or when they have to spend time judging the legitimacy
of dozens of e-mails each day. Not surprisingly, both IT and business perspectives are important in setting
policies. Business users must be able to say what they want from the information security program and
how they expect the security function to support their business activities. On the other hand, IT leaders
should be consulted for two reasons: (1) their judgment prevents unrealistic goals for standardization and
integration and (2) policy decisions require the ability to analyze the technical and security implications of
user behaviors and business processes. If either users or IT leaders are not consulted, unenforceable pol-
icies will probably result.
4. Information security education, training, and awareness (SETA): It is very important to make business
users aware of security policies and practices and to provide information security education, training,
and awareness (SETA). Training and awareness programs build a security-conscious culture. To promote
effectiveness and post-training retention, training and awareness programs must be linked to the unique
requirements of individual business processes. Business user participation in planning and implementing
training and awareness programs helps gain acceptance of security initiatives. However, IT security person-
nel are in the best position to know critical issues. Thus, both IT security managers and business users must
be actively involved in planning SETA activities.
5. Information security investments: The fear, uncertainty, and doubt (“FUD”) factor once was all that was
needed to get top management to invest in information security. As information security becomes a routine
concern in daily operations, security managers increasingly must justify their budget requests financially.
But it is difficult to show how important security is until there has been a breach-and even then it is hard to
put a dollar amount on the value of security. As when determining business needs, different units within the
company may have rival or conflicting “wish lists” for information security-related purchases that benefit
their unique needs. The IS organization also should have a significant say in these decisions because it is in
the best position to assess whether and how the investments may fit with the company’s current IT infra-
structure and application portfolio. Thus, both IT and business leaders should participate in investment and
prioritization decisions. One way to ensure this joint participation is to use executive committees/councils .,.J
Breaches and How They Occurred IEII
composed of business and IT executives, such as the IT steering committee and budget committee, with the
CIO having overlapping memberships in both. These committees are where IT and business leaders make
business cases for their proposed investments and debate the merit and priorities of the investments. These
decisions about the appropriate level of investment are made with the company’s best interests in mind.
Breaches and How They Occurred
In 2013 and 2014, before the Office of Personnel Management’s attack, the most famous breaches infiltrated the
systems at EBay (twice), Target, Home Depot, and Anthem Blue Cross. See Figure 7.2 for the magnitude and cause
of each breach.
Password Breaches
It is important to emphasize the damage that can be done by password breaches. As the following descriptions
indicate, trusting and trustworthy users might have no idea they are opening a security hole by clicking on an
attachment, using public WiFi, or following a link to an authentic-looking site. Executives should not believe that
employees who use their personal laptops away from the office are harmless to the firm. When employees whose
systems are infected log onto work e-mail systems or intranets, a hacker can gain access to the firm.
60 Minutes reported in 2015 that 80% of breaches are conducted by stealing a password. 9 There are many ways
to steal a person’s password. One common method is to conduct a successful phishing attack, 10 which sends
a person a counterfeit e-mail that purports to be from a known entity. The e-mail includes either a virus-laden
Date Detected
November 2013
May 2014 EBay #1
40 million debit and credit card account
! 145 million user names, e-mails, physical
i addresses, phone numbers, birth dates,
I encrypted passwords’
September 2014 \ EBay #2 i Small but unknown
s-e-p-te-,;;b;;,Q,1″Z,;;;D;,;-at ~ -c:::!:: :::::,~~:~”
January 2015 Anthem Blue Cross i 80 million names, birthdays, e-mails,
I social security numbers, addresses, and
i employment data (including income)1
Contractor’s opening of an
e-mail attachment containing a
virus, revealing a passwordb
Obtaining an employee’s
Cross-site scripting
-·—–··-·-··–····· ——-·——·-·-~
Obtaining a vendor’s password 1
and exploiting an operating I
system’s vulnerability• ‘
Obtaining passwords of at least
five high-level employees9
‘Brian Krebs, “Target Hackers Broke in Via HVAC Company,” Krebs on Security (February 14, 2014),
via-hvac-company/ (accessed June 22, 2015).
‘Brian Krebs, “Home Depot: Hackers Stole 53M Email Addresses,” Krebs on Security (November 14, 2014),
hackers-stole-53m-email-addreses/ (accessed June 28, 2015).
‘Andy Greenberg, “EBay Demonstrates How Not to Respond to a Huge Data Breach, Wired (May 23, 2014),
how-not-to-respond-to-a-huge-data-breach/(accessed June 22, 2015).
‘Bill Whitaker, “What Happens When You Swipe Your Card?” 60 Minutes (November 30, 2014), transcript,
card-and-hacking-and-cybercrime/ (accessed June 24, 2015).
• Ashley Carman, “Windows Vulnerability Identified as Root Cause in Home Depot breach,” SC Magazine (November 10, 2014),
home-depot-breach-caused-by-windows-vulnerability/article/382450/ (accessed June 28, 2015).
‘Michael Hiltzik, “Anthem Is Warning Consumers about Its Huge Data Breach. Here’s a Translation,” LA Times (March 6, 2015),
hiltzik/la-fi-mh-anthem-is-warning-consumers-20150306-column.html#page=l (accessed June 28, 2015).
FIGURE 7.2 Well-known breaches. what was stolen, and how.
9 Ibid.
10 Brian Honan, “Reactions to the EBay Breach,” (accessed June 22, 2015).
IEfJ Security
attachment or a link that invites the user to click and visit a page to either solve a problem or accomplish a task (as
described in detail at the end of this chapter).
The only limit is the phisher’s imagination to create a scenario that would motivate a user to click on a link. The
attachment or link in a phishing message often initiates a key logger, or software that traps keystrokes and stores
them for hackers to inspect later. A key logger can even be hidden on a thumb drive plugged into a public computer
in a hotel’s business center. A key logger might also be triggered by visiting an unfamiliar Web site. Just by click-
ing on a search result, a user might inadvertently download and install the key logging software. Asking the user to
log-in will reveal his or her user name and password, opening a world of opportunity for the hacker.
Another way to obtain a password is simply to guess it. Experts warn that large breaches can be caused by using
a weak password, such as “123456,” which, incredibly, won again as the most common password of all in 2014. 11
Passwords can be troublesome. Creating a strong password that cannot be guessed results in a hard-to-remember
string of nonsense characters. The name of a hometown, a team, an employer, or a family member would be among
the first guesses of a hacker. Also, even if it is difficult to guess, many people use the same password for multiple
purposes, and if one account is breached, all of their other accounts are then wide open. It is challenging to keep
track of difficult passwords that are different for every account. Tools such as LastPass, Dashlane, and Sticky
Password allow access with one password to a set of highly complex and impossible-to-remember passwords
synchronized across Windows and Mac computers as well as Android and iOS smartphones. 12
Yet another way to open a firm to a large breach is for employees to use an unsecured network at a coffee shop,
hotel, or airport. 13 Many users do not realize that, even if the network’s name matches the coffee shop’s name,
someone in the shop might have set up a so-called evil twin connection WiFi connection and that all incoming
and outgoing Internet traffic becomes routed through the perpetrator’s system. Without the proper tools or training,
most users can’t validate a public WiFi connection. Once connected, the unwitting users’ keystrokes, including
their user names and passwords, are captured as they shop online, do Internet banking, or log into their company’s
intranet site. 14 The only solution might be for companies to establish policies forbidding their employees to use
public WiFi and use their smartphones as their PC’s sole Internet connection even when tempted by free WiFi in
public places.
Other Attack Approaches
Cross-Site Scripting
As shown in Figure 7.2, a second EBay breach is another important attack for management to understand. It was
discovered in September 2014 by an astute user who nagged EBay to fix the problem for over a year. 15 He even
created a surprising YouTube video to show how it worked. 16 The damage is unclear, affecting only the users who
clicked on one particular search result that was eventually removed. However, the cause is clear in this case:17
cross-site scripting (XSS), which involves booby traps that appear to lead users to their goal, but in reality, they
lead to a fraudulent site that requires a log-in. EBay permits users to install some computer code in their listings to
make their items in EBay search results grab shoppers’ attention. It is intended to allow animation in listings, but
malicious code was inserted instead, designed for a nefarious purpose: to alter the listing’s address to point to a
bogus log-in screen. Users assumed they needed to log-in once again for security purposes, but in reality everyone
who “logged-in” that second time provided the crooks with user names and passwords.
11 Jamie Condliff, “The 25 Most Popular Passwords of 2014: We’re All Doomed,” Gi~modo (January 20, 2015).
popular-passwords-of-2014-were-all-doomed-l 68059695 l (accessed June 22, 2015).
12 Neil J. Rubenking. “The Best Password Managers for 2015,” PC Magazine (June 2, 2015),,28l7,2407168,00.asp
(accessed June 25, 2015).
13 Sergio Galindo. “Reactions to the EBay breach,” (accessed June 22, 2015).
14 Andrew Smith, “Strange Wi-Fi Spots May Harbor Hackers: ID Thieves May Lurk Behind a Hot Spot with a Friendly Name,” Dallas Morning News
(May 9, 2007), (accessed August 25, 2015).
15 Chris Brook, “A Year Later, XSS Vulnerability Still Exists in EBay,” Threatpost (April 29. 2015),
still-exists-in-ebay/l l2493 (accessed August 27. 2015).
16 Paul Kerr, “Ebay Hacked Proof!” (September 16, 2014), (accessed June 22, 2015).
17 Phil Muncaster, “EBay Under Fire After Cross-Site Scripting Attack.” lnfosecurity (undated),
under-fire-after-cross-site/ (accessed June 22, 2015).
Breaches and How They Occurred llil
Third Parties
Several breaches have involved third parties. The Target attackers broke into the network using credentials stolen
from a heating, ventilation, and air conditioning (HVAC) contractor and installed malware on the retail sales
system. The malware captured and copied the magnetic stripe card data right from the computer’s memory before
the system could encrypt and store it. Why would an HVAC contractor have access? Security expert and blog-
ger Brian Krebs reports that it is common for large retailers to install on their systems temperature and energy-
monitoring software provided by contractors. HVAC companies need to update and maintain their software, and
are given access to their main systems so they don’t have to endure delays in those updates. Access to the retailing
system enabled the malware to spread to a majority of Target’s cash registers, collecting information from debit and
credit cards and sending it to various drop points in Miami and Brazil to be picked up later by hackers in Eastern
Europe and Russia. 18
Home Depot’s story echoed that of Target from a year earlier. Logon credentials were stolen from a vendor
that had access to Home Depot’s system, and the same malware was unleashed to cash registers. Target’s story
motivated Home Depot to update its system but the attack occurred before the company could complete all of the
improvements. 19
The attack at Anthem Blue Cross demonstrates that stealing high-level user names and passwords can pro-
vide quick access to large and important files. Target and Home Depot hackers had to wait until transactions were
recorded to gain valuable information, which takes several days. But at Anthem, being able to download important
employment and identity information from 80 million people at one pass was easy with the high-level passwords.
Log-in credentials of lower-level employees would involve transaction-by-transaction data collection. Therefore,
log-in accounts of executives need special attention, and their activities should be monitored regularly.
System Logs and Alerts
Early news reports of Target’s hack outraged customers when it was revealed that the newly installed, state-of-the-
art $1.6 million security system detected what was going on. It sent several warnings to the IT department, even
before the first files were transferred, but those alerts were unheeded. 20 However, some security experts explain that
there are perhaps hundreds of generic alerts each day, and it is difficult to follow up on every one. One expert was
quoted aptly: “it is completely understandable how this happened.” 21
The Cost of Breaches
A Ponemon study places the cost of a data breach in 2015 to be at an all-time high, between $145 and $154 per each
lost or stolen record containing sensitive information. 22 If a breach exposes 100 million records, the costs could
escalate to about $15 billion. Many firms facing such costs would be put in serious jeopardy. The Target breach cost
$61 million in just two months, 23 $162 million a year later, 24 and potentially billions of dollars in damage control
over the long run. 25 The CIO resigned, fourth quarter profit fell 46%, and revenue declined 5.3%. 26 The Home Depot
18 Brian Krebs, “Target Hackers Broke in Via HVAC Company,” Krebs on Security (February 14, 2014),
hackers-broke-in-via-hvac-company/ (accessed June 22, 2015).
19 Shelly Banjo, “Home Depot Hackers Exposed 53 Million Email Addresses,” The Wall Street Journal (November 6, 2014),
articles/home-depot-hackers-used-password-stolen-from-vendor-1415309282 (accessed June 22, 2015).
20 Michael Riley, Ben Elgin, Dune Lawrence, and Carol Matlack, “Missed Alarms and 40 Million Stolen Credit Card Numbers: How Target Blew
It,” Bloomberg Business (March 13, 2014 ),
(accessed August 25, 2015).
21 Joel Christie, ‘Target Ignored High-Tech Security Sirens Warning Them of a Data Hack Operation BEFORE Cyber-Criminals in Russia Made Off
with 40 Million Stolen Credit Cards,”
operation-BEFORE-cyber-criminals-Russia-40-million-stolen-credit-cards.html (last accessed June 24, 2015).
22 Ponemon Institute. “2015 Cost of Data Breach Study,” IBM, (accessed June 23, 2015).
” Riley, Elgin, Lawrence. and Matlack, “Missed Alarms and 40 Million Stolen Credit Card Numbers.”
” PYMNTS@pymnts, “How Much Did the Target, Home Depot Breaches Really Cost?” (February 26, 2015),
news/20 l 5/target-home-depot-reveal-full-breach-costs/#.VYr_6EZZV34 (accessed June 24, 2015).
25 Christie, “Target Ignored High-Tech Security Sirens.”
26 Associated Press. “Target’s Tech Boss Resigns as Retailer Overhauls Security in Wake of Massive Payment Card Breach,” Financial Post (March 5,
2014 ), _lsa=O 11 c-800 I (accessed August 27, 2015).
B Security
breach cost $33 million (after insurance proceeds of $30 million reduced the initial outlays of $63 million), 27 and
the company’s stock price fell 2.1 % the day after the breach was announced. 28 Sales were not affected, however,
which might indicate that customers have become numb to these announcements. 29
The Impossibility of 100% Security
To obtain 100% security for an organization, a first step would be to list all of the potential threats, and the second
step would be to obtain tools that would guard against them. However, as in our personal lives, the challenge would
be overwhelming and the solution untenable. To keep ourselves completely safe and injury free, we would need
thick steel walls and air bags around us not only when we drive but also when we run, walk, and even just sit at
home. We would avoid germs by spraying disinfectants on all surfaces, including our own skin before touching
anything. But paradoxes exist that make it impossible to be completely safe: We would want to be high on a hill to
avoid floods but low in a valley to avoid lightning strikes-an impossible paradox. We learn quickly that it is per-
haps impossible to be l 00% safe, 24/7.
Likewise, data stored in a firm would be easier to protect if they would just “stay still” as well and not be
connected to the Internet. Although some paradoxes exist in locating the data, the security closest to l 00% would
be to place them in a remote area, removed from Internet access, and under several locks without any keys at all. In
short, the closest we can get to perfect safety is to make data inaccessible. But this is not feasible.
Just as we accept some degree of risk to our safety even when we move from the living room to the kitchen,
management must accept some level of risk as well when it makes any part of its treasure trove of data accessible
to even a single person inside or outside an organization. Wider data accessibility entails great risk.
Back in 1995, the late L. Dain Gary, former manager of the U.S. Computer Emergency Response Team (CERT)
in Pittsburgh appeared on an episode of 60 Minutes and let the public in on a unpleasant fact with a sobering state-
ment: “You cannot make a computer secure. You can reduce the risk, but you can’t guarantee security.”30 Because of ..,,j
the futility of seeking 100% security, many companies take out insurance policies to mitigate the financial impacts
of a breach. It is important to also consider the so-called “Paulsen’s law” that states that information is secure when
it costs more to get it than it’s worth. 31 This is a good rule to remember, and the role of management is to work with
the IT function to make it harder to break in than it is worth.
And stolen information is worth a lot. A security expert reported that in 2014, stolen credit cards sold for bet-
ween $1 and $50 each, depending on the type of card (e.g., platinum, silver, suggesting its credit limit) and expira-
tion date. Of the 40 million Target credit card numbers stolen, about 2 million (5%) were sold at an average price
of $20, yielding $4 million to the hackers. A member of a street gang who bought one of those credit cards for $20
was likely to yield $400 in purchases of gift cards and electronics. 32
Further, a complete identity-theft “kit” containing not only a card but social security number and medical
information is worth far more-between $100 and $1,000 each on the black market. 33 The value is high because
identity-theft information can be used to open new credit cards again and again, generating quite a bit of revenue.
The hackers do not keep stolen credit cards or identity theft information for their own use, given the stagger-
ing volume they acquire. They quickly sell them online to others all over the world who use them before they are
27 PYMNTS@pymnts, “How Much Did the Target. Home Depot Breaches Really Cost?”
28 Hiroko Tabuchi, “Home Depot Posts a Strong 3rd Quarter Despite a Data Breach Disclosure,” The New York Times (November 18, 2014), http://www. (accessed June 23, 2015).
29 Anne D’Innocenzio, “4 Reasons Shoppers Will Shrug Off Home Depot Hack,” USA Today (September 11, 2014),
money/business/2014/09/l l/4-reasons-shoppers-wi!l-shrug-off-home-depot-hack/15460461/ (accessed June 23, 2015).
30 60 Minutes, “E-Systems” (February 26, 1995).
31 “Anything Made by a Man Can Be Hacked,” DSL Reports (March 6, 2006),,15623829 (accessed September
15, 2015).
” Whitaker, “What Happens When You Swipe Your Card?”
” Tim Greene, “Anthem Hack: Personal Data Stolen Sells for !Ox Price of Stolen Credit Card Numbers,” Networkworld (February 6, 2015), http://www. le/2880366/ securi tyO/anthem-hack-personal-data-s tolen-sells-for- I Ox-price-of-stolen-credit-card-numbers.html ( accessed June J
24,2015). …,
What Should Management Do? Im
reported as stolen. Those cards even come with a return policy in case they are declined, because the black market
shops need to maintain their reputations. However, the guarantees come with a warning that they run out after only
a few hours. 34
One final discouraging word is important. A study by the Software Engineering Institute in 2002 revealed that
over time, the knowledge needed by an intruder for an attack reached an all-time low whereas the potential impact
of the intruders’ attack reached an all-time high. 35 The intruders’ tools have not only become more sophisticated
but also have actually become user friendly. Automated tools can be purchased on the Deep Web, which is a part
of the Internet that is reputed to be 400 times larger than the public Web. The Deep Web includes unindexed Web
sites that are accessible only by a browser named “Tor,” which guarantees anonymity and provides access to sites
offering both legal and illegal items. Examples of illegal items offered are passports, citizenship, and even murders
for hire. 36 Also for sale are tools that can scan for vulnerable systems, exploit the weaknesses found, and even gen-
erate viruses. Payment could reach hundreds of thousands of dollars, usually made through Bitcoin, an electronic
currency that is difficult to track.
The outlook is certainly grim, but some of the clues in the stories told here can provide some prescriptions for
What Should Management Do?
Five critical elements to build security described earlier include security strategy, infrastructure, policies, training,
and investments. Security strategy needs to come first, and top management must determine the general strategy as
well as investments that are needed. Infrastructure, policy, and training decisions have to be made in more detail,
and these three areas will now be discussed. Fortunately, general managers can easily understand key issues for
each of these elements and participate fully in design and implementation of the resulting security plans.
Hackers have significant tools to breach security barriers as previously described. In this rapidly escalating cyber
war, management must use its own set of technologies and specialists to reduce risk and increase security. Many
firms employ a chief information security officer (CISO), described in Chapter 8, to keep abreast of new threats that
emerge and manage the policies and education necessary to reduce risk. In other firms, this responsibility falls to
the CIO or simply the facilities security staff. Even with specialists, managers need to have a broad understanding
of these tools to communicate effectively with them.
Tools can be divided into two categories: those that provide protection from access by undesired intruders and
those that provide protection for storage and transmission. See Figure 7.3 for a list of common system tools to pre-
vent access and their advantages and disadvantages and Figure 7.4 for a list of common storage and transmission
tools and their advantages and disadvantages.
Passwords are by far the most popular security tool even though they have proven to be the cause of most
breaches. Some security specialists claim that passwords are obsolete and should be discontinued. 37 Also, all access
protection tools have the disadvantage of requiring an additional access method if it fails. For instance, because
users often forget a password, firms need to make additional investments to create an automated resetting mecha-
nism through an alternate method, such as an e-mail to a known address or a text message to a mobile phone.
” Aaron Sankin, “Inside the Black Markets for Your Stolen Credit Cards,” The Kernel (September 28, 2014),
sections/features-issue-sections/ I 0362/inside-the-black-markets-for-your-stolen-credit-cards/ (accessed August 27, 2015).
” Howard F. Lipson, “Tracking and Tracing Cyber-Attacks: Technical Challenges and Global Policy Issues,” Special Report CMU/SEl-2002-SR-009, (accessed August 27, 2015).
” Nyshka Chandran, “From Drugs to Killers: Exploring the Deep Web,” CNBC Technology (June, 2015). (accessed
June 25, 2015).
37 Justin Balthrop, “Passwords Are Obsolete,” (April 12, 2014),
(accessed June 24, 2015).
Im Security
Access Tool
Physical locks
– . ···-··· —–11·——–·· —-·-···–···–··1–·———–·–·- —-,
Concept i Ubiquity ~ Notable Advantages _____j_ Notable Disadvantages i
Physically protect Very high [ • They are excellent as • Many popular locks can be I
computing , long as the lock is highly picked with tools sold online j
resources I secure and guarded • Most information resources do ,
I • Few criminals can access not require physical access i
.~~;;;;;;;-;-~-t o_f __ _,_! -V-ery high
I physical devices • Users often lose keys or J
[ combinations !
• They have very high
acceptance and
\ • They prove to be poor by
I 8;ometcks
I Challenge
I questions
characters known
only by the user
Scan a body
, characteristic, such
as fingerprint,
voice, iris, head, or
hand geometry
1 Medium
1 • They are easy to use
1. unless forgotten
• Mature best practices
replace forgotten
passwords (no longer a
need to call the help line
to reset)
I • It is somewhat better than
1 • It can be very reliable
(e.g., iris scanning)
• It cannot be forgotten
• It cannot be derived from
key loggers or social
• It can be quite
inexpensive (e.g.,
voice, fingerprint)
• They are sometimes forgotten
• They are sometimes derived
from key loggers or social
engineering i
• They can be guessed by “brute 1
force” software
I • It can present false positives I
and false negatives (e.g., voice; [
facial recognition)
• It can be relatively expensive I
and intrusive techniques (e.g.,
iris scanning)
I • It is possible to change
characteristics over time,
such as voice
· • It can result in lost limbs
• It can create “loopholes” such
as using a photo of a face or
····————–·———- _________ ___!i~_:r:~int on paper:_____ I
i Prompt with a Medium / • The answers are usually
[ follow-up question overall; I not forgotten
‘ such as “model of very high in I • Shuffling through several
first car?” , banking · different questions can
‘ I enhance security
• Some answers can be derived
from social network sites
• Some answers can be derived
by those who know the user
1f-~-o-k_e_n—-+–U-se_s_m __ a_ll _____ ,_L_o_w_o.-v_e-ra-l-l;-+I •
J electronic very high in I
Even if passkey is stolen,
the system is still secure
when the passkey
• Spelling inconsistencies can be
a nuisance
·, • Access requires physical
possession of token device
I device that highly secure i
generates a new environments I
Text message
supplementary I
passkey at
frequent intervals I
Send a text
message with a
i Medium
• Even if a password is
stolen, the system is still
• If the device is lost, access is
lost until a new one is obtained
• Alternative access control (e.g.,
password) is essential if token
device is
secure I • Home phone option requires
• Mobile phone saturation text to speech hardware/
is very high; no additional software
equipment is needed I • Alternative access control (e.g.,
• It is very useful when password) is essential if mobile
password is forgotten device is stolen ___________________ ,
FIGURE 7.3 Common system access security tools and their advantages and disadvantages.
Access Tool I Concept
Multifactor Couple two or
authentication more access
techniques, for
• Passwords and
• Biometrics
and follow-up
• Passwords and
text messaging
FIGURE 7.3 (Continued)
very high
in banking
and other
Notable Advantages
It enhances security
Even if a password is
stolen, the system is still
What Should Management Do? lliJ
Notable Disadvantages
• It requires an additional access
authentication technique if one
or more of the techniques fails
• Users might be tempted to
use an easy password, which
removes the advantage of a
second factor
Storage and/or j Concept Ubiquity ‘ Notable Advantages Notable Disadvantages
Transmission Tool ,
Very high , • Products block known
System logs
System alerts
periodic state of the
whole system to detect
threats of secret software ,
‘ that can either destroy
data or inform a server
of your activity
, Software and sometimes High
, hardware-based tilter
I prevent or allow outside
: traffic from accessing the
I network
‘ They keep track of Very high
system activity, such as
successful or failed login
attempts, file alterations,
tile copying, file deletion,
or software installation
System detects unusual
activity, such as scores
of unsuccessful log-in
attempts, log-ins from
countries without any
I branches, alterations of
: files, or copying of files
FIGURE 7.4 Common storage and transmission security tools.
threats very effectively
• Products have a large
database and can detect
hundreds of thousands
of patterns that reveal a
, • Some products reveal a
limited set of zero-day
threats (brand-new
outbreaks) by tracking
suspicious behavior
• ls flexible and can
prevent traffic from a
particular user, device,
method, or geography
• If an irregularity occurs,
the IP address of the
attacker could be
• The extent of the
irregularity can be
• They can aid in combing
through logs more
• Administrators can be
alerted to an irregularity
while it is occurring
• Many breaches can be
detected this way• (high
• Products sometimes
slow down the device
• Products are not as
effective for a clever
zero-day threat
(brand-new outbreak)
• It can filter only known
• It can have well-known
• Some anonymizing
software can hide the
true IP address of the
• Some attackers erase
or disable the logs
• Logs can be huge
and difficult to wade
• Some firms fail to
inspect logs regularly
• Many firms receive
hundreds of alerts each
• It is difficult to discern
real attacks from false
alarms (low selectivity)
Im Security
Storage and/or Concept Ubiquity I Notable Advantages Notable Disadvantages
Transmission Tool
···········–··–··-·····-······ ………. . …… !··········· ·······-·——-··-····· -··-·—-·- –
Encryption System follows a Very high • It is very difficult to use or • The key can be
complex formula, using read a stolen computer unnecessary if access
a unique key (set of file without the key password is known
characters) to convert • Long and complex keys • If the key is not strong,
plain text into what would take years of hackers can uncover it
looks like unreadable computer time to break by trial and error
nonsense and then to
decode back to plain I
text when presented I with the decoding key –·—·—1 WEP/WPA Encryption is used in a Very high • It is same as encryption • It is same as encryption
wireless network Nearly all modern user Some older devices I (wired equivalent • •
privacy and devices have capabilities might not be able to
wireless protected • It provides a secure be connected ,
access) connection between the • WEP is not secure yet
user’s device and the is still provided for
I WiFi router compatibility
Virtual private Software provides Medium • Trusted connection works • If the device is stolen
network a trusted, encrypted as if you are connected while connected, the
connection between at your office; it is useful hacker has access to all
your site and a particular for mobile workers resources
server • Eavesdroppers cannot • It sometimes slows
easily decrypt VPN the connection or
communications complicates use
• Vi nod Khosia, “Behavioral Analysis Could Have Prevented the Anthem Breach,” (February 24, 2015), http://www. ..,,,,j (accessed June 28, 2015).
FIGURE 7.4 (Continued)
A study in the United Kingdom found that 39% of IT professionals admit that passwords are the only IT security
measure in their firms, and one-third believes that biometrics are likely to be used in five years. 38 There is a general
trend toward multifactor authentication, or the use of two or more authorization methods to gain access. Exam-
ples are use of a password followed by a passkey sent to a mobile phone as a text message or a password followed
by a challenge question. Between 2013 and 2014, the organizations around the world using multifactor authenti-
cation increased from 30% to 37%, and this number continues to increase rapidly. 39
Fears of making passwords intrusive or lowering convenience are likely to factor into IT’s reluctance to adopt
multifactor authentication. For instance, in Apple’s “I’m a Mac” campaign in 2008, Apple poked fun at Micro-
soft Vista’s “Cancel or Allow” messages,40 emphasizing the diminished convenience caused by security warnings.
Security and convenience are indeed generally at odds with each other,41 but our current state of convenience is
untenable over the long run, and the days of single-factor authentication using a password are undoubtedly going
to become a distant memory.
Not only access controls are important, but also the way that information is stored and transmitted requires
security tools. Figure 7.4 provides a representative list of those tools. Although these tools are likely to help limit
security problems, managers also need to provide a strong security policy as described in the next section.
38 SecureAuth, “The Password’s Pulse Beats On. Hackers Still One Step away from Your Information,” (March 18, 2015), https://www. IN ews/March-2015/The-Password % E2%80%99s-Pulse-Beats-On- Hackers-Still-One-St.aspx ( accessed June 24, 20 15 ).
39 SafeNet, “More Enterprises Plan to Strengthen Access Security with Multi-Factor Authentication,” SafeNet Survey Report (May 21, 2014), http:// ( accessed June 24, 2015).
40 Renee Quinn, “Comparative Advertising: Mac vs. PC,” IP Watchdog (November 16, 2008),
advertising-mac-vs-pc/id=268/ (accessed June 24, 2015).
41 David Jeffers, “Why Convenience ls the Enemy of Security,” PC World (June 18, 2012), ~
is_the_enemy_of_security.html (accessed June 25, 2015).
What Should Management Do? Im
Security Policy
Management needs to approach security in a way that expresses its importance and instructs users on what they
need to do to achieve safety. Without sound management policy, access and storage technologies will be useless. If
employees write their passwords on sticky notes and put them near their workstations, passwords will be ineffective
from the start. Figure 7 .5 provides a list of management policy tactics to prevent security weaknesses.
Several of these policy areas are quite interesting. For instance, some managed security services provider (MSSP)
firms offer the services of white hat hackers who break into a firm’s systems to help it uncover weaknesses. White
hat hackers lie in sharp contrast to black hat hackers, who break in for their own gain or to wreak havoc on a firm.
Grey hat hackers test organizational systems without any authorization and notify a company when they find a
weakness. Although they can be helpful, what they do is nevertheless illegal.
Another interesting area is that of social media. We are still in the early stages of understanding the impacts of
being on social media for employees and firms themselves. Companies continue to set up policies about accept-
able behavior on social media including the appropriateness of sharing company secrets, security procedures, and
Perform security
updates promptly
Separate unrelated
–·-··—–·—-·–····–·-·· .. ·—–·–·-·· –,–··-···—-···–··–
Concept \ Notable Advantages
Make sure all security
updates are applied as
soon as possible
Disconnect distinct and
unrelated parts of the
network. For instance,
Target’s HVAC system
should have been
disconnected from the
financial system
/ • Most operating systems
have automatic updates
i • Protect one part of the
system when the other
part is attacked
: Notable Disadvantages
! • Sometimes the added
security causes some older
, applications to “break”
: • There is an option to prevent
automatic updates
• Sometimes there are
connections that are
unknown or unexpected
• Each requires different log-in
credentials, complicating its
Keep passwords secret Forbid users from sharing
i • If everyone complies,
any activities on the site
will be traceable to one
user’s access
• It will be harder if the user
is on the road and needs
an assistant to help with
Perform mobile device Provide a BYOD (bring • It will prevent, or at least
allow IT to trace, potential
security problems
• It will restrict users to apps
they might not wish to use management your own device) policy
on permitted products
and required connection
• It might restrict users to
certain devices they might
not desire to use
Data policies Require disposal of e-mails
and other documents of a
certain age
1 • Data that are not owned • Workers might be unable I
I cannot be stolen to refer back to the details I
\ • Legal liability is of a previous successful
Social media
Managed security
services providers
dramatically reduced by assignment for guidance ‘)
destroying memos and
e-mails that can be taken j’
out of context
—————- —-,——————— —-+——————- ‘
Provide rules about what , • It will prevent • It might appear restrictive to I
can be disclosed on social misrepresentation and workers
media, who can Tweet, and , confusion • It might appear to be ,
how employees can identify I • It will limit liability by meddling in workers’ I
themselves ! avoiding errors personal use of social media
expertise and checklists, comprehensive very small company
most often to medium and security plan • It can provide a bewildering
large enterprises set of options
Consultants who bring their • It can help build a ~ can be too expensive for-~
~– —–~~—– ——-‘———··——~———- –
FIGURE 7.5 Commonly used management security policies.
B Security
personal information that could be linked back to a company. Given the large size of some firms, it is difficult to
control personal behavior. But lacking policy, devastating impacts of uncontrolled behavior can be high.
Education. Training. and Awareness
Users’ behavior cannot be expected to change unless they are aware of security policy and tools, understand them,
and know what to do. Merely dictating rules to employees and providing the required tools will not guarantee
compliance. Security education, training, and awareness (SETA) can provide well-rounded preparation to users.
Because 50%-75% of security incidents originate from within an organization, researchers have found that SETA
was effective in reducing IS misuse and that severity of punishment was more potent than certainty of punishment if
users were caught. As one might expect, the researchers also found that monitoring behavior was quite important. 42
Each component of SETA is discussed next.
Although awareness comes at the end of the SETA acronym, it is an important first step merely to let users know
that security is a complex but important issue and that there are consequences when policies are not followed. Users
must see the importance of the security policies and the need to use the appropriate tools. Awareness includes an
explanation of what might occur if users are relaxed about security, such as in the cases discussed in this chapter.
Awareness creates attitudes, and researchers note that attitudes are important in predicting compliance. Impor-
tantly, users’ feelings of efficacy (ability to comply) and normative beliefs (social pressure to comply) are both
important for forming favorable attitudes toward compliance,43 suggesting that the awareness stage is crucial for
security success. Managers should be cautious not to overwhelm users all at once; this is where education programs
can help.
Education and Training
Education provides frameworks, reveals concepts, and builds understanding. Training usually provides procedures
to follow and practice in following them. For example, 69% of company breaches have been discovered by out-
siders, not insiders. 44 In some cases, customers complain of irregularities in their accounts, such as unauthorized
charges. However, it takes time for that information to reach the breached firm, if ever, as the unsettling recent
60 Minutes interview revealed; after hacking, Visa and MasterCard do not reveal which retailer was involved.
Further, in the case of Home Depot, it took Brian Krebs to notify the firm after seeing credit cards for sale on Deep
Web sites. He says he did some “detective work” and tracked the stolen cards to Home Depot.45
Apparently, insiders do not always notice signals that might indicate a problem. Some of that can be alleviated
through education. Users need to be educated about the potential for different types of suspicious activities, such
as strange cars parked with the motor running, which might indicate tapping into a company’s WiFi, or strangers
standing near active equipment, which might indicate surveillance or potential invasive action. Employees must be
trained to make sure active equipment is watched and suspicious activity reported. Training also instructs on power-
ing down equipment, logging users out of systems, closing browser windows, and frequently updating passwords.
In a recent alarming situation, a security researcher claimed on Twitter to have tapped into the avionics system
through the entertainment system on an airplane, causing the plane to go into a brief, unscheduled climb. While
on the plane, the person bent over and wiggled and squeezed the under-seat electronic box’s cover to pry it off.46
The person then attached a modified Ethernet cable to an open port in the entertainment equipment below two
passenger seats. Although pilots were able to quickly take over in this situation, the FBI took his Tweet seriously.
42 John D’ Arey, Anal Hovav, and Dennis Galletta, “Awareness of Security Countermeasures and Its Impact on Information Systems Misuse: A Deterrence
Approach,” Information Systems Research 20, no. I (March 2009), 79-98.
43 Burcu Bulgurcu, Hasan Cavusoglu, and Izak Benbasat, “Information Security Policy Compliance: An Empirical Study of Rationality-Based Beliefs
and Information Security Awareness,” MIS Quarterly 34, no. 3 (20!0), 523-48.
44 Mandiant, “M-Trends 2015: A View from the Front Lines,” (accessed June 24,
45 Whitaker, “What Happens When You Swipe Your Card?”
‘° Kim Zetter, “Is It Possible for Passengers to Hack Commercial Aircraft?” Wired (May 26, 2015),
hack-commercial-aircraft/ (accessed June 25, 2015).
What Should Management Do? Ill
Subject Sample Educational Activities Sample Training Activities

Access tools Advantages and limitations of passwords How to choose a password
Why passwords should be complex and long How to change your password
How often passwords should be changed How to use multifactor authentication
Strengths of multifactor authentication How to use a password manager
Bringing your own Why there are rules How to follow the rules
devices (BYOD) What the rules are What to do if something goes wrong
—· – -·-·· … – ·–··-··-··—·- –····-·-···–·····——— ···-· — -·-·—-·-···— —··—··· -··-·–·-···· — –···-·-·–···— —–··–···—–··——··——-··-··-····– – –·—· ··-·–
Social media Why there are rules What to do in particular situations on
Examples of issues that have occurred in the past social media
How those issues could have been avoided What to do if you need help or
clarification on an issue
Vigilance What signals you might see under certain situations Where and how to look for warning
(warning messages; phishing e-mails; customer signs
complaints) What to do when you see the various
What physical intrusions look like signals (for instance, a number to call
What the signals mean or way to shut down)
Which pieces of equipment have ports (USB, ethernet) How to protect your laptop when
······-···–·—–·-··—–·-·— -··———-·——·-·
FIGURE 7.6 Major areas for education and training. with examples.
Agents seized the plane’s equipment to investigate his claims and found evidence that boxes under his seat and
under the seat in front of him on one of his flights had indeed been tampered with. 47 Had flight attendants been edu-
cated that this was the possible action of a hacker and been trained to notice passengers preoccupied with something
below the seat, the hack might have been stopped earlier. See Figure 7.6 for a list of areas for education and training
along with possible activities for each.
New employee onboarding processes include education in security policies including vulnerabilities and the
tools and practices used to avoid problems. Types and levels of passwords or other access tools should be described
to employees. “Dos” and “Don’ts” of social media should be presented in a well-organized manner so they are
understood. And these policies must be reinforced at regular intervals to ensure compliance.
The goal of education is to avoid the consequences of phishing by helping individuals identify ways to recognize
these scams. There are certain “classic” signs of a phishing message:
• An e-mail or bank account is closed, and the user needs to click to log-in and reactivate it.
• An e-mail inbox is too full, and the user is asked to click to increase storage.
• The user just won a contest or lottery and is asked to click to claim the prize.
• A user just inherited a fortune or will receive a commission to administer an inheritance after clicking to
claim it.
• A product delivery failed, and the user needs to click to retry.
• An odd or unexpected Web address shows up when hovering a mouse pointer over a link in an e-mail.
• A familiar name in the “from” box is followed by an odd e-mail address.
• Poor grammar and spelling are in a note that purports to be from a large company.
• Goods or services are offered at an impossibly low price.
• An attachment is executable, often with an extension such of ZIP, EXE, or BAT.
47 Even Perez, “FBI: Hacker Claimed to Have Taken Over Flight’s Engine Controls,” (May 18, 2015),
!bi-hacker-flight-computer-systems/ (accessed June 25, 2015).
lrfJ Security
Paypal customer
~ PayPal
We Need Your Help
Dear Customer,
We need your help resolving an issue with your account. To give us time to work together on
this, we’ve temporarily limited what you can do with your account until the issue is resolved.
We understand it may be frustrating not to have full access to your PayPal account. We want
to work with you to get your account back to normal as quickly as possible.
Why my PayPal™ account is limited?
We recently noticed a pattern of account activity that, in our experience, is usually high risk.
For more information, see Restricted Activities identified in our User Agreement.
What can I do to resolve the problem?
It’s usually pretty easy to take care of things like this. Most of the time, we just need you to
verify your account. Click the link below
Please mark this email as “Not Spam” to enable link, if this email appears in your spam or junk mail .
Ve 11/y your Account
FIGURE 7.7 Actual phishing message received February 21. 2015.
Even if the signals are not present, security experts recommend not to click on any link or open any attachment
in an e-mail unless it was requested and expected from a known source. Unexpected e-mail, even from a known
source could breed viruses because of any one of the following: (1) The e-mail might not really be from the known
source, and someone is spoofing (counterfeiting) the address, (2) the e-mail might be from a known source’s com-
puter but the e-mail had a virus, which will infect the recipient’s computer, or (3) the e-mail might have been sent “””‘
from a familiar person who doesn’t know that a virus is attached. Opening the attachment or clicking the link would
likely infect the recipient’s computer and continue the spread of the virus to her or his contacts.
An actual phishing message received by one of the authors of this text on November 21, 2014, had the subject
header of “PAYMENT OF A CONTRACT/INHERITANCE FUNDS” (all caps in the original), and the first sen-
tence was “We have expected receiving you in the office, but no one has ever head from you” (italics added to high-
light errors). Another recent phishing message (Figure 7.7) was more believable, but had some minor grammatical
issues. Some messages are nearly flawless, looking identical to genuine ones from the named company, and making
it critical to suspect every link or attachment in any e-mail.
Education programs describe phishing and spoofing and how to guard against clicking on dangerous links.
Users must understand that opening a virus-laden Web page or file leads to “catching” the virus. Education pro-
grams might also include the different types of threats and include training on how to avoid scams, the loading of
key-logging software on unsuspecting users’ systems, and the breach of security measures already put in place.
Training would demonstrate how to examine a link, what cues to evaluate, and what to do if a site is suspicious.
• Five key IT security decisions focus on security strategy, infrastructure, policies, training, and investments.
• Perpetrators (hackers) most often work from a great distance, over long periods of time, and not by accessing data center
buildings in person.
• Of breaches, 80% are enabled by stolen passwords. Those passwords are obtained from phishing messages, cross-site
scripting, weak passwords, key loggers, and evil-twin connections.
• The statistics are staggering: It takes 205 days for the average breach to be detected, and the longest breach recorded
took 11 years to detect. The message is that hackers have plenty of time to figure out how to steal files. Also, 97% of all
firms have been hacked, and the average cost of a data breach is estimated to range from $145-$154 per stolen record ,1//////1/11
containing sensitive information. Many breaches involve tens of millions of records.
CaseStudy g
• Perfect security of data and digital assets is not possible. However, there are best practices for reducing risks by using
tools, implementing tactics (policies) and providing training (and education).
• Infrastructure technologies can limit access to authorized people ai1d protect data storage and transmission.
• Policies need to be created to cover the need to install updates, separate unrelated networks, keep passwords secret, manage
mobile devices, destroy data at the proper time, manage social media, and properly use managed security services providers.
• SETA refers to security education, training, and awareness, each of which has a specialized purpose.
antivirus/antispyware (p. 157)
biometrics (p. 156)
firewall (p. 157)
grey hat hacker (p. 159)
key logger (p. 152)
social media management (p. 159)
spoofing (p. 162)
black hat hacker (p. 159)
challenge question (p. 158)
cross-site scripting (XSS) (p. 152)
deep Web (p. 155)
mobile device management (p. 159)
multifactor authentication (p. 158)
phishing attack (p. 151)
token (p. 156)
weak password (p. 152)
white hat hacker (p. 159)
zero-day threat (p. 157)
encryption (p. 158) security education training and
evil twin connection (p. 152) awareness (SETA) (p. 150)
1. Did you change your shopping habits after hearing of the widespread breaches at Target, Home Depot, and dozens of other
stores during 2013-2015? Why or why not?
“‘2. Evaluate your password habits and describe a plan for new ones. Explain why you chose the new habits and how they reduce the risk of compromising your system’s security.
3. Across all access tools listed in Figure 7.3 which have the most compelling advantages? What are the most concerning
weaknesses? Provide support for your choices.
4. What is the likely future of access tools? Will they continue to be useful security measures? In your discussion, predict what
you believe is the future of passwords.
5. What is an evil twin WiFi connection? What should you do to increase your security in a coffee shop the next time you want
to connect?
6. Name three commonly used management security policy areas and describe an example policy for each area.
7. Create an outline for a training session to help your team avoid phishing. What would you include in that training session?
What are some typical signs that an e-mail might be fraudulent?
• CASE STUDY 7-1 The Aircraft Communications Addressing and Reporting System (ACARS)
On June 22, 2015, LOT, the state-owned Polish airline had to ground at least 10 national and international flights because
hackers breached the network at Warsaw’s Chopin airport and intercepted the flight plans that pilots need before taking off.
The grounding affected about 1,400 passengers and lasted over five hours before the problem was solved. A month earlier,
United Airlines was reported to have experienced the same problem in the United States, and pilots reported bogus flight
plans repeatedly popping up on the system.
A consultant explained that the radio network that carried flight plans did not need authentication and was designed to
trust the communications. A committee was then set up to develop a proposed standard for flight plan security.
Fortunately, the flight plan did not control the plane, and a pilot had to accept and enter the plan. A strange result, such as
heading to a distant city in the wrong direction, would not be entered or accepted. Even if the bogus plan were entered and
accepted by the pilot, there was no danger of collision or crash because of the fraudulent plans.
Any changes received to the plan while in flight had to be confirmed with air traffic controllers, who analyzed the new
plan for safety. Alarms would also indicate a possible collision.
B Security
Discussion Questions
I. Which of the two aircraft breaches is more serious: the breach described here or the breach created by the hacker
(described earlier in the chapter) who took control of a plane’s throttle briefly through the entertainment system and
then tweeted about it? Why?
2. Which of the access controls and storage/transmission controls would be most helpful for the ACARS problem? The
entertainment system problem? Why?
– 3. If password control is used to solve the ACARS weakness, what might hackers do next?
Sources: Kim Zetter, “All Airlines Have The Security Hole That Grounded Polish Planes,” Wired (June 22, 2015), http://www.wired.
com/2015/06/airlines-security-hole-grounded-polish-planes/ (accessed August 25, 2015); and “Hackers Ground 1,400 Passengers at
Warsaw in Attack on Airline’s Computers,” The Guardian (June 21, 2015),
1400-passengers-warsaw-lot (accessed June 26, 2015).
• CASE STUDY 7-2 Sony Pictures, The Criminals Won
The Tech section in Forbes magazine reported that the “criminals won” in the Sony pictures breach. An anonymous threat
posted on an obscure site warned that people who watch the to-be-released movie The Interview would be “doomed” to a
“bitter fate” and recalled the tragic events of September 11. The threat said that the movie inappropriately made light of
North Korean officials.
As a result of the threat, five large theater chains in the United States and Canada canceled plans to include the film on
their screens. Ultimately, Sony had no choice but to cancel the theater release of the film for reasons that are both economic
and legal. The former was due to a lack of revenue given the small number of remaining theaters that might go ahead and
run the film. The latter was driven by what would happen if an attack was carried out. A Steve Carell project that featured
North Korea was also canceled.
The Guardian reported that a group named the Guardians of Peace retaliated against Sony. They hacked into Sony’s
systems and stole over I 00 terabytes of files, including unreleased movies, social security numbers for thousands of Sony
employees, and internal e-mails, some of which show embarrassing conversations between Sony employees. The hackers
began distributing the files in various locations online, making them free for the taking.
The officials of that government denied any involvement in the hack but said that it might have been a “righteous deed”
of those who support the government.
North Korean officials demanded some changes to the movie, including taming down a death scene of its leader. Sony
initially refused but then decided to go ahead and edit the scene. The movie eventually opened without incident on a limited
basis in some cinemas on Christmas Day and then was made available via online rental.
According to the Mirror in the United Kingdom, neither the Department of Homeland Security nor the FBI could find
evidence that the violence was a credible threat, but the FBI believed North Korea was behind the hacking. In tum, North
Korea claimed that the U.S. government was responsible for creation of the movie.
Discussion Questions
I. Setting aside the political issues between North Korea and the United States, is there a reasonable way to respond to an
anonymous threat found on the Internet somewhere? What elements would you require before canceling the film if you
were CEO of Sony? If you were CEO of a chain of theaters?
2. What access and data protection controls would you recommend Sony use to provide better security for unreleased
digital films and e-mails?
3. If you were a hacker, what approach would you have used to break into Sony’s system? What do you think the most
important SETA elements would be to prevent future hacker attacks against Sony or other media firms?
Sources: Dave Lewis, “Sony Pictures: The Data Breach and How the Criminals Won,” Forbes Tech (December 17, 2014), http://www. /sony-pictures-how-the-criminal-hackers-won/ (accessed June 25, 2015); Oliver Laughland, “The
Interview: Film at Center of Shocking Data Breach Scandal Opens in LA,” The Guardian (December 12, 2014) http://www.theguardian.
com/film/2014/dec/12/the-interview-sony-data-hack (accessed June 25, 2015); and Anthony Bond, “Sony Hack: The Interview WILL Be
Released Despite Huge Cyber Attack Against Film Maker,” Mirror (December 23, 2014),
sony-hack-interview-released-despite-4868965 (accessed June 25, 2015). ..,,,,j
The Business of
Information Technology
This chapter explores the business of information technology (IT) and the customers it
serves. Beginning with the introduction of a maturity model to understand the balancing
act between the supply and business demand for information systems (IS), the chapter
describes key IT organization activities and relates them to one of three maturity levels. The
chapter continues with a discussion about the work done by the IT organization and how
the leadership within the IT organization ensures that activities are conducted efficiently and
effectively, both domestically and globally. We then examine business processes within the
IT department, including building a business case, managing the IT portfolio, and valuing
and monitoring IT investments. The remainder of the chapter focuses on funding models
and total cost of ownership.
After several months in the job of chief information officer (CIO) of Alcoa’s Industrial Chemicals
Business, Kevin Homer received a wake-up call from the president of the business: 1
We chose you because you were the best of the IT group, and you are doing a great job complet-
ing IT projects and managing the IT organization. But I am afraid that you don’t know the business of
your business. You haven’t thoroughly answered my repeated questions about how much IT costs the
business! Furthermore, you can’t communicate with the people running the business in words they
As a high-achieving math major in college with minors in computer science and business, Homer
was quite savvy about his craft and did not expect to hear these remarks. When he protested that
the structure of the financial information in European and Asian subsidiaries made it really difficult
to find the answer, his boss’s response surprised him: “If it wasn’t a hard problem, I wouldn’t need
you here!”
Interpreting this unpleasant meeting as his being “under review” for possible ouster, Horner
saw this as a wake-up call to the true meaning of being a C-level executive. He had found some
answers about cost issues, but many of the financial numbers were “buried”-inextricably inter-
twined in general categories of financial statements in Europe and Asia. He had some early results,
but managing the IT group took most of his time and effort.
Further, his early presentations were heavy with technical details and were often met with glazed
eyes and yawns. Homer reported that he began to realize that this audience did not want to hear
about the technology. “They certainly wanted me to handle technology issues, but they wanted me
to communicate with them in words they understood … people, time, money and the possibilities
technology created for them in their businesses. Most importantly they wanted me to help them to
use IT to grow the business at either the top line (sales) or bottom line (net income).”
6.,. 1 This story and all the quotes are based on a personal interview with Kevin Horner and one of our authors. March 23, 2015.
11m The Business of Information Technology
Horner embarked on a re-energized mission to answer all of the president’s concerns in a more complete way,
and that mission ultimately paid handsome dividends both to him and Alcoa. If success can be measured by promo-
tions, he went far beyond redeeming himself. After five years as CIO of Alcoa Chemical, he had many promotions
until he ultimately became CIO of Alcoa Global. In 2011, he took an opportunity to become chief executive officer
(CEO) of Mastech, a $100 million publicly traded IT staffing firm where he remains.
How did he achieve such resounding success? The first thing he did was to partner with the CFO to understand
the financials of the business. The CFO was able to determine how to peel back the layers of accounting numbers
and truly wrestle the IT costs from the general accounting categorizations where they comfortably hid. Within
60 days, the president and his management team had their answers.
But Horner did not stop at a good, solid set of internal cost numbers, a remarkable achievement in and of itself.
Rather than only gaze inside the firm, he found it most helpful to use the Hackett Group, an external benchmarking
consulting firm, to compare his costs against those of similar firms. This analysis was most helpful for the lead-
ership of the business because after finding that the company was high on some key IT costs, the leaders all saw
the writing on the wall for the next mission: Find ways to reduce costs but continue to provide improved services.
Two key examples of how Homer addressed those needs will help explain his early success. He accompa-
nied salespeople on actual sales calls to see exactly how the overall supply chain process worked. Then with that
information as a base, he was able to have the business provide reliable product information to customers, acceler-
ating delivery of the products customers needed without creating excessive inventory buffers.
Homer also worked with procurement officials to renegotiate contracts for the highest-cost elements within the
company’s IT spending. For example, two very costly areas included telecommunications costs (including cell
phones) and PCs. He found two important cost-savings opportunities: eliminate unnecessary services and nego-
tiate many small separate contracts as a larger unit, raising the business’s bargaining power. As contracts would
come up for renewal, a joint team from IT and procurement spearheaded an intense process to streamline costs,
focusing on the highest cost elements first. These contract negotiations led to another benefit: standardization,
which enabled further savings by simplifying items such as interconnectivity between segments of the business,
and PC and mobile phone support.
The lessons learned in Homer’s initial CIO role in the chemicals business transferred naturally into his next role
as CIO of Alcoa Europe, which was a collection of historical Alcoa businesses and locations along with several
newly acquired companies representing what Homer called “kind of a $3B ‘start-up’ company.” He knew immedi-
ately that he had to get a clear picture of the IT business in Europe from several perspectives-technology, applica-
tions, people, vendors, cost, and “quick wins,” which solved problems for his business leadership colleagues. This
time Homer didn’t need the questions from the business president to guide him: He had to quickly assess talent
in his team, determine total IT cost in the business, assist the management team to move to Europe from a struc-
ture focusing on legal entity driven reporting and reporting finances in a new structure that aligned with corporate
Alcoa and unified pan-European business units. As a result of his business-focused thrusts, within 24 months, the
entire unified structure was created and implemented; legal entity fiscal reporting was maintained; a shared service
function for finance, accounting, HR, and procurement plus the technology to operate it was implemented; Y2K
remediation was completed; and European IT costs were reduced by 25%.
What does this experience demonstrate? It shows that there are common denominators that every business leader
understands: people, time, and money. When a business leader wants to invest capital to produce more product or
a new product, that investment is scrutinized for cost and benefit. Horner says that a CIO should make sure IT is
not the exception to that rule. “Don’t talk about ERP or mobile apps, talk about what is going to happen to the
business … [and] to people, time, and money when you have the ERP or the mobile app,” he says. “Getting the
cost side of the IT organization in order represents table stakes for the CIO,” implying that you would wear out
your welcome by focusing inward. Rather than focusing only on managing the technologies and IT people and
describing new investments and initiatives by using “techy” jargon, a CIO should take a business viewpoint. If you
follow that advice, you will not only be welcome at the table but also will thrive. This demonstrates the Business of
Information Technology, the title of this chapter.
In this chapter, issues related to the business side of IT are explored. We begin by looking at key activities
managers can expect of their IT organization and, probably just as importantly, what the IT organization does not
Organizing to Respond to Business: A Maturity Model Im
provide. The chapter continues with a discussion of key business processes within the IT organization, such as
building a business case, managing an IT portfolio, and valuing and monitoring IT investments. This is followed
by a discussion of ways of funding the IT department and an exploration of several ways to calculate the cost of
IT investments, including total cost of ownership and activity-based costing. These topics are critical for the IT
manager to understand, but a general manager must also understand how the business of IT works to successfully
propose, plan, manage, and use information systems.
Organizing to Respond to Business: A Maturity Model
The Alcoa situation just discussed reveals that IT leaders must make sure they have the right resources and organi-
zation to respond to business needs. It is not enough to focus inward on managing personnel, software, and equip-
ment, which can seem like a full-time responsibility. IT managers must go beyond internal matters and partner
with their business colleagues. Responding to business demands adds substantially to IT managers’ responsibilities
because it requires them not only to manage the complexity within the IT function, but also to go well beyond what
seem to be the boundaries of IT and understand intricacies of their business partners.
Merlyn’s business-IT maturity model in Figure 8.1 provides characteristics of how engaged the IT function
can be with the rest of the organization at three unique levels of maturity. At Level 1, representing an immature IT
organization, IT managers maintain an inward focus. They merely react to specific needs that are brought to their
attention, often in an environment that emphasizes cost reduction. As the IT organization matures to Level 2, the
focus shifts to business processes, and IT personnel search for solutions to business problems. Level 3 represents
IT managers as business partners who search for ideas that provide value to the organization and value relationships
both inside and outside not only the IT organization but also the firm. They seek ideas that provide not only new
revenue but also help identify new opportunities that redefine the business.
This model illustrates that for IT to provide the most value to the business, IT managers and business managers
must recognize their mutual dependency and ensure that business capability has the technology support needed
for success. This model does not comment on the type of technology used but on the way the business organi-
zation approaches its use of IT. For example, in Level 3, business leaders see IT’s role as a business partner that
they can include in high-level meetings that explore new lines of business. Compare this approach with lower
levels of maturity. At Level 2, the focus would instead be on creating an effective business process, which has a
much more limited scope and impact. At Level 1, where the business demand for IT is primarily all about cost
Maturity Level Nature of the Level I Engagement Characteristics
I Level3
IT as business partner • Proactive
• Outside-in
• Relationship centric
• Focused on business growth
• Framed on a context of business
I I Level 2 · ·· — — —
IT as solutions provider
• Process centric
• Focused on solutions
• Framed in a context of projects
‘ —-+———-+—– ———;
Level 1 IT as order taker • Reactive l
• Inside-out
• Technology centric
• Framed in a context of cost
—-·-·———··-··-··—·-·-·—-··~ i
FIGURE 8.1 Business-IT maturity model.
Source: Adapted from Vaughan Merlyn,
(accessed April 22, 2015}.
Im The Business of Information Technology
savings and foundation systems, the IT function might be seen more as a necessary evil that needs to be pushed
into a corner rather than expanded to flex organizational muscles. When the maturity of the IT organization rises
to Level 3, it is able not only to keep up with business demands but also to enhance the business in ways that were
not envisioned before.
This chapter describes the complex, multifaceted tasks for which an IT organization takes responsibility and
how IT is organized. The chapter describes both the internal and external issues that must be handled by IT leaders
and the personnel responsible for them. The description is presented in a context of how the IT organization must
make it a priority to partner with business leaders. Because running the business of IT requires funding, we also
explore how to fund IT projects to support business and how to cover the operational costs.
Understanding the IT Organization
Consider the analogy of a ship to help explain the purpose of an IT organization and how it functions. A ship trans-
ports people and cargo to a particular destination in much the same way that an IT organization directs itself toward
the strategic goals set by the larger enterprise. All ships navigate waters, but different ships have different structures,
giving them unique capabilities such as transporting people versus cargo. Even among similar categories, ships
have different features, such as those configured to transport a cargo of finished products versus one configured to
transport a cargo of oil. All IT organizations provide services to their businesses, but based on the skills and capa-
bilities of their people, the organizational focus of their management, and their state of maturity, they, too, differ
in what they can do and how they work with the businesses. Sometimes the IT organization must navigate peril-
ous waters or storms to reach port. For both the IT organization and the ship, the key is to perform more capably
than any competitors. It means doing the right things at the right time and in the right way to propel the enterprise
through the rough waters of business.
Different firms need to do different things when it comes to IT. Because firms have different goals, they need to ..,,;
act in different ways and as a result, there are differences in the IT activities that are provided. But even if two firms
have similar goals, the firms’ size, organization structure, and level of maturity might affect what the IT organiza-
tion in each firm is expected to do.
What a Manager Can Expect from the IT Organization
We look at the IT organization from the perspective of the customer of the IT organization, the general manager, or
“user,” of the systems. What can a manager expect from the IT organization? Just as IT leaders benefit from under-
standing their business partners, a general manager benefits from understanding what the IT organization does.
Managers must learn what to expect from the IT organization so they can plan and implement business strategy
accordingly. Although the nature of the activities may vary in each IT organization depending upon its overall goal, a
manager typically can expect some level of support in 14 core activities: (I) developing and maintaining information
systems, (2) managing supplier relationships, (3) managing data, information, and knowledge, ( 4) managing Internet
and network services, (5) managing human resources, (6) operating the data center, (7) providing general support,
(8) planning for business discontinuities, (9) innovating current processes, ( 10) establishing architecture platforms
and standards, (11) promoting enterprise security, (12) anticipating new technologies, (13) participating in setting
and implementing strategic goals, and (14) integrating social IT. 2 These activities are briefly described in Figure 8.2.
Although the activities could be found at any maturity level, we indicate in Figure 8.2 the level where they are
especially important. Recall that Level 1 focuses on cost savings and efficiency of business operations; Level 2
takes a process view, provides services of an integrated nature across the organization, and supports decision mak-
ing to maximize business effectiveness; and Level 3 focuses on innovation and support of business strategy. This
progression implies that the scope of activities in the IT organization expands with increased IT maturity.
‘ Eight activities are described by John F. Rockart, Michael J. Earl, and Jeanne W. Ross. “Eight Imperatives for the New IT Organization,” Sloan ..,,,,J
Management Review (Fall 1996), 52-53. Six activities have been added to their eight imperatives.
Developing and
maintaining systems
Managing supplier
–·—·—– —–···
Managing data,
information, and
Managing Internet and
network systems
Managing human
Operating the data
Providing general
Planning for business
Innovating current
platforms and standards
Promoting enterprise
What a Manager Can Expect from the IT Organization Im
Description ! Maturity Level
————–··——-. ———————————+————1
• Together with business users, analyze needs, design, write, and test the i 1
• Identify, acquire, and install outside software packages to fill business
• Correct system errors or enhance the system to respond to changing
business and legal environments
– -·- . . ···-··-·····–·-···- —- ·-··-·-·-····-····· -···-· ··- -·–·–·–····– …. ·-·······-···—·—-·- —·-·-··-··-······-·—–·–·· – – –
• Maximize the benefit of supplier relationships to the enterprise and
pre-empt problems that occur
• Collect and store data created and captured by the enterprise (Level 1) 1, 2
• Manage enterprise information and knowledge (Level 2)
• Develop and maintain Internet access and capabilities
• Manage private networks, telephone systems, and wireless
• Design, build, and maintain the network architecture and infrastructure
• Hire, train, and maintain good staff performers; fire poor performers
• Work with enterprise HR personnel to learn up-to-date regulations
1, 2 (depending
on nature of
Operate and maintain large mainframe computers, rows of servers, or ! 1
other hardware on which the company’s systems are built !
Provide connections between the firm’s systems and cloud services i
• Manage diverse help desk activities
• Collect and record support information
• Assign appropriate personnel to support cases
• Follow up with vendors as needed
• Follow up with business contacts with updates or solutions
• Develop and implement business continuity plan
• Make preparations to counter physical or electronic attacks, hacking
attempts, weather disasters, and other events that could cripple the
• Work with managers to innovate processes that can benefit from
technological solutions
• Explore modifications that can reduce costs, improve service, or
connect with customers
• Design systems that facilitate new ways of doing business
• Develop, maintain, and communicate standards
• Maintain consistency and integrity of the firm’s data
• Maintain the integrity of the enterprise infrastructure
• Develop and implement enterprise information security policies,
strategy, and controls
• Identify, prioritize, and guard against threats to the enterprise’s
information assets
• Work with business units to enhance security of operational practices
• Train employees to raise awareness, importance, and understanding of
security risks
• Participate in discussions about security investments
i 1

Anticipating new
• Scout new technology trends and help the business integrate them
into planning and operations
• Assess the costs and benefits of new technologies for the enterprise
• With business partners, prioritize the most promising opportunities on
strategic and operational grounds, and schedule their implementation
• Limit investments in technologies that are incompatible with current or
planned systems or that quickly become obsolete
FIGURE 8.2 IT organization activities and related level of maturity.
ID The Business of Information Technology
Activity i Description I Maturity Level
~p~-~i~i~;ti~-gi~ ;;,1;-;;9—·-i-;-En~l; bu;~;;s-~;~;g~s-t~~~hi;~~-~,~~-t;gl~g;;l~-by-;~ti~g~—-r3
and implementing I educators or consultants I
strategic goals i • Advise managers on best practices within IT i
I • Work with managers to develop IT-enhanced solutions to business J,, I. problems
~·———-1 Serve as par!~_ers in movin~-t~e enterprise forward _ I __ _
Leverage the use of social IT to transform the business 3 -·—–• Integrating the use of
social IT Adapt social IT from personal to business use
Encourage engagement, collaboration, and innovation in customer-,
supplier-, and employee-directed applications
‘————··– Manage the data resulting from social IT t? provide business insights
FIGURE 8.2 (Continued)
The IT organization can be expected to be responsible for most, if not all, of the activities listed in Figure 8.2.
However, instead of actually performing the activities, the IT organization increasingly identifies and then works
with vendors who provide them. More traditional activities such as data center operations, network management,
and system development and maintenance (including application design, development, and maintenance) have
been outsourced to vendors for decades. More recently, enterprises are outsourcing providers to perform more
newly acquired IT activities such as process management (alternatively called business process outsourcing). In our
increasingly flat world, many companies are successfully drawing from labor supplies in other parts of the world
to meet the business demand that they can’t handle internally in their own IT organization. Managing the sourcing
relationships and global labor supply is so important that a whole chapter (i.e., Chapter 10) is devoted to discussing
these sourcing issues in greater depth. Yfltlllli
What the IT Organization Does Not Do
This chapter presents core activities for which the IT organization is typically responsible. It is enlightening to
examine tasks that should not be performed by the organization. Clear examples include core business functions,
such as selling, manufacturing, and accounting, and few functional managers would attempt to delegate these tasks
to IT professionals. However, some functional managers inadvertently delegate key operational decisions to the IT
organization. For example, when general managers ask the IT professional to build an information system for their
organization and do not become active partners in the design of that system, they are in effect turning over control
of their business operations. Likewise, asking an IT professional to implement a software package or app without
partnering with that professional to ensure that the package meets both current and future needs is ceding control.
Partnerships between the general managers and IT professionals are also important for a number of other
decisions. For instance, IT professionals should not have the sole responsibility for deciding which business pro-
jects receive IT dollars. Giving carte blanche to the IT professional would mean that the IT organization decides
what is important to the business units. If IT professionals try to respond to every request from their business
counterparts, they would likely face a backlog of delayed initiatives and become overwhelmed. Business partners
participate in prioritizing IT projects to ensure that resources are applied appropriately. Similarly, IT professionals
should not solely decide the acceptable level of IT services or security. Because senior managers run the business,
they are the ones who must decide on the level of service and security that should be delivered by the IT organiza-
tion.3 These are examples of decisions that should be made jointly with business counterparts. Perfection comes at a
price that many business leaders may be unwilling to pay. Not every system needs to have gold-plated functionality,
and not every system needs to be fortified from every conceivable danger.
Chief Information Officer Iii
As discussed in Chapter 2, the senior management team, including the CIO, sets business strategy. However, in
many organizations, the general manager delegates critical technology decisions to the IT professional alone, and
this can lead to technology decisions that might hinder business opportunities. The strategy formulation process is
a joint process including business and IT professionals. The role for the IT professional in the discussion of strategy
includes such things as suggesting technologies and applications that enable it, identifying limits to the technol-
ogies and applications under consideration, reporting on best practices and new technologies that might enhance
opportunities of the firm, and consulting all those involved with setting the strategic direction to make sure they
properly consider the role and impact of IT on the decisions they make. The IT organization does not set business
strategy. It does, however, participate in the discussions and partner with the business to ensure that IT can provide
the infrastructure, applications, and support necessary for the successful implementation of the business strategy.
The IT organization can also provide ideas of new business capabilities afforded by new technologies. In that sense,
IT leaders must be part of key business strategy discussions.
Chief Information Officer
If an IT organization is like a ship, the chief information officer is like the captain. The chief information officer
(CIO) is the most senior executive in the enterprise responsible for technology vision and leadership for designing,
developing, implementing, and managing IT initiatives for the enterprise to operate effectively in a constantly
changing and intensely competitive marketplace. The CIO is an executive who manages IT resources to implement
enterprise strategy and who works with the executive team in strategy formulation processes.
CI Os are a unique breed. They have a strong understanding of the business and of the technology. In many organi-
zations, they take on roles that span both of these areas. One recently coined term is business technology strategist,
the strategic business leader who uses technology as the core tool in creating competitive advantage and aligning
business and IT strategies.4 The CIO, as the most senior IT professional in the corporate hierarchy, must champion the
IT organization by promoting IT as a strategic tool for growth and innovation. The title C/0 signals to both the orga-
nization and to outside observers that this executive is a strategic IT thinker and is responsible for linking IS strategy
with the business strategy. In other words, CIOs must know the business vision and understand how the IT function
contributes to making this vision happen. This means that CIOs must work effectively not only in the technical arena
but also in the overall business management arena. They need the technical ability to plan, conceive, build, and
implement multiple IT projects on time and within budget. However, their technical skills must be balanced against
business skills such as the ability to realize the benefits and manage the costs and risks associated with IT, to articulate
and advocate for a management vision of IT, and to mesh well with the existing management structure.
Just as the chief financial officer (CFO) is somewhat involved in operational management of the financial activ-
ities of the organization, the CIO is involved with operational issues related to IT. More often than not, CIOs are
asked to perform strategic tasks at some part of their day and operational tasks at other times. Some of their oper-
ational activities include identifying and managing the introduction of new technologies into the firm, negotiating
partnership relationships with key suppliers, setting purchasing and supplier policies, and managing the overall
IT budget. Actual day-to-day management of the data center, IT infrastructure, application development projects,
vendor portfolio, and other operational issues are typically not handled directly by the CIO but by one of the man-
agers in the IT organization. Ultimately, whether they directly function as operational managers or as leaders with
oversight of other operational managers, the CIO must assume responsibility for all the activities described in
Figure 8.2 that the IT organization is charged to perform.
Where the CIO fits within an enterprise is often a source of controversy. In the early days of the CIO position,
when it was predominantly responsible for controlling costs (Level 1), the position reported to the CFO. Because
the CIO was rarely involved in enterprise governance or in discussions of business strategy, this reporting struc-
ture worked. However, as IT became a source for competitive advantage in the marketplace, reporting to the CFO
proved too limiting. Conflicts arose because the CFO misunderstood the vision for IT or saw only the costs of
technology. They also arose because management still saw the CIO’s primary responsibility as providing services
llil The Business of Information Technology
whose costs had to be controlled. More recently, CIOs often report directly to the CEO, president, or other execu-
tive manager. This elevated reporting relationship not only signals that the role of IT is critical to the enterprise and
indicates Level 3 maturity but also makes it easier to implement strategic IT initiatives.
Some organizations choose not to have a CIO. These organizations do not believe that a CIO is necessary, in
part because technology is highly integrated into virtually every aspect of the business and no single officer need
provide oversight. These firms typically hire an individual to be responsible for running the computer systems and
possibly to manage many of the activities described later in this chapter. But they signal that this person is not a
strategist by giving him or her the title of data processing manager, director of information systems, or some other
name that clearly differentiates this person from other top officers in the company. Using the words chief and officer
usually implies a strategic focus, and some organizations that do not see the value of having an IT person on their
executive team choose not to use these words.
Although the CIO’s role is to guide the enterprise toward the future, this responsibility is frequently too great
to accomplish alone. Many organizations recognize that certain strategic areas of the IT organization require more
focused guidance. This recognition led to the creation of new positions, such as the chief knowledge officer (CKO),
chief technology officer (CTO), chief telecommunications officer (also CTO), chief network officer (CNO), chief
information security officer (CISO), chief privacy officer (CPO), chief resource officer (CRO), chief mobility
officer (CMO), and chief social media officer (CSMO). See Figure 8.3 for a list of the different responsibilities for
each position that, with the occasional exception of the CTO, typically is subordinate to the CIO. Together, these
officers form a management team that leads the IT organization.
Many large corporations take the concept of CIO one step further and identify the CIO of a business unit. This
is someone who has responsibilities similar to those of a corporate CIO, but the scope is the business unit and there
is not as much concern about defining corporate standards and policies to ensure consistency across the business
units. The business unit CIO is responsible for aligning the IT investment portfolio with the business unit’s strategy.
Typically, the business unit CIO has dual reporting responsibility to both the corporate CIO and the president of the
business unit. At IBM, the CIO is a manager from a business unit who serves a two- to three-year term. 5 ..,,,,,;
Chief technology officer (CTO)
Chief knowledge officer (CKO)
Chief data officer (CDO)
Chief analytics officer (CAO)
Chief telecommunications officer (CTO)
Track emerging technologies; advise on technology adoption; design
and manage IT architecture
Create knowledge management infrastructure; build a knowledge
culture; make corporate knowledge payoff
Create and maintain the definition, storage, and retirement of data in the
firm; streamline access to the data; reduce data redundancy
Take advantage of data analysis opportunities, often used for
understanding customers, transactions, markets, or trends
Manage phones, networks, and other communications technology
across the entire enterprise
—————-+—————-··—·——··· –·-·———
Chief network officer (CNO) Build and maintain internal and external networks
e——-re_s_o_u_rc_e_o_ff __ ic_e_r_(_C_R_O_) ______ _,__M_a_n_a_g_e_outsourcing relation_~~s ________________________________________________ ~
information security officer (CISO)
Chief privacy officer (CPO)
·—- ·-·——-···-
Chief mobility officer (CMO)
Chief social media officer (CSMO)
Ensure that information management practices are consistent with
security requirements
Establish and enforce processes and practices to meet privacy concerns
of customers, employees, and vendors
——···-·····-<·-·-----·-· ·----··-······· ···- -· .j Oversee and ensure the viable use of mobile platforms and apps Maintain a social IT perspective that results in effectively implementing J social media '------· ·--------------'- -------- --------------------------- FIGURE 8.3 The Cl O's lieutenants. ' Ann Majchrzak, Luba Cherbakov, and Blake Ives, "Harnessing the Power of the Crowds with Corporate Social Networking Tools: How IBM Does It.00 ..,,,J MIS Quarterly Executive 8, no. 2 (2009), 103-8. \., Building a Business Case 1fi1 Building a Business Case In order to meet demand, the IT organization is often charged with providing solutions. Businesses managers often turn to IT for good solutions, but IT projects end up competing with those of other managers in tight economic times when there clearly aren't enough budget resources to cover them all. After all, there is often no shortage of other business investments such as new production machinery for higher product quality and lower costs or funding for product research and development on product innovations. Thus, managers need to show that the solution they want would be not only a good IT investment but also a good business investment. To gain support and a "go-ahead" decision, every manager must often create a business case. Similar to a legal case, a business case is a structured document that lays out all the relevant information needed to make a go/no-go decision. The business case for an IT project is also a way to establish priorities for investing in different projects, an opportunity to identify how IT and the business can deliver new benefits, gain commitment from business man- agers, and create a basis for monitoring the investment." The components of a business case vary from corporation to corporation, depending on the priorities and decision-making environment. However, there are several primary elements of any business case (see Figure 8.4). Critical to the business case is the identification of both costs and benefits, both in financial and nonfinancial terms. In building, it is particularly important for the business case to describe the benefits to be gained with the acceptance of the project the case is selling. Ward, Daniel, and Peppard7 suggested a framework for identifying and describing both financial and nonfinancial benefits (Figure 8.5). The first step in this framework is to identify each benefit as innovation (allowing the organization to do new things), improvement (allowing the organization to do ~~~-~~c~~p~nent Description I Executive summary . I 4-,, I Overview and introduction One- or two-page description of the overall business case document summarizing key points I [ Assumptions and rationale i I [ Project summary ~ Financi~l discussion and analysis i i I Benefits and business impacts f I Schedule and milestones I Brief business background, the current business situation, a clear statement of the business problem or opportunity, and a recommended solution at a high level Issues driving the proposal (e.g., operational, human resources, environmental, competitive, industry or market trends, or financial) High-level and detailed descriptions of the project: scope, objectives, contacts, resource plan, key metrics, implementation plan, and key success factors Overall summary followed by projected costs/revenues/benefits, financial metrics, financial model, cash flow statement, underlying assumptions, and total cost of ownership (TCO) analysis Summary of business impacts followed by details on nonfinancial matters such as new business, transformation, innovations, competitive responses, organizational, supply chain, and human resource impacts Entire schedule for the project with milestones and expected metrics at each · stage; if appropriate, can include a marketing plan and schedule I Risk and contingency analysis Analysis of risks and ways to manage those risks, sensitivity analysis of scenarios, and interdependencies and the impact they will have on potential : outcomes r -· ... ---·-----------------·· i Conclusion and recommendation Primary recommendation and conclusions [ Appendices Back--u-p--m-a--te-r-ia-l .. s. -n-o-t -d-ir-e-ct-ly-p--ro-v-i_d_e_d_i_n-th-e_b_o-d_y_o_f_t_h_e-d_o_c_u_m._e_n_t_, s-u-c·h--a-s--·~ detailed financial investment analysis, marketing materials, and competitors' .. . .. .. .... literature. . ·-·- . - . . ·-··- -·--···-··---· -·-----·. FIGURE 8.4 Components of a business case. 6 John Ward, Eli;abeth Daniel. and Joe Peppard. "Building Better Business Cases for IT Investments," MIS Quarterly Executive 7, no. I (March 2008). I. 1-15. -'Ibid. IJD The Business of Information Technology Type of Business Change Innovation I Improvement I Cessation (do new things) (do things better) (stop doing things) High Financial benefits Financial value can be calculated by applying a cosVprice r or other valid financial formula to a quantifiable benefit. Quantifiable benefits There is sufficient evidence to forecast how much improvemenVbenefit should result from the changes. Measurable benefits Although this aspect of performance is currently measured Degree of or an approximate measure could be implemented, it is not Explicitness possible to estimate how much performance will improve l when changes are implemented. Observable benefits By using agreed criteria, specific individuals or groups will use their experience or judgment to decide the extent the Low benefit will be realized. FIGURE 8.5 Classification framework for benefits in a business case. Source: Adapted from John Ward, Elizabeth Daniel, and Joe Peppard, "Building Better Business Cases for IT Investments," MIS Quarterly Executive 7, no. 1 (March 2008), 1-15. things better), or cessation (stopping things). Then the benefits can be classified by degree of explicitness or the ability to assign a value to the benefit. As shown in Figure 8.6, benefits fall into one of these categories: • Financial: There is a way to express the benefit in financial terms. These are the metrics that are most easily used to judge the go/no-go decision because financial terms are universal across all business decisions. An example is improvement in profit. • Quantifiable: There is a way to measure the size or magnitude of the benefit, but financial benefits are not .,,,,,,; directly determinable. For example, a firm might expect a 20% increase in customer retention, but to deter- mine the financial benefit of resulting increased sales, it would require an analysis of what items they would buy. Most business cases revolve around quantifiable benefits, so it is important to ensure the collection of a comprehensive list of quantifiable benefits and any associated costs. • Measurable: There is a way to measure the benefit, but it is not necessarily connectable to any organiza- tional outcome. Management must ensure alignment with the business strategy. For example, many organi- zations collect satisfaction or web engagement data and are able to detect improvements. • Observable: They can be detected only by opinion or judgment. These are the subjective, intangible, soft, or qualitative benefits. Things seem better but no measures are available. For example, customers might be expected to be happier or less argumentative. : Benefits 1 Financial : Quantifiable Measurable Observable Innovation: Chat Function and Customer Support Forum Fewer returns; higher sales Shorter customer wait time Higher customer satisfaction scores complaints FIGURE 8.6 Benefit examples for a business case. Improvement: Remodeled Facebook Page Sales from redemption of special coupons by new customers i Cessation: Reduce Phone 1 Support by 90% Overall costs reduced ' - ----···----- .. . . -·--------- -- --------;----------------- ----------------------------. ------------------------, Number of new customers Number of "shares" by new customers Supportive comments on the page Wait time for phone lines Overall customer service satisfaction scores Decrease in verbal complaints by phone-in customers IT Portfolio Management lfil Consider the example of a small manufacturing firm that hopes to differentiate itself with excellent customer service but that has customers who are confused from time to time, an expanding customer support department, long customer wait time, and growing dissatisfaction. The firm identified a potential three-pronged social network project that included a remodeled Facebook page, a new chat function, and a new customer support forum. The project would be funded from reducing the phone support department by 90%. See Figure 8.6 for examples from a potential benefit analysis for the social network project. Of course, the benefit analysis is only part of the story because costs and risks need to be considered as well. Projected costs would include purchase of hardware and software, consulting help, internal costs, training costs, and other new expenditures. There would also be technical risks, financial risks, and organizational risks. Technical risks could include complexity in usage of the new chat and customer support forum and incomplete statistics from the Facebook page. Examples of financial risks would be a lack of accuracy in estimating costs, overestimates of usage, and overly optimistic call center reduction. Organizational risks would include inadequate monitoring of the new functionality or inability to recruit knowledgeable monitors for the chat function, support forum, and Facebook page. IT Portfolio Management Managing the set of systems and programs in an IT organization is similar to managing resources in a financial organization. There are different types of IT investments or projects, and together they form the business's IT port- folio. IT portfolio management refers to "evaluating new and existing applications collectively on an ongoing basis to determine which applications provide value to the business in order to support decisions to replace, retire, or further invest in applications across the enterprise."8 This process requires thinking about IT systems as a cohe- sive set of core assets, not as a discontinuous stream of one-off (one-time only), targeted investments as often has been the case in the past. IT portfolio management involves continually deciding on the right mix of investments '1., from funding, management, and staffing perspectives. The overall goal of IT portfolio management is for the company to fund and invest in the most valuable initiatives that, taken together as a whole, generate maximum benefits for it. Professor Peter Weill and colleagues at MIT's Center for Information Systems Research (CISR) describe four asset classes of IT investments that typically make up the company's IT portfolio: 9 • Transactional systems: Streamline or cut costs on the way business is done (equivalent to Level 1 in the Business Maturity Model) • Infrastructure systems: Provide the base foundation of shared IT services used for multiple applications such as servers, networks, tablets, or smartphones (equivalent to Level 2 in the Business Maturity Model) • Informational systems: Provide information used to control, manage, communicate, analyze, or collaborate (equivalent to Level 2 in the Business Maturity Model) • Strategic systems: Gain competitive advantage in the marketplace (equivalent to Level 3 in the Business Maturity Model) In analyzing the composition of any single company's IT portfolio, one can find a profile of the relative investment made in each IT asset class. Weill's study found that the average firm allocates 46% of its total IT investment each year to infrastructure and only 25% of its total IT investment in transactional systems. Weill also found that firms in diverse industries allocate their IT resources differently. 10 8 James D. Mc Keen and Heather A. Smith, "Developments in Practice XXXIV: Application Portfolio Management," Communications of the Association for Information Systems 26. no. 9 (2010). (accessed September 4, 2015). 9 Peter Weill and Marianne Broadbent, Leveraging the New Infrastructure: How Market Leaders Capitalize on Infonnation Technology (Cambridge, MA: Harvard Business School Press, June 1998). © MIT Sloan Center for Information Systems Research 2005-12. Used with permission. For more information, see 4.,, 10 Ibid. 1fZ1 The Business of Information Technology Weill's work also suggests that a different balance between IT investments is needed for a cost-focused strategy compared to an agility-focused strategy. A company with a cost-focused strategy would seek an IT portfolio that helps lower costs as the primary business objective. In that case, Weill's work suggests that on average, 27% of the IT investments are made in transactional investments, suggesting higher use of applications that automate processes and typically lower operational costs. I I On the other hand, a company with an agility focus would be more likely to invest a higher percent of its IT portfolio in infrastructure ( e.g., 51 % on average) and less in transactional systems (e.g., 24% on average). The infrastructure investment would create a platform that would likely be used to more quickly and nimbly create solutions needed by the business whereas the transactional systems might lock in the current processes and take more effort and time to change. From the portfolio management perspective, potential new systems are evaluated on their own merits and com- pared against other systems in the prospective portfolio. Often applications can't stand alone and require integration with other applications, some of which would need to be acquired or developed. A complete picture is required for a fair comparison of portfolio alten,atives. Portfolio management helps prioritize IT investments across multiple decision criteria, including value to the business, urgency, and financial return. Just like an individual or company's investment portfolio is aligned with its objectives, the IT portfolio must be aligned with the business strategy. Valuing IT Investments New IT investments are often justified by the business managers proposing them in terms of monetary costs and benefits. The monetary costs and benefits are important but are not the only considerations in making IT investments. Soft benefits, such as the ability to make future decisions, are often part of the business case for IT investments, mak- ing the measurement of the investment's payback (length of time to recoup the cost) difficult. Several unique factors of the IT organization make it very challenging to determine the value from IT invest- ments. First, the systems are complex, and calculating the costs is an art, not a science. Second, because many IT investments are for infrastructure, calculating a payback period may be more complex than other types of capital ...,J investments. Third, many times the payback cannot be calculated because the investment is a necessity rather than a choice without any tangible payback. For example, upgrading to a newer version of software may be required because the older version simply is no longer supported. Many managers do not want to have to upgrade just because the vendor insists that an upgrade is necessary. Instead, managers may resist IT spending on the grounds that the investment adds no incremental value. These factors and more fuel a long-running debate about the value of IT investments. IT managers need to learn to express benefits in a businesslike manner such as return on investment (ROI) or increased customer satisfaction. IT managers, like the business managers who propose IT projects, are expected to understand and even try to calculate the true return on these projects. Measuring this return is difficult, however. To illustrate, consider the relative ease with which a manager might analyze whether the enterprise should build a new plant. The first step would be to estimate the costs of construction. The plant capacity dictates project production levels. Demand var- ies, and construction costs frequently overrun, but the manager can find sufficient information to make a decision about whether to build. Most of the time, the benefits of investing in IT are less tangible than those of building a plant because the IT cannot be felt and touched like a physical building can be. Such benefits might include tighter systems integration, faster response time, more accurate data, and more leverage to adopt future tech- nologies, among others. How can a manager quantify these intangibles? He or she should also consider many indirect, or downstream, benefits and costs, such as changes in how people behave, where staff report, and how tasks are assigned. In fact, it may be impossible to pinpoint who will benefit from an IT investment when making the decision. I2 Despite the difficulty, the task of evaluating IT investments is necessary. Knowing which approaches to use and when to use them are important first steps. A number of financial valuation approaches are summarized in Figure 8.7. Managers should choose based on the attributes of the project. For example, ROI or payback analysis II Ibid. 12 John C. Ford, "Evaluating Investment in IT," A11stralian Acco1111tant (December I 994 ), 3. Monitoring IT Investments llii f ~~:~:eot~ROi: _L;,~;:~tom ove, the;ove~m::c~k"~~as ROI a (Reveo"e - love~meot Net present value (NPV) ; Accounting for the time value of money, the NPV discounts cash flows from future ' periods as being worth less than immediate cash flows. Discounting is performed J by using a present value factor, which is 1/(1 + Discount rate).veara Economic value added (EVA) Payback period I The amount of benefit of an investment that exceeds the costs of the capital used : for investments. It is sometimes implemented firmwide as net operating profit after 1 taxes (Capital x Cost of capital). : This is a simple and popular method that, assuming there are regular or irregular i financial benefits of an investment, computes how long a firm estimates it must wait j until it breaks even on the investment (all costs are finally recouped). 1----------------'-------------------------------- lnternal rate of return (IRR) ! Like an interest rate, IRR represents the rate that is earned on an investment. The rate i is compared to a target that is determined by corporate policy. : Weighted scoring methods I Costs and revenues are weighted based on their strategi~-lmportance, Lev~ I accuracy or confidence, and comparable investment opportunities. __ ____J FIGURE 8.7 Financial valuation methods. can be used when detailed analysis is not required, as when a project is short lived and its costs and benefits are clear. When the project lasts long enough that the time value of money becomes a factor, net present value (NPV) and economic value added (EVA) are better approaches. EVA is particularly appropriate for capital-intensive projects. Both IT and business managers may encounter a number of pitfalls when analyzing return on investment. First, some situations are heavy in soft benefits and light in projected financial benefits. That is, increased customer sat- '-,. isfaction might not result in actual financial inflows. Second, it is difficult to reconcile projects of diverse size, benefits, and timing in light of a fixed budget avail- able for new projects. The budget might contain enough funding for only one large project with moderate but quick return, and then there is no room for other smaller projects with higher but slower return. Third, circumstances may alter the way managers make estimates. For instance, in a software implementation, if experience shows that it usually takes 20% longer than budgeted to build a system, managers might begin to rou- tinely add 20% to future estimates when preparing schedules and budgets to account for the uncertainty. Fourth, managers can fall into "analysis paralysis." Reaching a precise valuation may take longer than is rea- sonable to make an investment decision. Because a single right valuation may not exist, "close enough" usually suffices. Experience and an eye to the risks of an incorrect valuation help decide when to stop analyzing. Finally, even when the numbers say a project is not worthwhile, the investment may be necessary to remain competitive. For example, UPS faced little choice but to invest heavily in IT. At the time, FedEx had made IT a competitive advantage and was winning the overnight delivery war. More recently, companies are finding that they must re-invest in their applications in order to make them work on mobile devices. Monitoring IT Investments An old adage says: "If you can't measure it, you can't manage it." Management's role is to ensure that the money spent on IT results in value for the organization. Therefore, a common, accepted set of metrics must be created, and those metrics must be monitored and communicated to senior management and customers of the IT department. These metrics are often financial in nature (i.e., ROI, NPV). But financial measurement is only one category of measures used to manage IT investments. Other IT metrics include logs of errors encountered by users, end-user surveys, user turnaround time, logs of computer and communication up-/downtime, system response time, and percentage of projects completed on time and/or within budget. An example of a business-focused method is the , extent to which the technology innovation improves the number of contacts with external customers, increases sales '-,revenue, and generates new business leads. Im The Business of Information Technology The Balanced Scorecard Deciding on appropriate measures is half of the equation for effective IT organizations. The other half of the equation is ensuring that those measures are accurately communicated to the business. Two methods for communi- cating these metrics are scorecards and dashboards. Financial measures may be the language of stockholders, but managers understand that such measures can be misleading if used as the sole means of making management decisions. One methodology used to solve this problem, created by Robert Kaplan and David Norton and first described in the Harvard Business Review in 1992, is the balanced scorecard, which focuses attention on the organization's value drivers (which include, but are not limited to, financial performance). 13 Companies use this scorecard to assess the full impact of their corporate strat- egies on their customers and work force as well as their financial performance. The balanced scorecard methodology allows managers to look at the business from four perspectives: customer, internal business, innovation/learning, and financial. For each perspective, the goals and measures are designed to answer these basic questions: • How do customers see us? (customer perspective) • At what must we excel? (internal business perspective) • Can we continue to improve and create value? (innovation and learning perspective) • How do we look to shareholders? (financial perspective) Figure 8.8 graphically shows the relationship of these perspectives. Financial Perspective Goals Measures Customer Perspective Internal Perspective Goals Measures Goals Measures Learning Perspective Goals Measures FIGURE 8.8 The balanced scorecard perspectives. Source: Based on R. Kaplan and D. Norton, "The Balanced Scorecard-Measures That Drive Performance," Harvard Business Review(January-February 1992), 72. " For more detail. see R. Kaplan and D. Norton. "The Balanced Scorecard-Measures That Drive Performance," Harvard Business Review 70, no. I, ...,,,,J (January-February 1992). 71-79. Monitoring IT Investments 1fi1 Since the introduction of the balanced scorecard, many people have modified it or adapted it to apply to their particular organization. Managers of information technology find the concept of a scorecard useful in managing and communicating the value of the IT department. Applying the categories of the balanced scorecard to IT might mean interpreting them more broadly than origi- nally conceived by Kaplan and Norton. For example, the original scorecard speaks of the customer perspective, but for the IT scorecard, the customer might be a user within the company, not an external customer of the company. The questions asked when using this methodology within the IT department are summarized in Figure 8.9. David Norton comments, "[D]on't start with an emphasis on metrics-start with your strategy and use metrics to make it understandable and measurable (that is, to communicate it to those expected to make it happen and to manage it)." 14 He finds the balanced scorecard to be the most effective management framework for achieving orga- nizational alignment and strategic success. FirstEnergy, a multibillion-dollar utility company, is a good example of how the IS scorecard can be used. One of its strategic, albeit nonfinancial, goals was to create "raving fans" among its customers. The MIS group inter- preted "raving fans" to mean satisfied internal customers. It used three metrics to measure the performance toward this goal: 15 • Percentage of projects completed on time and on budget • Percentage of projects released to the customer by agreed-on delivery date • End-of-project customer satisfaction survey results A scorecard used within the IT organization helps senior IT managers understand their organization's performance and measure it in a way that supports its business strategy. The IT scorecard is linked to the corporate scorecard and ensures that the measures used by IT are those that support the corporate goals. At DuPont Engineering, the balanced scorecard methodology forces every action to be linked to a corporate goal, which helps promote align- ment and eliminate projects with little potential impact. The conversations between IT and the business focus on strategic goals, the merits of the project at hand, and the actual impact rather than on technology and capabilities. 16 Dimension Customer perspective Learning perspective Financial perspective ·----·-·····-··--+ Measures that reflect factors that really Measures of what the company must do nTP•rn••11v to meet customer expectations Can we continue to improve and create value? Measures of the company's ability to inno- vative, improve, and learn How do we look to shareholders? Measures to indicate contribution of activ- ities to the bottom line FIGURE 8.9 Balanced scorecard applied to IT departments. FY11m,~IA of IT Measures Impact of IT projects on users, impact of IT's reputation among users, and user-defined operational metrics IT process metrics, project comple- tion rates, and system operational performance metrics IT R&D, new technology introduction success rate, training metrics IT project ROI, NPV, IRR, cost/benefit, TCO,ABC Source: Adapted from R. Kaplan and D. Norton, "The Balanced Scorecard-Measures That Drive Performance," Harvard Business Review (January-February 1992), 72. 14 "Ask the Source: Interview with David Norton." (July 25, 2002) (accessed February 22, 2003). 15 Adapted from Eric Berkman, "How to Use the Balanced Scorecard," CIO Magazine 15, no. 15 (May 15, 2002), 1-4. 16 Ibid; also Hall of Fame Organizations: Dupont, (accessed February 19, 2012). B The Business of Information Technology IT Dashboards Scorecards provide summary information gathered over a period of time. Another common IT management mon- itoring tool is the IT dashboard, which provides a snapshot of metrics at any given point in time. Much like the dashboard of an automobile or airplane, the IT dashboard summarizes key metrics for senior managers in a manner that provides quick identification of the status of the organization. Like scorecards, dashboards are useful outside the IT department and are often found in executive offices as a tool for keeping current on critical measures of the organization. This section focuses on the use of these tools within the IT department. The contents of a dashboard depend on what is important to management, but in most cases graphical representations provide quick, at-a-glance results. Dashboards are often quite colorful, but as Figure 8.10 illustrates, they can be very useful even without using color. IT dashboards are also used in an IT department, which provide frequently updated information on areas of interest such as the status of projects of various sizes or operational systems of various types. For example, a dash- board used by General Motors (GM) North America's IT leadership team monitors project status. 17 Because senior managers question the overall health of a project rather than the details, the dashboard they designed provides red, yellow, or green highlights for rapid comprehension. A green highlight means that the project is progressing as planned and performance is within acceptable limits. A yellow highlight means at least one key target has been missed. A red highlight means the project is significantly behind and needs some attention or resources to get back on track. COMPANY TOP-LINE REVENUE $23,044,000 $25,220,000 - $23,044,000 I NOV APR SEP 2012 2013 2013 REVENUE PER PRODUCT ii. OLD Widgets '-" • • , ,.,._."""' ~~~: ~...--~~ NSW Widgets ~, ~ _ • ~:~: ~t~F VIC Widgets~ Items 1211k ii.. Parts - -• :" ....... ALL Widgets ~_..........____ ~ .. ~:~: ~Er MCV SEP 2012 2013 MARKET SHARE BY COMPETITOR ·. BrandW 0% Research Dale: 100% ADVERTISING SPEND BY CHANNEL THIS MONTH $162k ·11 ii "'' ;.111 $32' ..2.• LI ~ Q [J PROFIT BY CHANNEL In-Store Website WEBSITE E-COMMERCE PURCHASES •.200 .,,,.~, 1.•••- I PER MONTH 900 I NOV APR SEP 2012 2013 2013 ORDERS .. ; Tli1SMONTH - - •: ... = FIGURE 8.10 Example of an executive dashboard. Source: BRAND AWARENESS \ ~,,, .. ..:'-'s,,~d'~:'Y 24% 14%Melb;!~~~/i -. 'I' V r v,~ COMPETITOR SPEND 1$1221-$24 T$3. - ~~$5 Brand w Brand X Brand y Brand z CURRENT INVENTORY 30% •••••••••• Widgets•••••••••• •••••••••• •••••••••• 23% •••••••••• Items 22o;. ®l!i l!I IIUlll 1111 !!Ill••• Parts 0 111111111111111111111111111111 $Ii 1111111111 111111111111111111111111 19% 6% 17 Adapted from Tracy Mayor, "Red Light, Green Light," C/0 Maga~ine 15, no. 1 (October 1. 2001), 108. Monitoring IT Investments g At GM, each project is tracked and rated monthly. GM uses four dashboard criteria: (1) performance to budget, (2) performance to schedule, (3) delivery of business results, and ( 4) risk. At the beginning of a project, these metrics are defined and acceptable levels set. The project manager assigns a color status monthly based on the defined criteria, and the results are reported in a spreadsheet. When managers look at the dashboard, they can immediately tell whether projects are on schedule based on the amount of green, yellow, or red highlights on the dashboard. They can then drill down into yellow or red metrics to get the projects back on track. The dashboard provides an easy way to identify where their attention should be focused. The director of IT opera- tions explains, "Red means I need more money, people or better business buy-in .... The dashboard provides an early warning system that allows IT managers to identify and correct problems before they become big enough to derail a project." 18 There are really four types of IT dashboards. 19 Portfolio dashboards like GM's help senior IT leaders manage IT projects. These dashboards show senior IT leaders the status, problems, milestones, progress, expenses, and other metrics related to specific projects. Business-IT dashboards show relevant business metrics and link them to the IT systems that support them. The metrics on the balanced scorecard provide a sample of the type of metrics followed by this dashboard. A service dashboard is geared toward the internal IS department, showing important metrics about the IS such as up time, throughput, service tickets, progress on bug fixes, help desk satisfaction, and so on. The fourth type is an improvement dashboard, which monitors the three to five key improvement goals for the IT group. Like the portfolio dashboard, the metrics to be monitored are based on the projects undertaken, but unlike the other dashboards, this one is geared toward monitoring progress toward important goals of the IT orga- nization itself. In order to increase its transparency, the U.S. government created an IT dashboard Web site20 in 2009. This Web site, which was built in six weeks, displays the status of each IT project (termed an "investment") currently under development within the U.S. government. This dashboard provides status information by project and agency and offers the ability to drill down for details. For each project, it provides color-coded (i.e., green, yellow, and red) performance metrics for cost, schedule, and CIO evaluation along with a project history. For each agency, it provides an agency rating and count of projects in each color grouping. For example, in September 2015, one could click the "Portfolio" button for a list of departments and their overall ratings. 21 Across all projects, pie charts revealed green, yellow, and red counts of 575, 129, and 34, respectively. The Department of Homeland Security (DHS) had average project rating of 3.9 out of 5 over 89 projects. Clicking on the OHS name allowed drilling down for detail about its projects, and clicking on each project provided 2015 spending along with ratings and commentary.22 For instance, the $163.5 million "FEMA-Infra- structure" project had a very low rating of 2.0 out of 5. A narrative and graphical rating history23 allows the user to understand the problems and when they occurred. The FEMA-Infrastructure evaluation score fell in April 2013, largely because the project was over budget and behind schedule. It is apparent that the increased transparency pro- vides increased accountability for managing the investments. 24 Dashboards are built on the information contained in the other applications, databases, and analytical systems of the organization (see Chapter 12 for a more complete discussion of business intelligence and business ana- lytics). Refer to Figure 8.11 for the architecture of a sample dashboard for Western Digital, a $3-billion global designer and manufacturer of high-performance hard drives for PCs, networks, storage devices, and entertainment systems. 25 18 Ibid. 19 Adapted from Chris Curran. "The 4 Types of CIO Dashboards." (June 15. 2009), the-4-types-of-cio-dashboards/ (accessed April 9. 2012). '° See (accessed September 4, 2015). " (accessed September 4, 2015). " (accessed September 4, 2015). 23 (accessed September 4, 2015). 24 U.S. government IT Dashboards, (accessed on accessed April 23, 2015). " Robert Houghton, 0. A. El Sawy, P. Gray, C. Donegan. and A. Joshi, "Vigilant Information Systems for Managing Enterprises in Dynamic Supply Chains: Real-Time Dashboards at Western Digital," MISQE 3, no. I (March 2004), 19-35. Im The Business of Information Technology Dashboards Highly Summarized Key Metric Driven Visualization and Alertness Business Intelligence Cross Application Query/Data Mining Statistical Analysis Functional Applications Transaction Based Standard Reporting Highly Focused ERP Raw Data Corporate Dashboards Planning/Forecasting Revenue Positions Inventory Positions BMIS (financial performance) Mitec Reporting (factory performance) Raw Data Factory Dashboard Component Inventory Line Utilization Yield QIS (product performance) Analysis System Feeds Transaction System Drive Cost, Customer Order, Customer Payment, Test Data, Build Data, etc ... FIGURE 8.11 Example architecture of a dashboard. Source: Robert Houghton, 0. A. El Sawy, P. Gray, C. Donegan, and A. Joshi, "Vigilant Information Systems for Managing Enter- prises in Dynamic Supply Chains: Real-Time Dashboards at Western Digital," MIS Quarterly Executive 3, no. 1 (March 2004). Funding IT Resources Who pays for IT? The users? The IT organization? Headquarters? Certain costs are associated with designing, developing, delivering, and maintaining the IT systems. How are these costs recovered? The three main funding methods are chargeback, allocation, and corporate budget. Both chargeback and allocation methods distribute the costs back to the businesses, departments, or individuals within the company. This distribution of costs is used so that managers can understand the costs associated with running their organization or for tax reasons when the costs associated with each business must be paid for by the appropriate business unit. Corporate budgeting, on the other hand, is a completely different funding method in which IT costs are not linked directly with any specific user or business unit; costs are recovered using corporate coffers. Charge back With a chargeback funding method, IT costs are recovered by charging individuals, departments, or business units based on actual usage and cost. The IT organization collects usage data on each system it runs. Rates for usage are calculated based on the actual cost to the IT group to run the system and billed out on a regular basis. For example, a PC might be billed at $100/month, which includes the cost of maintaining the system, any soft- ware license fees for the standard configuration, e-mail, network access, a usage fee for the help desk, and other related services. Each department receives a monthly bill showing the number of units it has, such as PCs, printers, or servers, multiplied by the charge for each unit. Services such as mainframe processing time and special project consulting help can also be included. When the IT organization wants to recover administrative and overhead costs using a chargeback system, these costs are built into rates charged for each service. ..., Funding IT Resources g Chargeback systems are popular because they are viewed as the most equitable way to recover IT costs. Costs are distributed based on usage or consumption of resources, ensuring that the largest portion of the costs is paid for by the group or individual who consumes the most. Chargeback systems can also provide managers a "menu" of options for managing and controlling their IT costs. For example, a manager may decide to select tablets rather than laptops because the unit charge is less expensive. The chargeback system gives managers the details they need to understand both what IT resources they use and how to account for IT consumption in the cost of their products and services. Because the departments get a regular bill, they know exactly what their costs are. Creating and managing a chargeback system, however, is a costly endeavor itself. IT organizations must build systems to collect details that might not be needed for anything other than the bills they generate. For example, if PCs are the basis for charging for network time, the network connect time per PC must be collected, stored, and analyzed each billing cycle. The data collection quickly becomes large and complex, which often results in com- plicated, difficult-to-understand bills. In addition, picking the charging criteria is challenging. For example, it is relatively easy to count the number of PCs located in a particular business unit, but is that number a good measure of the network resources used? It might be more accurate to charge based on units of network time used, but how would that be captured and calculated? Chargeback methods are most appropriate when there is a wide variation in usage among users or when actual costs need to be accounted for by the business units. Allocation To simplify the cost recovery process, an allocation system can be used. An allocation funding method recovers costs based on something other than usage, such as revenues, log-in accounts, or head count ( number of employees) in each business unit or department. For example, suppose the total spending for IT for a year is $1 million for a company with 10,000 employees. A business unit with 1,000 employees might be responsible for 10%, or $100,000, of the total IT costs. Of course, with this type of allocation system, it does not matter whether these employees even use the IT; the department is still charged the same amount. The allocation mechanism is simpler than the chargeback method to implement and apply each month. Actual usage does not need to be captured. The rate charged is often fixed at the beginning of the year. Allocation offers two main advantages. First, the level of detail required to calculate the allocations is much less, which reduces record keeping expenses. Second, the charges from the IT organization are predictable. Unlike the chargeback mechanism, where each bill opens up an opportunity for discussion about the charges incurred, the allocation mechanism seems to generate far less frequent arguments from the business units. Often, quite a bit of discussion takes place at the beginning of the year when rates and allocation bases are set, but less discussion occurs each month because the managers understand and expect the bill. Two major complaints are made about allocation systems. First is the free-rider problem: A large user of IT ser- vices pays the same amount as a small user when the charges are not based on usage. Second, deciding the basis for allocating the costs is an issue. Choosing the number of employees over the number of desktops or other basis is a management decision, and whichever basis is chosen, someone will likely pay more than his or her actual usage would imply. Allocation mechanisms work well when a corporate directive requires the use of this method and when the units agree on the basis for dividing the costs. Often when an allocation process is used, a follow-up process is needed at the end of the fiscal year to compare the total IT expenses against the total IT funds recovered from the business units, and any extra funds are given back to the business. Sometimes this process is called a "true-up" process because true expenses are balanced against payments made. In some cases, additional funds are needed; however, IT managers try to avoid asking for funds to make up for shortfalls in their budget. The true-up process is needed because the actual cost of the information system is difficult to predict at the beginning of the year. Cost changes over the year because hardware, software, or support costs fluctuate in the marketplace and because IT managers, like all managers, work constantly on improving efficiency and productivity, resulting in lower costs. In an allocation process that charges a fixed rate for each service for the year, a true-up process allows IT managers to pass along any additional savings to their business counterparts. Business managers often prefer the predictability of their monthly IT bills along with a true-up pro- cess over the relative unpredictability of being charged actual costs each month. Im The Business of Information Technology i Funding Method i Description ~ . ----+---·-····-----····----·-- -····-- -----·--····--· -· -·---- ·-··--·-- - I Chargeback I Charges are calculated based I It is the fairest method for 1 ! on actual usage. i recovering costs based on I ; actual usage. IT users can : ' i ~·---------·----------------i-- ---·-··--·--- ----· -··-·--··- ! Allocation i Total expected IT expenditures j i are divided by agreed upon , i basis such as number of login j IDs, number of employees, or 1 number of workstations. I f see exactly what their usage ' costs are. It requires less bookkeeping for IT because rate is set once per fiscal year, and basis is well understood. Monthly costs for the business units are predictable. IT department must collect details on usage, which can , be expensive and difficult. IT must be prepared to defend the charges, which takes time and resources. IT department must , defend allocation rates; it may charge a low-usage department more than its usage would indicate is fair. Corporate Budget Corporate allocates funds to IT at annual There is no billing to the 111 competes with all other business units. IT exercises more \ budgeted items for funds; "---- __ f :g.,,.,,;oa _ . ~··. - ~::;;;~~;1~;;:;,g I ;;~~::i;::;:;J~;~;~~c FIGURE 8.12 Comparison of IT funding methods. Corporate Budget An entirely different way to pay for IT costs is to simply consider them all to be corporate overhead and pay for them directly out of the corporate budget. With the corporate budget funding method, the costs fall to the corpo- rate bottom line, rather than levying charges on specific users or business units. Corporate budgeting is a relatively simple method for funding IT costs. It requires no calculation of prices of the IT systems. And because bills are not generated on a regular cycle to the businesses, concerns are raised less often by the business managers. IT managers control the entire budget, giving them control of the use of those funds and, ultimately, more input into what systems are created, how they are managed, and when they are retired. This funding method also encourages the use of new technologies because learners are not charged for exploration and inefficient system use. As with the other methods, certain drawbacks come with using the corporate budget. First, all IT expenditures are subjected to the same process as all other corporate expenditures, namely, the budgeting process. In many com- panies, this process is one of the most stressful events of the year: Everyone has projects to be done, and everyone is competing for scarce funds. If the business units are not billed in some way for their usage, many companies find that the units do not control their usage. Getting a bill for services motivates the individual business manager to reconsider his or her usage of those services. Finally, if the business units are not footing the bill, the IT group may feel less accountable to them, which may result in an IT organization that is less end-user or customer oriented. Figure 8.12 summarizes the advantages and disadvantages of these methods. How Much Does IT Cost? The three major IT funding approaches in the preceding discussion are designed to recover the costs of building and maintaining the information systems in an enterprise. The goal is to simply cover the costs, not to generate a profit (although some IT organizations are actually profit centers for their corporation). The most basic method for calculating the costs of a system is to add the costs of all the components, including hardware, software, network, and the people involved. IT organizations calculate the initial costs and ongoing maintenance costs in just this way. Activity-Based Costing Another method for calculating costs is known as activity-based costing (ABC). Traditional accounting methods account for direct and indirect costs. Direct costs are those that can be clearly linked to a particular process or ..,j product, such as the components used to manufacture the product and the assembler's wages for time spent building How Much Does IT Cost? the product. Indirect costs are the overhead costs, which include everything from the electric bill, the salary of administrative managers, and the expenses of the administrative function to the wages of the supervisor over- seeing the assembler, the cost of running the factory, and the maintenance of machinery used for multiple products. Further, depending on the funding method used by the enterprise, indirect costs are allocated or absorbed elsewhere in the pricing model. The allocation process can be cumbersome and complex and often is a source of trouble for many organizations. The alternative to the traditional approach is ABC. Activity-based costing calculates costs by counting the actual activities that go into making a specific product or delivering a specific service. Activities are processes, functions, or tasks that occur over time and produce recog- nized results. They consume assigned resources to produce products and services. Activities are useful in costing because they are the common denominator between business process improvement and information improvement across departments. Rather than allocate the total indirect cost of a system across a range of services according to an allocation for- mula, ABC calculates the amount of time that system supported a particular activity and allocates only that cost to that activity. For example, an accountant would look at the enterprise resource planning (ERP) system and divide its cost over the activities it supports by calculating how much of the system is used by each activity. Product A might take up one-twelfth of an ERP system's capacity to control the manufacturing activities needed to make it, so it would be allocated one-twelfth of the system's costs. The help desk might take up a whole server, so the entire server's cost would be allocated to that activity. In the end, the costs are put in buckets that reflect the products and services of the business rather than the organization structure or the processes of any given department. In effect, ABC is the process of charging all costs to "profit centers" instead of to "cost centers." Jonathan Bush, CEO of management services company Athenahealth, did activity-based costing for Children's Hospital in Boston. When he found that it cost the hospital about $120 to admit a patient, he recommended a solu- tion of using the information received from the primary care doctor. He argues, "Your primary-care doctor has already created 90% of that information to see you for your regular visit. Why wouldn't the hospital give the doctor $100 if it was costing them $120 to do it themselves ?"26 The ABC approach allowed the hospital to realize the cost of running the hospital systems to perform the activity and to compare it with the cost of an alternative source that turned out to be cheaper. But until the thorny issues of electronic medical records are sorted out, the doctors and the hospitals will likely continue to create their own records. Total Cost of Ownership When a system is proposed and a business case is created to justify the investment, summing up the initial outlay and the maintenance cost does not provide an entirely accurate total system cost. In fact, if only the initial and main- tenance costs are considered, the decision is often made on incomplete information. Other costs are involved, and a time value of money affects the total cost. One technique used to calculate a more accurate cost that includes all associated costs is total cost of ownership (TCO). It has become the industry standard. Gartner Group introduced TCO in the late 1980s when PC-based IT infrastructures began gaining popularity.27 Other IT experts have since modified the concept, and this section synthesizes the latest and best thinking about TCO. TCO looks beyond initial capital investments to include costs associated with technical support, administration, training, and system retirement. Often, the initial cost is an inadequate predictor of the additional costs necessary to successfully implement the system. TCO techniques estimate annual costs per user for each potential infrastruc- ture choice; these costs are then totaled. Careful estimates ofTCO provide the best investment numbers to compare with financial return numbers when analyzing the net returns on various IT options. The alternative, an analysis without TCO, can result in an "apples and oranges" comparison. Consider a decision about printers. The initial cost of a laser printer may be much less than an inkjet printer, but when considering the cost of toner and ink over the expected lifetime of the printers, the total cost of ownership of the laser printer is much lower. A similar analysis of a larger IT system clarifies similar alternatives and comparisons. 26 David Lidsky. "#43 Athenahealth;• (February 17. 20 I 0). (accessed January 30, 2012). " M. Gartenberg, "Beyond the Numbers: Common TCO Myths Revealed," Gartner Group Research Note: Technology (March 2, 1998). Im The Business of Information Technology A major IT investment is for infrastructure. The hardware, software, network, and data framework can be used to organize the TCO components the manager needs to evaluate each infrastructure option. Hardware, software, and networking units can include the obvious equipment and packages but also "invisible" significant items such as technical support, administration, training, and disposal costs can easily be overlooked. "Soft" data costs can include removable media such as thumb drives or portable hard drives, as well as on-site and off-site storage. Even if managers can't get a completely accurate figure of costs, they can be more aware of areas where costs can be cut. More or less detail can be used in each area as needed by the business environment. The manager can adapt this framework for use with varying IT infrastructures. TCO Component Breakdown TCO is sometimes difficult for managers to fully comprehend. To clarify how the TCO framework is used, this section examines the hardware category in more detail. For shared components, such as servers and printers, TCO estimates should be computed per component and then divided among all users who access them. For more complex situations, such as when only certain groups of users possess certain components, it is wise to segment the hardware analysis by platform. For example, in an organization in which every employee possesses a desktop computer that accesses a server and half the employees also possess stand-alone laptops that do not access a server, one TCO table could be built for desktop and server hardware and another for laptop hardware. Each table would include software, network, and data costs associated only with its specific platforms. Soft costs, such as technical support, administration, and training, are easier to estimate than they may first appear. For example, as Figure 8.13 depicts, technical support costs include areas such as phone support, troubleshooting, hot swaps, and repairs. These and all other costs are summed and divided by the number of devices to derive an amount per unit, which is when added to the initial cost of a device, and reflects a truer sense of cost of ownership, or TCO. The final soft cost, informal support, may be harder to determine, but it is important nonetheless. Informal .. . ...J support comprises the sometimes highly complex networks that develop among co-workers through which many ~ problems are fixed and much training takes place without the involvement of any official support staff. In many circumstances, these activities can prove more efficient and effective than working through official channels. Still, managers want to analyze the costs of informal support for two reasons: 1. The costs-both in salary and in opportunity-of a nonsupport employee providing informal support may prove significantly higher than analogous costs for a formal support employee. For example, it costs much more in both dollars per hour and forgone management activity for a midlevel manager to help a line employee troubleshoot an e-mail problem than it would for a formal support employee to provide the same service. 2. The quantity of informal support activity in an organization provides an indirect measure of the efficiency of its IT support organization. The formal support organization should respond with sufficient promptness and thoroughness to discourage all but the briefest informal support transactions. Various IT infrastructure options affect informal support activities differently. For example, a more user-friendly systems interface may alleviate the need for much informal support, justifying a slightly higher software expendi- ture. Similarly, an investment in support management software may be justified if it reduces the need for informal support. Web-based applications change the equation even further. Those companies that use a vendor-supplied Web-based application may find that support activities are provided by the vendor or the applications are written in such a way as to minimize or eliminate support entirely. TCO as a Management Tool This discussion focused on TCO as a tool for evaluating which infrastructure components to choose, but TCO also can help managers understand how infrastructure costs break down. Research has consistently shown that the labor costs associated with an IT infrastructure far outweigh the actual capital investment costs. TCO provides the .,J Soft Cost Areas Technical support Hardware hot swaps Physical hardware repair Source Call center IT operations ; IT operations · ·rlT~perations ·-·+--- -·------·· ! Summary B Total cost of technical support -----·---···---------··--- --··-·----- ·------ --··-----+--- --·-·--·----· ------- -·---·-------· Hardware setup i System administrator ----··-----·-·-·--·-·-··-+----·----------------; ----------------.; Administration : Hardware upgrades/modifications System administrator >——–·–~——-·—– I – —-
! New hardware evaluation
Training , IT operati._o_n_s __ _
Ongoing administrator training : Hardware vendor
Total cost of training
—-·-·-····-····-···——— ·–··ti;ial s-;;ft~osts for hardwar~——-·–·–1—·–··
—–·-··-·——-·—··-··——-L——········———-·-·–·- . . . . -··-·—-
FIGURE 8.13 Soft cost considerations.
fullest picture of where managers spend their IT dollars. Like other benchmarks, TCO results can be evaluated
over time against industry standards (much TCO target data for various IT infrastructure choices are available
from industry research firms). Even without comparison data, the numbers that emerge from TCO studies assist in
making decisions about budgeting, resource allocation, and organizational structure.
However, like the ABC approach, the cost of implementing TCO can be a detriment to the program’s overall suc-
cess. Both ABC and TCO are complex approaches that may require significant effort to determine the costs to use
in the calculations. Managers must weigh the benefits of using these approaches with the costs of obtaining reliable
data necessary to make their use successful.
• IT organizations can be expected to anticipate new technologies, participate in setting and implementing strategic
goals, innovate current processes, develop and maintain information systems, manage supplier relationships, estab-
lish architecture platforms and standards, promote enterprise security, plan for business discontinuities, manage data/
information/knowledge, manage Internet and network services, manage human resources, operate the data center, pro-
vide general support, and integrate social IT.
• IT activities can reveal the group’s level of maturity. The most mature IT organizations are proactive and partner with
business executives.
• The chief information officer (CIO) is a high-level IS officer who oversees many important organizational activities. The
CIO must display both technical and business skills. The role requires both strategic and operational skills.
• A business case is a tool used to support a decision or a proposal of a new investment. It is a document containing a
project description, financial analysis, marketing analysis, and all other relevant documentation to assist managers in
making a go/no-go decision.
• Benefits articulated in a business case can be categorized as observable, measurable, quantifiable, and financial. These
benefits are often for innovations, improvements, or cessation.
• The portfolio of IT investments must be carefully evaluated and managed.
• The investments may be valued using such methods as return on investment (ROI), net present value (NPV), economic
value added (EVA), payback period, internal rate of return (IRR), and weighted scoring.
6., • Benefits derived from IT investments are sometimes difficult to quantify and to observe or are long range in scope.
m The Business of Information Technology
• Monitoring and communicating the status and benefits of IT is often done through the use of balanced scorecards and IT
• IT is funded using one of three methods: chargeback, allocation, or corporate budget.
• Chargeback systems are viewed as the most equitable method of IT cost recovery because costs are distributed based on
usage. Creating an accounting system to record the information necessary to do a chargeback system can be expensive
and time consuming and usually has no other useful application.
• Allocation systems provide a simpler method to recover costs because they do not involve recording system usage to
allocate costs. However, allocation systems can sometimes penalize groups with low usage.
• The corporate budget method does not allocate costs at all. Instead, the CIO seeks and receives a budget from the corpo-
rate overhead account. This method of funding IT does not require any usage record keeping but is also most likely to be
abused if the users perceive it to be “free.”
• Activity-based costing (ABC) is another technique to group costs into a meaningful bucket. Costs are accounted for
based on the activity, product, or service they support. ABC is useful for allocating large overhead expenses.
• Total cost of ownership (TCO) is a technique used to understand all the costs beyond the initial investment costs associ-
ated with owning and operating an information system. It is most useful as a tool to help evaluate which infrastructure
components to choose and to help understand how infrastructure costs occur.
activity-based costing (ABC) (p. I 85)
allocation funding method (p. 183)
balanced scorecard (p. 178)
business case (p. 173)
business-IT maturity model (p. 167)
business technology strategist (p. I 71)
chargeback funding method (p. 182)
chief information officer
(CIO) (p. 171)
corporate budget funding
method (p. 184)
dashboard (p. 180)
economic value added (EVA) (p. 177)
IT portfolio management (p. 175)
net present value (NPV) (p. 177)
payback period (p. 176)
return on investment (ROI) (p. 176)
total cost of ownership (TCO) (p. 185)
1. Using an organization with which you are familiar, describe the role of the most senior IS professional. Is that person a
strategist or an operational manager?
2. What advantages does a CIO bring to a business? What might be the disadvantages of having a CIO?
3. Under what conditions would you recommend using each of these funding methods to pay for information systems expenses:
allocation, chargeback, and corporate budget?
4. In the following table are comparative typical IT portfolio profiles for different business strategies from Weill and Broad-
bent’s study. 28 Explain why infrastructure investments are higher and transactional and informational investments are lower
for a firm with an agility focus than a firm with a cost focus. Also, how would you explain the similar values for strategic
investments among the three profiles?
; Average firm 25%
1 Costi-~~~~—— — 27% 44%
r—–·–··-.. -·-·- ‘ -·-·-··· ——·–·–·– ··-·········· .. -·-·-·T————-·-··-···· . ··-······-···—·-·–···—··1 · – ···—-·-····-·- ····-·-···–,—–··-·–···-·-·-···-··-_Agility focus I 24% ____ _L _____ 51% J_ ____ 1_5_% _______ L_ __ 19 __ ‘X_o __ ~
5. Describe the conditions under which ROI, payback period, NPV, and EVA are most appropriately applied to information
systems investments.
08 Weill and Broadbent, Le1•eraging The New Infrastructure.
CaseStudy g
6. A new inventory management system for ABC Company could be developed at a cost of $260,000. The estimated net
operating costs and estimated net benefits over six years of operation would be:
Year Estimated Net Operating Costs
0 $260,000
a. What would the payback period be for this investment? Would it be a good or bad investment? Why?
b. What is the ROI for this investment?
c. Assuming a 15% discount rate, what is this investment’s NPV?
7. Compare and contrast the IT scorecard and dashboard approaches. Which, if either, would be most useful to you as a general
manager? Please explain.
8. TCO is one way to account for costs associated with a specific infrastructure. This method does not include additional costs
such as disposal costs-the costs to dispose of the system when it is no longer of use. What other additional costs might be
of importance in making total cost calculations?
9. Check out the U.S. government IT dashboard site at Based upon the site:
a. Describe the portfolio for the Department of Justice.
b. Which investments, if any, appear to be in trouble in the Department of Justice? Based on the information that is provided,
can you estimate the status of those projects? Is there any additional information that you think a manager would like to
see about the status of the project?
• CASE STUDY 8-1 KLM Airlines
KLM Airlines, headquartered in the Netherlands, is one of the world’s leading international airlines. Following its merger
with Air France in 2004, KLM employs 33,000 people worldwide (1,000 of whom work in the IT function) and operates
about 200 planes.’9
Following the 9/11 terrorist attack in 2001, the challenging business environment for airlines caused KLM’s CEO to
appoint a new CIO from the operations area, clearly outside of the IT area, to make a structural break from the past. Three
priorities included examining outsourcing IT, creating a board of business and IT representatives, and fashioning a process
for governance of IT that is shared between the IT function and business units.
The result of the ensuing efforts over several years was to create four levels of committee governance: An executive
committee kept an eye on matching the business strategy with IT strategies; A business/IT board, which was composed
of the CEO, CIO, and all business unit executive vice presidents, was formed to manage the portfolio and budget; an
IT management team worked on tactical planning for the business/IT board; and finally, the CIO/information services
management team planned and managed IT operations. KLM also established a set of key principles and practices
and developed a standard business case template that had to be used whenever requesting an investment greater than
150,000 euros.
KLM experienced five benefits attributed to the governance structure: reduced IT costs per kilometer flown, increased
capacity for IT innovation, better alignment of investments to business goals, increased trust between functional units and
the IT organization, and a mind-set of the value of IT.
” Adapted from Steven De Haes, Dirk Gemke. John Thorp, and Wim Yan Grembergen, “KLM’s Enterprise Governance of IT Journey: From Managing
IT Costs to Managing Business Value.” MIS Quarterly Executi,·e IO, no. 3 (20! l), 109-20.
Im The Business of Information Technology
Discussion Questions
I. What is likely to have led to increased trust for the IT organization?
2. What might explain an item that is seemingly quite unrelated to IT (costs per kilometer flown) decreased as a result of
the new CIO structure?
3. What maturity level did KLM appear to exhibit (a) in 2000 and (b) in 2011? Why?
4. Why do you think that KLM requires its employees to use a standard business case template when they want to make
an investment?
Sources: Adapted from Steven De Haes, Dirk Gemke, John Thorp, and Wim Van Grembergen, “KLM’s Enterprise Governance
of IT Journey: From Managing IT Costs to Managing Business Value,” MIS Quarterly Executive 10, no. 3 (2011), 109-20, and “Analyz-
ing IT Value Management at KLM Through the Lens of Val IT,”
Analyzing-lT-Value-Management-at-KLM-Through-the-Lens-of-Val-lT.aspx (accessed May 30, 2015).
• CASE STUDY 8-2 Balanced Scorecards at BIOCO
BIOCO is a profitable and growing medium-sized biopharmaceutical company located in the southeast United States.
It develops, produces, and markets vaccines and antibody-based pharmaceutical products. As part of the company’s strate-
gic transformation, BIOCO’s CEO introduced a top-down, strategy-driven management process called the “BIOCO Way.”
The CEO has a strong conviction that the success of a company starts with a clear vision of what the company wants to be
and a corporate strategy that reflects that vision. In the BIOCO Way, the corporate vision and strategy are translated into a
long-term corporate strategic plan, which in turn is used to generate the corporate strategy map. To measure progress against
the strategy map, a cascade of balanced scorecards (corporate, division/department) are developed and used. As a result of
the full integration of the levels of balanced scorecards into the planning process, the BIOCO Way emphasizes how the
strategies and related tactics should be carried out and measured at all levels. The CEO is a strong champion of balanced
scorecards and is considered an in-house guru for the method.
Each year, BIOCO managers at the corporate and department levels review performance and assess the appropriateness
of their respective balanced scorecards for the prior year. Based on the results of the performance reviews and a short-term
execution plan for the upcoming year, strategic initiatives are added, modified, or removed, and the metrics in the scorecards
are adjusted accordingly. The CIO thinks that the balanced scorecards help the departments look beyond their own opera-
tions, and the vice president thinks they mobilize everyone in the company by setting up tangible goals that are clearly linked
to the overall goals of the company. The CIO thinks the scorecard enhances communications because it “provides a focal
point and common language around the key value drivers of the organization,” and it helps IT understand other business
areas. To overcome cultural differences among the departments, he added culture as a fifth perspective in the scorecards.
– Discussion Questions
I. What benefits has BIOCO realized from its use of balanced scorecards?
2. Do you think the BIOCO Way was useful in helping the IT department align its goals with that of the company? Why
or why not?
3. Do you think that the BIOCO approach could be implemented successfully in large companies? Why or why not? If so,
what, if any, adjustments need to be made?
4. BIOCO recently was sold and now has a new CEO. Do you think the BIOCO Way will be as successful under the new
CEO? Why or why not?
Sources: 0. Hu and C. D. Huang, “Using the Balanced Scorecard to Achieve Sustained IT-Business Alignment: A Case Study,”
Communications of the Association for Information Systems 17, no. 1 (2006); Organized Change Consultancy, “Examples of Companies
Using the Balanced Scorecard” (2010),
(accessed May 30, 2015).
Governance of the
Information Systems
Governance structures define the way decisions are made in an organization. This chapter
explores four models of governance based on the location of decision making in organiza-
tion structure (centralized, decentralized, and federal}, decision rights, digital ecosystems,
and contro~ considering frameworks from the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), Control Objectives for Information and related Tech-
nology (COBIT}, and Information Technology Infrastructure Library (ITIL). Examples and strat-
egies for implementation are discussed.
Intel’s information technology (IT) performance reports for 2013 1 and 2015 2 boast about how the
company increased its storage capacity from 25 petabytes in 2010 to 106 petabytes in 2014, and over
the same interval raised the number of handheld devices from 19,400 to 53,700. Intel also exploited
other highly visible opportunities of using predictive data analytics. It reduced the amount of time
required to detect data threats from two weeks in 2013 to 20 minutes in 2014. Finally, Intel enjoyed
a revenue increase of $351 million from advanced analytics in the areas of sales leads, supply,
demand, and pricing.
An outsider might assume that Intel stepped up spending and IT investments to accomplish these
goals. However, it actually reduced the number of data centers from 91 in 2010 to 61 in 2014 and
reduced IT spending from 2.64% to 2.30% of revenue during that same five-year interval.
How did Intel accomplish these and other laudable goals? Its approach was the result of 23 years
of evolution of its strategy that began by creating a centralized IT organization in 1992 with control
resting in IT. Intel has come a long way from its original governance structure, which was centered
on mainframes and wide-area networks. Later, in 2003, Intel initiated its “Protect Era” in response
to two events: the then-new Sarbanes-Oxley legislation and a virus that had infected Intel’s internal
networks through an employee’s home-based network connection. The company’s “Protect Era”
was led by IT and locked down resources to such an extent that employees had to devise risky policy
workarounds to be able to complete some of their tasks. Data could be used only within a particular
functional area, not shared among areas.
Intel’s current “Protect to Enable Era” in information governance began in 2009 after man-
agers found that its overly restrictive policies on bring your own device (BYOD) had frustrated its
employees who saw those policies as both expensive and detrimental to innovation over the long
run. This led Intel to discover that consumerization is a powerful force. That six-syllable mouthful
describes the increasingly powerful tools available in the consumer space that can impact the corpo-
rate space. Mobility has been the major breakthrough in consumerization, and the increasing use of
‘ pdf ( accessed
September 1, 2015).
‘ /us/en/it-management/intel-it-best-practices/intel-it-annual-performance-report-2014-15-
paper.html (accessed September l, 2015).
Im Governance of the Information Systems Organization
smartphones, tablets, and smaller/more powerful laptops coupled with Web-based applications that offer everything
from free business productivity tools, such as Google Docs to sharing applications like YouTube and SlideShare
and to social tools such as Twitter and Linkedln, have created a new IT environment.
Intel found that cloud services, desktop applications, social networking, mobile devices, and the management
policies surrounding them had changed the business of IT. BYOD forced IT leaders at Intel and many other firms to
re-evaluate how IT services are offered. Intel’s traditional command and control mentality-with IT leaders making
all technology decisions-no longer could work. The consumerization of technology changed Intel’s management
approach3 from “How do we stop it?” to “How do we work with this?”
Intel’s governance structure also resulted in a lost opportunity to exploit data and analytics (described in
Chapter 13). Because information was restricted to the particular department in which it was generated, Intel could
not explore connections between manufacturing decisions and consumer reactions or between social media trends
and product design decisions. A new approach to governance was clearly needed, and Protect to Enable has ad-
dressed those needs.
More recently, Intel has extended the governance framework’s reach by its new six-pronged focus on social net-
working, mobile devices, analytics, cloud technologies, Internet of Things, and security. Intel reports that it has now
moved to the top of a three-tiered pyramid of IT leadership of ( 1) developing programs and delivering services, (2)
contributing business value, and (3) transforming the company.
How does a governance framework provide these benefits? Intel now uses information governance boards that
include representatives from a variety of its functions, including marketing, manufacturing, product design, human
resources (HR), legal, business development, internal audit, and IT. Sharing the governance with business units is
one of five key success factors, according to an analysis of the Intel case.4 Intel reports that they have moved beyond
categorizing challenges as IT problems or business problems. They assert that only integrated solutions work to
“disrupt instead of being disrupted.”5
Although each information systems (IS) organization is unique in many ways, all have elements in common. The
focus of this chapter is to introduce managers to issues related to the way decisions about IT are made in the organi- ,.,,,,,
zation. These issues should reflect the typical activities of an IS organization that were discussed in Chapter 8. The
current chapter examines governance of the IS organization as it relates to decisions about IT issues.
IT Governance
Expectations (or more specifically, what managers should and should not expect from the IS organization) are at
the heart of IT governance. Governance in the context of business enterprises is all about making decisions that
define expectations, grant authority, or ensure performance. In other words, governance is about aligning behavior
with business goals through empowerment and monitoring. Empowerment comes from granting the right to make
decisions, and monitoring comes from evaluating performance. As noted in Chapter 3, a decision right is an impor-
tant organizational design variable because it indicates who in the organization has the responsibility to initiate,
supply information for, approve, implement, and control various types of decisions.
Four perspectives of IT governance are described here. The first, a traditional perspective of IT governance,
focuses on how decision rights can be distributed to facilitate centralized, decentralized, or hybrid modes of
decision making. In this view of governance, the organization structure plays a major role. The second focuses on
the interaction between accountability and allocation of decision rights to executives, business unit leaders, or IT
leaders. The third focuses on an “ecosystem” that reflects the significant impacts of the large variety of resources
available from individuals, organizational units, and outside service providers. The final perspective, control struc-
tures developed in response to important legislation, also provides governance guidelines to firms.
3 Paul P. Tallon, James E. Short. and Malcolm Harkins, ‘The Evolution of Information Governance at Intel,'” MIS Quarterly Executive 12, no. 4 (2013 ),
4 Ibid.
‘ /us/en/i t-management/intel-it -best-practices/intel-it-annual-perf ormance-report-20 14-15-paper.html, 20 ( accessed
September 3, 2015).
IT Governance DD
Centralized versus Decentralized Organizational Structures
Companies’ organizational strategies exist along a continuum from centralization to decentralization. At one end
of the continuum, centralized IS organizations bring together all staff, hardware, software, data, and processing
into a single location. Decentralized IS organizations scatter these components across different locations to
address local business needs. These two approaches do not refer to IT architectures but to decision-making frame-
works. A combination, or hybrid, of the two is called federalism, found in the middle (see Figure 9.1 ). Enterprises
of all shapes and sizes can be found at any point along the continuum. Over time, however, each enterprise may
gravitate toward one end of the continuum or the other, and often reorganization is in reality a change toward one
end to the other.
Centralization and decentralization trends have evolved through the five eras of information usage (see
Chapter 2, Figure 2.1 ). In the 1960s, mainframes dictated a centralized approach to IS because the mainframe
resided in one physical location. Centralized decision making, purchasing, maintenance, and staff kept these early
computing behemoths running. The 1970s remained centralized due in part to the constraints of mainframe com-
puting, although minicomputers planted early seeds for decentralizing. In the 1980s the advent of the personal
computer (PC), which allowed computing power to spread beyond the raised-floor, super-cooled rooms of main-
frames, provided further fuel for decentralization. Users especially liked the shift to decentralization because it put
them more in control and increased their agility. However, the pressures for secure networks and massive corpo-
rate databases in the 1990s shifted some organizations back to a more centralized approach. Yet, the increasingly
global nature of many businesses makes complete centralization impossible. The most recent global survey found
that 70.6% of the participating organizations were centralized in terms of IT, 13.5% were decentralized, and 12. 7%
were federated. 6 Although the high percentage of centralized companies in the sample may seem surprising, the
study suggested that with the increasing appreciation for governance found in companies with high levels of gov-
ernance maturity comes the need for control that is made possible in the centralized structure.
The survey also found that two-thirds of responding enterprises had governance activities for enterprise IT
(GEIT). These companies indicated that the main driver for GEIT activities is to ensure that IT functionality aligns
with business needs, and, like Intel’s findings, the most commonly experienced outcomes were improvements in
management of IT-related risk and communication and relationships between business and IT. Good governance
therefore can increase the transparency of IT supply and demand and help in assigning priorities for IT projects
and services.
What are the most important considerations in deciding how much to centralize or decentralize? Figure 9.2
shows some advantages and disadvantages of each approach.
Consider two competing parcel delivery companies, UPS and FedEx, in the year that they both reported
spending about $1 billion on IT. UPS’ s IT strategy focused on delivering efficiencies to meet the business demands
of consistency and reliability. UPS ‘s centralized, standardized IT environment supported dependable customer
service at a relatively low price. In contrast, FedEx chose a decentralized IT strategy that allowed it to focus on
flexibility in meeting business demands generated from targeting various customer segments. The higher costs of
the decentralized approach to IT management were offset by the benefits of localized innovation and customer
responsiveness. 7
Decentralization Federalism Centralization
FIGURE 9.1 Organizational continuum.
6 IT Governance Institute, “Global Status Report on the Governance of Enterprise IT (GEIT)” (2011), 49,
Research/Documents/Global-Status-Report-GEIT-10Jan2011-Research.pdf (accessed February 27, 2011 ).
7 J. W. Ross and P. Weill, “Six IT Decisions Your IT People Shouldn’t Make,” Harvard Business Review (November 2002), 1-8.
Im Governance of the Information Systems Organization
Approach i Advantages Disadvantages
Centralized • Global standards; common data • Technology may not meet local
• “One voice” for negotiating needs
I supplier contracts • Slow support for strategic
• Greater leverage in deploying initiatives
strategic IT initiatives • Schism between business and IT
• Economies of scale and a shared organization
cost structure • “Us versus them” mentality when
• Access to large capacity technology problems occur
• Improved recruitment and • Lack of business unit control over
training of IT professionals overhead costs
• Improved control of security and
1• Consistent with centralized
I enterprise structure
Decentralized • Technology customized to local • Difficulty in maintaining global
business needs standards and consistent data
• Close partnership between IT and • Higher infrastructure costs
business units • Difficulty in negotiating
• Greater flexibility preferential supplier agreements
• Reduced telecommunication • Loss of control
costs • Duplication of staff and data
• Consistency with decentralized
enterprise structure
• Business unit control of overhead
• J. W. Ross and P. Weill, “Six IT Decisions Your IT People Shouldn’t Make,” Harvard Business Review (November 2002), 1—8.
b Ibid.
FIGURE 9.2 Advantages and disadvantages of organizational approaches.
Companies Adopting I
Zara, UPS• /
VeriFone, FedExb
Zara, the global retail and apparel manufacturer introduced in Chapter 2, also used a centralized approach, which
differs from other clothing chains. The head of IS, who was not a CIO, reported directly to the deputy general
manager, who was two levels below the CE0. 8 This way of structuring the IS department was consistent with the
organization’s predominantly centralized structure. It was also well suited to organizational processing about which
most administrative decisions were made in the headquarters at Lacoruria, Spain. The users did not require a lot of
hand-holding with regard to the point-of-sale (POS) systems in the stores. For these reasons, a centralized approach
was a good fit for Zara. The store managers, however, did retain some decision rights about which products to order.
Thus, Zara was not totally at the centralization end of the continuum. In contrast, Verifone, which we discuss in
Chapter 4, needs a decentralized structure for its globally distributed employees.
Companies adopt a strategy based on lessons learned from earlier years of centralization and decentralization.
Most companies want to achieve the advantages derived from both organizational paradigms. This desire leads
to federalism, 9 a structuring approach that distributes power, hardware, software, data, and personnel between a
central IS group and IS in business units. Many companies adopt a form of federal IT yet still count themselves
as either decentralized or centralized, depending on their position on the continuum. Organizations such as Home
Depot and the U.S. Department of Veteran Affairs recognize the advantages of a more hybrid approach and actively
seek to benefit from adopting a federal structure. See Figure 9.3 for the interrelationship of these approaches.
Archetypes of Accountability and Decision Rights
Sometimes the centralized/decentralized/federal approaches to governance are not fine-tuned enough to help
managers deal with the many contingencies facing today’s organizations. This issue is addressed by a framework
8 Andrew McAfee, Vincent Dessain, and Anders Sjman, “Zara: IT for Fast Fashion,” Harvard Business School Case 9-604-081 (September 6, 2007).
9 John F. Rockart, Michael J. Earl, and Jeanne W. Ross, “Eight Imperatives for the New IT Organization,” Sloan Management Review (Fall l 996), 52-53.
The federal IT attempts
to capture the benefits of
centralized and decentralized
organizations while eliminating
the drawbacks of each.
• No Business
Unit Ownership
of Systems
Federal IT
• IT Vision and
• Users Control
IT Priorities
• Business
• No Business • Control of Units Have
Unit Control of Standards Ownership
Central Overhead • Critical • Responsive
Costs Mass of to Business
• Doesn’t Meet Skills Unit’s Needs
Centralized IT
FIGURE 9.3 Federal IT.
IT Governance •
• Excessive Overall
Costs to Group
• Variable
Standards of IS
• Reinvention of
• No Synergy and
Decentralized IT
Source: Michael J. Earl, “Information Management: The Organizational Dimension,” The Role of the Corporate IT Function in the
Federal IT Organization, ed. S. L. Hodgkinson (New York: Oxford University Press, 1996), Figure 12.1. By permission of Oxford
University Press, Inc.
developed by Peter Weill and Jeanne Ross. They define IT governance as “specifying the decision rights and
accountability framework to encourage desirable behavior in using IT.” 10 IT governance is not about what decisions
are actually made but rather about who is making them (i.e., who holds the decision rights) and how the decision
makers are held accountable for them.
It is important to match the manager’s decision rights with his or her accountability for a decision. Figure 9.4
indicates what happens when there is a mismatch. Where the CIO has a high level of decision rights and account-
ability, the firm is likely to be at maturity Level 3 (which was introduced in Chapter 8). Where both the decision
rights and accountability are low, the company is likely to be at Level 1. Mismatches result in either an oversupply
of IT resources or the inability of IT to meet business demand.
Good IT governance provides a structure to make good decisions. It can also limit the negative impact of orga-
nizational politics in IT-related decisions. IT governance has two major components: (1) assignment of decision-
making authority and responsibility and (2) decision-making mechanisms (e.g., steering committees, review boards,
policies). When it comes specifically to IT governance, Weill and his colleagues proposed five generally applicable
categories of IT decisions: IT principles, IT architecture, IT infrastructure strategies, business application needs,
and IT investment and prioritization.” A description of these decision categories with an example of major IS activ-
ities affected by them is provided in Figure 9.5.
Weill and Ross’s study of 256 enterprises shows that a defining trait of high-performing companies is the use
of proper decision right allocation patterns for each of the five major categories of IT decisions. They use six
political archetypes with highly descriptive names (business monarchy, IT monarchy, feudal, federal, IT duopoly,
and anarchy) to label the combinations of people who either input information or have decision rights for the key
10 Peter Weill and Jeanne W. Ross, IT Governance: How Top Performers Manage IT Decision Rights for Superior Results (Cambridge, MA: Harvard
Business School Press, 2004); Peter Weill, “Don’t Just Lead, Govern: How Top-Performing Firms Govern IT,” MIS Quarterly Executive 3, no. l (2004),
l-17. The quote is on page 3.
11 P. Weill, “Don’t Just Lead, Govern: How Top-Performing Firms Govern IT,” MIS Quarterly Executive 3, no. 1 (2004).
lfl:t Governance of the Information Systems Organization
, Decision Rights
-. ..i
! High
.. I Low
··-·+ —-·-
I Technocentric gap
1, • There is danger of overspending on
IT, creating an oversupply
• IT assets may not be utilized to meet
business demand
• Business group might become
frustrated with IT group
Support norm {Level 1 balance)
• It works for organizations where IT is
viewed as a support function
• Its focus is on business efficiency
i • IT is viewed as competent
1 • IT is viewed as strategic to business
Business gap
• Cost considerations dominate IT decision
• IT assets may not utilize internal
‘ • competencies to meet business demand
IT group might cause frustration for i
, business group I
– –·—-·—- -·– –·1·–·-·–·——·—-·—- —
FIGURE 9.4 IS Decision rights accountability gap.
Source: Adapted from V. Grover, R. M. Henry, and J.B. Thatcher, “Fix IT-Business Relationships through Better Decision Rights,”
Communications of the ACM 50, no. 12 (December 2007), 82, Figure 1.
I Category JD~scription ……. f ~a’!l~~E:~~f~ffected IS Activities . J
I How to determine IT assets that are I Participating in setting strategic direction ‘I
I needed 1 1 ···t- ·—-, .. – …. –·–· •””-···—··-·———,—–.. ——–·-·-··–·-·-·—– .. —– ·-
IT infrastructure strategies ·1-:-;:;: =~~l:~~:~::::ets —–. –· ·–/ t:a~r:i!~~~;~~~-:~:~:~~;~:::~::~t~;:- –·
I I data, human resources, mobile computing J
j Business application needs j How to acquire, implement, and · 1 Developing and maintaining information ‘
, I maintain IT (insource or outsource) 1 systems ———-4
IT investment and prioritization How much to invest and where to
invest in IT assets
Anticipating new technologies
FIGURE 9.5 Five major categories of IT decisions.
Source: Adapted from P. Weill, “Don’t Just Lead, Govern: How Top-Performing Firms Govern IT,” MIS Quarterly Executive 3, no. 1
(2004), 4, Figure 2.
IT decisions. 12 An archetype is a pattern resulting from allocation of decision rights. Decisions can be made at
several levels in the organization: top executives, IT executives, or business unit executives. Figure 9.6 summarizes
the level and function for the allocation of decision rights in each archetype.
For each decision category, the organization adopts an archetype as the means to obtain inputs for decisions and
to assign accountability for them. Although there is little variation in the selection of archetypes regarding who
provides information for decision making, there is significant variation across organizations in terms of archetypes
selected for decision right allocation. For instance, the duopoly is used by the largest portion (36%) of organiza-
tions for IT principles decisions whereas the IT monarchy is the most popular for IT architecture and infrastructure
decisions (i.e., 73% and 59%, respectively). 13
There is no one best arrangement for the allocation of decision rights. Rather, the most appropriate arrangement
depends on a number of factors, including the type of performance indicator. Some common performance indica-
tors are asset utilization, profit, or growth.
” Peter Weill and Jeanne W. Ross, IT Governance: How Top Performers Manage IT Decision Rights for Superior Results (Cambridge, MA: Harvard
Business School Press, 2004 ).
13 Weill and Ross, IT Governance.
IT Governance
i CxO Corp. IT Business
Decision rights or inputs rights for a particular IT decision are held by:
Level and/or Unit Leaders
! Execs Business or Process
Unit IT Owners
“—-··· ·— ·- –“-”
Business A group of, or individua~ business executives (i.e., CxOs).
Monarchy Includes committees comprised of senior business ,I I
executives (may include CIO). Excludes IT executives
I acting independently.
IT monarchy Individuals or groups of IT executives.
··-· …. f····–· ~-·-·—··———··—··—-·——·–···-·————-
Feudal Business unit leaders, key process owners or their ,I
Federal C level executives and at least one other business group ,I ,I ,I
(e.g., CxO and BU leaders)-IT executives may be an
, ………… … -·- ·-·······-··-
additional participant. Equivalent to a country and its states
,I ,I
working together.
f–· —–
IT duopoly IT executi,,es and one other group ,I ,I
(e.g., CxO or BU leaders). ,I ,I
Anarchy Each individual user. _ _J
FIGURE 9.6 IT governance archetypes.
Source: P. Weill, “Don’t Just Lead, Govern: How Top-Performing Firms Govern IT,” MIS Quarterly Executive 3, no. 1 (2004), 5,
Figure 3.
4., Emergent Governance-The Digital Ecosystem
New consumer technologies challenge a “top-down” governance approach for making all decisions in a planned
and methodical manner. The best-laid plans are often derailed. Intel’s decree to lock down data and strictly control
devices used by employees grew so difficult that it impeded the company’s ability to not only compete but also
to fulfill everyday tasks. Sometimes the best plans aren’t even prescribed far in advance; in some situations, they
simply emerge. For instance, social networking was ignored by many firms in its early days because they failed to
recognize its impact. Most firms now realize that social networking needs not only recognition but also strategic
There are many freely available and widely used apps, Web sites, social networks, smartphones, and other IT
assets; it would be foolish to try to invent something identical in house, so firms often exploit them. Using a variety
of such assets implies that governance might need to be more flexible and follow patterns of adaptation much like
biological ecosystems, forming an interrelated set of interacting species. 14 Just as a species cannot ignore preda-
tors, prey, and complementary species, an information systems department cannot ignore new technologies and
information assets that emerge suddenly and unexpectedly. One interesting definition of digital ecosystem regards
those systems as self-interested, self-organizing, and autonomous digital entities. 15
A simple example can be useful. Before YouTube, firms had to find their own way to provide digital video
content to customers on the Web. Some used animations that were available in special image formats whereas
others had to choose between requiring a download of a video file that they hoped would be playable on a user’s
computer or streaming a file to users who had to also install a particular streaming player that was compatible with
the streaming video. Providing that content widely was not generally considered to be feasible or even desirable.
With YouTube, firms can now simply use a link or even embed the video into their own Web site. Coupling this
14 Maja Hadzic and Elizabeth Chang. “Application of Digital Ecosystem Design Methodology within the Health Domain.” IEEE Transactions on
Systems, Man and Cybernetics, Part A: Systems and Humans 40, no. 4 (2010): 779-88.
t ” Rahnuma Kazi and Ralph Deters, “Mobile Event-Oriented Digital Ecosystem,” Digital Ecosystems Technologies (DEST), 2012 6th IEEE International
– Conference (2012).
Im Governance of the Information Systems Organization
new simplicity with an ability to display a map from Google Maps forms new and very useful interdependencies
between these digital assets.
In recent years, mobile computing, GPS, and social media have indeed presented new, unexpected challenges
and opportunities as described earlier. However, other technological developments have also provided digital eco-
system opportunities, such as cloud computing, the Internet of Things (loT), radio frequency ID (RFID), and smart
cards. Interconnecting firms with each other allows connectivity in new, unpredictable, and very helpful ways.
A good example in the health care arena is an electronic medical record (EMR). 16 An EMR is filled with a variety
of information about a patient (for instance, patient demographics, appointments, medications, medical history,
billing records). Not only can a doctor’s computer pick out the relevant information about a patient to use but also
a pharmacy can identify potential drug interactions and a laboratory can be informed of certain medical conditions
when processing a specimen. In addition, both the pharmacy process and the insurance company can bill for the
medication and the appointment.
Some or all of these functions could have been in the original plans for EMRs, but others might occur to enter-
prising designers along the way. For instance, a bank that is administering the patient’s flexible spending account
can be provided medical billing information for properly disbursing funds. Also, a tax authority might be provided
billing information from the EMR to verify deductible expenses. Each party would be privy only to the relevant
information for it, and the rest would be kept confidential.
A smartphone provides another example of how a digital ecosystem can form between applications, firms, and
digital entities. Even just the junction of identity, date, location, preference, and relationship information can pro-
vide real-time driving directions, invitations to nearby events, alerts about nearby friends, personalized advertising,
and chatter on social network alerts. Many of these uses were not even imagined 15 years ago, and it is hard to
imagine the possible new connections and uses that will occur in another 15 years. For instance, new ecosystem
connections will be made possible when the loT places more technology into automobiles. A self-driving car could
actually react independently to an urgent situation with a family member and safely make a split-second decision to
change course before all of the information is fully comprehended by the occupant (formerly called the “driver”) . ..,,J
Individual devices and applications that are difficult to imagine today might be combined in new ways on the road,
in the home, and at the office.
Strong governance implications emerge from ecosystems. The symbiotic multifirm and adaptive situations
cannot be completely planned or orchestrated by a single entity. Much of the decision making exists outside the
firm, and, therefore, complete plans no longer can be made in a single boardroom. Along with the good news of
synergies between with and among various “apps” and devices, there is the potential danger of changes to the
information passed between them or even the complete failure of an outside entity. Imagine what hotels would
need to do if Google Maps would disappear altogether. Further, what would need to be done with location-based
ads if predictions come true that one or more of the GPS satellites would fail 17 and are also vulnerable to attack? 18
Fortunately, most ecosystems have adopted stringent standards for data exchange, and the most useful ones are
quite successful. The likelihood of a permanent failure of Google Maps is quite remote for the foreseeable future.
Even if Google were to divest the app, a new firm would likely be able to maintain the tightly specified connec-
tions. IT governance is perhaps most vulnerable to an inability to imagine strategic potential from new devices,
applications, and connections. A firm should explore whether plans can be changed in mid-year. Can competitors
become allies? Can business processes be changed quickly? Can new capabilities that might be contrary to previous
activities or directions be enabled? Firms in the future will probably need to answer all of these questions in the
affirmative for their ultimate survival.
To summarize the three governance frameworks, see Figure 9.7 for the main concept and potential best practice
of each framework.
16 Hadzic and Chang, “Application of Digital Ecosystem Design Methodology within the Health Domain.”
17 “GPS System Close to Breakdown,” (accessed September 4, 2015).
18 “Global Positioning System Is a Single Point of Failure,”
failure (accessed September 4, 2015).
Decision-Making Mechanisms Im
Governance Framework I Main Concept
Centralization-Decentralization I Decisions can be made by a central authority or by
———, ________ , ___ . ·-·- _ I auto_r,~mou_s ind~vid~~l:_<:>~ §1.r~u~=~~-~~-<:>r~~~-i_zat(<:>_n.
Decision archetypes I Patterns based upon allocating decision rights and
1 accountability are specified.
‘ Possible Best Practice l
–‘ ——··——1
, Use a hybrid, federal ,
Tailor the archetype to
the situation.
Digital ecosystems Members of the ecosystem contribute their strengths, j Build flexibility and
giving the whole ecosystem a complete set of capabilities I adaptability into
that can impact decision making and operations. l governance. ____ ….L:-‘.__ ____ –
FIGURE 9.7 Three governance frameworks.
Decision-Making Mechanisms
Many different types of mechanisms can be created to ensure good IT governance. Policies are useful for defining
the process of making a decision under certain situations. However, when the environment is complex, policies are
often too rigid. In a recent worldwide study of IT governance, almost 60% of the respondents relied on policies
and standards for governance, making it the most popular mechanism for governance. 19 A second method, a review
board, or committee that is formally designated to approve, monitor, and review specific topics, can be an effective
governance mechanism. For example, Twila Day, CIO of Sysco, established an architecture review board to look
at new technologies and processes.20
A third mechanism that is used very frequently for IT decisions is the IT steering committee, also called an
IT governance council. Such a committee is composed of key stakeholders or experts who provide guidance on
important IT issues. Steering committees work especially well with the federal archetype, which calls for joint
participation of IT and business leaders in the decision-making process. Steering committees can be geared toward
different levels of decision making. The highest level of steering committees report to the board of directors or the
CEO and are often composed of top-level executives and the CIO. At this level, the steering committee provides
strategic direction and funding authority for major IT projects and ensures that adequate resources be allocated to
the IS organization for achieving strategic goals.
Committees with lower-level players typically are involved with allocating scarce resources effectively and effi-
ciently. Lower-level steering committees provide a forum for business leaders to present their IT needs and to offer
input and direction about the support they receive from IT operations.
Either level may have working groups to help increase the steering committee’s effectiveness and to measure
the performance of the IS organization. The assessment of performance differs for each group. For example, the
lower-level committee likely would include more details and would focus on the progress of the various projects
and adherence to the budget. The higher-level committee would focus on the performance of the CIO and the ability
of the IS organization to contribute to the company’s achievement of its strategic goals.
Although an organization may have both levels of steering committees, it is more likely to have one or the other.
If the IS organization is viewed as being critical for the organization to achieve its strategic goals, the firm’s C-level
executives are likely to be on the committee. Otherwise, the steering committee tends to be larger so that it can
have widespread representation from the various business units. In this case, the steering committee is an excellent
mechanism for helping the business units realize the competing benefits of proposed IT projects and develop an
approach for allocating among the project requests.
19 IT Governance Institute, “Global Status Report on the Governance of Enterprise IT (GEIT)” (2011), 49,
Research/Documents/Global-Status-Report-GEIT-10Jan201 I-Research.pdf (accessed February 27, 2011 ).
20 Martha Heller, “How to Make Time for Strategy,” (April 22, 2010), _to_Make_ Time_for_Strategy
(accessed January 16, 2012).
B Governance of the Information Systems Organization
For example, when Hilton Worldwide’s CIO started working on a project to create a new loyalty program,
he and the business sponsor of the project convened a lower-level steering committee made up of people from
IT, marketing, HR, finance, and other departments. They discussed change management and business issues that
arose as they designed the system to be used in 85 countries in over ten brands in the Hilton portfolio. The project
went very smoothly. But earlier, another project to outsource the hotel help desk had not gone as well. The CIO
learned from both experiences that there is no such thing as too much communication and created weekly steering
committee meetings for each project. The CIO is quoted as saying, “E-mail is great for scheduling meetings, but
it’s the steering committees where we are working through really difficult issues together, and making promises and
keeping promises, where the foundations of trust are established.” 21
Governance Frameworks for Control Decisions
The framework described previously focuses on which department is responsible for decisions. More recently, gov-
ernance frameworks have been employed specifically to define responsibility for control decisions. They are being
implemented to help ward off future accounting fiascos. These frameworks focus on processes and risks associated
with them.
Sarbanes-Oxley Act of 2002
In response to rogue accounting activity by major global corporations such as Enron and WorldCom and their
accounting firms, such as Arthur Andersen, the Sarbanes-Oxley Act (SoX) was enacted in the United States
in 2002 to increase regulatory visibility and accountability of public companies and their financial health. The
U.S. government wanted to assure the investing public that they could rely on financial markets to deliver valid
performance data and accurate stock valuation. All corporations that fall under the jurisdiction of the U.S. Securities
and Exchange Commission are subject to SoX requirements. This includes not only U.S. and foreign companies
that are traded on U.S. exchanges but also those entities that make up a significant part of a U.S. company’s finan-
cial reporting. Within five years of SoX’s passage, 15,000 U.S. companies, 1,200 non-U.S.-based companies. and
over 1,400 accounting firms in 76 countries have been affected by SoX. 22
According to SoX, CFOs and CEOs must personally certify and be accountable for their firms’ financial records
and accounting (Section 302), auditors must certify the underlying controls and processes that are used to compile
the financial results of a company (Section 404), and companies must provide real-time disclosures of any events
that may affect their stock price or financial performance within a 48-hour period (Section 409). Penalties for fail-
ing to comply range from monetary fines to a 20-year jail term.
A comprehensive Public Company Accounting Oversight Board (PCAOB) review of 2,800 engagements of the
largest audit firms found hundreds of cases involving audit failures, suggesting that improvements could be made in
audit firm performance as well as the PCAOB’s process for assessing and reporting on engagements. However, the
review reported that SoX has been successful in increasing corporate focus on a strong ethical culture in publicly
owned companies. 23
Although SoX was not originally aimed at IT departments, it soon became clear that IT played a major role in
raising the accuracy of financial data. Consequently, in 2004 and 2005, there was a flurry of activity as IT managers
21 Adapted from “Candid Talk Trumps the Blame Game,” (November 201 I),
Blame_Game (accessed September 4, 2015); “How Cl Os Build Bridges with Other C-Level Execs,” (November 2011 J.
article/2402725/relationship-building-networking/how-cios-build-bridges-with-other-c-level-execs.html (accessed September 4, 2015).
” These figures were derived from the Public Company Accounting Oversight Board (PCAOB) as reported in Ashley Braganza and Arnaud Franken,
“SoX, Compliance, and Power Relationships,” Communications of the ACM 50, no. 9 (September 2007), 97-102.
23 Curtis Yershoor, “Has SoX Been Successful,” September 5, 2012, (accessed
March 27, 2015).
Governance Frameworks for Control Decisions
identified controls, determined design effectiveness, and validated operational controls through testing. Five IT
control weaknesses repeatedly were uncovered by auditors: 24
1. Failure to segregate duties within applications, set up new accounts, and terminate old ones in a timely
2. Lack of proper oversight for making application changes, including appointing a person to make a change
and another to perform quality assurance on it.
3. Inadequate review of audit logs to ensure that systems are running smoothly and that there is an audit of the
audit log.
4. Failure to identify abnormal transactions in a timely manner.
5. Lack of understanding of key system configurations.
Although SoX’s focus is on financial controls, many auditors encouraged (forced) IT managers to extend their
focus to organizational controls and risks in business processes. This means that IT managers must assess the level
of controls needed to mitigate potential risks in organizational business processes. As companies move beyond
SoX certification into maintaining compliance, IT managers must be involved in ongoing and consistent risk
identification, actively recognize and monitor changes to the IS organization and environment that may affect SoX
compliance, and continuously improve IS process maturity. It is likely that managers will tum to software to auto-
mate many of the needed controls.
Frameworks for Implementing SoX
~ coso
The Enron and WorldCom major financial scandals were not the first. In the wake of financial scandals in the
mid- l 980s, the Treadway Commission ( or National Commission on Fraudulent Financial Reporting) was created.
Its head, James Treadway, had previously served as commissioner of the SEC. The members of the Treadway
Commission came from five highly esteemed accounting organizations: Financial Executives International (FEI),
American Accounting Association (AAA), American Institute of Certified Public Accountants (AICPA), Institute
of Internal Auditors (IIA), and Institute of Management Accountants (IMA). These organizations became known as
the Committee of Sponsoring Organizations of the Treadway Commission ( COSO ). The commission created three
control objectives for management and auditors that focused on addressing risks to internal control. These control
objectives deal with:
• Operations: To help the company maintain and improve its operating effectiveness and protect the assets of
• Compliance: To ensure that the company is in compliance with relevant laws and regulations
• Financial reporting: To ensure that the company’s financial statements are produced in accordance with
generally accepted accounting principles (GAAP). SoX is focused on this control objective.
To make sure a company meets its control objectives, COSO established five essential control components for
managers and auditors: ( 1) create a control environment that addresses the overall culture of the company; (2) assess
the most critical risks to internal controls; (3) create control structures that outline important processes and guide-
lines; (4) provide clear information about employees’ responsibilities and procedures to be followed; and (5) mon-
itor internal controls. The Sarbanes-Oxley Act requires public companies to define their control framework and
specifically recommends COSO as that business framework for general accounting controls. It is not IT specific.
24 Ben Worthen, ‘The Top Five IT Control Weaknesses” (July I, 2005), /project-management/the-top-five-it-control-
weaknesses.html (accessed September 4. 2015).
Bil Governance of the Information Systems Organization
Control Objectives for Information and Related Technology (COBIT) COBIT (Control Objectives for
Information and Related Technology) is an IT governance framework that is consistent with COSO controls, and
also a governance tool to ensure that IT provides the systematic rigor needed for the strong internal controls and
Sarbanes-Oxley compliance. It provides a framework for linking IT processes, IT resources, and IT information to
a company’s strategies and objectives. As a governance framework, it provides guidelines about who in the organi-
zation should make decisions about IT processes, resources, and information.
Information Systems Audit & Control Association (ISACA) issued COBIT in 1996. COBIT consists of several
overlapping sets of guidance with multiple components, which almost form a cascade of process goals, metrics,
and practices. At the highest level, key areas of risks are defined in four major domains: planning and organization,
acquisition and implementation, delivery and support, and monitoring and evaluating. When implementing a COBIT
framework, a company determines the processes that are the most susceptible to the risks that it judiciously chooses to
manage. There are far too many risks for a company to try to manage all of them.
Once the company identifies processes that it is going to manage, it sets up a control objective and then more
specific key goal indicators. As with any control system, metrics called key performance indicators (KP/s) need
to be established to enable measurement of progress in meeting the goals. Then activities to achieve the KPis are
selected. These activities, or critical success factors, are the steps that need to be followed to successfully provide
controls for a selected process. When a company wants to compare itself with other organizations, it uses a well-
defined maturity model. The components of COBIT and examples of each component are provided in Figure 9.8.
One advantage of COBIT is that it is well suited to organizations focused on risk management and mitigation.
Another advantage is that it is very detailed. However, this high level of detail unfortunately can serve as a dis-
advantage in the sense that it makes COBIT very costly and time consuming to implement. Yet, despite the costs,
companies are starting to realize benefits from its implementation. As a governance framework, it designates clear
ownership and responsibility for key organizational processes in such a way that is understood by all organizational
Domain One of four major areas of risk: plan and organize
(PO), acquire and implement {Al), deliver and
support (DS), and monitor and evaluate (ME);
each domain consists of multiple processes
Control objective Focus on control of a process associated with risk;
: can be 34 processes
Critical success
Maturity model
Specific measures of the extent to which the
goals of the system have been met in regard to
a control objective
Actual, highly specific measures for measuring
‘ accomplishment of a goal
Description of the steps that a company must
take to accomplish a control objective; can be
318 critical success factors
uniquely defined six-point ranking of a
company’s readiness for each control objective
made in comparison with other companies in the
FIGURE 9.8 Components of COBIT and their examples.
Deliver and support (or DS)
DS {deliver and support) objective
#11-Manage data: ensures delivery of
complete, accurate, and valid data to the
A measured reduction in the data preparation
: process and tasks
Percent of data input errors (Note:
percentage should decrease over specified
periods of time)
–·———-·–··—·-·- -.
Data entry requirements clearly stated,
enforced, and supported by automated
techniques at all levels, including database
and file interfaces
Level 0: Data not recognized as corporate
resources and assets; no assigned data
ownership or individual accountability for
data integrity and reliability; data quality and
security poor or nonexistent
Source: Adapted from Hugh Taylor, The Joy of SoX (Indianapolis, IN: Wiley, 2006).
Governance Frameworks for Control Decisions Iii
stakeholders. Consistent with the Information Systems Strategy Triangle discussed in Chapter I, COBIT provides
a formal framework for aligning IS strategy with the business strategy. It does so by using a governance framework
and focusing on risks of internal control and associated processes to recognize who is responsible for important
control decisions. Finally, CO BIT makes possible the fulfillment of the COSO requirements for the IT control envi-
ronment that is encouraged by the Sarbanes-Oxley Act.
Other Control Frameworks
Although COB IT is the most common set of IT control guidelines for SoX, it is by no means the only control frame-
work. Others include those provided by the International Standards Organization (ISO), as well as the Information
Technology Infrastructure Library (ITIL). A set of concepts and techniques for managing information tech-
nology infrastructure, development, and operations, ITIL was developed in the United Kingdom. It is a widely
recognized framework for IT service management and operations management that has been adopted around the
globe. ITIL 2011 has five distinct volumes: service strategy; service design; service transition; service operation;
and continual service improvement.
IS and the Implementation of Sarbanes-Oxley Act Compliance
Because of the level of detail, the involvement of the IS department and the CIO in implementing SoX-most nota-
bly Section 404, which deals with management’s assessment of internal controls-is considerable. Although the IS
department typically plays a major role in SoX compliance, it often lacks formal authority. Thus, the CIO needs to
tread carefully when working with auditors, the CFO, the CEO, and business leaders. Braganza and Franken pro-
vide six tactics that CIOs can use in working effectively in these relationships. These strategies include knowledge
building, knowledge deployment, innovation directive, mobilization, standardization, and subsidy. Figure 9.9 pro-
vides a definition for each of these tactics, along with examples of activities to enact them.
Tactic I Definition Examples of Activities I
Knowledge .. ·-··f
i~t;bli~h a kn~,,:;ledge base to Acquire technical knowledge about SoX and Section 404 · ···· · · j
building implement SoX _JI,
Knowledge i Disseminate knowledge about SoX Move IT staff with knowledge of 404 to parts of the
deployment I and develop an understanding of organization that are less knowledgeable; create a central
! this knowledge by management repository of 404 knowledge; absorb 404 requirements from I
I and other organizational members external bodies; conduct training programs to spread an
lnnovati~~—- I Organiz;·f~r implem~nting Sox and r~~~=~~t:~~~::n:ft~::~~courage th~;do-~~~-~f404-~’
directive / announce the approach compli~nce practice~; publish rep~rts of ea~h unit’s pro~ress )
i toward 1mplementat1on; deploy drivers for 1mplementat1on; i
! I direct implementation from top down and/or bottom up J
Mobilization i Persuade decentralized players an~Create a positive impression of SoX (and 404) J
I subsidiaries to participate in SoX f implementation; conduct promotional and awareness i
I implementation campaigns i
Stand~;dizatio~ ·1 Negotiate agre~~~nts between · Use mandatory controls, often embedded within the –I
I organizational members to facilitate technology; indicate formal levels of compliance required;
the SoX implementation establish firmwide standards of control; create an ,
, overarching corporate compliance architecture I
Subsidy _____ lFu~the i;~le-~~nte~~~ costs duringj. C~ntralize template- developm~nt; develop Web-based —-J’
J the SoX implementation and the resources; train IT staff for implementing 404; fund
s’ costs during its deployment short-term skill gaps; track implementation; target funds
use during implementation for specific IT-related 404 goals
——·- -···—~-··———-·–·-·—-·—- –.. ··–·-·-··—·-·-···—-···-··——·——– ·——·—·—-·-··——–
FIGURE 9.9 CIO tactics for implementing SoX compliance.
Source: Adapted from Ashley Braganza and Arnoud Franken, “SoX, Compliance, and Power Relationships,” Communications of
the ACM50, no. 9 (September 2007), 97-102.
E!D Governance of the Information Systems Organization
::::: Social Business Lens: Governing the Content
Since the beginning of social applications like Facebook, Twitter, and lnstagram, there has been a debate about
who gets to decide on what’s allowed to be posted. Should the users decide? Should the application company
decide? This debate still rages today.
One perspective is that the users own and manage their content. Aside from the legal issues, which are dis-
cussed in Chapter 13 of this text, users have control over what they post and what they block from their pages on
most social media. Most social networks have controls that allow users to block others from posting on their page,
but it’s not the default in most cases. For example, when a user tags another Facebook user in a post or photo, the
content then also shows up on the tagged person’s timeline. Even though a control can be set to minimize this,
some have found it troublesome that items can be placed in their timeline in this manner. Most users feel that they
should have control of their content on their social media page.
Now ratchet this up to the group level. Should the “crowd” decide what is appropriate to put on a social media
site or should the company decide? The crowd has a say in some manner; members of the community can vote
or “like” a post and in some cases, content with the most votes rises to the top for others to see.
But the social media company also has a say in what content is appropriate. Again, aside from content that
crosses legal boundaries, which of course vary country by country, some companies have taken a stronger stance.
For example, lnstagram removed a number of users from its Web site for not following instructions. Its Web site
plainly stated two new policies:
We want lnstagram to continue to be an authentic and safe place for inspiration and expression. Help us foster this
community. Post only your own photo~ and videos and always follow the law. Respect everyone on lnstagram, don’t
spam people or post nudity.*
We want … to maintain the best possible experience on lnstagram, so spam, fake accounts and other people and posts .,,,J
that don’t follow our Community Guidelines may be removed from lnstagram.1
*From 111,tag:ram·s Commuuitv G11id1:lirws. http.s://lwlp.instawam.rnm/-t 7 ?-t:l-t1036:2111()/ (ac1′{‘SSPd \!av :2:2. :201.i).
; From lnstag:ra111·, !-IPlp CP11t<'r. http"//hPlp.instawam.rnm/:309i010-t9:2-t6 7 ?:l (ac,·!'ssed \lav :2:2 .. :201.i). Soun·es: "( :Ju10s Ens11e,.\s l11stag:ram lkletPs \lillions of Acco1111ts ... http://wv.·w.b11sirwssirosider.,·,m1/chaos-Pns11c,-a,-ins1awa111-dl'IPtl's- millions-of-accounts-:201-t-1:2#ixzz:')\IJ.\l .mhlm (acc!'ss1:d Septcrnber-t. :201.,): all(l /nstag:rarn ,·ompany wd,,-;itP. wv.-v.·.instag:rarn.co111: "111,tagram l'sers Report \lass lklPtion of Profiles for ·violating:· 'forms of Se1TicP.' 0 http://t,·,·\\·,-arwly.sis/instaf(n11n- 11s!'rs-report-mass-delPtion-of-profilc,-for-viola1i11g:-l,·n11s-of-scrvice-86h60.ht111I ( atl’flll)(‘r -t. :201:; ): “l11stag:rn111 DdctPs
:\lillions of •\cconnts in Spam P11rg:e … http://v.·!tPchnolog:y-:10:;-t8-t(i:l (,wcc,sPd ScplrntlH·r -t. :2013).
The extent to which a CIO could use these various tactics depends on the power that he or she holds relating to
the SoX implementation. Those few CIOs who are given carte blanche by their CEOs to implement SoX compli-
ance can employ compelling activities, such as subsidy, standardization, and innovation directives. Those CIOs can
establish standards and enforce their compliance, creating an overarching corporate compliance architecture. They
can direct the SoX implementation from top down and put Section 404 implementation drivers in place. If, on the
other hand, the CEO does not vest the CIO with the considerable power to employ such tactics, the CIO may need
to take more of a persuasive stance and focus on training programs and building an electronic knowledge database
of SoX documents. In this case, it is especially important to sell the CIO and CFO on the importance of complying
with prescribed procedures and methods. In either situation, the CIO needs to acquire and manage the considerable
IT resources to make SoX compliance a reality.
These new guidelines sound reasonable enough, but they are much more stringent than the previous set of
guidelines they replaced. Instagram deleted not only thousands of accounts, which mostly involved spam and fake
identities, but also others that the company deemed inappropriate. According to some sources, the crowd was not
happy. A mass campaign to stop following Instagram’s own official Instagram account followed, and that account
lost 30% of its followers. Does the crowd govern the content or the company?
CaseStudy B
• Alternative approaches to governance of information systems organization are possible. One approach is based on where
IS decisions are made in the organization’s structure. Centralized IS organizations place IT staff, hardware, software,
and data in one location to promote control and efficiency. At the other end of the continuum, decentralized IS organiza-
tions with distributed resources can best meet the needs of local users. Federalism in IS organizations is in the middle of
the centralization/decentralization continuum.
• A second governance approach involves decision rights. In this approach, IT governance specifies how to allocate decision
rights in such a way as to encourage desirable behavior in the use of IT. The allocation of decision rights can be broken
down into six archetypes (business monarchy, IT monarchy, feudal, federal, IT duopoly, and anarchy). High-performing
companies use the proper decision rights allocation patterns for each of the five major categories of IT decisions.
• A third governance approach recognizes the power of combining complementary technologies in ways that were not
predicted or controlled by an organization. This so-called digital ecosystem represents formal recognition of a firm’s
healthy adaptation and synergistic adoption to new hardware, applications, and connections with customers, employees,
and other firms. Much of this has been driven by consumerization of technology.
• A fourth governance approach is based on controls. The Sarbanes-Oxley Act (2002) was enacted to improve organiza-
tions’ internal controls. COB IT is an IT governance framework based on control that can be used to promote IT-related
internal controls and Sarbanes-Oxley compliance.
archetype (p. 196)
centralized IS organizations (p. 193)
COBIT (Control Objectives for
Information and Related
Technology) (p. 202)
Consumerization (p. 191)
decentralized IS organizations (p. 193)
digital ecosystem (p. 197)
federalism (p. 194)
governance (p. 192)
Information Technology Infrastructure
Library (ITIL) (p. 203)
IT governance (p. 195)
review board (p. 199)
Sarbanes-Oxley Act (SoX) (p. 200)
steering committee (p. 199)
1. The debate about centralization and decentralization is heating up again with the advent of BYOD and the increasing use of
the Web. Why does the Internet make this debate topical?
2. Why is the discussion of decision rights among managers in a firm important?
3. Why can an IT governance archetype be good for one type of IS decision but not for another?
• CASE STUDY 9-1 IT Governance at University of the Southeast
University of the Southeast2′ was (and still is) one of the largest universities in the United States. It had been growing rap-
idly: that growth was spurred. in part, by information technology. The university embraced lecture capture technologies that
allowed lectures to be streamed to students in a classroom, in dorm rooms, on the grass near the main campus central foun-
tain, and at a variety of other places of the students’ choosing whenever they chose to watch. This made it possible to have
__ sections of classes with over 1,000 students without having to build physical classrooms with enough seats to accommodate
each person enrolled. It also made it possible to offer classes that were streamed to students at remote campuses. Each stu-
dent was charged a technology fee (i.e., $5.16 for undergraduates and $13.85 for graduates per credit hour each semester),
which was administered hy the Information Technologies and Resources (IT &R) Office to help fund the costs of providing
IT to students and faculty.
m Governance of the Information Systems Organization
IT &R was responsible for providing computer services, technologies, and telecommunications across the campus
(Computer Services and Technology), helping faculty with their instructional delivery and multimedia support (Office of
Instructional Resources), helping faculty develop and deliver Web-based and lecture capture courses (Center for Distributed
Learning), and the library. The IT&R Office developed IT-related policies with very little input from the faculty and was
responsible for deciding and implementing decisions concerning IT architecture and infrastructure. IT &R worked with the
university president and other top administrators in making IT investment decisions. IT&R staff also worked with the vari-
ous colleges, administrative offices, and an advisory board in making decisions about applications that needed to be devel-
oped. However, faculty were not consulted at all when the lecture capture system was selected.
As was often the case at large universities, many decision rights on a wide range of issues had been allocated to the
colleges. The College of Business Administration had its own server and Technology Support Department (TSD). A recent
survey of faculty and staff in the college indicated a high level of satisfaction with the TSD but far less satisfaction with the
services provided by the university-level IT&R. Some college respondents indicated their displeasure about IT&R’s support
of the technology for the lecture capture courses, help desk, and classroom technologies.
The problems with the technology support for lecture capture software were particularly troublesome. The software
would not authenticate students who had paid to enroll in some lecture capture courses, making it impossible for them to
download the lectures even though they were registered in the course. Further, some university-affiliated housing did not
have adequate network bandwidth to allow students to download the lectures. When problems occurred-which they did on
a daily basis-the IT &R help desk often referred the students to instructors who could not resolve their problems. One fac-
ulty member who was teaching a lecture class with 1,400 students exclaimed, “It is utter chaos for me when something goes
wrong with the system and hundreds of my students are trying to call, see or email me in panic to get me to fix something
that I can ·1 fix.”
To fix some of these issues, the CIO argued that all e-mail accounts should be placed on one central server. This would
allow the IT&R greater control and make maintenance easier and more efficient. It also would considerably improve se-
curity. But it was not ideal for the faculty. A faculty meeting about e-mail revealed some concerns with this move. First,
faculty wanted e-mails sent to the central university server to be forwarded to their accounts on their other university-based ….,;
servers (i.e., the college, department, or institute servers) but found that this was impossible to do so. Second, faculty wanted
to retain their control over archiving e-mails. Third, faculty wanted to have control over their preferred e-mail address. In
some cases, the faculty e-mail addresses that they had used for a decade had been changed in the printed university directory
to the e-mail address on the central university server without their knowledge. This meant that faculty did not receive (or
even know about) messages sent to them via the address on the university server. They could not change the printed e-mail
address in the university directory to the address on the college server that they had been using or forward the mail sent to
the central server to a different account.
The IT&R spokesman said that having a centralized server for e-mail accounts was more secure, reliable and efficient.
He said that faculty shouldn’t have control over their preferred e-mail address, even if it were on a campus server, because of
the identity management problems that it would create. A frustrated faculty member at the meeting asked the IT&R spokes-
man to describe one time when issues about ease of use and functionality of the system by the user were weighted more than
security in decisions about e-mail. The IT&R spokesman could not think of an example.
Discussion Questions
I. Describe the IT governance system that was in place at the University of the Southeast using both decision rights and
structure as the bases of governance.
2. The CIO wanted to implement a centralized IT governance system. As demonstrated in this case, what are the advan-
tages of a centralized IT governance system? What are the disadvantages?
3. In your opinion, what assignment of decision rights would be best for University of the Southeast? Please explain.
CaseStudy Iii
• CASE STUDY 9-2 The “MyJohnDeere” Platform
“The customer is in control of the data and can share with dealers, crop consultants, and anyone in their network of trust-
ed advisers; securely, from any internet enabled device,” says Chris Batdorf, a marketing manager at John Deere. 26 The
MyJohnDeere project was designed with the realization that there was synergy in linking together disparate sources of
information into this “platform.”27
Who would be interested in using this application? You might expect that John Deere customers and employees would be
the only parties. But according to Accenture, a multinational management consulting, technology services, and outsourcing
company, John Deere realized that there was value in opening access to its system to farmers, ranchers, landowners, banks,
and government workers. The platform is useful for all those people because it integrates information about equipment, pro-
duction data, and farm operations and helps users improve their profitability. 28
A farmer described how the John Deere Operations Center allowed him to upload a treasure trove of data about planting,
spraying, fertilizing, and harvesting. He said that he accessed that information later not only to diagnose problems about
the equipment but also to make decisions about the use of land and personnel. He said that he can send that information to
consultants for real-time recommendations on what to change even while he was harvesting. 29
A platform such as MyJohnDeere could introduce new capabilities that can provide strategic value to customers, other
firms, and, of course, its host. According to Accenture, the platform integrated the Internet of Things with social, mobile,
analytics, and cloud technology. The combination encouraged the development of new applications over time and repre-
sented a recent pivotal technology trend. Such a platform provided reusable components that can evolve over time. 30
Discussion Questions
What governance approach did John Deere appear to have adopted? Did it fit the profile of an “old” heavy industry
What difficulties do you think an “old” heavy industry player such as John Deere encountered internally when proposing
to develop the MyJohnDeere platform?
What difficulties do you believe John Deere faced externally among the proposed users?
How do you think John Deere might have overcome those internal and external difficulties? 4.
5. What other parties might have been interested in obtaining the information in John Deere’s cloud? What might they
have done with it?
Sources: Adapted from John Deere press release, “The MyJohnDeere Operations Center-New Tools to Manage Data” (August 21,
2014), en_ US/ corporate/ our _company /news_and_media/press_releases/2014/ agriculture/2014aug21_mjd_ (accessed September 4, 2015); Cindy Zimmerman, “MyJohnDeere Operations Center Connectivity” (March 2,
2015); (accessed September 4, 2015); and
William Lesieur, “Proliferating Digital Ecosystems through ‘The Platform (R)evolution’-Accenture Technology Vision 2015,” http://
%28R%29evolution-acn-technology-vision-2015.aspx (accessed September 4, 2015).
26 en_ U Sf corporate/our_ company /news _and_media/press_releases/20 l 4/agriculture/20 l 4aug2 l _mj d_operations_ center. page
(accessed September 4, 2015).
” http://www. accenture .com/us-en/bl ogs/techn olo gy-b log/ arc hi ve/20 15/0 l /26/pro lif erating-digi tal-ecos y stems-through-the-platform-% 28R % 2 9
evolution-acn-technology-vision-2015.aspx (accessed September 4, 2015).
28 Ibid.
29 ( accessed September 4, 2015).

0 (accessed September 4, 2015).
chapter Information Systems
This chapter is organized around decisions in the Sourcing Decision Cycle. The first question
regarding information systems (IS) in the cycle relates to the decision to make (insource) or
buy(outsource) them. This chapter’s focus is on issues related to outsourcing whereas issues
related to insourcing are discussed in other chapters of this book. Discussed are the critical
decisions in the Sourcing Decision Cycle: how and where (cloud computing, onshoring,
offshoring). When the choice is offshoring, the next decision is where abroad (farshoring,
nearshoring, or captive centers). Explored next in this chapter is the final decision in the
cycle, keep as is or change in which case the current arrangements are assessed and modi-
fications are made to the outsourcing arrangement, a new outsourcing provider is selected,
or the operations and services are backsourced, or brought back in house. Risks and strat-
egies to mitigate risks are discussed at each stage of the cycle.
After 13 years, Kellwood, an American apparel maker, ended its soups-to-nuts IS outsourcing …,,J
arrangement with EDS. The primary focus of the original outsourcing contract was to integrate
12 individually acquired units with different systems into one system. Kellwood had been satis-
fied enough with EDS’s performance to renegotiate the contract in 2002 and 2008, even though
at each renegotiation point, Kellwood had considered bringing the IS operations back in house,
or backsourcing. The 2008 contract iteration resulted in a more flexible $105 million contract that
EDS estimated would save Kellwood $2 million in the first year and $9 million over the remaining
contract years. But the situation at Kellwood had changed drastically. In 2008, Kellwood had been
purchased by Sun Capital Partners and taken private. The chief operating officer (COO), who was
facing a mountain of debt and possibly bankruptcy, wanted to consolidate and bring the operations
back in house to give some order to the current situation and reduce costs. Kellwood was suffering
from a lack of IS standardization as a result of its many acquisitions. The chief information officer
(CIO) recognized the importance of IS standardization and costs, but she was concerned that the
transition from outsourcing to insourcing would cause serious disruption to IS service levels and
project deadlines if it went poorly. Kellwood hired a third-party consultant to help it explore the
issues and decided that backsourcing would save money and respond to changes caused by both the
market and internal forces. Kellwood decided to backsource and started the process in late 2009. It
carefully planned for the transition, and the implementation went smoothly. By performing stream-
lined operations in house, it was able to report an impressive $3.6 million savings, or about 17% of
annual IS expenses after the first year. 1
The Kellwood case demonstrates a series of decisions made in relation to sourcing. Both the
decision to outsource IS operations and then to bring them back in house were based on a series of
‘ For more information see Stephanie Overby. “Company Saves Millions by Ending Outsourcing Deal,””, http://www.cio.
com/article/549463/Company _Saves_Millions_B y _Ending_lT _ Outsourcing_Deal?page= I &taxonomyld=3 l 95 (accessed January
31, 2012); B. Bacheldor, “Kellwood Stayed on Top of Its Outsourcing All the Way to the End,”,
beth_bacheldor/kellwood_stayed_ on_top_of _its_ outsourcing_all_the_ way _to_the_end?page=O (accessed February IO, 2012).
Sourcing Decision Cycle Framework flil
factors. These factors, similar to those used by many companies in their sourcing decisions, are discussed later in
this chapter. The global outsourcing market has been growing steadily. Companies of all sizes pursue outsourcing
arrangements, and many multimillion-dollar deals have been widely publicized. As more companies adopt out-
sourcing as a means of controlling IS costs and acquiring “best-of-breed” capabilities, managing these supplier
relationships has become increasingly important. IS departments must maximize the benefit of these relationships
to the enterprise and pre-empt problems that might occur. Failure in this regard could result in deteriorating quality
of service, loss of competitive advantage, costly contract disputes, low morale, and loss of key personnel.
How IS services are provided to a firm has become an important strategic and tactical discussion. As briefly
mentioned in Chapter 6, there are numerous alternatives to sourcing computing power, applications, and infrastruc-
ture. This chapter examines the sourcing cycle to consider the full range of decisions related to who should perform
the IS work of an organization. The cycle begins with a decision to make or buy information services and products.
Once the decision to make or buy has been finalized, a series of questions must be answered about where and how
these services should be delivered or products developed. The discussion in this chapter is built around the Sourcing
Decision Cycle framework discussed in the next section. Considering the answers to sourcing questions can help
explain a number of terms associated with sourcing: insourcing, outsourcing, cloud computing, full outsourcing,
selective outsourcing, multisourcing, onshoring, offshoring, nearshoring, farshoring, and backsourcing. For each
type of sourcing decision, the risks, or likelihood of something negative occurring as a result of the decision, are
discussed, and some steps that can be taken to manage the risks are proposed.
Sourcing Decision Cycle Framework
Sourcing does not really just involve only one decision. It involves many decisions. The rest of this chapter is built
around the critical sourcing decisions shown in Figure 10.1. Many of the chapter headings are tied to key decisions
i in Figure 10.1. Although the Sourcing Decision Cycle starts anywhere, we choose to start with the original
.., make-or-buy decision. If an organization decides to “make,” that means that it plans to create and run its own
applications. “Buy,” on the other hand, means the organization plans to obtain its applications from an outside
Note: lnsourcing can
include captive centers
‘-,FIGURE 10.1 Sourcing Decision Cycle framework.
fJlil Information Systems Sourcing
vendor or vendors. When the “buy” option is selected, the organization becomes a client company that must then
decide on “how” and “where” to outsource. The answers to the “how” question include the scope of the outsourcing
and the steps that should be taken to ensure its success. The answers to the “where” question focus on whether the
client company should work with an outsourcing provider (i.e., vendor) in its own country, offshore, or in a cloud.
If the client company decides to go offshore because labor is cheaper or needed skills are more readily available, it
must make another decision: It must decide whether it wants the work done in a country that is relatively nearby or
in a country that is quite distant. Finally, the client company chooses an outsourcing provider (or decides to do its
own IS work). After a while, the client company faces another decision. It periodically must evaluate the sourcing
arrangement and see whether a change is in order. If the in house work is unsatisfactory or other opportunities that
are preferable to the current arrangement have become available, then the client company may tum to outsourcing.
If, on the other hand, the outsourcing arrangement is unsatisfactory, the client company has several options to con-
sider: to correct any existing problems and continue outsourcing with its current provider, to outsource with another
provider, or to backsource. If the company decides to make a change in its sourcing arrangements at this point, the
Sourcing Decision Cycle starts over again.
Starting the Cycle: The Make-or-Buy Sourcing Decision
Managers decide whether to make or buy information services and products. The products can include an appli-
cation or a system, and services can range from help desk support, telecommunications, running data centers, and
even implementing and operating business processes as in business process outsourcing (BPO). A simple “make”
decision often involves insourcing some or all of the business’s IS infrastructure, and a simple “buy” decision often
involves outsourcing, although it could also include purchasing packaged software. In its simplest form, the make-
or-buy decision hinges on whether to insource (“make”) or outsource (“buy”).
The most traditional approach to sourcing is insourcing, or providing IS services or developing them in the com-
pany’s own in house IS organization and/or in its local cloud. Several “yes” answers to the questions posed in
Figure 10.2 favor the decision to insource. Probably the most common reason is to keep core competencies in house.
Managers are concerned that if they outsource a core competency, they risk losing control over it or losing contact
with suppliers who can help them remain innovative in relation to that competency. Failing to control the competency
or stay innovative is a sure way to forfeit a company’s competitive advantage. On the other hand, by outsourcing
commodity work, a firm can concentrate on its core competencies. Other factors that weigh in favor of insourcing
are having an IS service or product that requires considerable security, confidentiality, or adequate resources in house
(e.g., time to complete the project with current staffing or IS professionals with the needed skills and training).
In some companies, the IS function is underappreciated by top management. As long as everything is running
smoothly, top managers may not notice the work done by or appreciate the services and products of the IS orga-
nization. Often an IS department that insources has found it necessary to compete for resources differently than
if it outsources. It is necessary for the department to have enough respect and support from top management to
acquire resources and get the department’s job done. A major risk of insourcing is that the complexities of running
IS in house requires management attention and resources that might better serve the company if focused on other
value-added activities.
Captive centers are a new variation of insourcing. A captive center is an overseas subsidiary that is created to
serve its main “client,” the parent company, but it may serve other clients as well. Firms have set up such subsid-
iaries to operate like an outsourcing provider, but the firms actually own the subsidiaries. They are launched in
less expensive locations, usually away from the company’s headquarters or major operating units. The three most
common types of captive centers are basic, shared, and hybrid. 2 The basic captive center provides services only
to the parent firm. The shared captive center performs work for both a parent company and external customers.
‘ I. Oshri. J. Kotalarsky and C.-M. Liew, “What to Do with Your Captive Center: Four Strategic Options.”‘ The Wall Street Journal (May 12, 2008), http:// 121018777870174513 (accessed September 2, 2015). ..,,,,,,i
Sourcing Decision Cycle Framework fJ11
Make or Buy Questions Suggests Suggests ! Examples of Associated Risk in
lnsourcing Outsourcing j Worse-Case Scenarios
Does it involve a core competency? Yes No I “outsourced: Loss of control over
. strategic initiatives; loss of strategic focus
>–·——.- — –
Does it involve confidential or sensitive Yes No If outsourced: Competitive secrets may
IS services or software development? be leaked
·- – ··-···-···-··- ·····-····-·– ··-··—-·– -···–··-· ·-·- ·-··-·····–·-·—··–· —-··-· ····-···-· -·—–··-··-··-·–·-··- -·····—–·-·-·-·····-···—-·–·—···—- –·-···-··-··-······-···-.. -··—··- – -· -·-·–·–
Is there enough time available to Yes No If insourced: Project not completed on
complete software development time
projects in house?
Do the in-house IS professionals have Yes No If outsourced:Technological innovations
adequate training, experience, or skills limited to what provider offers;
to provide the service or develop the overreliance on provider’s skills
Are there reliable outsourcing No Yes If outsourced: Project not completed or,
providers who are likely to stay if completed, is over budget and late
in business for the duration of the when another provider takes it over
Is there an outsourcing provider that No Yes If outsourced: Conflict between client
i has a culture and practices that are I and provider personnel
compatible with the client?
Does the provider have economies of Most likely No Most likely Yes If outsourced: Excessive costs of project
scale that make it cheaper to provide or operations because of the way the
the service or develop the software contract is written
than in house?
Does it offer a better ability to handle Most likely No Most likely Yes If insourced: Loss of business
Does it involve consolidating data Most likely No Most likely Yes If insourced· Inefficient operations
FIGURE 10.2 Make or buy? Questions and risks.
The hybrid captive center typically performs the more expensive, higher profile or mission-critical work for the par-
ent company and outsources the more commoditized work that is more cheaply provided by an offshore provider.
Outsourcing means purchasing a good or service that was previously provided internally or that could be provided
internally but is now provided by outside vendors. In the early days of outsourcing, outside providers often took
over entire IS departments, including people, equipment, and management responsibility. Reducing costs was the
primary motivation for outsourcing. This classic approach prevailed through most of the 1970s and 1980s but then
experienced a decline in popularity. In 1989, Eastman Kodak Company’s multivendor approach to meeting its
IS needs created the “Kodak effect.” Kodak outsourced its data center operations to IBM, its network to Digital
Equipment Company, and its desktop supply and support operations to Businessland. 3 Kodak managed these rela-
tionships through strategic alliances. 4 It retained a skeletori IS staff to act for its business personnel with out-
sourcing providers. Its approach to supplier management became a model emulated by Continental Bank, General
Dynamics, Continental Airlines, National Car Rental, and many more. 5
Kodak’s watershed outsourcing arrangement ushered in new outsourcing practices that put all IS activities up
for grabs, including those providing competitive advantage. As relationships with outsourcing providers become
3 L. Applegate and R. Montealegre, “Eastman Kodak Co.: Managing Information Systems Through Strategic Alliances,” Harvard Business School case
192030 (September 1995).
‘ Anthony DiRomualdo and Vijay Gurbaxani, “Strategic Intent for IT Outsourcing,” Sloan Management Review (June 22, 1998).
5 Mary C. Lacity, Leslie P. Willcocks, and David F. Feeny, “The Value of Selective IT Sourcing,” Sloan Management Review (March 22, 1996).
fJfJ Information Systems Sourcing
more sophisticated, companies realize that even such essential functions as customer service are sometimes better
managed by experts on the outside. Over the years, motives for outsourcing broadened beyond cost control. The
next section examines factors and risks to be considered in making the outsourcing decision. The sourcing strategy
suggested by the answers to the key how to source question and associated risks are listed in Figure 10.2.
Factors in the Outsourcing Decision
Under what conditions would an organization decide to outsource? There are three primary factors that are likely to
favor the decision to seek to buy the services or products of an outsourcing provider: lower costs due to economies
of scale, ability to handle processing peaks, and the client company’s need to consolidate data centers. These and
other factors are listed in Figure 10.2.
One of the most common reasons given for outsourcing is the desire to reduce costs. Outsourcing providers
derive savings from economies of scale that client companies often cannot realize. Outsourcing providers achieve
these economies through centralized (often “greener”) data centers, preferential contracts with suppliers, and large
pools of technical expertise. Most often, enterprises lack such resources on a sufficient scale within their own
IS departments. For example, a single company may need only 5,000 PCs, but an outsourcing provider might
negotiate a contract for 50,000 to spread over many clients and at a much lower cost per computer. Second, the
outsourcing provider’s larger pool of resources than the client company’s allows the provider leeway in assign-
ing available capacity to its clients on demand. For instance, at year-end, an outsourcing provider potentially can
allocate additional mainframe capacity to ensure timely completion of nightly processing in a manner that would
be impossible for an enterprise running its own bare-bones data center. Third, an outsourcing provider may help
a client company to consolidate data centers following a merger or acquisition or when the internal group cannot
overcome the inertia of its top management. Outsourcing may also offer an infusion of cash as a company sells its
equipment to the outsourcing vendor.
If the service or product involves a core competency, then the organization should strongly consider insourcing ..,J
to protect the benefits the organization enjoys from its own competency. However, if the product or service is con-
sidered to be a commodity instead of a core competency, then there are some distinct advantages to outsourcing. By
bringing in outside expertise, client company management often can pay more attention to its core activities rather
than to IS operations. Further, if an organization does not have employees with the training, experience, or skills
in house to successfully implement new technologies, it should consider outsourcing. This is because outsourcing
providers generally have larger pools of talent with more current knowledge of advancing technologies and best
practices. For example, many outsourcing providers gain vast experience solving business intelligence problems
whereas IS staff within a single company would have only limited experience, if any. That is why client companies
tum to outsourcing providers to help them implement such technologies as Enterprise 2.0, Web 2.0 tools, cloud
computing, and enterprise resource planning (ERP) systems. However, it is important to remember that client
company managers are ultimately still responsible for IS services and products provided to their firm.
Outsourcing providers also have an added advantage because they can specialize in IS services. Outsourcing
providers’ extensive experience in dealing with IS professionals helps them to understand how to hire, manage,
and retain IS staff effectively. Often they can offer IS personnel a professional environment in which to work that
a typical company cannot afford to build. For example, a Web designer would have responsibility for one Web site
within a company but for multiple sites when working for an outsourcing provider. It becomes the outsourcing
provider’s responsibility to find, train, and retain highly marketable IS talent. Outsourcing relieves a client of costly
investments in continuous training to keep its IS staff current with the newest technologies and the headaches of
hiring and retaining highly skilled staff that easily can change jobs.
Outsourcing Risks
Opponents of outsourcing cite a considerable number of risks with it (see Figure 10.2). A manager should consider
each of these before making a decision about outsourcing. Each risk can be mitigated with effective planning and
ongoing management.
Sourcing Decision Cycle Framework Ill
First, outsourcing requires that a client company surrender a degree of control over critical aspects of the
enterprise. The potential loss of control could extend to several areas: project control, scope creep, technologies
employed, costs, financial controls, accuracy and clarity of financial reports, and even the company’s IS direction.
By turning over data center operations, for example, a company puts itself at the mercy of an outsourcing provider’s
ability to manage this function effectively. A manager must choose an outsourcing provider carefully and negotiate
terms that encourage an effective working relationship.
Second, outsourcing client companies may not adequately anticipate new technological capabilities when nego-
tiating outsourcing contracts. Outsourcing providers may not recommend so-called bleeding-edge technologies for
fear of losing money in the process of implementation and support, even if their implementation would best serve
the client company. Thus, poorly planned outsourcing can result in a loss in IS flexibility. For example, some out-
sourcing providers were slow to adopt social technologies for their clients because they feared the benefits would
not be as tangible as the costs of entering the market. This reluctance impinged on clients’ ability to realize social
business strategies. To avoid this problem, an outsourcing client should have a chief technology officer (CTO)
or technology group that is charged with learning about and assessing emerging technologies that can be used to
support its company’s business strategy.
Third, by surrendering IS functions, a client company gives up any real potential to develop them for compet-
itive advantage-unless, of course, the outsourcing agreement is sophisticated enough to comprehend developing
such an advantage in tandem with the outsourcing company. However, the competitive advantage may be compro-
mised if it is made available to the outsourcing provider’s other clients. Under many circumstances, the outsourcing
provider becomes the primary owner of any technological solutions that it develops for the client. This allows the
outsourcing provider to leverage the knowledge to benefit other clients, possibly even competitors of the initial
client company.
Fourth, contract terms may leave client companies highly dependent on their outsourcing provider with little
recourse in terms of terminating troublesome provider relationships. That is, the clients may be locked into an
arrangement that they no longer want. It may be too expensive to switch to another outsourcing provider should
the contract sour. Despite doing due diligence and background checks, the outsourcing provider may be unreliable
or go out of business before the end of the contract. The risk of over-reliance for any number of reasons typi-
cally increases as the size of the outsourcing contract increases. DHL Worldwide Express entrusted 90% of its IT
development and maintenance projects to a large Indian-based company, Infosys. ‘There’s a lot of money wrapped
up in a contract this size, so it’s not something you take lightly or hurry with,” said Ron Kifer, DHL’s Vice President
of Program Solutions and Management. 6 Clearly, DHL faced considerable risk in off shoring with Infosys because
of its reliance on the provider.
Fifth, it might be harder to keep its competitive secrets when a company employs an outsourcing provider.
Although outsourcing providers are sensitive to keeping client information separated in their systems, an outsourcer’s
staff will usually work with multiple customers. Some managers are concerned that their company databases are no
longer kept in house, and the outsourcing provider’s other customers may have easier access to sensitive information.
Although all outsourcing agreements contain clauses to keep customer data and systems secure, managers still voice
concern about data security and process skills when they are managed by a third party. Thinking through the security
issues carefully and implementing controls where possible mitigate this risk. Often, the outsourcing provider has
more secure processes and practices in place simply because its business depends on it-it’s a competitive necessity
and often a core competency of the outsourcing provider.
Sixth, the outsourcing provider’s culture or operations may be incompatible with that of the client company,
making the delivery of the contracted service or system difficult. Conflicts between the client’s staff and the staff
of the outsourcing provider may delay progress or harm the quality of the service or product delivered by the out-
sourcing provider.
Finally, although many companies tum to outsourcing because of perceived cost savings, these savings may
never be realized. Typically, the cost savings are premised on the old way that the company performed the processes.
6 Stephanie Overby, “The Hidden Costs of Offshore Outsourcing” (September l, 2003).
Offshore_Outsourcing (accessed June 4, 2012).
fJB Information Systems Sourcing
= Social Business Lens: Crowdsourcing
Crowdsourcing is a form of outsourcing that is provided by a very large number of individuals. Two forms of
crowdsourcing are available: collaboration and tournament. Collaboration crowdsourcing occurs when individ-
uals use social media to collectively create a common document or solution. Examples are Wikipedia or crowd-
sourcing for innovation as was discussed in Chapter 5. Tournamentcrowdsourcingalso uses social media to solicit
and collect independent solutions from a potentially large number of individuals but selects one or a few of the
contributions in exchange for financial or nonfinancial compensation.
Some sites offer marketplaces to promote particular types of tournament crowdsourcing. Consider 99designs
(}, which is the largest online graphic design marketplace where people or firms can go to get
affordable designs for such things as logos, labels, business cards, and Web sites. It is anticipated that by 2016,
the site will have over a million members offering graphic services. Businesses can source graphic design work
by launching design contests to the 99design community, working individually with designers who are members
of the community, or purchasing design templates from 99designs’ ready-made logo store. Recently, 99designs
opened a new site, Swiftly, for customers who want to get small design tasks done quickly for a flat fee.
Sonrcc.s: l. Blohm . .I. \I. Lcirneistt’l’. and IL Krcmar. .. CrowdsourcinF(: llow to Bl’ncfit from (Too) Man1· Great Ideas·· 1W!S Q11arler(1·
l::n,1·11/ire I:!. 110. -+ (:Wl:~)- 199-211: Ahout ()<)d,•siF(llS. http://99dP,iF(11s.co111/about (downloach·d \fay 22. 201.i ). However, new technologies may usher in new processes, and the anticipated savings on the old processes become moot. Further, the outsourcing client is, to some extent, at the mercy of the outsourcing provider. Increased vol- umes due to unspecified growth, software upgrades, or new technologies not anticipated in the contract may end up costing a firm considerably more than it anticipated when it signed the contract. Also, some savings, although real, may be hard to measure. 'lfllllli Decisions about How to Outsource Successfully Clearly, the decision about whether to outsource must be made with adequate care and deliberation. It must be fol- lowed with numerous other decisions about how to mitigate outsourcing risks and make the outsourcing arrange- ment work. Once these decisions have been made, they should be openly communicated to all relevant stakeholders. Three major decision areas are selection, contracting, and scope. Selection Selection-related decisions focus on finding compatible outsourcing providers whose capabilities, managers, internal operations, technologies, and culture complement those of the client company. This means that compati- bility and cultural fit might trump price, especially when long-term partnerships are envisioned. Selection factors are discussed more fully in the "where" and "where abroad" decisions. Contracting Many "how" decisions center around the outsourcing contract. In particular, client companies must ensure that contract terms allow them the flexibility they require to manage and, if necessary, sever supplier relationships. The 10-year contracts that were so popular in the early 1990s are being replaced with contracts of shorter duration lasting 3 to 5 years and full life cycle service contracts that are broken up into stages. Deal size also has declined this millennium. Although the numbers of megadeals and midrange contracts awarded each year have remained relatively stable since 2002, smaller contracts valued at $100 million or less had more than tripled a decade later. 7 7 Stephanie Overby. "IT Outsourcing Deal Size Data Shows Decade-Long Decline," deal-size-data-shows-decade-long-decline.html (accessed March 9, 2015). ..,,,,,j Sourcing Decision Cycle Framework 1111 Often client companies and outsourcing providers have formal outsourcing arrangements, called service level agreements (SLAs) that define the level of service to be provided. SLAs often describe the contracted delivery time and expected performance of the service. Contracts are tightened by adding clauses describing actions to be taken in the event of a deterioration in quality of service or noncompliance with the SLA. Service levels, baseline period measurements, growth rates, and service volume fluctuations are specified in the contracts to reduce oppor- tunistic behavior on the part of the outsourcing provider. Research demonstrates that tighter contracts tend to lead to more successful outsourcing arrangements. 8 To write tighter contracts, it is a good idea for the client company to develop contract management skills and to hire both outsourcing and legal experts. Unfortunately, a tight contract does not provide much solace to a client company when an outsourcing provider goes out of business. It also does not replace having a good relationship with the outsourcing provider that allows the client to work out problems when something unanticipated occurs. Scope Most enterprises outsource at least some IS functions. This is where scope questions come into play. Defining the scope of outsourcing means that the client must decide whether to pursue outsourcing fully or selectively with one (single sourcing) or more providers (multisourcing). If a client decides to go the selective outsourcing route, it may insource most of its IS duties but selectively outsource the remaining functions. Full outsourcing implies that an enterprise outsources all its IS functions from desktop services to software development. An enterprise typically outsources everything only if it does not view IT as a strategic advantage. Full outsourcing can free resources to be employed in areas that add greater value. This choice can also reduce overall cost per transaction due to size and economies of scale. 9 Many companies outsource IS simply to allow their managers to focus attention on other business issues. Others outsource to accommodate growth and respond to their business environment. Kellwood, the case discussed at the beginning of the chapter, appeared to have used full outsourcing to improve operations. With selective outsourcing, an enterprise chooses which IT capabilities to retain in house and which to give to one or more outsiders. A "best-of-breed" approach is taken to choose suppliers for their expertise in specific tech- nology areas. Possible areas for selective sourcing include Web site hosting, Web 2.0 applications, cloud services, business process application development, help desk support, networking and communication, social IT services, and data center operations. Although an enterprise can acquire top-level skills and experience through such relationships, the effort required to manage them grows tremendously with each new provider. Still, selective outsourcing, some- times called strategic sourcing, reduces the client company's reliance on outsourcing with only one provider. It also provides greater flexibility and often better service due to the competitive market. 10 To illustrate, an enterprise might retain a specialist firm to develop social business applications and at the same time select a large outsourcing provider, such as IBM, to assume mainframe maintenance. Consider JetBlue, an airline that turned to Verizon to manage its IT infrastructure-its network, data center, and help desk. The six-year contract with Verizon allows the data centers to scale as JetBlue grows and helps JetBlue "reduce the cycle time for delivery of those capabilities and allow the rest of IT to focus on other capabilities," said JetBlue CIO, Joe Eng. Eng asserted that JetBlue can still have control over IT: "We own the decision paths, the service-level agreements and what direction we want to take, but Verizon will be key in the implementation." 11 Verizon was chosen over other providers for a number of reason, especially because the operation of networks is its core business. A client company that decides to use multiple providers when fully or selectively outsourcing is multisourc- ing. IT multisourcing is defined as delegating "IT projects and services in a managed way to multiple vendors 8 See, for example, C. Saunders, M. Gebel!, and Q. Hu, "Achieving Success in Information Systems Outsourcing," California Management Review 39, no. 2 ( 1997), 63-79; M. Lacity and R. Hirschheim, Information Systems Outsourcing: Myths, Metaphors and Realities (Hoboken, NJ: John Wiley, 1995). 9 Tom Field, "An Outsourcing Buyer's Guide: Caveat Emptor" (April I, 1997). ' 0 Ibid. 11 M. Hamblen, "Verizon to Manage JetBlue's Network, Data Centers and Help Desk," (October 6, 2009), article/9138965Nerizon_to_manage_JetBlue_s_network_data_centers_and_help_desk (accessed January 31, 2012). ID Information Systems Sourcing who must (at least partly) work cooperatively to achieve the client's business objectives." 12 Over the last 15 years, numerous benefits of IT multisourcing have made this approach take off markedly in terms of number of com- panies using it and contract sizes. In particular, it helps companies limit the risks associated with working with just one provider. It can also help client firms lower their IT service costs due to competition among providers, improve the quality through best-of-breed services, enhance their flexibility in adapting to changing market condi- tions, and provide easier access to specialized IT expertise and capabilities. 13 However, multisourcing comes with its downsides. Having more providers requires more coordination than with working with a single outsourcing provider. Further, when a major problem occurs, there may be a tendency to "finger-point." That is, each out- sourcing provider may claim that the problem is caused by or can be corrected only by another provider. And as outsourcing providers expand their service offerings, unexpected competition among providers can hurt the client if not managed well. Adidas, a multinational footwear and sports apparel company, recently adopted a multisourcing strategy, which carefully pitted three IT providers against each other at the same time that they were working coopera- tively together. 14 Adidas split virtually all of its huge IT budget allocated for outsourcing among three providers: a large Indian outsourcing company with which it had worked for a decade and two "hungry" smaller firms. Adidas selected the three firms in such a way that at least two vendors, and sometimes all three, could perform particular services that it needed. The large Indian outsourcing provider had become complacent, and the competi- tion provided better IT services at a lower price. In addition, all three vendors were charged to be more innovative. Through careful management, Adidas orchestrated the delicate balance between provider cooperation and compe- tition among the providers. Deciding Where-In the Cloud. Onshoring. or Offshoring? Until recently, outsourcing options were either to use services onshore (work performed in the same country as the client) or offshore (work performed in another country). More recently, a new sourcing option has become more available and more accepted by managers: cloud computing. We next describe the three sourcing options. We also describe some answers to the "how" question: how to make the arrangement successful. Many best practices were discussed in the previous subsection because they are common to all three outsourcing options. A few more unique practices are discussed in the next sections. Cloud Computing As discussed in Chapter 6, cloud computing is the dynamic provisioning of third-party-provided IT services over the Internet using the concept of shared services. Companies offering cloud computing make an entire data center's worth of servers, networking devices, systems management, security, storage, and other infra- structure available to their clients. In that way, their clients can buy the exact amount of storage, computing power, security, or other IT functions that they need, when they need it, and pay only for what they use. Thus, the client company can realize cost savings by sharing the provider's resources with other clients. The pro- viders also provide 24/7 access using multiple mobile devices, high availability for large backup data storage, and ease of use. Cloud computing's many advantages make it quite popular with executives. The total global cloud computing market is estimated to spurt from $61 billion in 2012 to $241 billion in 2020. 15 This growth was originally fueled by small- to medium-size businesses that lacked large IT functions or internal capabilities. More recently, larger companies have been signing up for cloud services to take advantage of the cloud's many benefits. 12 Martin Wiener and Carol Saunders. "Forced Coopetition in IT Multi-Sourcing."" The Jmmw/ ()f Strategic Information System 23. no. 3 (2014 ). 210-25. " Ibid. 14 Ibid. " Till Winkler, Alexander Benlian, Marc Piper, and Henry Hirsch, "Bayer HealthCare Delivers a Dose of Reality for Cloud Payoff Mantras in Multina- tionals."' MIS Quarterly Executive 13, no. 4 (2014). 193-207. ,,J Sourcing Decision Cycle Framework fJD Advantages and Risks/Challenges of Cloud Computing Cloud computing offers a number of advantages. Because resources can be shared, costs for IT infrastructure and services can be slashed. There are no up-front investment costs, and ongoing costs are variable according to the firm's needs, especially for those with multina- tional units in large countries. 16 The Commonwealth Bank of Australia claimed that its IT costs dropped by approx- imately 40% when it moved to a cloud for IT infrastructure, software, and development. 17 Further, with companies such as Amazon, Google, IBM, and Microsoft vying for customers, pricing is still rather competitive. Flexibility is enhanced because infrastructure needs that vary over time can be met dynamically. For many companies, cloud computing means "pay-as-you-go." They can get the exact level of IT support that they need when they need it. Further, cloud computing is scalable, which means that more providers can be added if requirements increase, or they theoretically can be taken out of play if the needs decrease. This allows business units to focus on their core competencies as long as they do not need to deal with local idiosyncrasies and customizations. 18 Netflix realized the advantages of cloud computing to support its strategic initiative to stream movies to its cus- tomers instead of mailing them DVDs. To do so, it needed so much more infrastructure that the cloud appeared to be its only option. " is nearly 100% in the cloud .... We really couldn't build data centers fast enough," says Jason Chan, Netflix's cloud security architect. The introduction of a Netflix application for iPhones will place even greater spikes in demand, at least temporarily. But Chan isn't concerned: "That's what cloud is really intended for." 19 As with any sourcing decision, organizations considering cloud computing must weigh its benefits against its risks and challenges. Executives worry over many of the same types of risks that are found with other types of out- sourcing. In particular, they fear technical lock in, long-term business commitments, and lost IT capabilities, which ultimately could lead to overdependence on the outsourcing provider. 20 IT executives are particularly concerned that they might lose control over the IT environment for which they bear responsibility. One big concern with cloud computing has been security, specifically with external threats from remote hackers and security breaches as the data travel to and from the cloud. Tied to the concerns about security are concerns about data privacy. The stan- dards, monitoring, and maintenance tools for cloud computing are still not mature. This makes security, interoper- ability, and data mobility difficult. However, knowing that their business is on the line, many cloud providers have strengthened their security and are willing to deal with the security issues of individual customers. For example, when Bayer HealthCare ran into security risks related to its pharmaceutical customer data in its cloud customer relationship management (CRM), a middleware solution was implemented to protect internal systems against intru- sions from outside the firewall. Another challenge that causes some managers to shy away from cloud computing is the fact that the ability to tailor service-level requirements, such as uptime, response time, availability, performance, and network latency, to the specific needs of a client is far less than with insourcing or many other outsourcing options. To manage this risk, an SLA needs to spell out these requirements. For multinationals, a related challenge is data sovereignty, which means that data are subject to the laws of the country in which they are located. 21 The Commonwealth Bank of Australia has excluded some application providers because the core data need to remain in Australia. 22 Bayer Healthcare took a different, far more time-consuming approach. It adopted a global solution that took into account the different regulatory requirements and processes across its business units in different countries. It also used a two-platform approach: The business units in small and medium countries used an in-house system as their "common platform," while business units in larger countries with more complex systems relied on cloud providers that offered an "advanced" cloud-based platform.23 16 Ibid. 17 Daniel Schlagwein. Alan Thorogood. and Leslie Willcocks. "How Commonwealth Bank of Australia Gained Benefits Using a Standards-Based, Multiprovider Cloud Model,"" MIS Quarterly Executi1•e 13, no. 4 (2014), 209-22. 18 Winkler et al., "Bayer HealthCare Delivers a Dose of Reality," 193-207. 19 Tim Greene, "Netflix Deals with Cloud Security Concerns," (September 21, 2011), (accessed September 22, 2011 ). '° Schlagwein, Thorogood. and Willcocks, "How Commonwealth Bank of Australia Gained Benefits," 209-22. " Winkler et al., "Bayer HealthCare Delivers a Dose of Reality," 193-207; Schlagwein, Thorogood. and Willcocks. "How Commonwealth Bank of Australia Gained Benefits," 209-22. " Schlagwein, Thorogood. and Willcocks, "How Commonwealth Bank of Australia Gained Benefits.'" " Winkler et al., "Bayer HealthCare Delivers a Dose of Reality," 193-207. m Information Systems Sourcing Cloud Computing Options Cloud computing comes in many different forms. Options include on-premise or private clouds, community clouds, hybrid clouds and public clouds. In private clouds, data are managed by the organization and remain within its existing infrastructure, or it is managed offsite by a third party for the organi- zation (client company). In a community cloud, the cloud infrastructure is shared by several organizations and supports the shared concerns of a specific community. An example of a community cloud is Norway's BankID community. BankID relies on a cloud infrastructure to provide a system that enables electronic identification, authentication, and signing. Members of the BankID community include Norwegian banks, the Norwegian government, the Norwegian Banking Federation, and merchants. 24 A hybrid cloud is a combination of two or more other clouds. Mohawk, a U.S. manufacturer of premium paper products discussed in Chapter 6, has a hybrid cloud. It is part of a computing environment with on-premises ERP and manufacturing systems, a secure suite of private cloud services to send and receive data files among on-prem- ises databases and to integrate with its business partners, and a suite of cloud services to integrate public cloud applications with internal applications and business processes. 25 In a public cloud, data are stored outside of the corporate data centers in the cloud provider's environment. As discussed in Chapter 6, public clouds include: • Infrastructure as a service ( laaS): Provides infrastructure through grids or clusters or virtualized servers, net- works, storage, and systems software designed to augment or replace the functions of an entire data center. The customer may have full control of the actual server configuration allowing more risk management con- trol over the data and environment. The earlier Netflix example illustrates the IaaS cloud option. • Software as a service (SaaS): Provides software application functionality through a Web browser. Mohawk uses the Web for a variety of Saas applications (e.g., e-marketing, CRM, and human resources [HR)). 26 Both the platform and the infrastructure are fully managed by the cloud provider, which means that if the operating system or underlying service is not configured correctly, the data at the higher application layer may be at risk. This is the most widely known and used form of cloud computing. A provider of SaaS is ""'1fi sometimes called application service provider (ASP). 27 • Platform as a service (PaaS): Provides services using virtualized servers on which clients can run existing applications or develop new ones without having to worry about maintaining the operating systems, server hardware, load balancing, or computing capacity; the cloud provider manages the hardware and under- lying operating system, which limits its enterprise risk management capabilities. Bayer Healthcare's cloud platform-based component development (PaaS) is used to customize cloud solutions when the existing Saas solutions are unable to satisfy the complex, idiosyncratic needs of its large business units. 28 Onshoring Outsourcing does not necessarily mean that IT services and software development are shipped abroad. Onshoring, also called inshoring, means performing outsourcing work domestically (i.e., in the same country). Onshoring may be considered the "opposite" of offshoring. In scope, it involves either selective or full outsourcing. A growing trend in onshoring in the United States is rural sourcing, which is hiring outsourcing providers with operations in rural parts of the country. Rural sourcing firms can be competitive because they take advantage of lower salaries and living costs when compared to firms in metropolitan areas. Dealing with a rural company can have advantages in terms of different time zones, similar culture, and fewer hassles compared with dealing with foreign outsourcing providers. However, the rural sourcing firms are usually too small to handle large-scale projects 24 Ben Eaton, Hanne Kristine Hallingby. Per-Jonny Nesse. Ole Hansel, "Achieving Payoffs from an Industry Cloud Ecosystem at BanklD.'" MIS Quarterly Executive 13, no. 4 (December 2014), 51-60. " Paul J. Stamas, Michelle L. Daarst-Brown, and School A. Bernard, "The Business Transformation Payoffs of Cloud Services at Mohawk," MIS Quarterly Executive 13. no. 4 (December 2014), 177-92. 26 Ibid. 27 Diana Kelley. "How Data-Centric Protection Increases Security in Cloud Computing and Virtualization" (2011 ), (accessed September 22, 2011). 18 Ibid.; Winkler et al., "Bayer HealthCare Delivers a Dose of Reality," 193-207. .,,,J Sourcing Decision Cycle Framework fJD and may not have the most technologically advanced employees. Rural sourcing is often viewed as more politically correct than off shoring. 29 Offshoring Offshoring (which is short for offshore sourcing) occurs when the IS organization uses contractor services, or even its own hybrid captive center in a distant land. The functions sent offshore range from routine IT transactions to increasingly higher-end, knowledge-based business processes. Programmer salaries can be a fraction of those in the home country in part because the cost of living and the standard of living in the distant country are much lower, maybe as much as 70% lower when only considering direct labor costs. However, these savings come at a price because other costs increase. Additional technology, telecom- munications, travel, process changes, and management overhead are required to relocate and supervises overseas operations. For example, during the transition period, which can be rather lengthy, offshore workers must often be brought to the home country headquarters for extended periods to become familiar with the company's oper- ations and technology. Because of the long transition period, it can often take several years for offshoring's labor savings to be fully realized. And even if they are realized, they may never reflect the true cost to a company. Many, especially those who have lost their jobs to offshore workers, argue that offshoring cuts into the very fiber of the society in the country of origin whose companies are laying off workers. Yet, it helps the economies of the countries where offshoring is performed. For example, India's IT services industry, the largest private sector employer, was a $108 billion industry in fiscal year 2013 with $76 billion derived from exports of services and products. 30 Even though the labor savings are often very attractive, companies sometimes turn to offshoring for other rea- sons. The employees in many offshore companies are typically well educated (often holding master's degrees) and proud to work for an international company. The offshore service providers are often "profit centers" that have established Six Sigma, ISO 9001, Capability Maturity Model (CMM), or another certification program. These off- shore providers usually are more willing to "throw more brainpower at a problem" to meet their performance goals than many companies in the United States or Western Europe. In offshore economies, technology know-how is a relatively cheap commodity in ample supply. 31 Offshoring raises the fundamental question of what to send offshore and what to keep within the enterprise IS organization when implementing the selective outsourcing model. Because communications are made difficult by differences in culture, time zones, and possibly language, outsourced tasks are usually those that can be well spec- ified. They typically, but not always, are basic noncore transactional systems that require the users or customers to have little in-depth knowledge. In contrast, early stage prototypes and pilot development are often kept in house because this work is very dynamic and requires familiarity with business processes. Keeping the work at home allows CIOs to offer learning opportunities to in house staff. In summary, the cost savings that lure many companies to turn to offshoring need to be assessed in relation to the increased risks and communication problems in working with offshore workers and relying on them to handle major projects. Deciding Where Abroad-Nearshoring or Farshoring? Offshoring can be either relatively proximate (nearshoring) or in a distant land (farshoring). Each of these offshore options is described in more detail here. They are also shown in Figure 10.3 with other domestic and nondomestic sourcing options in Figure 10.3. In some cases, the distinction is hard to make because some cloud computing can be considered as insourcing if it is a local private cloud or local community cloud or some hybrid. However, in most cases, cloud computing tends to be a form of outsourcing either domestically or nondomestically in the ether. Further, although most captive centers could be considered a form of insourcing, hybrid captive centers sometimes outsource a client's simple, more commoditized work. 09 Bob Violino, "Rural Outsourcing on the Rise in the U.S." (March 7, 2011), taxonomyld=l4&pageNumber=l (accessed September 22, 2011). 30 India Brand Equity Foundation, (accessed March 9, 2015). " Aditya Bhasin, Vinay Couto, Chris Disher, and Gil Irwin, '·Business Process Off shoring: Making the Right Decision" (January 29, 2004), http://www2. l 6 l .html (accessed August 14, 2005). ml Information Systems Sourcing r ; lnsourcing r--··-·---·---i---------·--~ --- - ···"·---····-· ... ···" -- .. 1 Domestic ! Situ~tion in which a firm ~r?vides IS I (local) ' services or develops IS 1n its own in house organization and/ or in its I local private cloud or, possibly, local I community cloud Nondomestic Situation in which a firm uses an offshore captive center FIGURE 10.3 Different forms of sourcing. ----~ Purchase of a good or services that was previously provided I internally or that could be provided internally but is now \' provided by an outside domestic outsourcing provider (i.e., onshoring), or outsourced to a rural or local cloud I provider ·--·---------· I I Situation when the IS organization uses contractor services in a distant land or in the ether; may include nearshoring, farshoring, cloud computing, or a hybrid captive center ---~ Source: Adapted from _EN-PROD/PR0D0000000000179790/0ffshoring %3A+ Globalisation+wave+reaches+services+se.PDF (downloaded May 22, 2015). = Geographic Lens: Corporate Social Responsibility Many outsourcing clients are increasing their corporate social responsibility (CSR) expectations for themselves and for their global IS outsourcing providers. Pessimists of global IS outsourcing are concerned that it maximizes profit for the rich but offers little or no benefits for other groups, especially the poor in developing countries. The pessimists are concerned that global IS outsourcing will deepen income inequalities and have disruptive effects on society around the globe. Optimists of global IS outsourcing see it as a way of sharing wealth on a global basis. It is ethically justified because it can improve efficiency, help developing countries where unemployment is very high by providing jobs, lead to transfers of knowledge and information technology, and encourage better educational systems in less developed countries so that people can do the outsourcing work. Ironically, global IS outsourcing may benefit both the more developed origin country (frequently the United States, Western Europe, """"' and Australia) as well as the destination country through free trade and reduced prices for computers and com- munications equipment. It also may fuel the creation of high-level jobs for workers in more developed countries. To promote corporate social responsibility, both clients and outsourcing providers should implement the following guidelines: understand relevant CSR regulatory requirements to ensure compliance, establish mea- sures and report CSR performance and compliance to stakeholders, respond to inquiries about CSR compliance, embed CSR in ongoing operations, and develop a CSR culture through hiring and education. SourC'es: R. Babin and B. \'id1olso11. ··Corporate Social all(I Em·irornucntal Responsibility and Global IT Outsourcing.'· J//S ()11artf'f'(1· E.i·ec11til'e 8. no. -t UOOCJ). :ZO:l-1:2: Laura D'Andn·a 1\-,on. ··0111'011n·inw \\hci's S11fr Anymon·~ .. (Fcl,ruan :z:l. 200-t). Farshoring Farshoring is a form of offshoring that involves sourcing service work to a foreign, lower-wage country that is relatively far away in distance or time zone ( or both). For countries such as the United States and United Kingdom that outsource large amounts of work, India and China are the most popular farshoring destinations. Ironically, companies in India and China are now themselves farshoring to countries with lower labor costs. Nearshoring Nearshoring, on the other hand, uses providers in foreign, lower-wage countries that are relatively close in dis- tance or time zones to the client company. With nearshoring, the client company hopes to benefit from one or more dimensions of being close: geographic, temporal, cultural, linguistic, economical, political, or historic linkages. Nearshoring basically challenges the assumption on which farshoring is premised: Distance doesn't matter. The advocates of nearshoring argue that distance does matter, and when closer on one or more of these dimensions, the client company faces fewer challenges in terms of communication, control, supervision, coordination, or social bonding. 'fllll Sourcing Decision Cycle Framework g Three major global clusters of countries are focused on building a reputation as a home for nearshoring: a cluster of 20 nations around the United States and Canada, a cluster of 27 countries around Western Europe, and a smaller cluster of three countries in East Asia: China, Malaysia, and Korea. 32 The dimensions of being close clearly extend beyond distance and time zone. For example, language makes a difference in nearshoring. That is why Latin American nearshoring destinations are appealing to Texas and Florida where there is a large Spanish-speaking population and why French-speaking North African nations are appealing to France. These dimensions likely play a key role when companies are trying to decide between a near- shore or farshore destination (particularly India). Ironically, India, which exports roughly five times the software of the strictly nearshoring nations in the three major nearshoring clusters, is responding to the competitive threat that these nations pose by offering its clients nearshoring options. For example, India-based Tata Consulting Ser- vices (TCS) offers its British clients services that are nearshore (Budapest, Hungary), farshore (India), or onshore (London, United Kingdom). It is likely that the differentiation based on "distance" will continue to be important in the outsourcing arena. Selecting an Offshore Destination: Answering the "Where Abroad?" Question A difficult decision that many companies face is selecting an offshoring destination. To answer the where abroad question, client companies must consider attractiveness, level of development, and cultural differences. Attractiveness Approximately 100 countries are now exporting software services and products. For various rea- sons, some countries are more attractive than others as hosts of offshoring business because of the firm's geographic orientation. With English as the predominant language of outsourcing countries (i.e., United States and United Kingdom), countries with a high English proficiency are more attractive than those where different languages are spoken. Geopolitical risk is another factor that affects the use of offshore firms in a country. Countries on the verge of war, with high rates of crime, and with hostile relationships with the client company's home country are typically not suitable candidates for this business. Other factors including regulatory restrictions, trade issues, data security, and intellectual property also affect the attractiveness of a country for an offshoring arrangement. Hiring legal experts who know the laws of the outsourcing provider's company can mitigate legal risks. Nonetheless, some countries are more attractive than others because of their legal systems. The level of technical infrastructure avail- able in some countries also can add to or detract from the attractiveness of a country. Although a company may decide that a certain country is attractive overall for offshoring, it still must assess city differences when selecting an offshore outsourcing provider. For example, Chennai is a better location in India for finance and accounting, but Delhi has better call center capabilities. 33 Some countries have created an entire industry of providing IT services through offshoring. India, for example, took an early mover advantage in the industry. With a large, low-cost English-speaking labor pool, many entre- preneurs set up programming factories that produce high-quality software to meet even the toughest standards. One measure of the level of proficiency of the development process within an IS organization is the Software Engineering Institute's Capability Maturity Model (CMM). 34 Its Level 1 means that the software development processes are immature, bordering on chaotic. Few processes are formally defined, and output is highly inconsis- tent. At the other end of the model is Level 5 in which processes are predictable, repeatable, and highly refined. Level 5 companies are consistently innovating, growing, and incorporating feedback. The software factories in many Indian enterprises are well known for their CMM Level 5 software development processes, making them extremely reliable, and, thus, desirable as vendors. However, if the client company is not at the same CMM level as the provider, it may want to specify which CMM processes it will pay for to avoid wasting money. Further, it may seek to elevate its own CMM certification to close the process gap between what it can do and what the outsourcing provider can do. ·" Erran Carmel and Pamela Abbott. '·Why 'Nearshore · Means that Distance Matters," Communications of the ACM 50, no. IO (October 2007), 40--46. " Ben Worthen and Stephanie Overby. "USAA IT Chief Exits .. (June 15, 2004). (accessed August 14. 2005). " CMM is now referred to as Capability Maturity Model Integration (CMMI). fl!I Information Systems Sourcing Development Tiers A very important factor in selecting an offshore destination is the level of development of the country, which often subsumes a variety of other factors. For example in the highest tier, the countries have an advanced technological foundation and a broad base of institutions of higher learning. Carmel and Tjia suggest that there are three tiers of software exporting nations: 35 • Tier I-Mature software-exporting nations: These include such highly industrialized nations as the United Kingdom, the United States, Japan, Germany, France, Canada, the Netherlands, Sweden, and Finland. It also includes the three "I's" (i.e., India, Ireland, and Israel) that became very prominent software exporters in the 1990s as well as China and Russia, which entered the tier in the 2000s. • Tier 2-Emerging software-exporting nations: These nations are the up-and-comers. They tend to have small population bases or unfavorable conditions such as political instability or an immature state of economic develop- ment. Countries in this tier include Brazil, Costa Rica, South Korea, and many Eastern European countries. • Tier 3-Jnfant stage software-exporting nations: These nations have not significantly affected the global software market, and their software industries are mostly "cottage industries" with small, isolated firms. Some of the 15 to 25 Tier 3 countries are Cuba, Vietnam, and Jordan. The tiers were determined on the basis of industrial maturity, the extent of clustering of some critical mass of software enterprises, and export revenues. The higher-tiered countries tend to offer higher levels of skills but also charge higher prices. Cultural Differences Often misunderstandings arise because of differences in culture and, sometimes, language. For example, GE Real Estate's CIO quickly learned that U.S. programmers have a greater tendency to speak up and offer suggestions whereas Indian programmers might think something does not make sense, but they go ahead