it for small and medium-sized enterprises (smes)

© Jan Devos - 1

IT for Small and Medium-sized

Enterprises (SMEs)

Dr. ir Jan Devos• ELIT-Lab & Industrial Management

Department HOWEST• Ghent University

• Graaf Karel De Goedelaan 5• BE-8500 KORTRIJK - BELGIUM

• T: +32 56 24 12 72• F: +32 56 24 12 24

• e-mail: [email protected]• e-mail: [email protected]

• linkedIn: www.linkedin.com/in/jangdevos• website: http://ela.howest.be/jdevos

• Twitter: @jangdevos

mailto:[email protected]

mailto:[email protected]

http://www.linkedin.com/in/jangdevos



http://ela.howest.be/jdevos

http://ela.howest.be/jdevos

History of SMEs Definitional problems and heterogeneity Generic characteristics of SMEs in relation

with IT: what is the problem? Findings from research Problems & Solutions

IS Failures (OISF) Lemon Markets Lack of models – new frameworks

Conclusions and future

Agenda

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SMEs largely ignored until the 1970s• 1953 In the US: Small Business Administration • 1959Theory of the growth of the firm (Penrose)

• 1970s Oil shocks (turning point)• 1971UK and AU: Bolton & Wiltshire Committees• 1973Small is beautiful (Schumacher)

• 1980s Downsizing & Outsourcing trends• 1990s Internet – “the virtual organization”• 2005The World is Flat (Friedman)

Two (flawed) views on SMEs: • backbone of the economy• second class citizen

History and rise of SMEs

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“The perfectly bureaucratic giant industrial unit not only outsets the small- or medium-sized firm and expropriates its owners, but in the end it also ousts the entrepreneur and expropriates the bourgeoisie as a class which in the process stands to lose not only its income but also, what is infinitely more important, its functions.”

(Schumpeter, 1942)


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“smallness within bigness”

“for a large organization to work it must behave like a related group of small organizations”

(Schumacher, 1973)


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• Systems thinking approach learned that SMEs played an important role in an economy separate from, but complementary to a large business.

• Business landscape is changingD.B. Audretsch: “The Entrepreneurial Economy” (vs The Managed Economy)

• Entrepreneurial SMEs counts for new employment, innovation and sustainability▫Strong economic focus by governments (Europe, US,

Singapore, Australia, Canada, ...)


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• Reduction in the average size of business firms

• High growth new firms provide the majority of new firm jobs

• SMEs play an important role in the development of innovation

• SMEs may be in a disadvantage in the access to new technology

• LE provide better quality jobs but the gap LE-SME in job quality is shrinking• JQ = wages (higher in LE), fringe benefits (more available in LE), job tenure

(+/- 4,5 years), employee morale, job satisfaction.


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Do Small Firms Compete with Large Firms?

“Despite the pervasive phenomenon of scale economies, the majority of firms have always been small firms. The emergence of small firms as a means of economic development on both sides of the Atlantic has been one of the major new topics of economic policy since the 1980s.”

“... small firms seek out markets where they are able to avoid competition with their larger counterparts.”

“… small firms pursue a strategy of producing in distinct product niches.”

(Audretsch et al., 1999).


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The flatteners:Collapse of the Berlin wall, Outsourcing, Netscape (?), Open Source, Supply Chains, VoIP, WIFI, Smartphones, …

(Friedman, 2005)


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Bolton committee defined an SME as: (Bolton, 1971)

1) one that has a relatively small market share,

2) one that is managed by its owners or part owners in a personalized way, not by an organized managerial structure,

3) one that is independent with the owners/managers having control of the activities of the business.

Definitional problem

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U.S. Small Business Administration (Size Standard)

1) depending on the industry of the SME

2) number of employees (<500) or the average annual receipts

3) independently owned and operated and not dominant in its field of operation


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EUROPE

SingaporeNew ZealandAustraliaCanada


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SME sector in Belgium

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2009 Number of enterprises

Flanders Walloon Brussels

SMEs (<50) 513.829 238.641 98.371

LE (>50) 3.129 1.092 835

99,4% 99,5% 99,1%

Source: website Unizo (http://www.unizo.be/statistieken)

SME sector in Europe

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Source: website Europe (http://ec.europa.eu/enterprise/policies/sme)

What usually gets lost is that more than 99% of all European businesses are, in fact, SMEs. They provide two out of three of the private sector jobs and contribute to more than half of the total value-added created by businesses in the EU. Moreover, SMEs are the true back-bone of the European economy, being primarily responsible for wealth and economic growth, next to their key role in innovation and R&D.

What is even more intriguing is that nine out of ten SMEs are actually micro enterprises with less than 10 employees. Hence, the mainstays of Europe's economy are micro firms, each providing work for two persons, in average.

This is probably one of the EU's best kept secrets!

• Organizational size (head count, turnover, margins, …) • Head count not always relevant for IT

example: manufacturing companies > 50 people ‘blue collars’ vs ‘white collars’

• Micro enterprises constitute a separate group (9 out of 10 is µ)• Innovative entrepreneurs or sub-contractors

(Pareto analysis: 1 customer / 1 supplier) • Ownership structure: family enterprises • Role of CEO • Management maturity (depends on organizational size) • Exporting – only domestic markets• Economic activity: manufacturing, services, trading, government

and not-for-profit organizations• Economic sector: see table

Heterogeneity of the SME sector

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Source: website Unizo (http://www.unizo.be/statistieken)

NUMBER OF COMPANIES (< 50 people)SECTOR FLANDERS BRUSSELS WALLOON BELGIË

Other 36.908 9.738 18.143 64.789

Automotive (trade and maintenance) 14.332 2.260 8.046 24.638

Construction & Building 65.264 9.993 30.291 105.548

Communication & IT 18.959 6.088 7.727 32.774

Retail 55.414 10.671 29.307 95.392

Financial services 15.088 3.485 6.033 24.606

Healthcare 15.516 2.419 8.840 26.775

Wholesales 29.218 5.439 8.961 43.618

Mediation & Trading 14.316 2.763 8.972 26.051

Hotel & catering 34.025 7.066 16.898 57.989

Real estate 20.102 5.856 7.179 33.137

Industry: agriculture, fishing & forestry 34.823 324 20.290 55.437

Chemical industry 2.283 323 1.184 3.790

Lumber & Furnishing 3.302 391 1.774 5.467

Electronics & IT 1.203 265 508 1.976

Manufacturing metals 5.767 340 2.769 8.876

Manufacturing paper and press 3.460 717 1.321 5.498

Textiles: leather, apparel 2.250 484 823 3.557

Alimentation Industry 5.336 554 2.492 8.382

Other industries 5.946 724 2.740 9.410

Personal services 31.762 3.855 15.102 50.719

Logistics & Transport 13.672 2.843 4.616 21.131

Business services 84.883 21.773 34.625 141.281

Total 513.829 98.371 238.641 850.841

Some findings from research

Organizational size• SMEs and LEs have not equal experiences with IS

success • SMEs and LEs are not equally in using ‘formal’ IT

Governance method• Micro enterprises differ considerably from small and

medium- sized enterprises

Economical activity • Trading-SMEs are less ‘IT minded’ than in services


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•SMEs have a different economic, cultural and managerial environment (compared to LEs) ▫Resource poverty (financial, knowledge, internal

IT expertise, ...) ▫Depend on external IT expertise▫Low IT capabilities and practices▫ Intuitive and informal management ▫more task-centric than process-centric▫Slow adopters of IT▫Focus (more) on trust, empathy, fairness and

devotion less on control, risk and assurance.▫Central role of CEO (owner)

Generic SME characteristics in relation with IT

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•Managerial Attention Deficit Disorder (MADD) - the patient

• is easily distracted• pays no attention to his/her environment• looses the power of concentration after a few

hours• has no thoughts for details• does not listen when he/she is addressed• jumps to conclusions • interrupts and disturbs the work of collaborators • interferes abruptly into conversations

Generic SME characteristics - SME CEO ?

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•What is the problem ?

• - lack of good and appropriate methods for governing IT in SMEs (Cobit, ITIL, ...)• - SMEs should adopt more IT: IT is seen as a driver for innovation and progress • - IT is not always very positively perceived by SMEs (not a good image)

• IT and SMEs (Europe, 2004) – The Go Digital Awareness Campaign 2001-2003: The main lessons to be learnt

• E-Business is not a top priority for most SMEs• Networking is the most successful marketing strategy to reach SMEs• Awareness raising needs to be based on realistic targets and expectations• SMEs often lack appropriate information about e-business and ICT• Most SMEs remain skeptical about ICT and e-business• Training and managerial change are key issues• Resources and costs matter for SMEs more than for LE• E-business might not always be beneficial for SMEs • Many IT solutions are still too expensive or not trusted

Generic SME characteristics in relation with IT

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•Lack of relevant IS research in SMEs▫Since 1979 (to august 2010): only 300 refereed A1-

publications (Devos, 2010; working paper)

•Starting point in 1979 (Ein-Dor & Segev)

IS projects are less likely to succeed in SMEs than in large ones.

IS Research in SMEs

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•Cultural differences: US vs Europe (+Singapore / New Zealand / Australia)

•No agreement on the size standard (5 – 3000)

•Absence of a consistent body of research▫Too much seen as a homogeneous group▫Inconsistent findings (e.g. strategic IT)

•Dated research (microcomputers, mini computers, …)

IS Research in SMEs

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IS Research in SMEs

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Class Research Topic Software and Applications (31)

ERP (15), Software packages & COTS (5), Applications (1), CRM (1), Expert Systems (1), CAD/CAM (1), Stock Record System (1), Groupware (1), Advanced Manufacturing Systems (1), Application Service Providing (1), DSS (1), Marketing Information System (1), Software for innovation (1),

Internet and Related technologies (71)

Internet (10), E-Commerce (26), E-Business (11), Supply Chain E-Business (5), Websites (3), e-government (1), e-mail (1), www (3), On line connection (1), Electronic Trading Systems (1), EDI (7), Internet Based Technologies (2), web services (1)

Hardware & Infrastructure (12)

Microcomputers (8), IS architecture (1), Computer Network Development & Implementation (1), Hardware & Software (2)

Organizational IT (18) Strategic IS (9), IS Sophistication (4), EUC (3), IS Planning (1), IS Architecture (1) Nominal view of IT 115

Studies of SMEs and IT according to IS Research Topic

IS Research in SMEs: Literature

• SME-IT Literature overview

Devos, J. Van Landeghem H. & Deschoolmeester D., (2009), IT and SMEs: LiteratureOverview.

IT Managerial, Methodological, and

Technological Practices

IT Managerial, Methodological, and

Technological Capabilities

System Quality

Information Quality

IT ArtifactSatis-

faction UseOrganiza-

tional Impact

Individual Impact

Impact

Source: Benbasat & Zmud, 2003; Gable et al, 2008

121

32

37

14

125 1

6 1

3

5

82

SMEs are often disappointed with their software packages. The disappointment is a result of the inability of the package to adapt to the needs of the company. For SME with less then 20 employees the packages are too difficult to use. (Heikkila et al; Finland)

Managers were found to be more successful when they develop their own numeric applications using spreadsheets to provide greater analytical support for decision-making. (Raymond & Bergeron; Canada)

Software characteristics, vendor capability and opinions from other concerned groups are relatively important factors when making the software selection decision. (Chau ; Hong-Kong)

SMEs that adopt the vendor-only approach have more effective IS than SMEs that adopt the consultant-vendor approach (Thong et al; Singapore)


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Top management support is not as important as effective external IS expertise (Thong et al: Singapore)

The most effective IS implementation environment is one in which both top management support and external IS experts work as a team. (Thong et al: Singapore)

Most important area of IT dissatisfaction is the lack of training and education. Most important factor of IT satisfaction are the owners attributes (age: younger CEO are more satisfied, gender: female are less likely to be dissatisfied then men). (Fuller & Southern: US)

CEO’s innovativeness and IS knowledge are positively associated with the decision to adopt IS in SMEs. The effect of competition on IS adoption in SMEs has no direct effect on IS adoption. (Poon & Swatman: Singapore)

In the eyes of SMEs, EDI still is not considered as something that enables them to gain major strategic benefits or competitive advantages. (Van Everdingen et al: Europe)


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Owners innovativeness is the strongest determinant for adopting traditional IT – relative advantage plays most critical role for Internet related technologies. (Chau & Hui: USA)

External expertise is the predominant key factor of IS implementation success in SMEs. (Lesjak & Lynn)

Three strategies are revealed: 1) ERP systems need to be localized to reflect local management features 2) ERP systems should be customizable at a variety of levels 3) BPR should be carried out in a incremental manner taking the dialectic of organizational learning into account (Levy et al: UK)

Different industry sectors significantly differ in the amount spend to IT investments. Firm size does not influence IT investment levels. Strategic benefits vary across different industry sectors. The way employees adapt to change as a result of IT implementations depends on the size of the organization. (Lucchetti & Sterlacchini: Australia)

Managerial and vendor support are essential for effective IS in Canadian SMEs. Managers should engage quality vendors to obtain IS that contribute to the specific goals of the small business.


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• Investigation to the relevance of ▫Strategic IT ▫ IT Outsourcing▫ IT Failures▫ IT Governance

•Survey (2008) – 12 questions#1538 organizations (random group)#169 response (11%)

IS Research in SMEs: Survey (Devos, 2008)

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IT Outsourcing

IT Failures

IT

Govern

an

ce

Str

ate

gic

IT

SMEs


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Micro (< 10) Small (10< <50)

Medium-sized (50< <250)

Large (250<)

22%

38%

16%

23%

Organizational size

©Jan Devos

Strategic IT • Strategic Information Systems (SIS)

developed to support, change or enable Business Processes and Business Strategies. (Porter)

• Has a profound impact on the operational, tactical and strategic level of a business

• Example: Enterprise Systems (ERP)“Large scale (?), real-time, integrated application-software packages that use the computational, data storage, and data transmission power of modern IT to support processes, information flows, reporting, and business analytics within and between complex organizations”

IS Research in SMEs

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Owners & Managers ?


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Organizational size ?

Industry ?

IT Outsourcing

• Project Management Outsourcing (Lacity & Hirschheim)

= outsourcing for a specific project or portion of IS work.

Ex. use of vendors to develop a new system, support an existing application,…

• In these cases the vendor is responsible for managing and completing the work

• Principal-Agent setting

IS Research in SMEs

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Number of conducted IT projects depends

on organizational size

Number of conducted IT projects is least in trading

Number of conducted IT projects


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Less outsourcing in micro and large organizations

Outsourcing is mainly done by small and medium-sized enterprises

Sourcing strategy

What are IS Failures ?

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Engineering Failures?

What are IS Failures ?

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An IS Failure is an outcome of a human process

IS Failures

• Best kept (public) secret worldwide ?

• A lot of research for almost 45 years • 1967, Management misinformation systems, (Ackoff)• 2010, Project failure en masse: a study of loose budgetary control in ISD projects (Conboy)

• Much is known - less is done !• 1975 / 1995, The mythical Man-Month (Brooks)

• Failure to learn ? CIOs - IS-Researchers• 1999, Learning failure in information systems development (Lyytinen & Robey)• MISQ, EJIS, ISR, JAIS, …

IS Research in SMEs

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IS Failures

•Expectation failures (Lyytinen & Hirschheim)

•Termination failures (Sauer)

•IS project abandonment (Ewusi-Mensah)

•IS project escalation (Keil)

•Outsourced IS Project failure (Devos et al.)

IS Research in SMEs

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IS Failures

•Expectation failures (Lyytinen & Hirschheim)

•= the inability of an IS to meet a specific stakeholder group’s expectations

• Stakeholders: any group of people who share a pool of values that define what the desirable features of an IS are and how they should be obtained

• - Correspondence Failure• - Process Failure• - Interaction Failure

IS Research in SMEs

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IS Research in SMEs

Expectation failures (Lyytinen & Hirschheim)

• Correspondence failures

• Process failures

• Interaction failures

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IS Failures

•Termination failures (Sauer)

when all development or operation is ceased, leaving the stakeholders (supporters) dissatisfied

•Project Runaways (Keil)

escalation of commitment(runaways): continued commitment in the face of negative information about prior resource allocations coupled with uncertainty surrounding the likelihood of goal attainment

Project Abandonment (Ewusi-Mensah)

defined as a phenomenon that concerned with the anticipated failure of the project prior to its full implementation

IS Research in SMEs

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IS Failures Project Runaways (Keil)

IS Research in SMEs

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Project Runaways (Keil)

Some IS projects never seem to terminate… “rather, they become like Moses, condemned to wander till the end of their days without seeing the promised land (Keider, 1974)

IS Research in SMEs

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IS Research in SMEs

Cover-UpOrganization

Deaf, Dumb and BlindOrganization

Healthy Organization

Ostrich Organization

Mum Effect

Deaf Effect

high

high

low

low

Blowing the whistle on troubled software projects (Keil, 2001)

bad news is transmitted less frequently than good news

reluctance to hear bad news

IS Failures•Outsourcing IS Failures - OISF (Devos)

• Moral Hazard: lost of trust • Adverse Selection: Lemon Markets


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Expectation failure

Termination Failure Escalation Failure (Runaway projects)

OISF

IS Failures


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1994 1996 1998 2000 2004

Failed projects 31% 40% 28% 23% 18%

Challenged projects 53% 33% 46% 49% 53%

Succeeded projects 16% 27% 26% 28% 29%

Source: Standish Group

IS Failures


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IS Failures

Bad experiences depend on organizational size

Bad experiences depend on number of projects

Number of projects depend on

organizational size


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IS Failures and the sourcing strategy


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IT Governance• Since late 1990s• Lack of a clear understanding of the term• Influences the benefits generated by IT

investments• Link with corporate governance (Sarbanes-

Oxley)• Link with Strategic IT• A lot of methodologies from and for

practitioners(Cobit, ITIL, PMBOK, PRINCE2, ISOxxxx, ...)


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IT Governance

to direct IT endeavors, to ensure ITs performance meetsthe following objectives:- - for IT to be aligned with the enterprise and realize the

promised benefits- - for IT to enable the enterprise by exploiting

opportunities and maximizing benefits- - for IT resources to be used responsibly- - for IT related risks to be managed appropriately

“Placing IT on the agenda of the board” (W. Van Grembergen)


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Use of a formal method depends on organizational size


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Use of a formal method and IS failures

Conclusions

• Why do IT projects fail in SMEs?• Information asymmetry • Low IT managerial, technological and methodological

capabilities in SMEs

• How do IT projects fail in SMEs?• Opportunistic behavior• Deterioration of trust• Lack of control

• How do SMEs manage there IT?• Absence of a formal intentional IT management

• Why is there not enough IT Governance in SMEs?• IT Governance is not an SME concept• Lack of IT managerial, technological and methodological

practices

•From a vendor perspective▫Niches – heterogeneous target groups ▫Low IT capabilities - Low expenditures▫Lot of IS failures▫Lemon Markets (the bad wipe out the good !)

•From a customer perspective (the SME) ▫Opportunistic behavior (E-tic charter)▫Winner’s curse en Vendor lock-in▫Lemon Markets (IT has not a good reputation)

Problems and solutions

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•Winner’s curse

•Vendor Lock-in

•Lemon Markets


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Theory of Lemon Markets

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ICT

ICT

ICT


• Nobel Prize Winner G. Akerlof, 1970 (Akerlof, G.A. (1970). ‘The Market for 'Lemons': Quality Uncertainty and the Market Mechanism’. Quarterly Journal of Economics, 84(3), 488-500.)

• a market with unbalanced information can lead to complete disappearance or to offerings with poor quality where bad products (lemons) wipe out the good ones

• Popular economic grant theory• Used car market (lemons)• E-business, E-auctions, IT security, Grid computing, IT outsourcing

• Devos J., Van Landeghem H. and Deschoolmeester D., (2010), An IS Theory: The Lemon Market, in Information Systems Theory: Explaining and Predicting Our Digital Society, Y.K. Dwivedi, M. Wade & S.L. Schneberger, to be published in 2011


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= €1

= €0.1

ICT


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€1

€0.1?


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€0.55

€0.55 - €1 = -€45

€0.55 - €0.1 =

€0.45


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€0.55

€0.55 - €0.1 = €0.45

€0.55 - €0.1 = €0.45

€0.55 - €0.1 = €0.45


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€0.23

€0.23- €0.1 = €0.13

€0.23 - €0.1 = €0.13

€0.23 - €0.1 = €0.13


• A market place: buyers and sellers (internally/externally; individuals/firms): von Neumann-Morgenstein maximizers of Expected Utility

• Information Asymmetry between transacting partners

• Overall quality of goods and services offered is reflected to the entire group of sellers rather than on individual sellers

• Lack of seller differentiation• There is incentive to market low quality (igniting

condition)

• High-quality sellers flee the market because their quality and reputation cannot be rewarded

• Complete Market Deterioration


Information Asymmetry

TrustAdverse Selection

Moral Hazard

Opportunistic Behavior

Perceived Quality

Reputation

independent

+ +

+

-

--

-

-

Who is serving SMEs?

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•Research (Devos, 2010) – Lemon Market ?• ICT Top 1000 → 484 ISV (Independent Software Vendors)

Screening of websites (profile, product/service offerings, working methods)

Checkpoint score 0Not

present

score l Minimal

score 2 Moderate

score 3 Strongly

Median

CP1 - SME – focus 61,1% 12,7% 15,2% 11,0% 2

CP2 - Positive framing 37,8% 40,3% 12,7% 9,2% 1

CP2b - Negative framing 96,8% 2,5% 0,7% 0,0% 0

CP3 - References 22,6% 28,6% 14,5% 34,3% 1

CP4 - Methodology 41,7% 20,5% 20,1% 17,7% 1

Who is serving SMEs?

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•Research (Devos, 2010) – Lemon Market ?

•77,4% reference selling•34,6% make use of case studies•38,9% of the ISV’s is targeting also an SME market •11,0% of the ISV’s is only targeting an SME

market•Large ISVs targeting LE (and sometimes SMEs)•Small ISVs targeting SMEs

•SME-customers are mainly served by SME-vendors

Agency Theory

• Principal = customer / determines the work

• Agent = contractor: ISV (Independent Software Vendor) or ERP Implementer / undertakes the work

• Contract =


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Agent theory: constraints

• Rational behaviour & expectations for both parties (bounded rationality)

• Self-interest of parties (goal conflict between parties)

• Outcome has effects on the Principal's profit and success

• Outcome is only partly a function of behaviours of Agent(risk aversion / risk neutral)

• Agent has discretionary freedom due to asymmetric information • ex ante = uncertainties for Principal (Adverse Selection)• ex post = disadvantages for Principal (Moral Hazard)


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Agent theory: IT and SMEs?

• SME-Principal is less knowledgeable on IT than ISV-Agent

• SME-Principal is confronted with high monitoring costs

• SME-Principal is limited in his ability to monitor and judge the contractor’s input and output.

• Missing metrics and measures for programmers productivity and outcome


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Some examples from real life cases: (Moral Hazard)• hidden characteristics

Skills to develop & modify screens in an ERP package• hidden intention

Agent want to use the custom made software for the purpose of developing a software packageAgent is working on two parallel projects

• hidden actionAgent is correcting software errors during billable hoursAgent is playing computer games during work hours


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• 1 - Situation of complete (public) information • When the P has information to verify A behavior, then A is more likely

to behave in the interests of the P.

• → best solution: Behavior-based contract• reward is outcome independent !

• 2 - situation of incomplete information (information asymmetry) • When the contract between the P and A is outcome based, then A is

more likely to behave in the interests of the principal.

• → second best solution: Outcome-based contract• reward is outcome dependent !


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Findings (Devos, 2007)

• AT does not take trust into account, trust is important for avoiding OISFs

• AT is not bidirectional: The Principal controls the Agent however: both parties are exposing opportunistic behaviour

• Adverse selection is better explained by Prospect Theory & Lemon Market Theory

• Structured controls are not sufficient to avoid OISFs

• Avoiding OISFs is cumbersome


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• Prospect Theory (Kahneman & Tversky)

• A falsification of the EUT

• - Theory of decision under risk

• Daniel Kahneman* & Amos Tversky

• “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty”

• *Nobel Price winner 2002


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•An experiment: lung cancer

• Prospect 1

• Surgery: Of 100 people have surgery 90 live through the post-operative period, 68 are alive at the end of the first year and 34 are alive at the end of five years.

• Radiation Therapy: Of 100 people having radiation therapy all live through the treatment, 77 are alive at the end of one year and 22 are alive at the end of five years.


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Survival Frame

82%

18%

•An experiment: lung cancer

• Prospect 2

• Surgery: Of 100 people have surgery 10 die during surgery or the post-operative period, 32 die by the end of the first year and 66 die by the end of five years.

• Radiation Therapy: Of 100 people having radiation therapy none die during treatment, 23 die by the end of one year and 78 die by at the end of five years.


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Mortality Frame

56%

44%

•Propositions of the Prospect Theory

• A person is risk averse for gains and is risk seeking for losses (reflectivity principle)

This is also known as the certainty effect

People favors risk aversion in the domain of gains and risk seeking in the domain of losses

“Losses loom larger than gains”


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The value function

A person is risk averse for gains (concave function)

A person is risk seeking for losses (convex function)

•Propositions of the Prospect Theory

• A decision about prospects is a two phase process consisting of:

• a editing or framing phase: • identical information is edited out (often a simpler

representation)

• a evaluation phase:• taken the decision on the highest “value”


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Application of Prospect Theory in IT Outsourcing for SMEs

- Editing phase (= tendering phase) is often an extreme positive framing of a proposal on behalf of the ISV, to keep the SME (customer) in the “survival” frame

• Stressing direct benefits (pseudo-tangible) • Denying the TCO concept (selling hardware, licenses, and …consultancy)• Simplification of ROI

• Short project time • Fixed Price Contracts• Absence of requirement management (package contains “all” functionalities)• Avoid speaking about IS risks factors

• Don’t mention the burden of change management• Don’t mention risk of scope creep• …


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1. Lack of top management commitment to the project2. Failure to gain user commitment3. Misunderstanding the requirements4. Lack of adequate user involvement5. Lack of required knowledge/skills in the project personnel6. Lack of frozen requirements 7. Changing scope/objective8. Introduction of new technology9. Failure to manage end user expectations10. Insufficient/appropriate staffing

Source: Schmidt, Lyytinen, Keil & Cule; Identifying Software Project Risks, 2001

Top 10 of IS failure risks



A Framework for IT Governance in SMEs

• Building theory from case studies (Eisenhardt, 2007)▫ Observations from previous literature▫ Commons sense▫ Experience

• Multiple case studies (#5)▫ Theoretically chosen, not randomly !

• Software Project Risks (Schmidt et al, 2001)▫ Potentially important constructs

• Pattern mapping

Result the OISF Framework

Derived hypotheses

Domain Nr Hypothesis (to avoid OISF)

SME principal

1 SME-principals should have CEOs who are personally committed to IS projects

2 SME-principals should have effective project management skills.

3 SME-principals should be convinced that an outsourced IS project is a joined endeavour between two collaborating partners and should to be managed towards an equilibrated balance between control and trust

ISV Agent 4 ISV-agents should have a profound capability maturity level on project management

5 ISV-agents should avoid all distrust mechanisms vis-à-vis SME principals

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Derived hypotheses

Domain Nr Hypothesis (to avoid OISF)

Tendering and Contracting

6 both parties should avoid fixed price contracts.

7 both parties should make renegotiable contracts

IT artefact 8 specific IT artifacts should be made for SMEs with less sophistication and build up from their specific business requirements.

Use 9 SME and ISV should work together in a spirit of collaboration and openness and keep the balance between control and trust equilibrated.

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• Novel, testable and empirical valid

• Unique SME perspective

• Generic and not only suitable for a particular technology or artifact (ERP, CRM, …)

• Complete cycle of plan-do-run-check(monitor)

• Spelling out characteristics of IT Governance for SMEs

Conclusion of the Framework

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• Scientific challenge: Testing of induced hypothesizes (increase external validity)

• Governmental challenge: Deploying Quality and Certification programs for ISV willing to serve an SME-market

• Managerial challenge: Developing realistic models for IT Governance for SMEs

Conclusion of the Framework

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•Open Source Software (OSS) and Free/Libre/open source Software (FLOSS)▫alternative for ERP ▫avoiding vendor lock-ins

•Cloud Computing▫Complete outsourcing▫Utility computing

• Social Networks▫Crowd sourcing▫SME networks

• IT for the not-for-profit (government agencies, cities, culture industry, NGOs, …)

• IT Governance in SMEs: expand our domain of knowledge

Future

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•SMEs constitute an important but separate unit of analysis

•SMEs struggle with IT (as LEs do)

•Lack of appropriate methods for running IT in SMEs

•Lack of theoretical knowledge about IT phenomena in SMEs (failures, adoption, use, management, …)• Is ‘control’ (always) the right way to do things ?

Conclusions

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it for small and medium-sized enterprises (smes)

Technology

smesdo small firms

theemergence of small

large firms

smes reduction

smes systems

themajority of firms

large business

small market share